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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-9756
RIGGS NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1217953
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1503 Pennsylvania Avenue, N.W., Washington, D.C. 20005
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(Address of principal executive offices) (Zip Code)
(301) 887-6000
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
- ----------------------- -----------------------------------------
Common Stock, par value OTC, NASDAQ National Market System
$2.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No. __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the Corporation's voting stock held by
non-affiliates of the registrant as of February 27, 1998, was $534,354,851.
The number of shares outstanding of the registrant's common stock, as of
March 18, 1998, was 30,580,288.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Riggs National Corporation's definitive Proxy Statement dated
Merch 18, 1998 to Stockholders are incorporated by reference, except for Items
402 (k) and (l) of Regulation S-K, in Parts I and III of this Annual Report.
FORM 10-K INDEX
PART I PAGE(S)
Item 1--Business 3
Item 2--Properties 5
Item 3--Legal Proceedings 6
Item 4--Submission of Matters to a Vote of Security Holders 6
PART II
Item 5--Market for Registrant's Common Equity
and Related Stockholder Matters 7
Item 6--Selected Financial Data 7
Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 8--Financial Statements and Supplementary Data 29
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 67
PART III
Item 10--Directors and Executive Officers of the Registrant (A), 67
Item 11--Executive Compensation 69
Item 12--Security Ownership of Certain Beneficial Owners
and Management 69
Item 13--Certain Relationships and Related Transactions 69
PART IV
Item 14--Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 69
(A) PORTIONS OF RIGGS NATIONAL CORPORATION'S DEFINITIVE PROXY STATEMENT TO
STOCKHOLDERS ARE INCORPORATED BY REFERENCE, EXCEPT FOR ITEMS 402 (K) AND (L) OF
REGULATION S-K, IN PART III OF THIS ANNUAL REPORT.
2
PART I
ITEM 1.
BUSINESS
RIGGS NATIONAL CORPORATION
Riggs National Corporation ("the Corporation") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and incorporated in the State of Delaware. The Corporation engages in a variety
of banking-related activities through its bank and non-bank subsidiaries. The
Corporation currently has banking operations or separate subsidiaries in the
Washington, D.C. metropolitan area; New Haven, Connecticut; Miami, Florida;
London, England; Paris, France; and Nassau, Bahamas. Additionally, the
Corporation provides investment advisory services domestically through
subsidiaries registered under the Investment Advisers Act of 1940. Subsidiaries
located in the Bahamas and France provide trust and corporate services, as well
as traditional banking services. At December 31, 1997, the Corporation and its
subsidiaries had 1,580 full-time equivalent employees.
Key elements of the Corporation's business strategy for its subsidiaries are
to continue to focus on: growth opportunities through the additional
accumulation of assets under management in its financial services
division--Riggs & Co., the orientation of its retail banking branches toward
money management relationships, the development and specialization in
relationship banking of banking products and services in specific growth
industries and the continued preeminence in the embassy banking operations
coupled with growth in selected international business lines. Such growth will
entail internally developed programs as well as possible alliances or
acquisitions in these areas. The Corporation will continue to serve the varied
financial needs of the Washington, D.C. metropolitan area and to meet its
commitments under the Community Reinvestment Act.
RIGGS BANK NATIONAL ASSOCIATION
The Corporation's principal subsidiary is Riggs Bank National Association (the
"Riggs Bank N.A.", formerly The Riggs National Bank of Washington, D.C., and
successor to The Riggs National Bank of Virginia and The Riggs National Bank of
Maryland, which entities merged on March 28, 1996), a national banking
association founded in 1836 and incorporated under the national banking laws of
the United States in 1896. Riggs Bank N.A. had assets of $5.8 billion, deposits
of $4.3 billion, and stockholder's equity of $484.9 million at December 31,
1997.
Riggs Bank N.A. operates 32 branches and an investment advisory subsidiary in
Washington, D.C., 16 branches in Virginia, seven branches in Maryland, a second
investment advisory subsidiary in New Haven, Connecticut, a commercial bank in
London, England, an Edge Act subsidiary in Miami, Florida, branch offices in
London, England and Nassau, Bahamas, and a Bahamian bank and trust company.
As a commercial bank, Riggs Bank N.A. provides a wide array of financial
services to customers in the Washington, D.C., metropolitan area, throughout the
United States and internationally.
Riggs Bank N.A.'s Corporate and Commercial Banking Groups provide services to
customers ranging from small regional businesses to major multinational
companies. These services include lines of credit, secured and unsecured term
loans, letters of credit, credit support facilities, foreign currency
transactions and cash management.
Riggs Bank N.A.'s financial services division, Riggs & Co. provides fiduciary
and administrative services, including financial management and tax planning for
individuals, investment and accounting services for governmental, corporate and
non-profit organizations, estate planning and trust administration.
Riggs Bank N.A. provides investment advisory services through Riggs Investment
Management Corporation ("RIMCO") and J. Bush & Co. Incorporated, both of which
are wholly-owned subsidiaries incorporated under the laws of Delaware and
registered under the Investment Advisers Act of 1940.
Riggs Bank N.A.'s Retail Banking Group provides a variety of services
including checking, NOW, savings and money market accounts, loans and personal
lines of credit, certificates of deposit and individual retirement accounts.
Additionally, the Retail Banking Group provides 24-hour banking services through
its telebanking operations and a network of Riggs Bank N.A.'s automated teller
machines ("ATMs") as well as national and regional ATM networks.
Riggs Bank N.A.'s International Banking Group furnishes a variety of financial
services including issuing letters of credit in connection with trade and other
transactions, taking deposits, foreign exchange, private banking and cash
management. Customers include embassies and foreign missions in Washington,
D.C., foreign governments, central banks, and over 200 correspondent banks
around the world. These services are provided through both domestic and
international offices.
Additional international operations of Riggs Bank N.A. include:
- - Riggs Bank Europe Limited, located in London, England, providing traditional
corporate banking services, commercial property financing and trade finance;
- - The Riggs Bank and Trust Company (Bahamas) Limited, in Nassau, providing trust
services for international private banking customers;
- - A London branch located in the U.S. Embassy, serving the Embassy, its
employees and official visitors;
3
- - The Riggs National Bank (Europe) S.A., located in the U.S. Embassy in Paris,
serving the Embassy, its employees, official visitors, and assisting the U.S.
Government with disbursement activities for the Department of Defense and the
Department of State.
RIGGS CAPITAL
Riggs Capital, a wholly-owned subsidiary of the Corporation, issued 150,000
shares of 8.625% Trust Preferred Securities, Series A, with a liquidation
preference of $1,000 per share, in December 1996. The Trust Preferred
Securities, Series A qualify as Tier I Capital with certain limitations, see
"Notes to Consolidated Financial Statements-Note 1 and Note 11" on pages 34 and
49, respectively, of this Form 10-K.
Riggs Capital II, a wholly-owned subsidiary of the Corporation, issued
200,000 shares of 8.875% Trust Preferred Securities, Series C, with a
liquidation preference of $1,000 per share, in March 1997. The Trust Preferred
Securities, Series C qualify as Tier I Capital with certain limitations, see
"Notes to Consolidated Financial Statements-Note 1 and Note 11" on pages 34 and
49, respectively, of this Form 10-K.
SUPERVISION AND REGULATION
The Corporation and Riggs Bank N.A. are subject to the supervision of and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Corporation's national banking subsidiaries and certain of
their subsidiaries are subject to the supervision of and regulation by the
Office of the Comptroller of the Currency (the "OCC"). Other federal, state and
foreign laws govern many aspects of the businesses of the Corporation and its
subsidiaries.
Under the BHCA, bank holding companies may not directly or indirectly acquire
the ownership or control of five percent or more of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. The BHCA also restricts the types
of businesses and activities in which a bank holding company and its
subsidiaries may engage. Generally, activities are limited to banking and
activities found by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
The Corporation is required to maintain minimum levels of qualifying capital
under Federal Reserve Board risk-based capital guidelines. For full discussion
of these guidelines, see "Management's Discussion and Analysis--Capital
Resources" and "Notes to Consolidated Financial Statements-Note 10."
Under Federal Deposit Insurance Corporation ("FDIC") regulations, the
assessment rate for an insured depository institution varies according to the
level of risk incurred in its activities. An institution's risk category is
based partly upon whether the institution is assigned to one of the following
"supervisory subgroups": "healthy"; "supervisory concern"; or "substantial
supervisory concern."
The OCC must take "prompt corrective action" in respect of depository
institutions that do not meet minimum capital requirements. The OCC has
established levels at which an insured institution would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
The following table details the minimum capital levels for each category:
CAPITAL CATEGORY
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COMBINED TANGIBLE
TIER I TIER I AND II LEVERAGE EQUITY
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RATIOS:
WELL
CAPITALIZED 6% or above 10% or above 5% or above N/A
ADEQUATELY
CAPITALIZED 4% or above 8% or above 4% or above N/A
UNDER-
CAPITALIZED Less than 4% Less than 8% Less than 4% N/A
SIGNIFICANTLY
UNDERCAPITALIZED Less than 3% Less than 6% Less than 3% N/A
CRITICALLY
UNDERCAPITALIZED N/A N/A N/A 2% or less
Beyond the minimum capital levels, well capitalized institutions may not be
subject to any order or written directive to meet and maintain a specific
capital level.
Riggs Bank N.A. exceeds current minimum regulatory capital requirements,
and qualifies as "well capitalized. "The applicable federal bank regulator for a
depository institution may, under certain circumstances, reclassify a "well
capitalized" institution as "adequately capitalized" or require an "adequately
capitalized" or "undercapitalized" institution to comply with supervisory
actions as if it were in the next lower category. Such a reclassification may be
made if the regulatory agency determines that the institution is in an unsafe or
unsound condition (which could include unsatisfactory examination ratings). A
summary of applicable regulatory capital ratios and the minimums required by the
OCC under its capital guidelines for Riggs Bank N.A., on a historical basis, is
shown in the "Notes to Consolidated Financial Statements--Note 10."
A depository institution may not make any capital distribution (including
payment of a dividend) or pay any management fee to its holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to increased regulatory monitoring and
growth limitations and are required to submit capital restoration plans.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act"), authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation. In addition, beginning June 1,
4
1997, the Interstate Act authorized a bank to merge with a bank in another state
as long as neither of the states had opted out of interstate branching between
the date of enactment of the Interstate Act and May 31, 1997. A bank may
establish and operate a de novo branch in a state in which the bank does not
maintain a branch if that state expressly permits de novo branching. Once a bank
has established branches in a state through an interstate merger transaction,
the bank may establish and acquire additional branches at any location in the
state where any bank involved in the interstate merger transaction could have
established or acquired branches under applicable federal or state law. A bank
that has established a branch in a state through de novo branching may establish
and acquire additional branches in such state in the same manner and to the same
extent as a bank having a branch in such state as a result of an interstate
merger. If a state opts out of interstate branching within the specified time
period, no bank in any other state may establish a branch in the opting out
state, whether through an acquisition or de novo.
Effective June 1995, coinciding with the mandatory 1.25% funding of the Bank
Insurance Fund ("BIF") reserve, insurance rates were reduced from a range of
$.23 to $.26 per $100 in deposits insured to a range of $.04 to $.07 per $100 in
deposits insured. Further, in November 1995, based on the continuing increase in
reserves with BIF, the FDIC announced an additional reduction of insurance rates
to zero percent, however, banks must pay a mandatory minimum of $2 thousand per
year.
On September 30, 1996, Congress passed and the President signed an omnibus
funding bill which included legislation for the recapitalization of the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC. This
legislation includes a provision requiring the merger of the BIF, which is also
administered by the FDIC, and SAIF in 1999, assuming that bank charters and
thrift charters are combined by that time. The legislation provided for a new
Financing Corporation ("FICO") sharing formula between BIF and SAIF insured
institutions, which imposes a surcharge of 1.3 cents per one-hundred dollars of
BIF-insured deposits. The Corporation is subject to the FICO surcharge and is
required to pay one-fifth of the rate that SAIF institutions pay for three
years, ending in 1999.
There are legal restrictions on the extent to which the Corporation and its
non-bank subsidiaries may borrow or otherwise obtain credit from Riggs Bank N.A.
Subject to certain limited exceptions, a bank subsidiary may not extend credit
to the Corporation or to any other affiliate (as defined) in an amount which
exceeds 10% of its capital stock and surplus and may not extend credit in the
aggregate to such affiliates in an amount which exceeds 20% of its capital stock
and surplus. Further, there are legal requirements as to the type, amount and
quality of collateral which must secure such extensions of credit by each bank
subsidiary to the Corporation or to other affiliates. Finally, extensions of
credit and other transactions between a bank subsidiary and the Corporation or
other affiliates must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to such a
bank subsidiary as those prevailing at the time for comparable transactions with
non-affiliated companies.
Under Federal Reserve Board policy, bank holding companies are expected to act
as a source of financial strength to their subsidiary banks and to commit
resources to support such banks in circumstances where a bank holding company
might not do so absent such policy. In addition, any capital loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
The Corporation's subsidiaries face substantial competition in their
operations from banking and nonbanking institutions, including savings and loan
associations, credit unions, money market funds and other investment vehicles,
mutual fund advisory companies, brokerage firms, insurance companies, mortgage
banking companies, finance companies and other types of financial services
providers.
ITEM 2.
PROPERTIES
The Corporation owns properties located in Washington, D.C. which house its
executive offices, 15 of its branches, and certain operational units of Riggs
Bank N.A. The Corporation also owns an office building in Maryland, where
additional operational units of Riggs Bank N.A. are located. Further, the
Corporation owns an office building in London, England, and leases various
properties in Washington, D.C.; London, England; Miami, Florida; Northern
Virginia; Maryland; and Paris, France.
5
ITEM 3.
LEGAL PROCEEDINGS
In the normal course of business, the Corporation is involved in various types
of litigation, including litigation with borrowers who are in default under
their loan agreements. In the opinion of management, based on its assessment and
consultation with outside counsel, litigation which is currently pending against
the Corporation will not have a material impact on the financial condition or
future operations of the Corporation as a whole.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1997.
Information required by this Item for Executive Officers of the Registrant is
included in Item 10--"Directors and Executive Officers of the Registrant" which
is incorporated herein by reference.
6
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of Riggs National Corporation is traded on the NASDAQ National
Market tier of The Nasdaq Stock Market under the symbol: "RIGS."
A history of the Corporation's stock prices and dividends can be found under
"Quarterly Stock Information" on Page 65 of this Form 10-K.
As of February 27, 1998, there were 3,178 stockholders of record.
Other information required by this item is set forth in the "Notes to
Consolidated Financial Statements--Notes 10 and 11" on Pages 47 and 49,
respectively, of this Form 10-K.
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
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Interest Income $ 330,792 $ 293,198 $ 298,799 $ 266,005 $ 256,951
Interest Expense 151,501 139,891 147,821 112,723 122,130
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 179,291 153,307 150,978 153,282 134,821
Less: Provision for Loan Losses (12,000) -- (55,000) 6,300 69,290
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Net Interest Income after
Provision for Loan Losses 191,291 153,307 205,978 146,982 65,531
Noninterest Income Excluding
Securities Gains, Net 84,424 89,007 73,493 85,298 88,509
Securities Gains, Net 3,500 7,170 511 226 24,141
Noninterest Expense 186,030 176,947 191,834 199,020 266,752
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Income (Loss) before Taxes
and Minority Interest 93,185 72,537 88,148 33,486 (88,571)
Applicable Income Tax Expense (Benefit) 24,690 6,174 346 (533) 5,640
Minority Interest in Income
of Subsidiaries, Net of Taxes 17,616 420 -- -- --
===================================================================================================================================
NET INCOME (LOSS) $ 50,879 $ 65,943 $ 87,802 $ 34,019 $ (94,211)
Less: Dividends on Preferred Stock 10,750 10,750 10,750 12,124 1,434
===================================================================================================================================
Net Income (Loss) Available
for Common Stock $ 40,129 $ 55,193 $ 77,052 $ 21,895 $ (95,645)
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 1.32 $ 1.82 $ 2.55 $ .72 $ (3.65)
Diluted 1.27 1.79 2.54 .72 (3.65)
DIVIDENDS DECLARED AND
PAID PER COMMON SHARE .20 .15 -- -- --
YEAR-END BALANCES
Assets $5,846,426 $5,135,100 $4,732,533 $4,425,665 $4,780,237
Earning Assets 5,347,736 4,621,463 4,196,339 3,979,588 4,302,278
Loans 2,884,373 2,637,834 2,571,959 2,549,924 2,528,133
Deposits 4,297,918 4,050,683 3,885,179 3,602,794 3,773,824
Long-Term Debt 191,525 191,525 217,625 217,625 213,325
Stockholders' Equity 463,182 425,776 376,669 267,663 293,197
7
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In 1997, the Corporation achieved consolidated net earnings of $50.9 million. By
comparison, the Corporation had net earnings of $65.9 million in 1996 and $87.8
million in 1995. Earnings per diluted share for 1997, 1996 and 1995, were $1.27,
$1.79 and $2.54, respectively. Net income for 1997 and 1995 benefited from $12.0
million and $55.0 million reductions, respectively, in the reserve for loan
losses, as continued improvement in credit quality resulted in the recording of
these reserve adjustments. Key measurements of profitability include the
Corporation's net income to average total assets, net income to average
stockholders' equity and the net interest margin. Net income to average total
assets was 0.97% for 1997, compared with ratios of 1.40% and 1.92% for 1996 and
1995, respectively. Net income to average stockholders' equity was 11.69% in
1997, compared with 16.48% for 1996 and 28.25% for 1995. The net interest
margin for 1997, 1996 and 1995 was 3.81%, 3.72% and 3.74%, respectively.
Net interest income (before the provision for loan losses) was a significant
component of earnings in 1997, totaling $179.3 million, an increase of $26.0
million from 1996's total. The net interest margin increased nine basis points
between the years. This is attributable to an increase of $578.3 million in
average earning assets, partially offset by an increase in average
interest-bearing liabilities of $188.4 million, resulting in an increase of
$389.9 million in net earning assets. The improvement in net earning assets
resulted from increases in earning assets funded by the issuance of trust
preferred securities in 1997, in addition to reductions in nonperforming assets
and increases in stockholders' equity during the year.
Noninterest income for 1997, excluding securities gains, totaled $84.4
million, compared with 1996's total of $89.0 million. The decrease from 1996,
totaling $4.6 million (5.2%), was partially due to $5.1 million in interest on
tax settlements in the 1996 year, and $3.2 million from the sale of a portion of
Riggs's corporate trust business in the fourth quarter of 1996. Noninterest
expense for 1997 rose to $186.0 million, a 5.1% increase totaling $9.1 million
from 1996's total of $176.9 million. The increase in expenses during 1997 was
primarily the result of a $6.0 million increase in salaries and wages, which was
partially offset by a $2.8 million reduction in pension and benefit expenses. In
1997 the Corporation recognized a $2.4 million write-off of prepaid expenses
relating to certain data processing services. Additionally, increases in
technology related enhancements and support services totaling $4.7 million, were
partially offset by decreases in occupancy expense of $1.8 million and legal
fees of $1.5 million. A $3.9 million increase in other noninterest expenses, the
result of consulting and other expenses, was partially offset by a $1.8 million
reduction in other real estate owned expense during the year.
Nonperforming assets, including other real estate owned, decreased $29.1
million, or 76.5%, during the year to $9.0 million at December 31, 1997. At
year-end 1997, the Corporation's reserve for loan losses totaled $52.4 million,
a decrease of $12.1 million from year-end 1996's balance, mainly due to a $12.0
million reduction as a result of increased credit quality in the loan portfolio.
The reserve to total loans ratio stood at 1.82% at December 31, 1997.
Nonperforming loans totaled $3.9 million at year-end 1997, with a reserve to
nonperforming loans (coverage) ratio of 1,345%.
On March 12, 1997, Riggs Capital II, a newly formed, wholly-owned subsidiary
of the Corporation, sold preferred equity capital through the private placement
of redeemable trust preferred securities. Riggs Capital II sold, at par, 200,000
shares of redeemable trust preferred securities, liquidation preference of
$1,000, for a total of $200.0 million, in a private placement. These securities
mature in 2027 and have an annual dividend rate of 8.875 percent, payable
semi-annually on June 30 and December 31 of each year. The net proceeds from
this sale, along with the $150 million of trust preferred securities issued by
Riggs Capital in December 1996, have enhanced certain capital ratios of the
Corporation and will be available for its general corporate purposes (see Note
11, "Common and Preferred Stock").
ACQUISITIONS
In October 1997, the Corporation acquired J. Bush & Co., a privately-held
investment advisor. At acquisition, J. Bush & Co. had approximately $250 million
in assets under management. J. Bush & Co. is a separate subsidiary of the
Corporation's principal banking subsidiary - Riggs Bank N.A. This acquisition
was accounted for as a purchase, the impact of which was not material to the
Corporation.
EARNING ASSETS
MONEY MARKET ASSETS
Short-term instruments such as time deposits with other banks, federal funds
sold and resale agreements represent the Corporation's most liquid investments.
These investments are lower-yielding assets that are highly interest-rate
sensitive. Funds available for short-term investments generally are a function
of daily movements in the Corporation's securities, loans and deposit
portfolios, combined with the Corporation's overall interest-rate risk and
asset/liability strategy. At December 31, 1997, total money market assets
decreased by $30.3 million
8
(3.7%) when compared with year-end 1996. This decrease was a result of fund
outflows deployed for the purchase of securities available for sale and the
funding of new loans. In 1997, the total average of time deposits with other
banks and federal funds sold and resale agreements increased from $549.4 million
in 1996 to $713.6 million in 1997.
SECURITIES
The securities portfolio consists of securities available for sale that are
accounted for in accordance with the Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (See Note 1, "Summary of Significant Accounting Policies" and Note
2, "Securities"). The securities portfolio increased $510.0 million (43.9%) from
a balance of $1.16 billion at year-end 1996 to a balance of $1.67 billion at
year-end 1997. The increase in securities from 1996 was mainly due to fund
inflows from the minority interest-trust preferred securities as well as
increases in the deposit and borrowing portfolios. In 1997, the Corporation had
purchases and maturities totaling $8.18 billion and $7.20 billion, respectively.
This large volume of purchases and maturities was due to the Corporation's
strategy of maintaining a portion of its investment portfolio in short-term
investments in conjunction with its interest-rate risk management. Proceeds
received from the sale of securities totaled $476.0 million in 1997. These sales
were the result of a repositioning of the securities portfolio which resulted in
securities gains of $3.5 million, as the Corporation replaced securities from
its U.S. Treasury portfolio with government agencies securities in the third
quarter of 1997. Securities available for sale are carried at fair value with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity. Quoted market prices are used to determine the estimated
fair value. When securities are sold, the adjusted costs of the specific
securities sold are used to compute gains or losses on the sale. The
weighted-average maturity and yield for securities available for sale, adjusted
for anticipated prepayments, were approximately 1.6 years and 6.1%,
respectively, at December 31, 1997. The securities portfolio is part of
management's asset/liability strategy and is a function of short and long-term
investments by the Corporation relative to its interest-bearing liabilities
outstanding. At December 31, 1997, all U.S. Treasury securities, government
agencies securities, and $24.8 million of the other securities were non-taxable
for state and local tax purposes.
At December 31, 1997, the aggregate securities portfolio was comprised
entirely of securities available for sale (see Table A). Securities available
for sale were primarily U.S. Treasury and government agencies securities.
Securities available for sale may be sold in response to changes in interest
rates, risk characteristics and other factors as part of the Corporation's
asset/liability strategy (see "Sensitivity to Market Risk"). At December 31,
1997, the Corporation had approximately $130 million in securities purchased,
but not settled, for which other liabilities were recorded.
LOANS
Loans, net of premiums, discounts and deferred fees, totaled $2.88 billion at
December 31, 1997, an increase of $246.5 million, or 9.3%, from the prior year
(see Tables B through D). Over the past few years, the quality and overall risk
level of the portfolio has improved as a result of adjustments to its
composition, combined with the Corporation's comprehensive underwriting and
review policies. During the year, the Corporation focused its efforts on new
loan production in the commercial and financial, real
estate-commercial/construction, home equity and foreign loan portfolios. This
strategy coincided with the continued improvement in the local economy, along
with a strong economy in Europe.
The commercial loan portfolio totaled $529.9 million at year-end 1997, a net
increase of $86.3 million, or 19.5%, over the $443.6 million at year-end 1996,
the result of increased demand due to a strong economy in the Washington, D.C.
metropolitan area. There were no individual borrowers or industries representing
more than a 10% share of the total loan portfolio.
The real estate-commercial/construction loan portfolio totaled $410.0 million
at year-end 1997, a net increase of $58.0 million, or 16.5% over the $352.0
million at year-end 1996. This increase was also related to the improved loan
demand and the strong local economy.
Consumer loans were flat compared to 1996, while residential mortgage loans
declined $69.6 million as a result of paydowns and payoffs in excess of new loan
production.
The home equity portfolio increased $35.8 million, or 12.7% in 1997, to a
total of $317.7 million, the result of new products introduced in 1997.
Originations in 1997 totaled $127.8 million. This growth was mostly offset by
payoffs and paydowns during the year.
Foreign loans increased $137.8 million (54.7%) to $389.6 million at year-end
1997, from the balance at year-end 1996 of $251.8 million. Contributing to the
growth in foreign loans in 1997 was the continued strengthening of the general
economy in the United Kingdom, together with the expansion of the recently
established Embassy Banking division in London and a regional Trade Finance
office in Manchester, England.
CROSS-BORDER OUTSTANDINGS
The Corporation extends credit to borrowers domiciled outside of the United
States through several of its banking subsidiaries.
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These assets may be impacted by changing economic conditions in their respective
countries. Management routinely reviews these credits and continually monitors
the international economic climate and assesses the impact of these changes on
foreign domiciled borrowers.
Cross-border outstandings include loans, acceptances, interest-bearing
deposits with other banks, investments, accrued interest and other monetary
assets, that are denominated in U.S. dollars or other currencies. In addition,
cross-border outstandings include legally enforceable guarantees issued on
behalf of nonlocal third parties and local currency outstandings to the extent
they are not funded by local currency borrowings. Cross-border outstandings are
then reduced by tangible liquid collateral and any legally enforceable
guarantees issued by nonlocal third parties on behalf of the respective country.
At December 31, 1997, the Corporation had no cross-border outstandings
exceeding 1% of its total assets to countries experiencing difficulties in
repaying their external debt. At December 31, 1997, the United Kingdom was the
only country with cross-border outstandings in excess of 1% of the Corporation's
total assets that had loans in either a nonperforming, past-due or potential
problem loan status. Net cross-border outstandings to the United Kingdom totaled
$154.7 million, compared with $196.3 million at year-end 1996 (see Tables E and
F). Nonaccrual loans in the United Kingdom totaled $1.4 million at December 31,
1997, compared with $287 thousand at December 31, 1996. There were no past-due
or potential problem loans outstanding in the United Kingdom at December 31,
1997 and year-end 1996.
At December 31, 1997, 1996, and 1995, the Corporation did not have any
cross-border outstandings between 0.75% and 1% of its total assets.
ASSET QUALITY
NONPERFORMING ASSETS SUMMARY
Nonperforming assets, which include nonaccrual loans, renegotiated loans, and
other real estate owned (net of reserves), totaled $9.0 million at year-end
1997, a $29.1 million (76.5%) decrease from the year-end 1996 total of $38.1
million (see Tables G and H). This decrease in nonperforming assets during 1997
was attributable to sales and paydowns of $26.8 million, nonaccrual loans
returning to accrual status of $3.2 million, and net charge-offs/writedowns of
$1.8 million, the total of which was partially offset by net additions in 1997
of $2.7 million.
Impaired loans generally are defined as nonaccrual loans which are
collectively evaluated for impairment. Specific reserves are required to the
extent that the fair value of the impaired loans is less than the recorded
investment. Impaired loans are further discussed in Note 3, "Loans and Reserve
for Loan Losses."
NONACCRUAL AND RENEGOTIATED LOANS
At December 31, 1997, nonaccrual loans were $3.8 million, or 0.1% of total
loans, compared with $9.9 million, or 0.4% of total loans, at December 31, 1996.
Loans (other than consumer) are placed on nonaccrual status when, in
management's opinion, there is doubt as to the ability to collect either
interest or principal, or when interest or principal is 90 days or more past
due, and the loan is not well-secured and in the process of collection. Consumer
loans generally are charged off when they become 120 days past due. Nonaccrual
loan activity during 1997 included sales and repayments of $4.4 million,
nonaccrual loans returning to accrual status of $3.2 million, charge-offs of
$395 thousand and transfers of nonaccrual loans to other real estate owned of
$451 thousand. These decreases were partially offset by net additions to
nonaccrual loans totaling $2.4 million.
Renegotiated loans totaled $101 thousand at December 31, 1997, compared with
$125 thousand at year-end 1996. Renegotiated loans generally consist of real
estate-commercial/ construction loans that are renegotiated to provide a
reduction or deferral of interest or principal as a result of a deterioration in
the financial position of the borrower. Renegotiated loans decreased $24
thousand in 1997, the result of repayments during the year.
PAST-DUE AND POTENTIAL PROBLEM LOANS
Past-due loans consist predominantly of residential real estate and consumer
loans that are well-secured and in the process of collection and on which the
Corporation is accruing interest. Past-due loans increased $3.4 million in 1997
to $7.3 million. These increases were primarily residential, single-family
past-due loans.
At December 31, 1997, the Corporation had identified approximately $10.0
million in potential problem loans. These loans are currently performing, but
management believes that they have certain attributes that may lead to
nonaccrual or past-due status in the foreseeable future. These loans consisted
entirely of domestic loans, primarily commercial and financial at year-end 1997.
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses represents a charge or credit to earnings
necessary, after loan charge-offs and recoveries, to maintain the reserve for
loan losses at a level adequate to absorb estimated losses inherent in the loan
portfolio. The Corporation determines the appropriate balance of the reserve for
loan losses based upon an analysis of risk factors that includes: primary
sources of repayment on individual loans and groups of similar
10
loans, liquidity and financial condition of the borrowers and guarantors,
historical charge-offs/writedowns within loan categories, general economic
conditions and other factors existing at the determination date. The loan
portfolio is continually monitored by management to identify loans requiring
particular attention. On a quarterly basis, the Loan Loss Reserve Committee
evaluates the adequacy of the reserve for loan losses and the Board of Directors
reviews management's determination of the reserves. The reserve for loan losses
is based on management's assessment of existing conditions and reflects
potential losses determined to be probable and subject to reasonable estimation.
Based on management's assessment of the adequacy of the reserve, risk
characteristics within the loan portfolio, current asset quality, lending
levels, economic developments and other factors, the reserve for loan losses was
reduced by $12.0 million in the fourth quarter of 1997. As a result, the
provision for loan losses amounted to a negative $12.0 million for 1997,
compared to no provision for the prior year. The reserve for loan losses was
$52.4 million, or 1.82% of total loans, at December 31, 1997, compared with
$64.5 million, or 2.44% of total loans, at December 31, 1996 (see Table I). Net
recoveries for 1997 totaled $472 thousand compared with $6.6 million for 1996.
Total net recoveries for 1997 were mostly attributed to $2.3 million in net
recoveries from domestic real estate-commercial/construction, partially offset
by net charge-offs to home equity and consumer loans of $401 thousand and $1.5
million, respectively. In 1996, net recoveries were mostly attributable to $5.3
million in net recoveries from foreign loans and $2.7 million from domestic real
estate-commercial/construction loans. The Corporation's coverage ratio (reserve
for loan losses divided by the sum of nonaccrual and renegotiated loans) was
1,345.2% at year-end 1997, compared with 644.8% at year-end 1996. The increase
in the coverage ratio was caused primarily by the aggregate 61% decrease in
nonaccrual and renegotiated loans in 1997.
The estimated allocation of the reserve for loan losses by loan category
represents management's assessment of existing conditions and risk factors
within these categories (see Table J).
OTHER REAL ESTATE OWNED, NET
Other real estate owned decreased 81.9% to $5.1 million at December 31, 1997,
from $28.1 million at December 31, 1996. The decrease resulted from sales and
repayments of $22.4 million and $1.4 million in writedowns, partially offset by
net additions of $823 thousand during the period. Loans are transferred to other
real estate owned when collateral securing the loans is acquired, or deemed to
be acquired, through foreclosure.
At December 31, 1997, residential and commercial land composed 80.3% of other
real estate owned, with the remainder of the portfolio consisting of office,
industrial, retail and other property types. Except for $83 thousand of
properties located in the United Kingdom, the remaining other real estate owned
properties were located in the Washington, D.C., metropolitan area at year-end
1997 (see Table K).
DEPOSITS
Total deposits at December 31, 1997, were $4.30 billion, compared with $4.05
billion at year-end 1996, an increase of $247.2 million, or 6.1%. The increase
in balances was concentrated in two categories, demand and time deposits in
foreign offices. The rise in demand deposits of $90.3 million is the result of
increased seasonal fluctuations above the prior year. Foreign time deposits
increased $142.1 million, due in part to increases in the funding of the
Corporation's London operations through inter-bank sources.
As a result of a new program introduced in the third quarter of 1996, the
Corporation has increased average earning assets by approximately $48 million,
resulting in a benefit of approximately $2 million pretax to net interest income
in 1997. Under this program, deposit balances in certain NOW and noninterest
checking accounts are transferred to the money market classification, thereby
reducing the level of deposit reserves required by the Federal Reserve. Based on
certain limitations, funds are periodically transferred back to the checking
accounts to cover checks presented for payment or other forms of withdrawal.
Total accounts transferred equaled $350.6 million at December 31, 1997.
Average domestic deposits were $3.48 billion for 1997, up $45.9 million, or
1.3%, from an average of $3.43 billion for 1996. Average core deposits (total
deposits in domestic offices, excluding negotiable certificates of deposit) were
$3.46 billion, an increase of $41.9 million, or 1.2%, from 1996's average
balance of $3.42 billion. Average foreign deposits increased $121.2 million, to
$492.4 million, primarily the result of increased deposits in the United Kingdom
subsidiary (see Table L).
Since 1994, the Corporation has been conducting a detailed analysis of its
retail banking system, to determine the best use of its locations, branch
facilities, product lines and personnel. The Corporation has sold or
consolidated seven retail branches as part of this analysis. The Corporation is
actively seeking enhancements to existing branches to attract new customers and
to improve service quality and overall profitability of its branches.
Enhancements include improving the computer network system, upgrading the
telephone customer service line, and the redesigning of 20 retail branches to
provide better access to traditional banking services as well as trust and
11
investment advisory services. In April 1997, the Corporation introduced its home
banking and imaging services products and in December 1997 opened its Internet
home pages at http://www.riggsbank.com and http://www.riggsco.com.
SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and repurchase
agreements, U.S. Treasury demand notes and other borrowed funds. These
short-term obligations are an additional source of funds used to meet certain
asset/liability and daily cash management objectives. Short-term borrowings
increased $97.3 million (38.1%) to $352.5 million at December 31, 1997, compared
with $255.2 million at year-end 1996. Average short-term borrowings for 1997
totaled $284.4 million, up from 1996's average of $241.0 million (see Table L).
The increase in the average balances during 1997 was due primarily to increases
in repurchase agreements, which are a funding vehicle for the Corporation.
Short-term borrowings are used to help the Corporation generate cash and
maintain adequate levels of liquidity (see Note 8, "Borrowings").
LONG-TERM DEBT
Long-term debt totaled $191.5 million at December 31, 1997 and 1996. Included in
long-term debt were subordinated debentures of $66.5 million due in 2009 and
subordinated notes of $125.0 million due in 2006. The subordinated debentures
due in 2009 bear a fixed rate of interest of 9.65% per annum, and the notes due
in 2006 bear a fixed rate of interest of 8.50% per annum. See Note 8,
"Borrowings."
MINORITY INTEREST IN PREFERRED STOCK OF
SUBSIDIARY
On March 12, 1997, Riggs Capital II issued 200,000 shares of 8.875% Trust
Preferred Securities, Series C, with a liquidation preference of $1,000 per
share. Riggs Capital II, a new trust entity formed in order to issue the
preferred securities, is a wholly-owned subsidiary of the Corporation. Dividends
are paid semi-annually on June 30 and December 31 of each year. The Trust
Preferred Securities, Series C, cannot be redeemed until March 15, 2007, and
have a final maturity of March 15, 2027. Riggs Capital II invested all of the
proceeds from its common and preferred stock sales of $200 million in Junior
Subordinated Deferrable Interest Debentures, Series C, issued by the Corporation
on March 12, 1997, at a rate of 8.875%, with comparable dividend payment dates
and maturity as the Trust Preferred Securities. Interest is cumulative and
deferrable on the Junior Subordinated Deferrable Interest Debentures for a
period not to exceed five years and is also cumulative and deferrable for the
same period for the Trust Preferred Securities. The Trust Preferred Securities
qualify as Tier I Capital with certain limitations (see Note 1, "Summary of
Significant Accounting Policies" and Note 11, "Common and Preferred Stock").
LIQUIDITY
SENSITIVITY TO MARKET RISK
The Corporation is exposed to various market risks. It has determined that
interest-rate risk has a material impact on the Corporation's financial
performance, and as such has established the Asset/Liability Committee ("ALCO")
to manage interest-rate risk. The role of this committee is to prudently manage
the asset/liability mix of the Corporation to provide a stable net interest
margin while maintaining liquidity and capital. This entails the management of
the overall risk of the Corporation in conjunction with the acquisition and
deployment of funds based upon the Committee's view of both current and
prospective market and economic conditions.
The Corporation manages its interest-rate risk through the use of an income
simulation model, which forecasts the impact on net interest income of a variety
of different interest rate scenarios. A "most likely" interest rate scenario is
forecasted based upon an analysis of current market conditions and expectations.
The model then evaluates the impact on net interest income of rates moving
significantly higher or lower than the "most likely" scenario. The results are
compared to risk tolerance limits set by corporate policy. The model's results
as of December 31, 1997 are shown in Table M. Current policy establishes limits
for possible changes in net interest income for 12 and 36 month horizons. The
interest rate scenarios monitored by ALCO are based upon a 100 basis point (1%)
gradual increase or decrease in rates (versus the "most likely" scenario) over a
12-month time period and a 300 basis point (3%) gradual increase or decrease in
rates (versus the "most likely" scenario) over a 36-month time period.
At year-end 1997, the forecasted impact of rates rising or falling 100 basis
points versus the "most likely" scenario over a 12-month time period was a
change in net interest income not exceeding 1.0%. For a 300 basis point movement
in rates versus the "most likely" scenario over a 36-month period, the impact on
net interest income did not exceed 6.3%. The results of the simulation for
year-end 1997 indicated that the Corporation maintained an asset sensitive
position, and was well insulated against interest rates moving significantly in
either direction.
In managing the Corporation's interest-rate risk, ALCO uses financial
derivative instruments, such as interest-rate swaps, caps, floors, collars,
futures, and options. Financial derivatives are employed to assist in the
management and/or reduction of the interest-rate risk of the Corporation, and
can effectively alter the sensitivity of segments of the statement of condition
for specified periods of time. All of these instruments are considered
off-balance-sheet, as they do not materially affect the level of assets or
liabilities of the Corporation. Interest-rate risk management strategies are
discussed and approved by ALCO prior to implementation.
12
Management finds that the methodologies discussed above provide a meaningful
representation of the Corporation's interest-rate and market risk sensitivity,
though factors other than changes in the interest rate environment, such as
levels of non-earning assets, and changes in the composition of earning assets,
may affect net interest income. Management believes its current interest-rate
sensitivity level is appropriate, considering the Corporation's economic outlook
and conservative approach taken in the review and monitoring of the
Corporation's sensitivity position.
CAPITAL RESOURCES
A fundamental objective of management is to maintain a level of capitalization
that is sufficient to take advantage of favorable investment opportunities and
to promote depositor and investor confidence. In addition, the current economic
and regulatory climate places an increased emphasis on capital strength and the
ability of the Corporation to withstand unfavorable economic and/or business
losses. The Corporation's management monitors its capital levels monthly in
relation to financial forecasts for the year, as well as internal and external
policies. The Corporation continues to maintain a strong capital position, and
is one of the highest capitalized banks in the country.
Total stockholders' equity at December 31, 1997 was $463.2 million, or 7.9% of
total assets, up $37.4 million from year-end 1996. The increase was the result
of earnings for the year totaling $50.9 million, partially offset by dividends
on preferred stock of $10.8 million and common stock of $6.1 million.
The Federal Reserve Board has issued risk-based capital guidelines for bank
holding companies. The guidelines define a two-tier capital framework. Tier I
Capital consists of common and qualifying preferred stockholders' equity along
with qualifying trust preferred securities, less goodwill and other adjustments.
Tier II Capital consists of mandatory convertible, subordinated and other
qualifying term debt, preferred stock and trust preferred securities not
qualifying as Tier I Capital and the reserve for loan losses up to 1.25 percent
of risk-weighted assets. Under these guidelines, one of four risk weightings is
assigned to the different on-balance sheet assets. Off-balance-sheet items, such
as loan commitments and derivatives, are also assigned a risk weighting after
conversion to balance sheet equivalent amounts. Bank holding companies are
required to meet a minimum ratio of qualifying total (combined Tier I and Tier
II) capital to risk-weighted assets of 8.00%, at least half of which must be
composed of core (Tier I) capital elements. The Corporation's total and core
capital ratios were 31.52% and 18.45%, respectively, at December 31, 1997,
compared with 28.47% and 20.04%, respectively, at December 31, 1996. The
Corporation's total and core capital ratios have been enhanced by the inclusion
of the proceeds from the trust preferred securities (see Note 11 "Common and
Preferred Stock").
The Federal Reserve Board has established an additional capital adequacy
guideline, the leverage ratio, in keeping with the Prompt Corrective Action
regulations promulgated under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which measures the ratio of Tier I Capital to
quarterly average assets. The minimum leverage ratio guideline is 3.00% for the
most highly rated bank holding companies. Those that are not in the most highly
rated category, including the Corporation, must maintain at least a minimum
ratio of 4.00% or higher, if determined necessary by the Federal Reserve Board
through its assessment of the Corporation's asset quality, earnings performance,
interest-rate risk and liquidity. The Corporation's leverage ratio was 11.15% at
December 31, 1997, compared with a leverage ratio of 11.84% at the prior
year-end.
The Corporation's policy is to ensure that its bank subsidiary is capitalized
in accordance with regulatory guidelines. The Corporation's national bank
subsidiary is subject to minimum capital ratios as prescribed by the Office of
the Comptroller of the Currency (the "OCC"), which are the same as those
prescribed by the Federal Reserve Board for bank holding companies. Table N
details the actual and required minimum ratios for the Corporation and its
insured bank subsidiary.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is derived by subtracting the cost of funds from the income
received on earning assets. Earning assets are mainly comprised of loans and
securities, although interest-bearing liabilities consist of deposits and
borrowed funds. Net interest income is impacted by variations in the volume and
mix of these assets and liabilities as well as fluctuations in interest rates.
Net interest income on a tax-equivalent basis (net interest income plus an
amount equal to the tax savings on tax-exempt interest), totaled $183.1 million
for 1997, an increase of $26.1 million, or 16.6%, from $157.0 million in 1996.
The Corporation experienced an increase during 1997 in average interest-earning
assets totaling $578.3 million, while the average rate earned decreased six
basis points between the years. Average loans, securities and money market
assets increased $103.5 million, $310.6 million and $164.2 million,
respectively, in 1997. The Corporation also had a $188.4 million increase in
average interest-bearing liabilities that was due mostly to the increase in
average interest-bearing deposits. The average rate paid increased 11 basis
points between the years; thus, the Corporation had a favorable net increase in
average interest-earning assets over interest-bearing liabilities of $389.9
million. The increase in average interest-earning assets for the year 1997 was
favorably impacted by the proceeds from the sale of the trust preferred
securities. On a comparative basis, this amounted to $303.9 million, on average,
year over year (see Tables O and P).
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The net interest margin (net interest income on a tax-equivalent basis divided
by average earning assets) was 3.81% for 1997, an increase of nine basis points
from the 3.72% net interest margin for 1996 due to the aforementioned changes in
earning assets and interest-bearing liabilities. Net interest spread (the
difference between the average tax-equivalent rate earned and the average rate
incurred on interest-bearing liabilities) for 1997 was 2.80%, down 17 basis
points from 1996's spread.
NONINTEREST INCOME
Noninterest income for 1997 was $87.9 million, down $8.3 million, or 8.6%, from
1996's total of $96.2 million. Excluding securities gains of $3.5 million and
$7.2 million for 1997 and 1996, respectively, noninterest income decreased $4.6
million (5.2%). Trust income of $37.3 million increased $4.0 million, or 12.1%,
in 1997 due to the increase in market value of trust and custodial assets from
$9.73 billion at year-end 1996 to $10.61 billion at year-end 1997. Service
charges and fees for 1997 increased $884 thousand (2.5%) to $36.9million, due
primarily to increases in ATM and debit card fee income totaling $1.1 million in
1997. In the second quarter of 1996, the Corporation recorded $5.1 million in
interest from tax receivables relating to tax returns from the 1970s and 1980s.
Also in the fourth quarter of 1996, the Corporation recorded a $3.2 million
pre-tax gain from the sale of a portion of its corporate trust business (see
Table Q).
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 was $186.0 million, an
increase of $9.1 million (5.1%) from $176.9 million for 1996. The increase in
noninterest expense was partly attributable to the increase in other noninterest
expense of $3.6 million, the result of increases in consulting and other
expenses related to the development and implementation of several retail banking
strategies (see "Deposits") along with the write-off of prepaid expenses
relating to certain data processing services. Additionally, increases in
salaries and wages of $6.0 million occurred, due in part to staff additions
during the year. These increases were partially offset by lower benefits costs
($2.8 million) attributable to reductions in medical and life insurance funding,
and a net position for other real estate owned costs resulting in income of $1.4
million versus expense of $431 thousand in the prior year (see Table R).
YEAR 2000
The arrival of the next millennium presents challenges for all companies.
Financial institutions are dependent on information systems and have many
internal and external interdependencies with other financial institutions and
companies. These interdependencies will affect the amount of work needed to be
performed to achieve Year 2000 compliance.
The Corporation began to identify the risks associated with the Year 2000 in
1995. Since then, with the concurrence and involvement of the board of
directors, management has established a corporate oversight structure to ensure
that risk assessments, remediation plans, systems testing and conversions are
accomplished in a timely manner. Additionally, management evaluated the issues
associated with the Year 2000 and determined that an enterprise-wide business
risk assessment approach is most appropriate for addressing and remediating Year
2000 problems.
The enterprise-wide business risk assessment approach includes: identifying
significant business segments within the organization; identifying significant
participants within those segments such as customers, vendors, suppliers, and
systems; and assessing the Year 2000 preparedness of each. Further, for the
systems, both those supported in-house and those provided by vendors, it
involves identifying where the Year 2000 has an impact, remediating those areas
and performing integrated testing of program changes.
The Corporation's progress towards completing the enterprise-wide business
risk assessment is on target. Management plans to complete remediation of all
critical systems by December 31, 1998, in accordance with federal regulatory
agency guidelines. Testing of systems changes will be performed throughout 1999.
Management has assessed the cost of remediating the Corporation's systems and
does not expect these costs to have a material impact on the Corporation's
business, operations, or financial condition.
INCOME TAXES
The Corporation's provision for income taxes includes both federal and state
income taxes. The Corporation's 1997 provision for income tax expense of $24.7
million increased from a provision of $6.2 million in 1996. This represents an
effective tax rate of 26.5% for 1997, compared with an effective tax rate of
8.5% for 1996. The increase in the provision for income taxes in 1997 compared
to 1996 is the result of the depletion of federal income loss carryforwards in
the second quarter of 1996 combined with the recognition of a $2.4 million tax
refund received in 1996 as a result of amended local tax returns from the 1980s.
The Corporation accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires primarily the use of the asset and liability
method for computing taxes. Under this method, deferred tax assets and
liabilities are recorded for differences between financial statements and
tax-based assets and liabilities. The tax effects of these differences are
recorded using anticipated tax rates in the years these
14
differences will reverse. Additionally, a valuation allowance is established for
deferred tax assets in the event that these assets may not be fully realized. At
December 31, 1997, the Corporation had net deferred tax assets totaling $22.5
million, which included a valuation allowance of $6.9 million. Further tax
discussion and a reconciliation of the effective tax rate to the 1997 federal
statutory rate of 35% can be found in Note 13, "Income Taxes."
FOURTH QUARTER 1997 VS.
FOURTH QUARTER 1996
For the fourth quarter of 1997, the Corporation reported net income of $17.0
million, or $0.45 per diluted share, compared with $11.2 million, or $0.27 per
diluted share, for the fourth quarter of 1996 (see Table S). Results for the
fourth quarter of 1997 included a credit of $12.0 million in the provision for
loan losses versus no provision in the fourth quarter of 1996.
Nonperforming assets totaled $9.0 million at December 31, 1997, a decrease of
$8.7 million from the third quarter of 1997, and a decrease of $29.1 million
from $38.1 million at December 31, 1996.
Net interest income on a tax-equivalent basis for the fourth quarter of 1997
was $48.1million, an increase of $7.8 million, or 19.3%, year-to-year,
reflecting the same impact of net increases in average earning assets in 1997
(see Table T). The net interest margin was 3.81% during the fourth quarter of
1997, up seven basis points from the fourth quarter of 1996. The net interest
spread was 2.74% for the quarter ended December 31, 1997, down 19 basis points
from that for the same period in the prior year.
The reserve for loan losses totaled $52.4 million, a decrease of $11.3 million
during the fourth quarter of 1997. This decrease was the result of the
aforementioned $12.0 million reduction along with net recoveries of $443
thousand, compared with no provision and net recoveries of $2.5 million for the
fourth quarter of 1996.
Noninterest income for the fourth quarter of 1997 was $23.0million, a decrease
of $734 thousand, or 3.1%, when compared with the same period in 1996. This
decrease was attributable to the $3.2 million gain from the corporate trust
business sale in the fourth quarter of 1996, mostly offset by an increase in
trust income of $1.3 million and service charges and fees of $381 thousand.
Noninterest expense for the fourth quarter of 1997 totaled $51.6 million,
compared with $46.0 million a year earlier, an increase of $5.6 million, or
12.2%. This increase was primarily the result of an increase in net personnel
expenses of $1.8 million, occupancy of $866 thousand, advertising and public
relations of $931 thousand, and a $2.4 million write-off of prepaid expenses
relating to certain data processing services. These increases were offset
partially by a net other real estate owned income of $577 thousand in the fourth
quarter of 1997, versus net other real estate owned expense of $266 thousand for
the same period in 1996.
1996 VS. 1995
In 1996, the Corporation recorded total net income of $65.9 million. By
comparison, the Corporation achieved record earnings of $87.8 million in 1995.
Earnings per diluted share for 1996 and 1995 were $1.79 and $2.54, respectively.
Net income for 1995 benefited from a $55.0 million reduction in the reserve for
loan losses in the third quarter, as continued improvement in credit quality
resulted in the recording of this reserve adjustment. Net income to average
total assets was 1.40% for 1996 and 1.92% for 1995. Net income to average
stockholders' equity was 16.48% for 1996 and 28.25% for 1995. The net interest
margin for 1996 was 3.72%, down from 3.74% in 1995.
At December 31, 1996, total money market assets increased by $166.8 million
(25.5%) compared with year-end 1995, the result of fund inflows from deposit
accounts and minority interest-trust preferred securities. The total average of
time deposits with other banks and federal funds sold and resale agreements
increased from $462.5 million in 1995 to $549.4 million in 1996.
The aggregate securities portfolio increased $192.5 million (19.8%) from a
balance of $970 million at year-end 1995 to $1.16 billion at year-end 1996. The
increase in securities from 1995 was due mainly to funds from increases in the
deposit and borrowing portfolios, as well as inflows from the minority
interest-trust preferred securities. The weighted-average maturity and yield for
securities available for sale adjusted for anticipated prepayments were
approximately 3 years and 6.10%, respectively, at December 31, 1996. At December
31, 1996, the aggregate securities portfolio was comprised entirely of
securities available for sale, which totaled $1.16 billion. Securities available
for sale were primarily U.S. Treasury and government agencies securities.
Loans, net of premiums, discounts and deferred fees totaled $2.64 billion at
December 31, 1996, an increase of $65.9 million, or 2.6%, from the prior year.
During the year, the Corporation focused its efforts on new loan production in
the commercial and financial, residential mortgage and home equity portfolios.
This strategy coincided with the improvement in the local economy, particularly
in the areas of employment and small- to mid-sized commercial businesses. The
commercial loan portfolio totaled $443.6 million at year-end 1996, a net
increase of $43.3 million from the prior year balance. New
15
residential mortgage loans in 1996 totaled $70.3 million, which was offset by
paydowns and payoffs during the year resulting in a decrease of less than 5% in
the portfolio. The home equity portfolio increased $30.1 million, or 12.0%, in
1996, the result of several new products introduced in 1994 and 1995. Activity
within the foreign and real estate-commercial/construction portfolios had a
movement upward in 1996, although the consumer portfolio remained flat. The
Corporation experienced selective limited new lending in these portfolios.
Nonperforming assets totaled $38.1 million at year-end 1996, a $7.8 million
(17.0%) decrease from the year-end 1995 total of $45.9 million. This decrease in
nonperforming assets during 1996 was attributable to sales and paydowns of $15.3
million, nonaccrual loans returning to accrual status of $0.5 million, and net
charge-offs/writedowns of $2.9 million. These reductions were partially offset
by exchange rate fluctuations of $0.2 million, combined with net additions in
1996 of $10.5 million. At December 31, 1996, nonaccrual loans were $9.9 million,
or 0.4% of total loans, compared with $9.3 million, or 0.4% of total loans, at
December 31, 1995. Nonaccrual loan activity during 1996 included sales and
repayments of $6.0 million, nonaccrual loans returning to accrual status of $0.5
million, charge-offs of $1.5 million and transfers of non-accrual loans to other
real estate owned of $1.3 million. These decreases were more than offset by net
additions to nonaccrual loans and an increase in foreign exchange translation
adjustments, totaling $9.7 million and $0.2 million, respectively.
Renegotiated loans totaled $0.1 million at December 31, 1996, compared with
$3.4 million at year-end 1995. Renegotiated loans decreased $3.3 million in
1996, the result of sales and repayments totaling $2.8 million and charge-offs
totaling $0.5 million during the year. Other real estate owned decreased 15.3%
to $28.1 million at December 31, 1996, from $33.2 million at December 31, 1995.
The decrease resulted from sales and repayments of $6.4 million and $0.9 million
in writedowns, partially offset by net additions of $2.2 million during the
period. Past-due loans consisted predominately of residential real estate and
consumer loans that were well-secured and in the process of collection and on
which the Corporation was accruing interest. Past-due loans totaled $3.8 million
at year-end 1996, a decrease of $1.6 million compared to year-end 1995. At
December 31, 1996, the Corporation had identified approximately $1.6 million in
potential problem loans. These loans consisted primarily of $1.2 million in
residential mortgage loans. The Corporation had no other potential problem
assets at December 31, 1996.
In the third quarter of 1995, the reserve for loan losses was reduced by $55.0
million, based on management's review of the adequacy of the reserve, risk
characteristics within the loan portfolio, current asset quality, lending
levels, economic development and other factors. As a result, the provision for
loan losses amounted to a negative $55.0 million for 1995, compared to no
provision in 1996. Approximately $41.8 million of the reversal in 1995 related
to domestic loans and $13.2 million related to foreign loans. The reserve for
loan losses was $64.5 million, or 2.4%, of total loans, at December 31, 1996,
compared with $56.5 million, or 2.2%, of total loans at December 31, 1995. Net
recoveries for 1996 totaled $6.6 million compared with $14.5 million for 1995.
The Corporation's coverage ratio (reserves for loan losses divided by the sum of
nonaccrual and renegotiated loans) was 644.8% at year-end 1996, compared with
444.0% at year-end 1995. The increase in the coverage ratio was impacted by the
21.5% decrease in nonaccrual and renegotiated loans and the net recoveries
recorded in 1996.
Total deposits at December 31, 1996, were $4.05 billion, compared with $3.89
billion at year-end 1995, an increase of $165.5 million, or 4.3%. Average
domestic deposits were $3.43 billion for 1996, up $29.3 million, or 0.9%, from
an average of $3.41 billion for 1995. Average core deposits (total deposits in
domestic offices, excluding negotiable certificates of deposit) were $3.42
billion, an increase of $26.9 million, or 0.8% from 1995's average balance of
$3.40 billion. Average foreign deposits increased $31.5 million, to $371.2
million, primarily the result of increased deposits in the United Kingdom
subsidiary.
Short-term borrowings increased $53.8 million (26.7%) to $255.2 million at
December 31, 1996, compared with $201.5 million at year-end 1995. Average
short-term borrowings for 1996 totaled $241.0 million, down from 1995's average
of $248.6 million. The decrease in the average balance during 1996 was due
primarily to decreases in treasury, tax and loan balances, which were a
temporary source of funds for the Corporation. Long-term debt totaled $191.5
million at December 31, 1996, a decrease from $217.6 at year-end 1995.
Total stockholders' equity at December 31, 1996 was $425.8 million, or 8.3% of
total assets, up $49.1 million from year-end 1995. The increase from year-end
1995 was the result of earnings totaling $65.9 million, partially offset by
dividends on preferred stock of $10.8 million and common stock of $4.5 million.
Net interest income on a tax-equivalent basis totaled $157.0 million for 1996,
an increase of $2.7 million, or 1.8%, from $154.3 million in 1995. The
Corporation experienced a sizable increase during 1996 in average
interest-earning assets, totaling $100.2 million, whereas the average rate
earned decreased 30 basis points between the years. Average loans remained level
during the period as the majority of the increase in average balances occurred
in the money market asset portfolio, which increased over $86.9 million in 1996.
The Corporation also had
16
a $50.3 million increase in average interest-bearing liabilities that was due
mostly to the increase in average interest bearing deposits, whereas the average
rate paid decreased 30 basis points between the periods. Thus, the Corporation
had a favorable net increase in average interest-earning assets over
interest-bearing liabilities of $49.9 million. The net interest margin was 3.72%
for 1996, a decrease of 2 basis points from the 3.74% net interest margin for
1995 because of the changes in earning assets and interest-bearing liabilities.
Net interest spread for 1996 was 2.97%, unchanged from 1995's spread. Interest
lost on nonaccrual and renegotiated loans totaled $1.0 million for 1996, which
had the effect of reducing the net interest margin by approximately 2 basis
points for the year. In 1995 interest lost totaled $2.0 million and had the
effect of reducing the net interest margin in that year by approximately five
basis points.
Noninterest income for 1996 was $96.2 million, up $22.2 million, or 30.0%,
from 1995's total of $74.0 million. Excluding securities gains of $7.2 million
and $0.5 million for 1996 and 1995, respectively, noninterest income increased
$15.5 million, or 21.1%. In the second quarter of 1996, the Corporation recorded
$5.1 million in interest from tax receivables relating to tax returns from the
1970s and 1980s. Also, in the fourth quarter of 1996, the Corporation recorded a
$3.2 million pre-tax gain from the sale of a portion of its corporate trust
business. Trust income of $33.3 million increased $3.4 million, or 11.3%, in
1996 due to the increase in market value of trust and custodial assets from
$8.99 billion at year-end 1995 to $9.73 billion at year-end 1996. Service
charges for 1996 increased $1.2 million (3.5%) to $34.9 million, and
international fee income increased $0.3 million (44.3%) to $1.1 million. The
increase in service charges for 1996 was due primarily to increases in ATM and
debit card fee income totaling $1.5 million in 1996.
Noninterest expense for the year-ended December 31, 1996 was $176.9 million, a
decrease of $14.9 million from $191.8 million for 1995. The decrease in total
noninterest expense, excluding nonrecurring items, was actually larger, as a
result of $5.6 million of nonrecurring accruals in the third quarter of 1995.
Excluding these nonrecurring items, noninterest expense decreased $9.3 million,
or 5.0%. The decrease in noninterest expense was due primarily to decreases in
personnel related expenses of $4.4 million, and reductions in FDIC insurance of
$4.3 million. Other noninterest expense totaled $46.9 million, down $0.8
million, or 1.6%, from the $47.7 million for 1995.
The Corporation's provision for income taxes includes both federal and state
income taxes. The Corporation's 1996 provision for income tax expense of $6.2
million increased from an expense of $0.3 million in 1995. This represents an
effective tax rate of 8.5% for 1996, compared with an effective tax rate of 0.4%
for 1995. The provision for income taxes in 1995 was less than the amount
determined by application of the federal statutory income tax rate, principally
because of the Corporation's reversal of the previously established valuation
allowance. Additionally, in the second quarter of 1996, the Corporation received
a $2.4 million tax refund, the result of amended local tax returns from the
1980s, which reduced 1996's provision for income tax expense.
------------------------------------------------------
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, THAT INVOLVE RISK AND UNCERTAINTY. IN ORDER TO COMPLY WITH THE
TERMS OF THE SAFE HARBOR, THE CORPORATION NOTES THAT A VARIETY OF FACTORS COULD
CAUSE THE CORPORATION'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM
THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE CORPORATION'S
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
CERTAIN RISKS AND UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE,
DEVELOPMENT, GROWTH PROJECTIONS AND RESULTS OF THE CORPORATION'S BUSINESS SUCH
AS, THE GROWTH OF THE ECONOMY, INTEREST RATE MOVEMENTS, TIMELY DEVELOPMENT BY
THE CORPORATION OF TECHNOLOGY ENHANCEMENTS FOR ITS PRODUCTS AND OPERATING
SYSTEMS, THE IMPACT OF COMPETITIVE PRODUCTS, SERVICES AND PRICING, CUSTOMER
BUSINESS REQUIREMENTS, CONGRESSIONAL LEGISLATION AND SIMILAR MATTERS. READERS OF
THIS REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS WHICH ARE SUBJECT TO INFLUENCE BY THE NAMED RISK FACTORS AND
UNANTICIPATED FUTURE EVENTS. ACTUAL RESULTS, ACCORDINGLY, MAY DIFFER MATERIALLY
FROM MANAGEMENT EXPECTATIONS.
17
TABLE A: MATURITIES OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
GROSS GROSS BOOK/
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Due within 1 year $ 279,878 $ 376 $259 $ 279,995
Due after 1 year but within 5 years 225,112 1,627 13 226,726
Government Agencies Securities:
Due within 1 year 398,900 1 54 398,847
Due after 1 year but within 5 years 468,442 277 13 468,706
Due after 5 years but within 10 years 49,989 -- 43 49,946
Mature after 10 years 48,946 13 2 48,957
Mortgage Backed Securities:
Mature after 10 years 156,997 126 97 157,026
Other Securities:
Mature within 1 year 12,398 -- -- 12,398
Mature after 10 years 28,752 1,197 -- 29,949
====================================================================================================================================
Total Securities Available for Sale $1,669,414 $3,617 $481 $1,672,550
TABLE B: YEAR-END LOANS
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial and Financial $ 529,894 $ 443,557 $ 400,280 $ 400,660 $ 412,006
Real Estate-Commercial/Construction 410,011 352,015 326,965 323,835 388,442
Residential Mortgage 1,156,493 1,226,110 1,284,193 1,317,169 1,149,363
Home Equity 317,669 281,867 251,798 220,910 234,049
Consumer 78,932 78,617 79,867 75,887 82,819
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic 2,492,999 2,382,166 2,343,103 2,338,461 2,266,679
Foreign:
Governments and Official Institutions 50,606 17,131 30,849 26,013 28,113
Banks and Other Financial Institutions 8,506 5,457 6,570 11,517 14,999
Commercial and Industrial 293,609 213,236 171,070 146,153 192,770
Other 36,911 15,958 15,761 20,875 19,514
- ------------------------------------------------------------------------------------------------------------------------------------
Total Foreign 389,632 251,782 224,250 204,558 255,396
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans 2,882,631 2,633,948 2,567,353 2,543,019 2,522,075
Unamortized Premium (Unearned
Discount/Net Deferred Fees) 1,742 3,886 4,606 6,905 6,058
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans, Net of Unamortized Premium
(Unearned Discount/Net Deferred Fees) 2,884,373 2,637,834 2,571,959 2,549,924 2,528,133
Reserve for Loan Losses (52,381) (64,486) (56,546) (97,039) (86,513)
====================================================================================================================================
Total Net Loans $2,831,992 $2,573,348 $2,515,413 $2,452,885 $2,441,620
18
TABLE C: REAL ESTATE-COMMERCIAL/CONSTRUCTION LOANS
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1997
GEOGRAPHIC LOCATION
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF UNITED
(IN THOUSANDS) COLUMBIA VIRGINIA MARYLAND KINGDOM OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Land Acquisition and
Construction Development $ 15,532 $ 9,259 $ 4,886 $ -- $ -- $ 29,677
Multi-family Residential 10,869 13,658 4,076 -- 6,500 35,103
Commercial:
Office Buildings 94,868 39,496 31,513 -- -- 165,877
Shopping Centers 32,573 14,016 17,081 -- -- 63,670
Hotels 1,143 -- -- -- -- 1,143
Industrial/Warehouse 2,232 15,252 4,257 -- -- 21,741
Churches 29,204 1,470 26,252 -- -- 56,926
Other 8,745 20,544 6,073 -- 512 35,874
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial 168,765 90,778 85,176 -- 512 345,231
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic Real Estate-
Commercial/Construction Loans 195,166 113,695 94,138 -- 7,012 410,011
Foreign -- -- -- 145,511 -- 145,511
====================================================================================================================================
Total Real Estate-
Commercial/Construction Loans $195,166 $113,695 $94,138 $145,511 $7,012 $555,522
TABLE D: YEAR-END MATURITIES AND RATE SENSITIVITY
DECEMBER 31, 1997
LESS THAN OVER
(IN THOUSANDS) 1 YEAR (1) 1-5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Maturities:
Commercial and Financial $101,322 $253,315 $ 175,257 $ 529,894
Real Estate-Commercial/Construction 62,171 246,257 101,583 410,011
Residential Mortgage 18,295 87,066 1,051,132 1,156,493
Home Equity 159,040 -- 158,629 317,669
Consumer 45,577 31,672 1,683 78,932
Foreign 328,477 41,193 19,962 389,632
====================================================================================================================================
Total Loans $714,882 $659,503 $1,508,246 $2,882,631
Rate Sensitivity:
With Fixed Interest Rates $ 78,575 $295,529 $1,011,164 $1,385,268
With Floating and Adjustable Interest Rates 636,307 363,974 497,082 1,497,363
====================================================================================================================================
Total Loans $714,882 $659,503 $1,508,246 $2,882,631
[FN]
(1)--Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
19
TABLE E: CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS (1)
GOVERNMENTS BANKS AND COMMERCIAL
AND OFFICIAL OTHER FINANCIAL AND
(IN THOUSANDS) INSTITUTIONS INSTITUTIONS INDUSTRIAL OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
UNITED KINGDOM $472 $(112,033) $264,549 $ 1,724 $154,712
===================================================================================================================================
As of December 31, 1996
United Kingdom 419 727 167,701 27,480 196,327
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
United Kingdom 242 22,090 133,336 25,199 180,867
[FN]
(1)--Cross-border outstandings include loans, acceptances, investments, accrued
interest and other monetary assets, net of interest-bearing deposits with other
banks that are denominated in U.S. Dollars or other nonlocal currencies.
TABLE F: CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS
WITH NONPERFORMING OR PAST-DUE LOANS
TOTAL
NONACCRUAL RENEGOTIATED NONPERFORMING PAST-DUE
(IN THOUSANDS) LOANS LOANS LOANS LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
UNITED KINGDOM $ 1,421 $ -- $ 1,421 $ --
===================================================================================================================================
As of December 31, 1996
United Kingdom 287 -- 287 --
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
United Kingdom 1,714 -- 1,714 36
20
TABLE G: NONPERFORMING ASSETS AND PAST-DUE LOANS
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Nonaccrual Loans: (1)
Domestic $ 1,916 $ 9,133 $ 7,542 $ 11,518 $ 85,075
Foreign 1,877 743 1,784 15,865 45,099
- -----------------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 3,793 9,876 9,326 27,383 130,174
Renegotiated Loans: (2)
Domestic 101 125 3,410 288 29,465
Foreign -- -- -- 267 834
- -----------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 101 125 3,410 555 30,299
Other Real Estate Owned, Net:
Domestic 4,993 27,722 32,627 44,068 45,049
Foreign 83 399 570 3,695 7,754
- -----------------------------------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net 5,076 28,121 33,197 47,763 52,803
===================================================================================================================================
Total Nonperforming Assets, Net $ 8,970 $ 38,122 $ 45,933 $ 75,701 $ 213,276
PAST-DUE LOANS: (3)
Domestic $ 7,279 $ 3,849 $ 5,423 $ 6,091 $ 3,315
Foreign -- -- 36 30 4
===================================================================================================================================
Total Past-Due Loans $ 7,279 $ 3,849 $ 5,459 $ 6,121 $ 3,319
Total Loans, Net of Unamortized
Premium (Unearned Discount/Net
Deferred Fees) $2,884,373 $2,637,834 $2,571,959 $2,549,924 $2,528,133
Ratio of Nonaccrual Loans to Total Loans .13% .37% .36% 1.07% 5.15%
Ratio of Nonperforming Assets to Total Loans
and Other Real Estate Owned, Net .31% 1.43% 1.76% 2.91% 8.26%
[FN]
(1)--Loans (other than consumer) that are contractually past due 90 days or more
in either principal or interest that are not well-secured and in the process of
collection, or that are, in management's opinion, doubtful as to the
collectibility of either interest or principal.
(2)--Loans for which terms have been renegotiated to provide a reduction of
interest or principal as a result of a deterioration in the financial position
of the borrower in accordance with SFAS no. 15. Renegotiated loans do not
include $9.9 Million in loans renegotiated at market terms that have performed
in accordance with their respective renegotiated terms. These performing,
market-rate loans no longer are included in nonperforming asset totals.
(3)--Loans contractually past due 90 days or more in principal or interest that
are well-secured and in the process of collection.
21
TABLE H: INTEREST INCOME ON NONACCRUAL AND RENEGOTIATED LOANS
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income at Original Terms:
Nonaccrual Loans--
Domestic $ 385 $ 972 $ 1,230 $ 3,571 $ 10,639
Foreign 65 228 1,156 2,476 5,601
Renegotiated Loans 18 68 54 444 1,845
===================================================================================================================================
Total $ 468 $ 1,268 $ 2,440 $ 6,491 $ 18,085
Actual Interest Income Recognized:
Nonaccrual Loans--
Domestic $ 5 $ 254 $ 214 $ 458 $ 1,506
Foreign -- 37 186 1,075 2,128
Renegotiated Loans -- -- -- -- 346
===================================================================================================================================
Total $ 5 $ 291 $ 400 $ 1,533 $ 3,980
TABLE I: RESERVE FOR LOAN LOSSES AND SUMMARY OF CHARGE-OFFS (RECOVERIES)
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 64,486 $ 56,546 $ 97,039 $ 86,513 $ 84,155
Provision (Credit) for Loan Losses (12,000) -- (55,000) 6,300 69,290
Loans Charged Off:
Commercial and Financial 146 764 243 593 4,703
Real Estate-Commercial/Construction -- 1,061 697 6,800 41,170
Residential Mortgage 10 11 -- 409 96
Home Equity 448 67 438 98 201
Consumer 2,047 1,513 906 1,511 1,864
Foreign 593 260 6,106 3,219 31,400
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans Charged Off 3,244 3,676 8,390 12,630 79,434
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries on Charged-Off Loans:
Commercial and Financial 220 397 2,084 695 527
Real Estate-Commercial/Construction 2,263 3,802 11,408 8,847 6,699
Residential Mortgage 10 -- 84 136 145
Home Equity 47 27 114 4 --
Consumer 510 512 838 942 938
Foreign 666 5,513 8,400 5,034 4,712
- -----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries on Charged-Off Loans 3,716 10,251 22,928 15,658 13,021
- -----------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) (472) (6,575) (14,538) (3,028) 66,413
Foreign Exchange Translation Adjustments (577) 1,365 (31) 1,198 (519)
===================================================================================================================================
Balance, December 31 $ 52,381 $ 64,486 $ 56,546 $ 97,039 $ 86,513
Ratio of Net Charge-Offs (Recoveries) to
Average Loans (.02)% (.26)% (.57)% (.12)% 3.04 %
Ratio of Reserve for Loan Losses to Total Loans 1.82 % 2.44 % 2.20 % 3.81 % 3.42 %
22
TABLE J: RESERVE FOR LOAN LOSSES ALLOCATION AND LOAN DISTRIBUTION
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial and Financial $ 5,524 $ 6,838 $ 9,334 $11,658 $ 8,836
Real Estate-Residential and Commercial/Construction 9,109 8,191 9,543 11,988 29,544
Home Equity and Consumer 3,593 4,236 2,717 6,178 2,905
Foreign 4,765 4,752 5,030 11,981 19,651
Based on Qualitative Factors 29,390 40,469 29,922 55,234 25,577
===================================================================================================================================
Balance, December 31 $52,381 $64,486 $56,546 $97,039 $86,513
DISTRIBUTION OF YEAR-END LOANS
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial and Financial 18.4% 16.8% 15.6% 15.8% 16.3%
Real Estate-Residential and Commercial/Construction 54.3 59.9 62.9 64.5 61.0
Home Equity and Consumer 13.8 13.7 12.8 11.7 12.6
Foreign 13.5 9.6 8.7 8.0 10.1
===================================================================================================================================
Balance, December 31 100.0% 100.0% 100.0% 100.0% 100.0%
TABLE K: OTHER REAL ESTATE OWNED, NET
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1997
GEOGRAPHIC LOCATION
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF UNITED
(IN THOUSANDS) COLUMBIA VIRGINIA MARYLAND KINGDOM TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Land $-- $752 $3,326 $-- $4,078
Single-Family Residential -- -- 511 -- 511
Office Buildings/Retail -- -- 404 -- 404
Hotels -- -- -- 83 83
===================================================================================================================================
Total Other Real Estate Owned, Net $-- $752 $4,241 $83 $5,076
23
TABLE L: AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) BALANCES RATES BALANCES RATES BALANCES RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits in Domestic Offices:
Noninterest-Bearing Demand Deposits $ 803,202 $ 802,265 $ 807,295
Savings and NOW Accounts 276,363 2.24% 633,119 2.16% 811,344 2.34%
Money Market Deposits 1,591,976 3.21 1,164,669 3.27 940,501 3.43
Other Core Deposits 792,925 4.32 822,541 4.63 836,530 5.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Core Deposits 3,464,466 3,422,594 3,395,670
Negotiable Certificates of Deposit 16,208 5.29 12,218 5.21 9,819 5.88
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Domestic Offices 3,480,674 3,434,812 3,405,489
Deposits in Foreign Offices: (1)
Noninterest-Bearing Demand Deposits 12,488 10,250 9,468
Interest-Bearing Bank Deposits 111,442 6.82 54,383 6.41 48,903 7.40
Interest-Bearing Non-Bank Deposits 368,463 5.32 306,528 5.21 281,253 5.62
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Foreign Offices 492,393 371,161 339,624
===================================================================================================================================
Total Average Deposits $3,973,067 $3,805,973 $3,745,113
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements $ 266,828 5.09% $ 212,206 4.73% $ 174,923 5.98%
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 17,563 5.10 28,747 4.41 73,694 5.70
===================================================================================================================================
Total Average Short-Term Borrowings $ 284,391 $ 240,953 $ 248,617
[FN]
(1)--The majority of interest-bearing deposits in foreign offices are
denominated in amounts of $100 thousand or more.
TABLE M: INTEREST-RATE SENSITIVITY ANALYSIS (1)
MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
SIMULATED IMPACT OVER NEXT SIMULATED IMPACT OVER NEXT
TWELVE MONTHS THIRTY-SIX MONTHS
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) +100BP -100BP +300BP -300BP
- -----------------------------------------------------------------------------------------------------------------------------------
Simulated Impact Compared With a
"Most Likely" Scenario:
Net Interest Income Increase/(Decrease) 1.0% 0.1% 6.3% 0.7%
Net Interest Income Increase/(Decrease) $1,945 $156 $36,354 $3,844
[FN]
(1)--Key Assumptions:
Assumptions with respect to the model's projections of the effect of changes
in interest rates on Net Interest Income include:
1. Target balances for various asset and liability classes, which are solicited
from the management of the various units of the Corporation.
2. Interest rate scenarios which are generated by ALCO for the "most likely"
scenario and are dictated by policy for the alternative scenarios.
3. Spread relationships between various interest rate indices, which are
generated by the analysis of historical relationships and ALCO consensus.
4. Assumptions about the effect of embedded options and prepayment
speeds: instruments that are callable are assumed to be called at the first
opportunity if an interest rate scenario makes it advantageous for the owner
of the call to do so. Prepayment assumptions for mortgage products are
derived from accepted industry sources.
5. Reinvestment rates for funds replacing assets or liabilities that are
assumed (through early withdrawal, prepayment, calls, etc.) To run off the
balance sheet, which are generated by the spread relationships.
6. Maturity strategies with respect to assets and liabilities, which are
solicited from the management of the various units of the Corporation.
24
TABLE N: CAPITAL RATIOS
DECEMBER 31, REQUIRED
---------------------------
1997 1996 MINIMUMS
- --------------------------------------------------------------------------------------------------------
Riggs National Corporation
Tier I 18.45% 20.04% 4.00%
Combined Tier I and Tier II 31.52 28.47 8.00
Leverage (1) 11.15 11.84 4.00
Riggs Bank N.A.
Tier I 14.35 18.66 4.00
Combined Tier I and Tier II 15.60 19.92 8.00
Leverage (1) 8.64 10.96 4.00
[FN]
(1)--Most bank holding companies and national banks, including the Corporation
and the Corporation's national bank subsidiary, are expected to maintain at
least a 4.00% Minimum leverage ratio, or higher, if determined appropriate by
the Federal Reserve Board. The Federal Reserve has not indicated a requirement
higher than 4.00% at December 31, 1997.
TABLE O: NET INTEREST INCOME CHANGES (1)
1997 VERSUS 1996 1996 VERSUS 1995
- -----------------------------------------------------------------------------------------------------------------------------------
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
(IN THOUSANDS) RATE VOLUME CHANGE RATE VOLUME CHANGE
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $(2,411) $ 9,210 $ 6,799 $ (5,029) $ 1,737 $ (3,292)
Securities Available for Sale 2,173 18,790 20,963 (1,421) 28,410 26,989
Securities Held-to-Maturity -- -- -- -- (29,461) (29,461)
Time Deposits with Other Banks 253 (2,071) (1,818) (2,817) (714) (3,531)
Federal Funds Sold and Reverse
Repurchase Agreements 429 11,367 11,796 (1,334) 5,432 4,098
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 444 37,296 37,740 (10,601) 5,404 (5,197)
Interest Expense:
Savings and NOW Accounts 442 (8,027) (7,585) (1,453) (3,896) (5,349)
Money Market Deposit Accounts (757) 13,769 13,012 (1,484) 7,329 5,845
Time Deposits in Domestic Offices (2,481) (1,166) (3,647) (4,026) (589) (4,615)
Time Deposits in Foreign Offices 845 6,962 7,807 (1,647) 1,756 109
Federal Funds Purchased and
Repurchase Agreements 798 2,735 3,533 (2,417) 1,997 (420)
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 177 (548) (371) (796) (2,140) (2,936)
Long-Term Debt 581 (1,720) (1,139) 69 (633) (564)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense (395) 12,005 11,610 (11,754) 3,824 (7,930)
===================================================================================================================================
Net Interest Income $ 839 $25,291 $26,130 $ 1,153 $ 1,580 $ 2,733
[FN]
(1)--The dollar amount of changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change in
volume) has been allocated between rate and volume variances based on the
percentage relationship of such variances to each other. Income and rates are
computed on a tax-equivalent basis using a federal income tax rate of 35% for
1997, 1996 and 1995, in addition to local tax rates as applicable.
25
TABLE P: THREE-YEAR AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES (1)
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
(IN THOUSANDS) BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial-Taxable $ 388,865 $ 30,458 7.83% $ 359,303 $ 30,483 8.48% $ 364,638 $ 30,101 8.26%
Commercial-Tax-Exempt 47,768 4,041 8.46 29,180 2,748 9.42 33,601 3,797 11.30
Real Estate-
Commercial/Construction 346,404 30,245 8.73 327,594 28,953 8.84 325,987 31,375 9.62
Residential Mortgage 1,196,090 85,727 7.17 1,258,669 89,674 7.12 1,310,249 93,179 7.11
Home Equity 306,470 24,932 8.14 273,860 22,555 8.24 237,438 21,457 9.04
Consumer 75,383 9,177 12.17 76,006 9,285 12.22 75,484 9,076 12.02
Foreign 299,892 24,606 8.20 232,800 18,689 8.03 195,757 16,694 8.53
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans, Including Fees 2,660,872 209,186 7.86 2,557,412 202,387 7.91 2,543,154 205,679 8.09
Securities Available for Sale (2) 1,426,082 86,702 6.08 1,115,466 65,739 5.89 634,198 38,750 6.11
Securities Held-to-Maturity -- -- -- -- -- -- 482,164 29,461 6.10
Time Deposits with Other Banks 167,235 8,470 5.06 208,108 10,288 4.94 219,967 13,819 6.28
Federal Funds Sold and
Reverse Repurchase Agreements 546,358 30,283 5.54 341,279 18,487 5.42 242,534 14,389 5.93
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS AND
AVERAGE RATE EARNED 4,800,547 334,641 6.97 4,222,265 296,901 7.03 4,122,017 302,098 7.33
Less: Reserve for Loan Losses 63,768 59,556 87,894
Cash and Due from Banks 158,531 192,024 203,327
Premises and Equipment, Net 165,710 160,354 151,372
Other Assets 191,094 201,282 184,329
===================================================================================================================================
TOTAL ASSETS $5,252,114 $4,716,369 $4,573,151
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits:
Savings and NOW Accounts $ 285,068 $ 6,359 2.23% $ 645,258 $ 13,944 2.16% $ 822,666 $ 19,293 2.35%
Money Market Deposit Accounts 1,602,131 51,375 3.21 1,173,179 38,363 3.27 949,501 32,518 3.42
Time Deposits in Domestic Offices 809,133 35,091 4.34 834,759 38,738 4.64 846,356 43,353 5.12
Time Deposits in Foreign Offices 461,045 26,738 5.80 340,262 18,931 5.56 309,832 18,822 6.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 3,157,377 119,563 3.79 2,993,458 109,976 3.67 2,928,355 113,986 3.89
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements 266,828 13,569 5.09 212,206 10,036 4.73 174,923 10,456 5.98
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 17,563 896 5.10 28,747 1,267 4.41 73,694 4,203 5.70
Long-Term Debt 191,525 17,473 9.12 210,494 18,612 8.84 217,625 19,176 8.81
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING FUNDS
AND AVERAGE RATE INCURRED 3,633,293 151,501 4.17 3,444,905 139,891 4.06 3,394,597 147,821 4.36
Demand Deposits 815,690 812,515 816,758
Other Liabilities 56,358 51,095 50,952
Minority Interest in Preferred
Stock of Subsidiary 311,644 7,787 --
Stockholders' Equity 435,129 400,067 310,844
===================================================================================================================================
TOTAL LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY $5,252,114 $4,716,369 $4,573,151
NET INTEREST INCOME AND SPREAD $183,140 2.80% $157,010 2.97% $154,277 2.97%
===================================================================================================================================
NET INTEREST MARGIN ON
EARNING ASSETS 3.81% 3.72% 3.74%
[FN]
(1)--Income and rates are computed on a tax-equivalent basis using a federal
income tax rate of 35% for 1997, 1996, and 1995, in addition to local tax rates
as applicable. Loan amounts include nonaccrual and renegotiated loans. Average
foreign assets, excluding net pool funds provided, details of which can be found
on page 66 of this report, were 8.7%, 9.0% And 8.4% Of average total assets for
the periods presented, respectively. Average foreign liabilities were 26.0%,
20.0% And 17.6% Of average total liabilities for the periods presented,
respectively.
(2)--The averages and rates for the securities available for sale
portfolio are based on amortized cost.
26
TABLE Q: NONINTEREST INCOME
YEARS ENDED
DECEMBER 31, CHANGE
-------------------------- ------------------------
(IN THOUSANDS) 1997 1996 AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
Service Charges and Fees $ 36,879 $ 35,995 $ 884 2.5 %
Trust Income 37,343 33,303 4,040 12.1
Interest on Tax Receivables -- 5,135 (5,135) (100.0)
Foreign Exchange Income 2,311 2,238 73 3.3
Other Noninterest Income 7,891 12,336 (4,445) (36.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income Excluding Securities Gains, Net 84,424 89,007 (4,583) (5.1)
Securities Gains, Net 3,500 7,170 (3,670) (51.2)
===================================================================================================================================
Total Noninterest Income $ 87,924 $ 96,177 $(8,253) (8.6)%
TABLE R: NONINTEREST EXPENSE
YEARS ENDED
DECEMBER 31, CHANGE
-------------------------- ------------------------
(IN THOUSANDS) 1997 1996 AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
Salaries and Wages $ 67,097 $ 61,086 $ 6,011 9.8 %
Pensions and Other Employee Benefits 11,046 13,860 (2,814) (20.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Staff Expense 78,143 74,946 3,197 4.3
- -----------------------------------------------------------------------------------------------------------------------------------
Occupancy, Net 19,095 20,917 (1,822) (8.7)
Data Processing Services 21,427 17,998 3,429 19.1
Furniture and Equipment 9,333 7,779 1,554 20.0
Advertising and Public Relations 5,405 4,898 507 10.4
FDIC Insurance 435 4 431 n/a
Other Real Estate Owned (Income) Expense, Net (1,392) 431 (1,823) n/a
Other Noninterest Expense 53,584 49,974 3,610 7.2
===================================================================================================================================
Total Noninterest Expense $186,030 $176,947 $ 9,083 5.1 %
27
TABLE S: FOURTH QUARTER CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
DECEMBER 31,
------------------------- CHANGE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 86,886 $74,077 $ 12,809
Interest Expense 39,793 34,727 5,066
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 47,093 39,350 7,743
Less: Provision for Loan Losses (12,000) -- (12,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 59,093 39,350 19,743
Noninterest Income 22,952 23,686 (734)
Noninterest Expense 51,560 45,965 5,595
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Taxes and Minority Interest 30,485 17,071 13,414
Applicable Income Tax Expense 8,542 5,430 3,112
Minority Interest in Income of Subsidiaries, Net of Taxes 4,987 420 4,567
===================================================================================================================================
NET INCOME $ 16,956 $11,221 $ 5,735
EARNINGS PER COMMON SHARE - BASIC $ .47 $ .28 $ .19
- DILUTED .45 .27 .18
TABLE T: FOURTH QUARTER NET INTEREST INCOME CHANGES (1)
THREE MONTHS ENDED
DECEMBER 31, DUE TO
-------------------- ------------------
(IN THOUSANDS) 1997 1996 CHANGE RATE VOLUME
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $54,596 $50,916 $ 3,680 $ 395 $ 3,285
Securities Available for Sale 22,389 14,805 7,584 (47) 7,631
Time Deposits with Other Banks 2,320 2,285 35 124 (89)
Federal Funds Sold and Reverse Repurchase Agreements 8,564 7,026 1,538 278 1,260
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 87,869 75,032 12,837 750 12,087
Interest Expense:
Savings and NOW Accounts 1,472 1,962 (490) (6) (484)
Money Market Deposit Accounts 13,160 11,439 1,721 685 1,036
Time Deposits in Domestic Offices 8,835 9,380 (545) (488) (57)
Time Deposits in Foreign Offices 7,654 4,947 2,707 361 2,346
Federal Funds Purchased and Repurchase Agreements 4,102 2,437 1,665 82 1,583
U.S. Treasury Demand Notes and Other Short-Term Borrowings 201 194 7 4 3
Long-Term Debt 4,369 4,368 1 1 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 39,793 34,727 5,066 639 4,427
===================================================================================================================================
Net Interest Income $48,076 $40,305 $ 7,771 $ 111 $ 7,660
[FN]
(1)--The dollar amount of changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change in
volume) has been allocated between rate and volume variances based on the
percentage relationship of such variances to each other. Income and rates are
computed on a tax-equivalent basis using a federal tax rate of 35% for 1997,
1996 and 1995, in addition to local tax rates as applicable.
28
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity-Sensitivity to Market Risk and Table M" on Pages 12 and 24,
respectively, of this form 10-K.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
(a) The following consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K
as follows:
Riggs National Corporation and Subsidiaries:
Consolidated Statements of Income 30
Consolidated Statements of Condition 31
Consolidated Statements of Changes in Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34-61
Management's Report on Financial Statements 62
Report of Independent Public Accountants 63
(b) The following supplementary data is set forth in this Annual
Report on Form 10-K as follows:
Quarterly Financial Information 64-65
Consolidated Financial Ratios and Other Information 64
Quarterly Stock Information 65
29
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $208,100 $201,414 $203,332
Interest and Dividends on Securities Available for Sale 83,939 63,009 38,750
Interest and Dividends on Securities Held-to-Maturity -- -- 28,509
Interest on Money Market Assets:
Time Deposits with Other Banks 8,470 10,288 13,819
Federal Funds Sold and Reverse Repurchase Agreements 30,283 18,487 14,389
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Money Market Assets 38,753 28,775 28,208
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 330,792 293,198 298,799
INTEREST EXPENSE
Interest on Deposits:
Savings and NOW Accounts 6,359 13,944 19,293
Money Market Deposit Accounts 51,375 38,363 32,518
Time Deposits in Domestic Offices 35,091 38,738 43,353
Time Deposits in Foreign Offices 26,738 18,931 18,822
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Deposits 119,563 109,976 113,986
Interest on Short-Term Borrowings and Long-Term Debt:
Federal Funds Purchased and Repurchase Agreements 13,569 10,036 10,456
U.S. Treasury Demand Notes and Other Short-Term Borrowings 896 1,267 4,203
Long-Term Debt 17,473 18,612 19,176
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Short-Term Borrowings and Long-Term Debt 31,938 29,915 33,835
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 151,501 139,891 147,821
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 179,291 153,307 150,978
Less: Provision for Loan Losses (12,000) -- (55,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 191,291 153,307 205,978
NONINTEREST INCOME
Service Charges and Fees 36,879 35,995 34,464
Trust Income 37,343 33,303 29,934
Interest on Tax Receivables -- 5,135 --
Other Noninterest Income 10,202 14,574 9,095
Securities Gains, Net 3,500 7,170 511
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 87,924 96,177 74,004
NONINTEREST EXPENSE
Salaries and Wages 67,097 61,086 66,184
Pensions and Other Employee Benefits 11,046 13,860 14,319
Occupancy, Net 19,095 20,917 26,415
Data Processing Services 21,427 17,998 17,043
Furniture and Equipment 9,333 7,779 7,960
Advertising and Public Relations 5,405 4,898 5,576
FDIC Insurance 435 4 4,303
Other Real Estate Owned (Income) Expense, Net (1,392) 431 178
Other Noninterest Expense 53,584 49,974 49,856
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 186,030 176,947 191,834
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Taxes and Minority Interest 93,185 72,537 88,148
Applicable Income Tax Expense 24,690 6,174 346
Minority Interest in Income of Subsidiaries, Net of Taxes 17,616 420 --
===================================================================================================================================
NET INCOME $ 50,879 $ 65,943 $ 87,802
Less: Dividends on Preferred Stock 10,750 10,750 10,750
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON STOCK $ 40,129 $ 55,193 $ 77,052
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Basic $ 1.32 $ 1.82 $ 2.55
Diluted 1.27 1.79 2.54
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
30
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 186,091 $ 211,144
Money Market Assets:
Time Deposits with Other Banks 241,813 281,126
Federal Funds Sold and Reverse Repurchase Agreements 549,000 540,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Money Market Assets 790,813 821,126
Securities Available for Sale (at Market Value) 1,672,550 1,162,503
Loans 2,884,373 2,637,834
Reserve for Loan Losses (52,381) (64,486)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Net Loans 2,831,992 2,573,348
Premises and Equipment, Net 165,377 166,074
Accrued Interest Receivable 38,209 30,042
Other Real Estate Owned, Net 5,076 28,121
Other Assets 156,318 142,742
===================================================================================================================================
TOTAL $5,846,426 $5,135,100
LIABILITIES
Deposits:
Noninterest-Bearing Demand Deposits $ 982,865 $ 892,594
Interest-Bearing Deposits:
Savings and NOW Accounts 436,337 472,625
Money Market Deposit Accounts 1,492,842 1,488,730
Time Deposits in Domestic Offices 867,772 820,748
Time Deposits in Foreign Offices 518,102 375,986
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 3,315,053 3,158,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 4,297,918 4,050,683
Short-Term Borrowings:
Federal Funds Purchased and Repurchase Agreements 327,579 237,166
U.S. Treasury Demand Notes and Other Short-Term Borrowings 24,929 18,068
- -----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 352,508 255,234
Other Liabilities 191,293 61,882
Long-Term Debt 191,525 191,525
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,033,244 4,559,324
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES 350,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock - $1.00 Par Value
Shares Authorized - 25,000,000 at December 31, 1997, and 1996;
Liquidation Preference - $25 per share
Noncumulative Perpetual Series B - 4,000,000 shares issued at December 31, 1997, and 1996 4,000 4,000
Common Stock - $2.50 Par Value
Shares Authorized - 50,000,000 at December 31, 1997, and 1996
Shares Issued - 31,461,786 at December 31, 1997, and 31,273,344 at December 31, 1996 78,654 78,183
Surplus - Preferred Stock 91,192 91,192
Surplus - Common Stock 159,160 157,060
Foreign Exchange Translation Adjustments (872) 1,111
Undivided Profits 152,732 118,682
Unrealized Gain (Loss) on Securities Available for Sale, Net 2,039 (729)
Treasury Stock - 900,798 shares at December 31, 1997, and 1996 (23,723) (23,723)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 463,182 425,776
===================================================================================================================================
TOTAL $5,846,426 $5,135,100
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
31
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
FOREIGN UNDIVIDED GAIN (LOSS)
(IN THOUSANDS, EXCEPT PREFERRED COMMON EXCHANGE PROFITS ON SECURITIES TOTAL
PER SHARE AMOUNTS) STOCK STOCK TRANSLATION (ACCUMULATED AVAILABLE FOR TREASURY STOCKHOLDERS'
$1.00 PAR $2.50 PAR SURPLUS ADJUSTMENTS DEFICIT) SALE, NET STOCK EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $4,000 $77,863 $247,315 $ (634) $ (9,014) $(28,144) $ (23,723) $267,663
Issuance of Common Stock
for stock option plans -
30,050 shares 75 197 272
Net Income 87,802 87,802
Unrealized Gain on Securities
Available for Sale, Net 31,921 31,921
Foreign Exchange Translation
Adjustments (239) (239)
Cash Dividends Declared:
Series B Preferred Stock,
$2.6875 Per Share (10,750) (10,750)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $4,000 $77,938 $247,512 $ (873) $ 68,038 $ 3,777 $ (23,723) $376,669
Issuance of Common Stock for
stock option plans -
98,082 shares 245 740 985
Net Income 65,943 65,943
Unrealized Loss on Securities
Available for Sale, Net (4,506) (4,506)
Foreign Exchange Translation
Adjustments 1,984 1,984
Cash Dividends Declared:
Common Stock, $.15 Per Share (4,549) (4,549)
Series B Preferred Stock,
$2.6875 Per Share (10,750) (10,750)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $4,000 $78,183 $248,252 $1,111 $118,682 $ (729) $ (23,723) $425,776
Issuance of Common Stock for
stock option plans -
188,442 shares 471 2,100 2,571
Net Income 50,879 50,879
Unrealized Gain on Securities
Available for Sale, Net 2,768 2,768
Foreign Exchange Translation
Adjustments (1,983) (1,983)
Cash Dividends Declared:
Common Stock, $.20 Per Share (6,079) (6,079)
Series B Preferred Stock,
$2.6875 Per Share (10,750) (10,750)
===================================================================================================================================
BALANCE, DECEMBER 31, 1997 $4,000 $78,654 $250,352 $ (872) $152,732 $ 2,039 $ (23,723) $463,182
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 50,879 $ 65,943 $ 87,802
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Provision for Loan Losses (12,000) -- (55,000)
Provision for Other Real Estate Owned Losses 1,437 906 2,868
Depreciation Expense and Amortization of Leasehold Improvements 11,659 11,165 11,662
Amortization of Purchase Accounting Adjustments 3,530 3,522 3,603
Provision (Benefit) for Deferred Taxes 4,980 (11,072) (8,547)
Interest on Tax Receivables -- (5,135) --
Gains on Sale of Securities Available for Sale (3,500) (7,170) (511)
Gains on Sale of Other Real Estate Owned (2,694) (920) (3,990)
Increase in Accrued Interest Receivable (8,167) (464) (1,674)
Increase in Other Assets (23,559) (5,954) (18,366)
Increase in Other Liabilities 129,411 10,297 15,986
- -----------------------------------------------------------------------------------------------------------------------------------
Total Adjustments 101,097 (4,825) (53,969)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 151,976 61,118 33,833
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Decrease (Increase) in Time Deposits with Other Banks 39,313 (49,752) (3,150)
Proceeds from Maturities of Securities Available for Sale 7,197,217 1,041,282 97,904
Proceeds from Sale of Securities Available for Sale 475,956 745,247 100,095
Purchase of Securities Available for Sale (8,175,479) (1,978,684) (89,218)
Proceeds from Maturities of Securities Held-to-Maturity -- -- 534,752
Purchase of Securities Held-to-Maturity -- -- (537,721)
Net Increase in Loans (246,890) (61,178) (7,553)
Proceeds from Sale and Other Payments of Other Real Estate Owned 25,109 7,007 15,782
Net Increase in Premises and Equipment (10,962) (22,469) (14,900)
Other, Net (561) 1,326 (69)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (696,297) (317,221) 95,922
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Demand, Savings, NOW and Money
Market Deposit Accounts 58,095 143,703 16,666
Net Increase in Time Deposits 189,140 21,801 265,719
Net Increase (Decrease) in Federal Funds Purchased
and Repurchase Agreements 90,413 51,157 (78,869)
Net Increase (Decrease) in U.S. Treasury Demand Notes
and Other Short-Term Borrowings 6,861 2,602 (13,093)
Proceeds from the Issuance of Common Stock 2,571 985 272
Repayments of Long-Term Debt -- (26,100) --
Proceeds from Preferred Stock of Subsidiaries 200,000 150,000 --
Dividend Payments - Preferred (10,750) (10,750) (10,750)
- Common (6,079) (4,549) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 530,251 328,849 179,945
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes (1,983) 1,984 (239)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (16,053) 74,730 309,461
Cash and Cash Equivalents at Beginning of Year 751,144 676,414 366,953
===================================================================================================================================
Cash and Cash Equivalents at End of Year $ 735,091 $ 751,144 $ 676,414
Supplemental Schedule of Noncash Investing and Financing Activities:
Loans Transferred to Other Real Estate Owned $ 823 $ 1,878 $ 741
Loans to Finance the Sale of Other Real Estate Owned -- -- 685
Securities Transferred to Available for Sale -- -- 446,132
Supplemental Disclosures:
Interest Paid (Net of Amount Capitalized) $ 150,642 $ 141,773 $ 145,807
Income Tax Payments 7,630 23,131 6,802
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS INDICATED)
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The following summary of significant accounting policies of Riggs National
Corporation (the "Corporation"), including its principal subsidiaries Riggs Bank
National Association (the "Riggs Bank N.A.") and Riggs Bank Europe Limited
(formerly known as Riggs AP Bank Limited) are presented to assist the reader in
understanding the financial, statistical and other data presented in this
report.
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 governmental, corporate and nonprofit organizations,
estate planning and trust administration.
GENERAL ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation are in accordance with
generally accepted accounting principles and conform to general practice within
the banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities for the years presented. Actual
results could differ from those estimates.
For purposes of reporting cash flows, cash equivalents include cash on hand,
amounts due from banks and federal funds sold and reverse repurchase agreements.
Generally, federal funds are purchased and sold for one-day periods.
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries, after elimination of all intercompany transactions.
In November 1996 and March 1997, the Corporation formed two Delaware business
trusts, Riggs Capital and Riggs Capital II, respectively, with all of the common
securities of each trust owned by the Corporation. Subsequently, in December
1996 and March 1997, respectively, each of the trusts sold preferred securities
in which the Corporation does not own any of the preferred securities
outstanding. The preferred securities represent a minority interest in each
trust, which is reflected separately in the Consolidated Statements of Condition
under the caption "Guaranteed Preferred Beneficial Interests in Junior
Subordinated Deferrable Interest Debentures. "Dividends on the trust preferred
securities are reflected in the Consolidated Statements of Income as a deduction
from income before taxes and minority interest under the caption of "Minority
Interest in Income of Subsidiaries, Net of Taxes" (See Note 11, "Common and
Preferred Stock-Minority Interest in Preferred Stock of Subsidiaries").
SECURITIES
Securities are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 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. Securities available
for sale are carried at fair value, with unrealized gains and losses, net of
tax, included as a separate component of stockholders' equity. Management has
established policies that require the periodic review of the securities
portfolio for proper classification of securities under SFAS No. 115 (See Note
2, "Securities").
LOANS
Loans are carried at the principal amount outstanding, net of unearned
discounts, unamortized premiums and deferred fees and costs. Interest on loans
and amortization of unearned discounts/premiums and deferred fees and costs are
computed by methods that generally result in level rates of return on principal
amounts outstanding over the estimated lives of the loans. Loan origination fees
and certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield.
The Corporation discontinues the accrual of interest on loans based on
delinquency status, an evaluation of the related collateral and the financial
strength of the borrower. Generally, loans are placed on nonaccrual status when
the loans are contractually in default in either principal or interest for 90
days or more and the loans are not well-secured and in the process of
collection. Income recognition on consumer loans is discontinued and the loans
are charged off after a delinquency period of 120 days. At that point, any
accrued interest that actually has not been collected is reversed.
The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" on January 1, 1995, which defines impaired loans as specifically
reviewed loans for which it is probable that the Corporation will be unable to
collect all amounts due according to the terms of the loan agreement. The
Corporation's impaired loans generally are defined as nonaccrual loans as
detailed above. Per SFAS No. 114, impaired loans do not include large groups of
smaller-balance loans with similar collateral characteristics such as
residential mortgage and
34
consumer installment loans, which are evaluated collectively for impairment.
Impaired loans are therefore primarily commercial and financial loans and
real estate-commercial/construction loans.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level that, in the opinion of
management, is adequate to absorb potential losses in the loan portfolio. The
adequacy of the reserve is based on management's review and evaluation of the
individual credits in the loan portfolio, historical loss experience by loan
type, current and anticipated economic conditions, and where applicable, the
estimated value of the underlying collateral. Thus, the determination of the
adequacy of the reserve for loan losses involves uncertainties and matters of
judgment and, therefore, could result in adjustments to future results of
operations.
The provision for loan losses is charged against, or credited to, earnings in
amounts necessary to maintain an adequate reserve for loan losses. A loan is
charged off if, in the opinion of management, the loan cannot be fully
collected. Recoveries of loans previously charged off are added to the reserve.
The specific reserves for impaired loans, under SFAS No. 114 at December 31,
1997, are included in the reserves for loan losses discussed above. Impaired
loans are valued based on the fair value of the related collateral if the loans
are collateral dependent, and for all other impaired loans, the specific
reserves are based on the present values of expected future cash flows
discounted at each loan's initial effective interest rate.
OTHER REAL ESTATE OWNED
Other real estate owned is property acquired or deemed to have been acquired
through foreclosure. Other real estate owned is recorded at the lower of fair
value less estimated costs to sell, or cost. Initial writedowns at the time of
foreclosure of other real estate owned are charged to the reserve for loan
losses. Revenues and expenses incurred in connection with ownership of the
properties, and subsequent writedowns and gains and losses upon sale, are
included, net, in other real estate owned expense.
PREMISES AND EQUIPMENT
Premises, leasehold improvements and furniture and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization of
premises, leasehold improvements, and furniture and equipment are computed using
the straight-line method. Ranges of useful lives for computing depreciation and
amortization are as follows:
Years
- -------------------------------------------------------------------------------
Premises 25 to 35
Leasehold Improvements 5 to 20
Furniture and Equipment 5 to 15
Major improvements and alterations to premises and leaseholds are capitalized.
Leasehold improvements are amortized over the shorter of the terms of the
respective leases or the estimated useful lives of the improvements. Interest
costs relating to the construction of the operations center located in
Riverdale, Maryland, completed in 1996, were capitalized in the basis of the
building at the Corporation's weighted-average cost of funds.
OTHER ASSETS
Included in other assets are intangible assets, such as goodwill, which is the
excess of cost over net assets of acquired entities, and core deposit
intangibles. In October 1997, the Corporation acquired J. Bush & Co., a
privately-held investment advisor. Goodwill related to this transaction is being
amortized using the straight-line method over a 15-year period. All other
goodwill is being amortized using the straight-line method over 25 years. The
Corporation had unamortized goodwill of $9.1 million and $4.4 million at
December 31, 1997, and 1996, respectively, with amortization expense of $368
thousand for 1997, and $294 thousand for 1996 and 1995. Core-deposit intangibles
represent the net present value of the future income streams related to deposits
acquired through mergers or acquisitions and are amortized on an accelerated
basis over 10 years. The unamortized core-deposit intangibles totaled $8.3
million and $11.5 million at December 31, 1997, and 1996, respectively, with
amortization expense of $3.2 million for 1997 and 1996, and $3.3 million for
1995.
INCOME TAXES
The Corporation provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which mandates the asset and liability method of accounting for
income taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized for future tax consequences of events that have been recognized in
the Corporation's financial statements in relationship to their respective tax
basis. Using management's judgment and estimates concerning the likelihood of
realization in future periods, deferred tax assets are reduced by a valuation
allowance.
BENEFIT PLANS
Riggs Bank N.A. maintains a noncontributory defined benefit pension plan for
substantially all employees of the Corporation and its subsidiaries. The net
periodic pension expense includes a service cost component and an interest cost
component, reflecting the expected return on plan assets, and the effect of
35
deferring and amortizing certain actuarial gains and losses, prior service
costs, and the unrecognized net transition asset over 12 years. The net periodic
pension expense is based on management's estimates and judgment through
actuarial assumptions and computations.
The Corporation also provides health care and a portion of the life insurance
benefits for retired employees. The estimated cost of retiree health insurance
benefits are accrued for active employees. As of January 1, 1998, the
Corporation no longer provides life insurance benefits for persons retiring on
or after January 1, 1998. The Corporation recognized a transition asset, which
is amortized over 20 years, when it adopted the current accounting treatment for
postretirement benefits. The accrual of postretirement benefit costs is based on
management's judgment and estimates through actuarial assumptions and
computations.
EARNINGS PER COMMON SHARE
In March 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No. 128
supersedes Accounting Principles Board Opinion (the "APB") No. 15 to conform
earnings per share with international standards as well as to simplify the
computation under APB No. 15. Basic earnings per share is calculated by dividing
net income, after deduction for preferred stock dividends, by the
weighted-average number of shares of common stock. Diluted earnings per share is
calculated by dividing net income, after deduction for preferred stock
dividends, by the weighted-average number of shares of common stock and common
stock equivalents, unless determined to be anti-dilutive. The weighted-average
shares outstanding were 30,422,822, 30,317,572, and 30,257,585 for 1997, 1996,
and 1995, respectively. The dilutive effect of stock option plans on
weighted-average shares outstanding was 1,164,568, 547,492, and 111,010 for the
same periods, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency amounts of assets and liabilities of foreign entities
are translated into U.S. dollars at year-end exchange rates. Income and expense
items are translated using appropriate weighted-average exchange rates for the
period. Functional currency to U.S. dollar translation gains and losses, net of
related hedge transactions, are credited or charged directly to the
stockholders' equity account, "Foreign Exchange Translation Adjustments."
FOREIGN EXCHANGE INCOME
Foreign currency trading and exchange positions, including spot and forward
exchange contracts, are valued monthly, and the resulting profits and losses are
recorded in foreign exchange trading income. The amount of net foreign exchange
trading gains included in the accompanying consolidated statements of income
under other noninterest income was $2.3 million for 1997 and $2.2 million for
1996 and 1995.
FINANCIAL DERIVATIVES
Gains and losses on futures and forward contracts to hedge certain
interest-sensitive assets and liabilities are amortized over the life of the
hedged transaction as an adjustment to yield. Fees received or paid when
entering certain derivative transactions are deferred and amortized over the
lives of the agreements.
Interest-rate agreements are entered into as hedges against fluctuations in
the interest rates of specifically identified assets or liabilities. The
notional amounts of the contracts do not affect total assets or liabilities of
the Corporation. Net receivables or payables under agreements designated as
hedges are recorded as adjustments to interest income or interest expense
related to the hedged asset or liability. Gains or losses resulting from early
termination of interest-rate agreements are deferred and amortized over the
remaining terms of the agreements.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities, based on a financial components
approach that focuses on control. Under this approach, after a transfer of
financial assets, financial and servicing assets are recognized if controlled,
or liabilities are recognized if incurred. Financial and servicing assets are
removed from the statement of condition when control has been surrendered, and
liabilities are removed when extinguished. SFAS No. 125 was effective and
adopted January 1, 1997, and was applied prospectively. In addition, in December
1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," was issued. SFAS No. 127 deferred implementation of
certain portions of SFAS No. 125 for one year relating primarily to repurchase
agreements, securities lending and comparable transactions. The Corporation did
not experience any material effect on its financial position or results of
operations from this implementation, and does not expect any when the remainder
is implemented January 1, 1998.
36
In June 1997, SFAS Nos. 130 and 131 were issued--"Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information," respectively. SFAS No. 130 requires that certain financial
activity typically disclosed in stockholders' equity be reported in the
financial statements as an adjustment to net income in determining
comprehensive income. Items applicable to the Corporation would include activity
in foreign exchange translation adjustments and unrealized gain/loss on
securities available for sale. Items identified as comprehensive income should
be reported in the statements of condition and the statements of changes in
stockholders' equity, under separate captions. SFAS No. 130 is effective for the
Corporation on January 1, 1998, including the restatement of prior periods
reported consistent with this pronouncement. The Corporation does not
anticipate any financial impact from the implementation of SFAS No. 130.
SFAS No. 131 requires the reporting of selected segmented information in
quarterly and annual reports. Information from operating segments is derived
from methods used by the Corporation's management to allocate resources and
measure performance. The Corporation is required to disclose profit/loss,
revenues and assets for each segment identified, including reconciliations of
these items to consolidated totals. The Corporation also is required to disclose
the basis for identifying the segments and the types of products and services
within each segment. SFAS No. 131 is effective for the Corporation on January 1,
1998, including the restatement of prior periods reported consistent with this
pronouncement, if practical. The Corporation does not anticipate any material
impact from the implementation of SFAS No. 131.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and
106" was issued. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It standardizes the disclosure requirements
for pensions and other postretirement benefits and requires additional
information on changes in the benefit obligations and fair values of plan
assets. SFAS No. 132 also eliminates certain disclosures which were required by
SFAS Nos. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for the
Corporation on January 1, 1998. The Corporation does not anticipate any material
impact from the implementation of SFAS No. 132.
===============================================================================
NOTE 2. SECURITIES
SECURITIES AVAILABLE FOR SALE
1997 1996
---------------------------------------------- --------------------------------------------
GROSS GROSS BOOK/ GROSS GROSS BOOK/
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 504,990 $2,003 $272 $ 506,721 $ 734,719 $1,474 $2,521 $ 733,672
Government Agencies Securities 966,277 291 112 966,456 399,219 -- 58 399,161
Mortgage-Backed Securities 156,997 126 97 157,026 -- -- -- --
Other 41,150 1,197 -- 42,347 29,670 -- -- 29,670
=================================================================================================================================
Total Securities Available for Sale $1,669,414 $3,617 $481 $1,672,550 $1,163,608 $1,474 $2,579 $1,162,503
Gross gains from the sale of securities totaled $3.5 million during the year and
no losses, compared with gross gains of $7.2 million and no losses for 1996. At
December 31, 1997, a $2.0 million unrealized gain, net of tax, was recorded in
stockholders' equity, compared to a $729 thousand unrealized loss, net of tax,
in 1996. Securities available for sale pledged to secure deposits and other
borrowings amounted to $1.32 billion at December 31, 1997, and $762.7 million at
December 31, 1996.
The "Other Securities" category consists of $15.3 million of Federal Home Loan
Bank of Atlanta ("FHLB-Atlanta") Stock, $9.4 million of Federal Reserve Stock,
$12.4 million of U.S. Treasury money market mutual funds and $5.2 million of
equity securities at year-end 1997. The FHLB-Atlanta and Federal Reserve Stock
have no readily available market value quotation and therefore their year-end
book values are an approximation of their market values.
37
The maturity distribution of securities at December 31, 1997 follows:
SECURITIES AVAILABLE FOR SALE
GOVERNMENT MORTGAGE-
U.S. TREASURY AGENCIES BACKED OTHER
SECURITIES SECURITIES SECURITIES SECURITIES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Within 1 year
Amortized Cost $279,878 $398,900 $ -- $12,398 $ 691,176
Book/Market 279,995 398,847 -- 12,398 691,240
Yield (1) 5.74% 5.64% -- 5.19% 5.67%
After 1 but within 5 years
Amortized Cost 225,112 468,442 -- -- 693,554
Book/Market 226,726 468,706 -- -- 695,432
Yield (1) 5.97% 6.37% -- -- 6.24%
After 5 but within 10 years
Amortized Cost -- 49,989 -- -- 49,989
Book/Market -- 49,946 -- -- 49,946
Yield (1) -- 6.67% -- -- 6.67%
After 10 years
Amortized Cost -- 48,946 156,997 28,752 234,695
Book/Market -- 48,957 157,026 29,949 235,932
Yield (1) -- 6.54% 6.80% 5.29% 6.56%
===================================================================================================================================
Total Securities Available for Sale
Amortized Cost $504,990 $966,277 $156,997 $41,150 $1,669,414
Book/Market 506,721 966,456 157,026 42,347 1,672,550
Yield (1) 5.84% 6.09% 6.80% 5.26% 6.06%
[FN]
(1)--Weighted-average yield to maturity at December 31, 1997.
===============================================================================
NOTE 3. LOANS AND RESERVE FOR LOAN LOSSES
The following schedule details the composition of the loan portfolio at
year-end:
1997 1996
- -------------------------------------------------------------------------------
Commercial and Financial $ 529,894 $ 443,557
Real Estate-
Commercial/Construction 410,011 352,015
Residential Mortgage 1,156,493 1,226,110
Home Equity 317,669 281,867
Consumer 78,932 78,617
Foreign 389,632 251,782
- -------------------------------------------------------------------------------
Loans 2,882,631 2,633,948
Unamortized Premiums
(Unearned Discounts/
Net Deferred Fees) 1,742 3,886
===============================================================================
Total Loans, Net $2,884,373 $2,637,834
A summary of nonperforming and renegotiated loans, loans contractually
past-due 90 days or more and potential problem loans at year-end follows:
1997 1996
- -------------------------------------------------------------------------------
Nonaccrual Loans $ 3,793 $9,876
Renegotiated Loans 101 125
Past-Due Loans 7,279 3,849
Potential Problem Loans 10,000 1,636
38
An analysis of the changes in the reserve for loan losses follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 64,486 $ 56,546 $ 97,039
Provision for Loan Losses (12,000) -- (55,000)
Loans Charged Off 3,244 3,676 8,390
Less: Recoveries on Charged-Off Loans 3,716 10,251 22,928
- -----------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) (472) (6,575) (14,538)
Foreign Exchange Translation Adjustments (577) 1,365 (31)
===================================================================================================================================
Balance, December 31 $ 52,381 $ 64,486 $ 56,546
The level of the reserve for loan losses is based on management's estimates of
the amount required to reflect the collection risks in the loan portfolio based
on circumstances and conditions known at the time. The adequacy of the reserve
for loan losses is based on management's review and evaluation of the individual
credits in the loan portfolio, historical loss experience by loan type, current
and anticipated economic conditions and, where applicable, the estimated value
of the underlying collateral.
In the fourth quarter of 1997, the Corporation recorded a $12.0 million
reduction in the reserve for loan losses. The reserve for loan losses reduction
was based on management's review of the adequacy of the reserve, risk
characteristics within the loan portfolio, current asset quality, lending
levels, economic development and other factors. As a result, the provision for
loan losses amounted to a negative $12.0 million for 1997, compared to no
provision in 1996.
Specific reserves for impaired loans are included in the reserve for loan
losses, as discussed in Note 1, "Summary of Significant Accounting Policies."
The Corporation's charge-off policy for impaired loans is consistent with its
policy for loan charge-offs to the reserve: impaired loans are charged-off when,
in the opinion of management, the impaired loan cannot be fully collected.
SFAS No. 118 allows a creditor to use existing methods for recognizing
interest income on an impaired loan. Consistent with the Corporation's method
for nonaccrual loans, interest received on impaired loans is recognized as
interest income or, when there is doubt as to the ability to collect either
interest or principal, interest received is applied to principal.
Impaired loans totaling $2.0 million at December 31, 1997, were comprised of
$621 thousand in domestic real estate-commercial/construction loans and $1.4
million in foreign loans. The 1997 average investment in impaired loans for
these portfolios were $1.2 million and $276 thousand, respectively, with no
interest income recognized. At December 31, 1996, impaired loans were $2.9
million, comprised entirely of domestic real estate-commercial/construction
loans. For 1996 the average investment in impaired loans was $5.2 million, of
which $4.0 million and $1.2 million consisted of domestic real
estate-commercial/construction loans and foreign loans, respectively. Interest
income recognized in 1996 totaled $25 thousand, all of which was recognized on
the foreign impaired loans. All impaired loans are collateral dependent and
measured at the fair value of collateral.
===============================================================================
NOTE 4. TRANSACTIONS WITH RELATED PARTIES
The Corporation and its banking subsidiaries have had, and expect to have,
transactions in the ordinary course of business with many of the Corporation's
directors, executive officers, their associates and family members.
During 1997, Allbritton Communications Company ("ACC"), a company indirectly
owned by Mr. Allbritton (chairman of the board and chief executive officer of
the Corporation), paid Riggs Bank N.A. $689 thousand to lease space in an office
building owned by Riggs Bank N.A. under a lease that has been extended through
2001. ACC paid $484 thousand and $212 thousand in 1996 and 1995, respectively,
to lease space from Riggs Bank N.A. In addition, during 1997 and 1996, the
Corporation purchased equipment from Wang Federal, Inc. Ronald Cuneo (a member
of the Corporation's board of directors in 1996 and part of 1997) was President
of Wang Federal, Inc. at the time of purchase. Total expenditures equaled $1.3
million in 1997 and $1.0 million in 1996, and were capitalized by the
Corporation.
The table on the next page reflects information concerning loans by banking
subsidiaries of the Corporation to directors and executive officers of the
Corporation, their associates and family members, and directors of Riggs Bank
N.A., their
39
associates and family members. In addition to the amounts set forth in the
table, the Corporation's banking subsidiaries had $10.1 million of letters of
credit outstanding at December 31, 1997 to related parties. There were no loans
included in the table below that were impaired, nonaccrual, past due,
restructured or potential problems at December 31, 1997.
In the opinion of management, these credit transactions did not, at the time
they were entered into, involve more than the normal risk of collectibility or
present other unfavorable features.
LOANS WITH RELATED PARTIES
DECEMBER 31, 1997 AND 1996
DECEMBER 31, AMOUNTS DECEMBER 31,
1996 ADDITIONS COLLECTED 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Loans to Directors, Executive Officers
and Family Members $15,579 $ 3,154 $ 7,853 $10,880
Loans to Companies of which Directors
were Principal Stockholders or Directors 47,462 313,525 296,407 64,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $63,041 $316,679 $304,260 $75,460
Percent of Loans 2.39% 2.62%
===============================================================================
NOTE 5. OTHER REAL ESTATE OWNED
Other real estate owned at December 31, 1997, and 1996 is
summarized as follows:
DECEMBER 31,
--------------------
1997 1996
- -------------------------------------------------------------------------------
Foreclosed Property - Domestic $4,993 $29,833
Foreclosed Property - Foreign 83 442
- -------------------------------------------------------------------------------
Total Foreclosed Property 5,076 30,275
Less: Reserve for Other Real
Estate Owned -- 2,154
===============================================================================
Total Other Real Estate Owned, Net $5,076 $28,121
An analysis of the changes in the reserves for other real estate
owned follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Balance, January 1 $2,154 $2,349 $2,270
Additions:
Provision for Other
Real Estate Owned Losses 1,437 906 2,868
Other -- -- 237
- -------------------------------------------------------------------------------
Total Additions 1,437 906 3,105
Deductions:
Loss on Sales/Selling Expenses 1,111 199 1,017
Writedowns 2,478 906 2,012
- -------------------------------------------------------------------------------
Total Deductions 3,589 1,105 3,029
Foreign Exchange Translation
Adjustments (2) 4 3
===============================================================================
Balance, December 31 $ -- $2,154 $2,349
Total net operating income, including net gains from sales, from other real
estate owned totaled $1.4 million for the year ended December 31, 1997, compared
with net expenses of $431 thousand and $178 thousand for 1996 and 1995,
respectively.
Other real estate owned income and expense consisted of the
following:
1997 1996 1995
- -------------------------------------------------------------------------------
Other Real Estate Owned
Operating Revenues $ 555 $ 564 $ 626
Net Gain on Sale of Properties 2,694 920 3,990
- -------------------------------------------------------------------------------
Net Revenues 3,249 1,484 4,616
Provision for Other Real Estate
Owned Losses 1,437 906 2,868
Selling and Other Real Estate
Owned Operating Expenses 420 1,009 1,926
- -------------------------------------------------------------------------------
Net Expenses 1,857 1,915 4,794
===============================================================================
Total Other Real Estate Owned
(Income) Expense, Net $(1,392) $ 431 $ 178
40
NOTE 6. PREMISES AND EQUIPMENT
Investments in premises and equipment at year-end were as follows:
1997 1996
- -------------------------------------------------------------------------------
Premises and Land $ 170,369 $ 166,390
Furniture and Equipment 73,440 68,465
Leasehold Improvements 43,350 42,615
Accumulated Depreciation
and Amortization (121,782) (111,396)
===============================================================================
Total Premises and
Equipment, Net $ 165,377 $ 166,074
Depreciation and amortization expense amounted to $11.7 million in 1997, $11.2
million in 1996 and $11.7 million in 1995.
The Corporation is committed to the following future minimum lease payments
under non-cancelable operating lease agreements covering equipment and premises.
These commitments expire intermittently through 2018 in varying amounts. The
total minimum lease payments under these commitments at December 31, 1997, are
as follows:
OPERATING
LEASES
- -------------------------------------------------------------------------------
1998 $ 7,358
1999 5,368
2000 3,734
2001 3,057
2002 2,195
2003 and after 15,656
===============================================================================
Total Minimum Lease Payments $37,368
Total minimum operating lease payments included in the preceding table have
not been reduced by future minimum payments from sublease rental agreements that
expire intermittently through 2002. Minimum sublease rental income for 1998 is
expected to be approximately $100 thousand. Rental expense for all operating
leases (cancelable and non-cancelable), less rental income for leased
properties, consisted of the following:
1997 1996 1995
- -------------------------------------------------------------------------------
Rental Expense $9,037 $10,926 $16,365
Rental Income (102) (15) (715)
===============================================================================
Net Rental Expense $8,935 $10,911 $15,650
In the normal course of business, the Corporation also leases space in
buildings it owns. This rental income amounted to $2.0 million in 1997, $1.9
million in 1996 and $3.0 million in 1995. Minimum lease commitments from
buildings owned for 1998 total approximately $2.1 million, compared with $1.4
million in 1997.
===============================================================================
NOTE 7. TIME DEPOSITS, $100 THOUSAND
OR MORE
The following table reflects the year-end balances and maturities for the
Corporation's time deposits in domestic offices of $100 thousand or more:
1997 1996
- -------------------------------------------------------------------------------
Certificates of Deposit Due Within:
Three Months $360,371 $231,771
Three to Six Months 37,506 36,895
Six to Twelve Months 29,055 37,343
Over Twelve Months 13,016 13,065
===============================================================================
Total $439,948 $319,074
Average time deposits of $100 thousand or more in domestic offices were
$346.3 million in 1997, compared with $296.4 million in 1996.
Interest expense related to time deposits of $100 thousand or more in domestic
offices amounted to $9.0 million in 1997, $8.8 million in 1996 and $7.6 million
in 1995.
The average rate paid on time deposits of $100 thousand or more for 1997 was
2.59% compared with the average rate of 2.98% paid during 1996.
A majority of time deposits in foreign offices were in denominations of $100
thousand or more.
41
NOTE 8. BORROWINGS
SHORT-TERM BORROWINGS
Short-term borrowings outstanding at year-end and other related information
follow:
FEDERAL FUNDS PURCHASED U.S. TREASURY DEMAND NOTES
AND REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS
------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $327,579 $237,166 $186,009 $24,929 $ 18,068 $ 15,466
Average Amount Outstanding (1) 266,828 212,206 174,923 17,563 28,747 73,694
Weighted-Average Rate Paid (1) 5.09% 4.73% 5.98% 5.10% 4.41% 5.70%
Maximum Amount Outstanding at any
Month-End 346,086 347,017 311,086 26,522 125,145 335,750
[FN]
(1)--Average amounts are based on daily balances. Average rates are computed on
actual interest expense divided by average amounts outstanding.
Federal funds purchased consisted of borrowings from other financial
institutions that have maturities ranging from 1 to 180 days. Repurchase
agreements are transactions with customers and brokers secured by either
securities or resale agreements, which mature generally within 30 days. At
December 31, 1997, the Corporation had two repurchase agreements with customers
that individually exceeded 10% of total stockholders' equity. These repurchase
agreements were for $85.7 million and $53.9 million. U.S. Treasury demand notes
consisted of treasury tax and loan funds transferred to interest bearing demand
notes with no fixed maturity, subject to call by the Federal Reserve. Other
short-term borrowings were primarily borrowings from other financial
institutions. At December 31, 1997, unused lines of credit totaled approximately
$575 million. A portion of these lines of credit is secured by residential
mortgage loans totaling $315.5 million.
-------------------------------------------------------------
LONG-TERM DEBT
Long-term debt outstanding at year-end and other related information follow:
BALANCE OUTSTANDING
DECEMBER 31,
INTEREST RATE ---------------------------
DECEMBER 31, 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Parent Corporation:
Fixed-Rate Subordinated Debentures due 2009 9.65% $ 66,525 $ 66,525
Fixed-Rate Subordinated Notes due 2006 8.50% 125,000 125,000
===============================================================================================================================
Total Long-Term Debt $191,525 $191,525
FIXED-RATE SUBORDINATED DEBENTURES DUE 2009
On June 6, 1989, the Corporation issued $100 million of 9.65% Subordinated
Debentures due June 15, 2009. These unsecured subordinated obligations may not
be redeemed prior to maturity. In April 1990, the Corporation purchased, on the
open market and at a discount, $33.5 million of the Subordinated Debentures,
resulting in pretax extraordinary gains of $7.7 million.
FIXED-RATE SUBORDINATED NOTES DUE 2006
On February 1, 1994, the Corporation sold $125 million of 8.5% Subordinated
Notes due 2006. The notes were priced at par and are not callable for five
years. In March 1994, the Corporation used the net proceeds from the offering,
$120.7 million, to redeem $69.2 million of the Subordinated Capital Notes due in
1996, as well as $51.5 million to redeem the remaining balance outstanding (at
that time) of floating-rate Subordinated Notes Due in 1996.
42
NOTE 9. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE-SHEET RISK
In the normal course of business, the Corporation enters into various
transactions that, in accordance with generally accepted accounting principles,
are not included on the consolidated statements of condition. These transactions
are referred to as "off-balance-sheet" commitments and differ from the
Corporation's balance sheet activities in that they do not give rise to funded
assets or liabilities. The Corporation enters into derivative transactions to
manage its own risks arising from movements in interest and currency rates. The
Corporation also offers such derivative products to its customers to meet their
financing objectives and to manage their interest and currency rate risk.
Outstanding commitments and contingent liabilities that do not appear in the
consolidated financial statements at December 31, 1997 and 1996, are as follows:
1997 1996
- ------------------------------------------------------------------------------
Commitments to Extend Credit:
Commercial $526,061 $453,481
Real Estate:
Commercial/Construction 59,113 50,214
Mortgage 6,719 4,219
Home Equity 192,230 179,721
- ------------------------------------------------------------------------------
Total Real Estate 258,062 234,154
Consumer 89,671 87,102
==============================================================================
Total Commitments to
Extend Credit $873,794 $774,737
Letters of Credit:
Commercial $ 72,731 $ 87,206
Standby - Performance 10,208 7,639
Standby - Financial 49,831 34,098
==============================================================================
Total Letters of Credit $132,770 $128,943
Derivative Instruments:
Foreign Currency Contracts -
Commitments to Purchase $111,215 $104,259
Commitments to Sell 190,324 202,844
Interest-Rate Swap Agreements -
Notional Principal Amount:
Interest-Rate Swaps 351,489 324,469
Interest-Rate Option
Contracts - Corridors -- 100,000
- Caps 642 668
Off-balance-sheet activities involve varying degrees of credit, interest-rate
or liquidity risk in excess of amounts recognized on the consolidated statements
of condition. The Corporation's management believes that financial derivatives,
such as interest-rate agreements, can be an important element of prudent balance
sheet and interest-rate risk management. The Corporation seeks to minimize its
exposure to loss under these commitments by subjecting them to credit approval
and monitoring procedures.
COMMITMENTS TO EXTEND CREDIT
The Corporation enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Corporation's commitments to extend credit are contingent upon customers meeting
and satisfying other conditions at the time of loan funding. The contractual
amount of commitments to extend credit for which the Corporation has received a
commitment fee, or which were otherwise legally binding, was $873.8 million at
December 31, 1997, with 50.7% of these commitments scheduled to expire within 1
year. Since many of the commitments are expected to expire without being drawn
upon, the total contractual amounts do not necessarily represent future funding
requirements.
CONCENTRATION OF CREDIT RISK
The Corporation regularly assesses the quality of its commercial credit
exposures and assigns risk ratings to substantially all extensions of credit in
its commercial, real estate and international portfolios. The Corporation seeks
to identify, as early as possible, problems that may result from economic
downturns or deteriorating conditions in certain markets or with respect to
specific credits. Lending officers have the primary responsibility of monitoring
credit quality, identifying problem credits and recommending changes in risk
ratings. When signs of credit deterioration are detected, credit or other
specialists may become involved to minimize the Corporation's exposure to future
credit losses. The Loan Review Department provides an independent assessment of
credit ratings, credit quality and the credit management process. This
assessment is achieved through regular reviews of loan documentation,
collateral, risk ratings and problem loan classifications.
43
Credit risk is reduced by maintaining a loan portfolio that is diverse in
terms of type of loan, as well as industry and borrower concentration, thus
minimizing the adverse impact of any single event or set of occurrences.
Geographically, the Corporation's loans are concentrated in the
Baltimore-Washington, D.C.-Richmond corridor and the United Kingdom. Loans in
the domestic portfolio are predominantly to borrowers located in the Washington,
D.C., metropolitan area. Loans originated by the Corporation's United Kingdom
subsidiary represent 77.5% of foreign loans and are predominantly to borrowers
located in the United Kingdom.
At December 31, 1997, approximately $555.5 million, or 19.3%, of the
Corporation's loan portfolio consisted of loans secured by real estate
(excluding single-family residential loans), of which approximately 74% and 26%
were secured by properties located in the Washington, D.C., area and in the
United Kingdom, respectively. In addition, the Corporation had $5.1 million in
other real estate owned at December 31, 1997.
Approximately 51% of the Corporation's loan portfolio is secured by the
primary residence of the borrower. At December 31, 1997, residential mortgage
loans were $1.16 billion and home equity loans were $317.7 million.
LETTERS OF CREDIT
There are two major types of letters of credit: commercial and standby letters
of credit. Commercial letters of credit are normally short-term instruments used
to finance a commercial contract for the shipment of goods from seller to buyer.
Commercial letters of credit are contingent upon the satisfaction of specified
conditions; therefore, they represent a current exposure if the customer
defaults on the underlying transaction. Commercial letters of credit issued by
the Corporation totaled $72.7 million at December 31, 1997.
Standby letters of credit can be either financial or performance-based.
Financial standby letters of credit obligate the Corporation to disburse funds
to a third party if the Corporation's customer fails to repay an outstanding
loan or debt instrument. Performance standby letters of credit obligate the
Corporation to disburse funds if the customer fails to perform some contractual
or nonfinancial obligation. The Corporation's policies generally require that
all standby letter of credit arrangements contain security and debt covenants
similar to those contained in loan agreements. At December 31, 1997, financial
standby letters of credit and performance standby letters of credit totaled
$49.8 million and $10.2 million, respectively.
FOREIGN CURRENCY CONTRACTS
Capital markets products include commitments to purchase and sell foreign
exchange, forward and spot contracts. The Corporation utilizes these products to
manage its exposure to movements in interest and currency rates, and to generate
revenue by assisting customers in managing their own exposure to such rate
movements. These products normally include the exchange of foreign currency
receivables and payables based on an agreed-upon rate of exchange. The types of
risk associated with these products are as follows: credit or performance risk,
currency-rate risk, and interest-rate risk. Performance risk relates to the
ability of a counterparty to meet its obligations under the contract.
Performance risk is limited to the cost of replacing the contract at current
rates, and does not include the notional principal balance or other
index/instrument used to determine payment streams.
Currency-rate risk and interest-rate risk arise from changes in the market
value of positions stemming from movements in currency and interest rates. The
Corporation limits its exposure to market value changes by entering into
offsetting or matching positions. The Corporation establishes and monitors
limits of exposure on unmatched positions.
Commitments to purchase and sell foreign currency contracts facilitate the
management of currency-rate risk by ensuring that at some future date a customer
will have a specific currency at a specified rate. The Corporation enters into
these contracts to serve its customers and to hedge its own risk positions
associated with its asset and liability management. In addition to entering into
offsetting or matching positions to offset foreign currency-rate risk, the
Corporation has established limits on the aggregate amount of open positions,
forward trading gaps and total volume of contracts outstanding, as well as
counterparty and country limits. At December 31, 1997, commitments to purchase
and sell foreign exchange were $111.2 million and $190.3 million, respectively.
At year-end 1997, the Corporation had approximately $78 million in commitments
to sell foreign exchange contracts, for the purpose of hedging the Corporation's
Sterling equity investment (Riggs Bank Europe Limited) and French Franc equity
investment (Riggs National Bank (Europe) S.A.). The remaining foreign exchange
contracts are for customers.
44
INTEREST-RATE AGREEMENTS AND CONTRACTS
The Corporation's management believes that financial derivatives, such as
interest-rate agreements, can be an important element of prudent balance sheet
and interest-rate risk management. Interest-rate agreements, such as
interest-rate swap agreements, involve two parties that have agreed to exchange
periodic payments calculated with reference to fixed or variable interest rates
applied to an agreed-upon notional principal amount. Notional amounts are used
to determine the amount of payments exchanged and do not represent an obligation
to exchange principal balances. Interest-rate swaps are entered into as hedges
against fluctuations in the interest rate of specifically identified assets or
liabilities, and reduce the Corporation's interest-rate risk. The Corporation is
exposed to certain levels of credit and market risk when entering interest-rate
agreements. Credit risk is measured as the cost of replacing, at market rates,
the defaulted agreement.
The Corporation minimizes credit risk by adhering to similar underwriting
standards as those used in other credit transactions, as well as by obtaining
collateral, if deemed appropriate under the specific circumstances. In addition,
all the Corporation's interest-rate swap agreements have been transacted with
either major investment or commercial banks. Market risk arises from changes in
the market values (replacement cost of agreements at current prices) of
agreements outstanding, the result of changes in interest rates or security
values underlying the interest-rate agreements. Market risk is minimized
primarily since the Corporation uses interest-rate swaps to hedge certain assets
and liabilities. During 1997 the Corporation entered into callable interest-rate
swap agreements which provide for a higher net yield to the Corporation. These
agreements are callable at the option of the counterparty to the agreement.
Interest-rate agreements called during 1997 had no material impact to the
Consolidated Statements of Income or Condition of the Corporation.
Interest-rate option contracts obligate a contract "seller" to make payments
to a contract "purchaser" in the event that a designated interest-rate index
exceeds a contractual "ceiling" level or falls below a contractual "floor"
level, or both, as in a "corridor" transaction. The Corporation has entered into
such contracts to obtain a specific hedge of certain assets/liabilities or to
offset previously entered derivative positions. The credit and market risk for
interest-rate option contracts is similar to that for interest-rate swap
agreements as described above.
Other than swaps entered into for customers, the Corporation's involvement
with off-balance-sheet financial derivative instruments has been for hedging
purposes. Such transactions have no effect on the level of total assets or
liabilities of the Corporation. Net receivables or payables under agreements
designated as hedges are recorded when realized or accrued as adjustments to
interest income or interest expense related to the hedged asset or liability.
Related fees are deferred and amortized over the lives of the agreements as an
adjustment to interest income or interest expense related to the hedged assets
or liabilities. Gains or losses resulting from early termination of
interest-rate agreements are deferred and amortized over the remaining terms of
the agreements.
At December 31, 1997, the Corporation's financial derivative instruments
included a $200 million (notional principal balance) interest-rate swap
agreement, entered into in July 1993, to hedge money market assets against the
possibility of declining interest rates. The swap agreement entails the receipt
of a fixed-rate of 5.38% while paying a floating rate equal to the three-month
London Interbank Offered Rate (the "LIBOR"), reset quarterly. The rate earned on
the actual money market assets is intended to offset the floating-rate payment
and the Corporation is left with the fixed-rate of 5.38%. All payments are
netted on a quarterly basis. The total aggregate net interest expense from this
swap transaction is included in interest income relating to the money market
assets.
In March 1995, the Corporation entered into a $25 million (notional principal
balance) interest-rate swap agreement to alter the interest sensitivity of a
portion of the Corporation's real estate mortgage loan portfolio that entailed
the receipt of a floating rate and payments of a fixed rate. This swap agreement
matured in March of 1997 (see the "Interest-Rate Swap Agreements" table on the
following page). Also, in April 1995, the Corporation entered into an additional
$25 million (notional principal balance) interest-rate swap agreement to alter
the interest sensitivity of a portion of the Corporation's real estate mortgage
loan portfolio. The April 1995 swap agreement entailed the receipt of a floating
rate and payment of a fixed rate. This swap agreement matured in April 1997 (see
the "Interest-Rate Swap Agreements" table on the following page). In January
1996, the Corporation entered into two additional $25 million (notional
principal balance) interest-rate swap agreements hedging a portion of the real
estate mortgage loan portfolio. Both swap agreements entail the payment of fixed
rates of 5.21% and 5.36%, respectively, and the receipt of floating rates, equal
to the three-month LIBOR, reset quarterly, and mature in January of 1998 and
1999. Payments for these swap agreements (which hedge the real estate mortgage
loan portfolio) are netted on a quarterly basis. The total aggregate net
interest income/expense from these swap agreements is included in interest
income relating to the real estate mortgage loan portfolio.
During the first quarter of 1997, the Corporation entered into two $25 million
(notional principal balance) callable interest-rate swap agreements to alter the
interest sensitivity of a portion of the Corporation's floating rate home equity
loan portfolio, which were terminated in the third quarter (see the
"Interest-Rate Swap Agreements" table, on the following page), with no material
impact to the Consolidated Statements of Income. In the third quarter of 1997,
the Corporation entered into four additional callable interest-rate swap
agreements, at a notional principal balance of $25 million each, to alter the
sensitivity of a portion of the Corporation's floating rate home equity loan
portfolio, three of which were terminated in the fourth quarter (see the
"Interest-Rate Swap Agreements" table, on the following page), with no material
impact to the Consolidated Statements of Income. The remaining swap agreement,
maturing July 1999, entails the receipt of a fixed rate
45
of 6.36%, and payment of a floating rate equal to the three-month LIBOR, reset
quarterly. In November 1997, the Corporation entered into an additional $25
million (notional principal balance) callable interest-rate swap agreement to
alter the sensitivity of the Corporation's floating rate home equity loan
portfolio. This swap entails the receipt of a fixed rate of 6.36% and payment of
a floating rate equal to the three-month LIBOR, reset quarterly, and matures in
November 1999. Payments for these swap agreements are netted on a quarterly
basis, with the aggregate net interest income/expense from these swap agreements
being included in interest income as an adjustment to interest income recognized
for the home equity loan portfolio.
INTEREST-RATE SWAP AGREEMENTS
DECEMBER 31, 1997
1997
WEIGHTED- ACCRUED ACCRUED UNAMORTIZED NET
NOTIONAL UNREALIZED AVERAGE RATE INTEREST INTEREST FEES & INTEREST
AMOUNT GAIN (LOSS)(1) RECEIVE PAY RECEIVABLE PAYABLE PREMIUMS INC./(EXP.)
- --------------------------------------------------------------------------------------------------------------------------------
Receive fixed/pay variable,
Maturing July 1998 $200,000 $(554) 5.38% 5.81% $1,913 $2,131 $-- $(827)
Receive fixed/pay variable,
Maturing July 1999 25,000 -- 6.36 5.76 340 308 -- 72
Receive fixed/pay variable,
Maturing November 1999 25,000 233 6.36 5.88 190 175 -- 14
Receive variable/pay fixed,
Maturing January 1998 25,000 43 5.81 5.21 266 235 -- 146
Receive variable/pay fixed,
Maturing January 1999 25,000 162 5.81 5.36 266 242 -- 109
For Customers 52,131 (532) -- -- 1,039 1,039 -- (129)
Receive variable/pay fixed,
Matured March 1997 -- -- -- -- -- -- -- (80)
Receive variable/pay fixed,
Matured April 1997 -- -- -- -- -- -- -- (88)
Receive fixed/pay variable,
Terminated July 1997 -- -- -- -- -- -- -- 79
Receive fixed/pay variable,
Terminated August 1997 -- -- -- -- -- -- -- 93
Receive fixed/pay variable,
Terminated October 1997 -- -- -- -- -- -- -- 40
Receive fixed/pay variable,
Terminated October 1997 -- -- -- -- -- -- -- 37
Receive fixed/pay variable,
Terminated December 1997 -- -- -- -- -- -- -- 42
Corridor,
Matured April 1997 -- -- -- -- -- -- -- (129)
================================================================================================================================
Total Interest-Rate Swap
Agreements $352,131 $(648) $4,014 $4,130 $-- $(621)
[FN]
(1)--Unrealized gain (loss) obtained from third-party market quotes for
replacement of derivative positions.
In April 1994, the Corporation purchased two $100 million (notional principal
balance) corridors, maturing in April 1996 and April 1997, to reduce its
interest-rate risk exposure relating to the $200 million swap agreement to hedge
money market assets. A premium was paid for these agreements, with the cost
amortized over the respective lives. The total aggregate net interest
income/expense for these corridor agreements are included in interest income
relating to money market assets. In December 1995, the Corporation terminated
one of the $100 million corridor agreements, which would have matured in April
1996. The remaining $100 million corridor matured in April 1997. See the
"Interest-Rate Swap Agreements" table above.
46
The Corporation's interest-rate swaps and option contracts activity for the
year ended December 31, 1997, is as follows:
BALANCE BALANCE
DECEMBER 31, DECEMBER 31,
1996 ADDITIONS MATURITIES TERMINATIONS 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-Rate Swaps:
Receive fixed/pay variable $200,000 $175,000 $ -- $125,000 $250,000
Receive variable/pay fixed 100,000 -- 50,000 -- 50,000
For Customers 25,137 26,994 -- -- 52,131
Interest-Rate Option Contracts 100,000 -- 100,000 -- --
==================================================================================================================================
Total $425,137 $201,994 $150,000 $125,000 $352,131
OTHER COMMITMENTS
During the first quarter of 1991, the Corporation entered into a ten-year
outsourcing agreement with IBM Global Services (formerly Integrated Systems
Solutions Corp.) for the management of operations directly associated with
computer and telecommunications functions of the Corporation. Payments for the
remaining three years of the contract are approximately $50.3 million. Total
expense under this contract for 1997 was $17.7 million, compared with $15.1
million in 1996 and $14.4 million in 1995.
LITIGATION
In the normal course of business, the Corporation is involved in various types
of litigation. In the opinion of management, based on its assessment and
consultation with outside counsel, litigation that 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.
===============================================================================
NOTE 10. RESERVE BALANCES, FUNDS
RESTRICTIONS, AND
CAPITAL REQUIREMENTS
RESERVE BALANCES
On March 28, 1996, Riggs Bank N.A. was formed when the Corporation merged its
three national banking subsidiaries: The Riggs National Bank of Washington,
D.C., The Riggs National Bank of Virginia and The Riggs National Bank of
Maryland. Riggs Bank N.A. must maintain reserves against deposits and
Eurocurrency liabilities in accordance with Regulation D of the Federal Reserve
Act (the "Act"). The total average reserve balances amounted to $23.8 million in
1997 and $47.2 million in 1996.
FUNDS RESTRICTIONS
The Act imposes restrictions upon the amount of loans or advances that banks,
such as Riggs Bank N.A., may extend to the Corporation and its non-bank
subsidiaries ("affiliates"). Loans by any bank to any one affiliate are limited
to 10% of the bank's capital stock and surplus. Further, aggregate loans by any
one bank to all of its affiliates may not exceed 20% of its capital stock and
surplus. In addition, the Act requires that borrowings by affiliates be secured
by designated amounts of collateral.
The National Bank Act limits dividends payable by national banks without
approval of the OCC to net profits (as defined) retained in the current and
preceding two calendar years. The payment of dividends by the Corporation's
national bank subsidiaries may also be affected by other factors, such as
requirements for the maintenance of adequate capital. In addition, the OCC is
authorized to determine, under certain circumstances relating to the financial
condition of a national bank, whether the payment of dividends would be an
unsafe or unsound banking practice and to prohibit payment thereof.
Riggs Bank N.A. had combined net income of $136.7 million for 1997 and
1996. The combined net income has resulted in Riggs Bank N.A. having a net
earnings position for consideration of dividend payments to the Corporation. On
January 15, 1997, Riggs Bank N.A. made a dividend payment of $112.0 million to
the Corporation. However, Riggs Bank N.A. made no dividend payment to the
Corporation in 1996. Before the merger on March 28, 1996, The Riggs National
Bank of Virginia made dividend payments totaling $481 thousand and $1.7 million,
respectively, during 1996 and 1995. The former Riggs National Bank of
Washington, D.C. and The Riggs National Bank of Maryland made no dividend
payments to the Corporation in 1996 or 1995.
47
CAPITAL REQUIREMENTS
Under the Federal Reserve Board's risk-based capital guidelines, bank holding
companies are required to meet a minimum ratio of qualifying total (combined
Tier I and Tier II) capital to risk-weighted assets of 8.00%, at least half of
which must be composed of core (Tier I) capital elements. The Corporation's
total and core capital ratios were 31.52% and 18.45%, respectively, at December
31, 1997, as compared with 28.47% and 20.04% at December 31, 1996.
The Federal Reserve Board has established an additional capital adequacy
guideline referred to as the leverage ratio, in keeping with the Prompt
Corrective Action regulations promulgated under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which measures Tier I capital to
quarterly average assets. The most highly rated bank holding companies are
required to maintain minimum leverage ratios of 3.00%. Those that are not in the
most highly rated category, including the Corporation, are expected to maintain
minimum ratios of at least 4.00%, or higher, if determined appropriate by the
Federal Reserve Board through its assessment of the Corporation's asset quality,
earnings performance, interest-rate risk and liquidity. The Federal Reserve
Board has not advised the Corporation of a specific leverage ratio requirement
above the 4.00% minimum. The Corporation's leverage ratio was 11.15% at December
31, 1997.
As a result of enactment of FDICIA, the Federal Reserve Board and the other
federal bank regulatory agencies have placed a greater emphasis on capital
ratios of banking organizations. FDICIA expressly conditions the ability of a
banking organization to engage in certain activities on the maintenance of
capital levels equal to or in excess of minimum guidelines and imposes
restrictions on banking organizations that fail to meet minimum guidelines. In
addition, the Federal Reserve Board has placed an increased emphasis on the
leverage ratio as a regulatory tool.
The national bank subsidiary of the Corporation (Riggs Bank N.A.) is subject
to minimum capital ratios prescribed by the Office of the Comptroller of the
Currency, which are the same as those of the Federal Reserve Board.
Riggs Bank N.A. exceeds current minimum regulatory capital requirements and
qualifies, at a minimum, as "well capitalized" under the FDICIA regulations. In
addition, 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. The Corporation's ability to provide
financial strength to its subsidiary will depend on, among other things, its
liquidity position and Federal Reserve approval.
The following table reflects the actual and required minimum ratios for the
Corporation and its national banking subsidiary:
CAPITAL RATIOS
DECEMBER 31,
----------------------- REQUIRED
1997 1996 MINIMUMS
- --------------------------------------------------------------------------------------------------------------------------------
Riggs National Corporation
Tier I (1) 18.45% 20.04% 4.00%
Combined Tier I and Tier II (1) 31.52 28.47 8.00
Leverage (2) 11.15 11.84 4.00
Riggs Bank N.A.
Tier I (1) 14.35 18.66 4.00
Combined Tier I and Tier II (1) 15.60 19.92 8.00
Leverage (2) 8.64 10.96 4.00
[FN]
(1)--Per regulatory guidelines, unrealized gains and losses for securities
available for sale recorded in equity are excluded from the computation of these
ratios. At December 31, 1997 and 1996, the Corporation had a net unrealized gain
of $2.0 million and a net unrealized loss of $729 thousand, respectively.
(2)--Most bank holding companies and national banks, including the Corporation
and the Corporation's national bank subsidiary, are expected to maintain at
least a 4.00% minimum leverage ratio, or higher if determined appropriate by the
Corporation's primary regulators. The Corporation's regulators have not
indicated a requirement higher than 4.00% at December 31, 1997.
48
NOTE 11. COMMON AND PREFERRED STOCK
COMMON STOCK
The Corporation is authorized to issue 50 million shares of Common Stock, par
value $2.50 (the "Common Stock"). At December 31, 1997, the Corporation had
30,560,988 shares issued and outstanding.
PREFERRED STOCK
The Corporation is authorized to issue 25 million shares of Preferred Stock, the
conditions of which will be set at the time of issuance. As of December 31,
1997, 4 million shares of Preferred Stock were issued and outstanding.
On October 21, 1993, the Corporation issued 4 million shares of 10.75%
Noncumulative Perpetual Preferred Stock, Series B ("Series B Preferred"), in
transactions exempt from the registration requirements of the Securities Act of
1933. The Series B Preferred shares have a liquidation preference of $25 per
share, no preemptive rights, limited public market and are non-voting (subject
to certain limited exceptions). The Series B Preferred shares are not redeemable
prior to October 1, 1998, at which time, at the Corporation's option, the
Corporation may redeem in whole or in part the Series B Preferred at prices
ranging from $27.25 in October 1998 to $25.00 in October 2008 and thereafter,
plus accrued but unpaid dividends.
There is no mandatory redemption or sinking fund obligation associated with
the Series B Preferred. Dividends are payable on February 1, May 1, August 1 and
November 1 of each year and are noncumulative. The proceeds from the Series B
Preferred issuance, net of expenses, were $95.3 million.
MINORITY INTEREST IN PREFERRED STOCK OF SUBSIDIARIES
On December 13, 1996, Riggs Capital, a wholly owned subsidiary of the
Corporation, issued 150 thousand shares of its 8.625% Trust Preferred
Securities, Series A. The Trust Preferred Securities, Series A, have a
liquidation preference of $1,000 per share and are not redeemable until December
31, 2006, with a final maturity on December 31, 2026. Dividends are payable
semi-annually on June 30 and December 31 of each year and are cumulative and
deferrable for a period not to exceed five years. Riggs Capital invested all of
the proceeds of the sale of the Trust Preferred Securities, Series A in Junior
Subordinated Deferrable Interest Debentures, Series A, issued by the Corporation
on December 13, 1996. The Trust Preferred Securities, Series A also qualify as
Tier I Capital, with certain limitations, and are accounted for as minority
interest (see Note 1, "Summary of Significant Accounting Policies").
Riggs Capital II, a new Delaware business trust formed in March 1997, for the
purpose of issuing preferred securities, is a wholly owned subsidiary of the
Corporation. On March 12, 1997, Riggs Capital II issued 200 thousand shares of
8.875% Trust Preferred Securities, Series C, with a liquidation preference of
$1,000 per share. Dividends are payable semi-annually on June 30 and December 31
of each year. The Trust Preferred Securities, Series C, cannot be redeemed until
March 15, 2007, and have a maturity of March 15, 2027. Riggs Capital II invested
all of the proceeds from its common and preferred stock sales in Junior
Subordinated Deferrable Interest Debentures, Series C, issued by the Corporation
on March 12, 1997, at a rate of 8.875%, with comparable interest payment dates
and maturity to the Trust Preferred Securities, Series C. Interest is cumulative
and deferrable on the Junior Subordinated Deferrable Interest Debentures for a
period not to exceed five years and thus is also cumulative and deferrable for
the same periods for the Trust Preferred Securities, Series C. The Trust
Preferred Securities, Series C, qualify as Tier I Capital for regulatory
purposes with certain limitations. The Trust Preferred Securities, Series C are
accounted for as a minority interest, with the dividends paid reflected as
deductions from net income.
49
NOTE 12. DISCLOSURE ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each major class of financial instrument for which it is practicable to estimate
that value:
CASH AND MONEY MARKET ASSETS
For short-term investments that reprice or mature in 90 days or less, the
carrying amounts are a reasonable estimate of fair value.
SECURITIES
Fair values are based on quoted market prices or dealer quotes. Quoted market
prices were not available for $24.8 million of securities at year-end 1997 and
$24.3 million at year-end 1996. These securities were comprised of Federal
Reserve and Federal Home Loan Bank-Atlanta stock and management believes that
these assets' carrying values approximate their fair value.
LOANS
The fair values of loans are estimated by discounting the expected future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. For
short-term loans, defined as those maturing or repricing in 90 days or less,
management believes the carrying amounts are a reasonable estimate of fair
value. Criticized loans are predominantly collateral-dependent; therefore, their
carrying values, net of related reserves, are a reasonable estimate of fair
value.
DEPOSIT LIABILITIES
The fair values of demand deposit, savings and NOW accounts, and money market
deposit accounts are the amounts payable on demand at the reporting date. The
fair values of investment and negotiable certificates of deposit, and foreign
time deposits with a repricing or maturity date extending beyond 90 days, are
estimated using discounted cash flows at the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
For short-term liabilities, defined as those repricing or maturing in 90 days or
less, the carrying amounts are a reasonable estimate of fair value.
LONG-TERM DEBT
For the Corporation's long-term debt, fair values are based on dealer quotes.
COMMITMENTS TO EXTEND CREDIT AND OTHER
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair values of loan commitments and letters of credit, both standby and
commercial, are assumed to equal their carrying values, which are immaterial.
Extensions of credit under these commitments, if exercised, would result in
loans priced at market terms.
The fair values of financial derivatives are equal to their replacement
values. The replacement value is defined as the amount the Corporation would
receive or pay to terminate the agreement at the reporting date, taking into
account the current market rate of interest and the current creditworthiness of
the derivative counterparties.
FOREIGN EXCHANGE CONTRACTS
The fair values of foreign exchange contracts represent the net asset or
liability already recorded by the Corporation, since these contracts are
revalued on a daily basis.
Changes in interest rates, assumptions or estimation methodologies may have a
material effect on these estimated fair values. As a result, the Corporation's
ability to actually realize these derived values cannot be assured. Management
is concerned that reasonable comparability between financial institutions may
not be likely because of the wide range of permitted valuation techniques and
numerous estimates that must be made, given the absence of active secondary
markets for many of the financial instruments. This lack of uniform valuation
methodologies introduces a greater degree of subjectivity to these estimated
fair values. In addition, the estimated fair values exclude nonfinancial assets,
such as premises and equipment, and certain intangibles, such as core-deposit
premiums and customer relationships. Thus, the aggregate fair values presented
do not represent the underlying market value or entity value of the Corporation.
50
ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments
are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and Due from Banks $ 186,091 $ 186,091 $ 211,144 $ 211,144
Money Market Assets 790,813 790,813 821,126 821,126
Securities Available for Sale 1,672,550 1,672,550 1,162,503 1,162,503
Total Net Loans 2,831,992 2,887,201 2,573,348 2,630,275
FINANCIAL LIABILITIES:
Deposits 4,297,918 4,298,831 4,050,683 4,052,140
Short-Term Borrowings 352,508 352,508 255,234 255,234
Long-Term Debt 191,525 209,062 191,525 205,839
OFF-BALANCE SHEET COMMITMENTS-
ASSET (LIABILITY):
Foreign Exchange Contracts 217 217 (3,678) (3,678)
Interest-Rate Agreements:
Interest-Rate Swaps (116) (764) (229) (1,744)
Interest-Rate Option Contracts -- -- 129 124
===============================================================================
NOTE 13. INCOME TAXES
The Corporation accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires an asset and liability approach in
accounting for income taxes.
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which taxes are expected to be paid. In addition, deferred tax assets
are recognized based on tax loss and tax credit carryforwards, to the extent
that realization of such assets is more likely than not.
Income, before income taxes and minority interest, relating to the operations
of domestic offices and foreign offices was as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Domestic Offices $89,289 $66,629 $75,551
Foreign Offices 3,896 5,908 12,597
===============================================================================
Total $93,185 $72,537 $88,148
The current and deferred portions of the income tax
provision were as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Current Provision
(Benefit):
Federal $17,921 $ 17,527 $ 8,749
State 1,868 (225) 276
Foreign (79) (56) (132)
- -------------------------------------------------------------------------------
Total Current
Provision (Benefit) 19,710 17,246 8,893
Deferred Provision
(Benefit):
Federal 6,801 (8,863) (8,547)
State (1,821) (2,209) --
Foreign -- -- --
- -------------------------------------------------------------------------------
Total Deferred
Provision (Benefit) 4,980 (11,072) (8,547)
===============================================================================
Provision for Income
Tax Expense $24,690 $ 6,174 $ 346
51
At December 31, 1997, and 1996, the Corporation maintained a valuation
allowance of approximately $6.9 million and $16.2 million, respectively, to
reduce the net deferred tax asset to $22.5 million and $26.5 million,
respectively. The net change in the valuation allowance for deferred tax assets
during 1997 was a decrease of $9.3 million. Substantially all of the decrease
related to the reversal of foreign and state valuation allowances.
RECONCILIATION OF STATUTORY TAX RATES TO EFFECTIVE
TAX RATES:
1997 1996 1995
- -------------------------------------------------------------------------------
Income Tax Computed at
Federal Statutory Rate of
35% for 1997, 1996
and 1995 $32,615 $ 25,388 $ 30,852
Add (Deduct):
State Tax, Net of
Federal Tax Benefit 2,766 256 179
Tax-Exempt Loan
Interest (975) (638) (1,488)
Amortization of Fair Value
Adjustments (63) 37 65
ESOP Loans -- (495) (625)
Amortization of
Core Deposits 231 231 231
Tax Benefit on
Foreign Exchange
Translation Adjustments
not Recognized -- -- (141)
Tax Benefit of
Unremitted Earnings of
Foreign Operations (1,737) (2,095) (911)
Reversal of Valuation
Allowance (9,316) (17,524) (31,134)
Other, Net 1,169 1,014 3,318
- -------------------------------------------------------------------------------
Provision for Income
Tax Expense $24,690 $ 6,174 $ 346
===============================================================================
Effective Tax Rate 26.5 % 8.5 % 0.4 %
The net deferred tax asset is included in other assets in the Consolidated
Statements of Condition. Management believes that it is more likely than not
that the net deferred tax asset will be realized. The components of income tax
liabilities (assets) that result from temporary differences in the recognition
of revenue and expenses for income tax and financial reporting purposes at
December 31, 1997, and 1996 are detailed in the table below:
SOURCES OF TEMPORARY DIFFERENCES RESULTING IN DEFERRED
TAX LIABILITIES (ASSETS):
1997 1996
- -------------------------------------------------------------------------------
Excess Tax Over Book
Depreciation $ 482 $ 665
Pension Plan and Post-Retirement 3,610 2,529
Discount Accretion, Net
of Securities Gains 1,193 903
Other, Net 3,712 1,918
- -------------------------------------------------------------------------------
Total Deferred Tax Liabilities 8,997 6,015
Accrual to Cash Basis
Conversion (165) (715)
Allowance for Loan Losses (21,968) (27,945)
Other Real Estate Owned (2,228) (3,221)
Other Tax Credit Carryforward (1,660) (2,106)
Net Operating Loss Carryforward (5,783) (7,819)
Capitalized Costs (3,535) (2,546)
Other, Net (3,062) (4,331)
- -------------------------------------------------------------------------------
Total Deferred Tax Assets (38,401) (48,683)
Valuation Allowance 6,860 16,176
===============================================================================
Net Deferred Tax Asset $(22,544) $(26,492)
52
NOTE 14. BENEFIT PLANS
PENSION PLANS
RIGGS NATIONAL CORPORATION
Under the Corporation's noncontributory defined benefit pension plan, available
to substantially all employees who qualify with respect to age and length of
service, benefits are normally based on years of service and the average of the
highest base annual salary for a consecutive five-year period prior to
retirement.
The Corporation's funding policy is to contribute an amount at least equal to
the minimum required contribution under the Employee Retirement Income Security
Act.
The assets of the Corporation's pension plan consist of an Immediate
Participation Guarantee contract with a life insurance company and funds held in
trust by the Corporation. The monies held in trust are invested primarily in
fixed-income and equity pooled funds.
RIGGS BANK EUROPE LIMITED
The Riggs Bank Europe Limited's pension plan provides monthly pension payments
upon normal retirement, at age 60 or upon later retirement, to substantially all
employees. The plan has a final-pay benefit formula that takes into account
years of service.
Riggs Bank Europe Limited's annual pension costs are determined based on the
Projected Unit Credit Cost Method, with specific amortization schedules for the
various categories of plan liabilities. Actuarial assumptions are selected based
on guidelines established by the Financial Accounting Standards Board.
RECONCILIATION OF FUNDED STATUS AND PREPAID PENSION COST
RIGGS NATIONAL CORPORATION RIGGS BANK EUROPE LIMITED
-------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value--
primarily unit funds $88,278 $80,143 $75,165 $17,771 $16,311 $13,976
Actuarial present value of
accumulated benefit obligation:
Vested benefits 70,933 68,903 73,420 12,502 11,823 10,075
Nonvested benefits 1,161 1,115 1,506 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total accumulated
benefit obligation 72,094 70,018 74,926 12,502 11,823 10,075
Actuarial present value of
future benefits 4,073 2,378 1,047 604 467 445
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of
projected benefit obligation 76,167 72,396 75,973 13,106 12,290 10,520
- --------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess (deficit) of
projected benefit obligation $12,111 $ 7,747 $ (808) $ 4,665 $ 4,021 $ 3,456
Unrecognized net loss (gain) 3,437 6,961 13,481 (5,581) (4,704) (3,966)
Unrecognized balance of initial
net asset -- (727) (1,458) (762) (1,028) (1,142)
Unrecognized prior service cost (830) (942) (1,054) -- -- --
================================================================================================================================
Prepaid (accrued) pension cost $14,718 $13,039 $10,161 $(1,678) $(1,711) $(1,652)
53
NET PERIODIC PENSION COST
RIGGS NATIONAL CORPORATION RIGGS BANK EUROPE LIMITED
-------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 1,017 $ 1,130 $ 1,299 $ 562 $ 473 $ 517
Interest cost on projected
benefit obligation 5,131 5,311 5,727 932 827 778
Actual return on plan assets (13,783) (6,558) (10,551) (2,829) (1,483) (2,413)
Net amortization and deferral 5,956 (261) 4,435 1,370 289 1,156
================================================================================================================================
Net periodic pension (benefit) cost $ (1,679) $ (378) $ 910 $ 35 $ 106 $ 38
Assumptions used in accounting
for the plans:
Weighted-average discount rate 7.25% 7.75% 7.25% 8.08% 8.50% 8.50%
Rates of increase in
compensation levels 4.00 4.00 4.00 6.00 6.50 6.50
Expected long-term rate of
return on plan assets 9.00 9.00 9.00 8.50 8.50 8.50
POSTRETIREMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees. Three benefit plans are provided:
medical and hospitalization insurance, dental insurance and life insurance. As
of January 1, 1998, the Corporation no longer provides life insurance benefits
for persons retiring on or after January 1, 1998. Substantially all active
employees may become eligible for benefits if they reach normal retirement age
or if they retire earlier with at least 10 years' service. Similar benefits for
active employees are provided through an insurance company and several health
maintenance organizations. The Corporation recognizes the cost of providing
those benefits by expensing the annual insurance premiums, which were $2.7
million in 1997, $3.2 million in 1996 and $4.3 million in 1995.
The Corporation accounts for post retirement benefits under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
No. 106 required a significant change in the Corporation's historical practice
of accounting for postretirement benefits on a pay-as-you-go (cash) basis by
requiring accrual of the expected cost of benefits during the years that the
employee renders the necessary service. Adoption of SFAS No. 106 in 1993
resulted in an accumulated transition obligation of $13.0 million, which the
Corporation elected to recognize over a 20-year period. The Corporation incurred
$1.6 million in 1997 for postretirement health and life insurance expenses,
which included $453 thousand relating to the amortization of the transition
obligation. This compares to $2.7 million in health and life insurance expenses
for 1996 and $2.2 million for 1995, with transition obligation amortization of
$651 thousand in both years.
The net periodic costs for postretirement health and life
insurance benefits are as follows:
1997 1996
- -------------------------------------------------------------------------------
Service Cost $ 305 $ 348
Interest Cost 1,003 1,381
Other 280 940
===============================================================================
Total $ 1,588 $ 2,669
The funding status of the postretirement plans and the amounts recognized in
the Corporation's Consolidated Statements of Condition at December 31, 1997, and
1996, follow:
1997 1996
- -------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 7,058 $ 11,768
Fully eligible active
plan participants 2,107 2,065
Other active
plan participants 5,298 4,917
- -------------------------------------------------------------------------------
Total 14,463 18,750
Unrecognized transition
obligation (6,799) (10,423)
Unrecognized net loss (3,868) (5,104)
Unrecognized prior
service cost 1,391 1,739
===============================================================================
Accrued postretirement
benefit cost $ 5,187 $ 4,962
54
The assumed health care cost trend rate ranged from 6.0% to 8.0% for 1997,
gradually decreasing to 6.0% by the year 2002 and remaining constant thereafter.
A range of 6.0% to 8.5% was used in 1996. A discount rate of 7.25% was used at
December 31, 1997 and a rate of 7.75% was used at December 31, 1996 to determine
the accumulated postretirement benefit obligation. Increasing the assumed health
care cost trend rate by one percentage point would increase the accumulated
postretirement benefit obligation at December 31, 1997 by $2.0 million and
increase the net periodic postretirement benefit cost for 1997 by $305 thousand.
STOCK OPTION PLANS
On March 10, 1993, the Board of Directors of the Corporation adopted the 1993
Stock Option Plan (the "1993 Plan"), which was approved at the May 14, 1993,
Annual Meeting of Shareholders. The 1993 Plan provides for the issuance of
options to purchase shares of common stock of the Corporation. Key employees of
the Corporation and certain subsidiaries may be granted either incentive or
nonqualified stock options. Generally, the exercise price cannot be less than
the fair market value of the common stock at the date of grant, with vesting
periods ranging from zero to three years. The aggregate number of shares of
common stock reserved for issuance upon exercise of options granted under the
1993 Plan is 1,250,000. Unless previously terminated by the Board of Directors,
the Plan will terminate on March 10, 2003.
A summary of the stock option activity under the 1993 Plan follows:
STOCK AVERAGE
OPTIONS PER SHARE
- -------------------------------------------------------------------------------
Outstanding at December 31, 1994 848,400 $ 9.54
Granted 300,000 10.63
Exercised 30,050 9.07
Terminated 41,850 9.21
- -------------------------------------------------------------------------------
Outstanding at December 31, 1995 1,076,500 $ 9.87
Granted 124,000 12.00
Exercised 67,950 9.60
Terminated 14,100 9.62
- -------------------------------------------------------------------------------
Outstanding at December 31, 1996 1,118,450 $ 10.12
GRANTED -- --
EXERCISED 121,125 9.02
TERMINATED -- --
===============================================================================
OUTSTANDING AT DECEMBER 31, 1997 997,325 $ 10.25
On May 11, 1994, the shareholders approved the Corporation's 1994 Stock Option
Plan (the "1994 Plan"), which was adopted by the Corporation's Board of
Directors in February 1994. Under the 1994 Plan, options to purchase up to
1,250,000 shares of common stock may be granted to key employees. Generally, the
exercise price cannot be less than the fair market value of the common stock at
the date of grant, with vesting periods ranging from zero to five years. Unless
previously terminated by the Board of Directors, the 1994 Plan will terminate on
February 9, 2004.
A summary of the stock option activity under the 1994 Plan follows:
STOCK AVERAGE
OPTIONS PER SHARE
- -------------------------------------------------------------------------------
Outstanding at December 31, 1994 -- $ --
Granted 220,000 10.05
Exercised -- --
Terminated -- --
- -------------------------------------------------------------------------------
Outstanding at December 31, 1995 220,000 $10.05
Granted 395,500 12.01
Exercised 30,132 11.02
Terminated 53,568 11.11
- -------------------------------------------------------------------------------
Outstanding at December 31, 1996 531,800 $11.35
GRANTED 271,000 19.89
EXERCISED 67,317 10.63
TERMINATED 10,000 17.43
===============================================================================
OUTSTANDING AT DECEMBER 31, 1997 725,483 $14.52
On March 26, 1996, the Board of Directors of the Corporation approved the 1996
Stock Option Plan (the "1996 Plan"), which was approved by the shareholders on
May 15, 1996. Under the 1996 Plan, options to purchase up to 2,000,000 shares of
common stock may be granted to key employees. Generally, the exercise price
cannot be less than the fair market value of the common stock at the date of
grant, with vesting periods determined by the market price of the common stock
equaling or exceeding a $14 to $25 range for 60 or more consecutive trading
days. Unless previously terminated by the Board of Directors, the 1996 Plan will
terminate on March 26, 2006.
A summary of the stock option activity under the 1996 Plan follows:
STOCK AVERAGE
OPTIONS PER SHARE
- -------------------------------------------------------------------------------
Outstanding at December 31, 1995 -- $ --
Granted 1,000,000 12.38
Exercised -- --
Terminated -- --
- -------------------------------------------------------------------------------
Outstanding at December 31, 1996 1,000,000 $12.38
GRANTED 500,000 20.50
EXERCISED -- --
TERMINATED -- --
===============================================================================
OUTSTANDING AT DECEMBER 31, 1997 1,500,000 $15.08
55
On July 9, 1997, the Board of Directors of the Corporation approved the 1997
Non-Employee Directors Stock Option Plan ("the 1997 Plan"), subject to the
approval of shareholders. Under the 1997 Plan, options to purchase up to 350,000
shares of common stock may be granted to directors of the Corporation or a
subsidiary who are not employees of the Corporation or a subsidiary. Generally,
the exercise price cannot be less than the fair market value of the common stock
at the date of grant, with vesting occurring at the date of grant. During 1997,
307,500 shares were granted and remain outstanding under the 1997 Plan, with a
price per share of $20.50, with no shares exercised or terminated during the
year. Unless previously terminated by the Board of Directors, the 1997 Plan will
terminate on July 8, 2007.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" and elected to continue to account for its stock option plans
under Accounting Principles Board Opinion No. 25, and thus is providing the fair
value-based disclosures required under SFAS No. 123 on a proforma basis (see
Note 1, "Summary of Significant Accounting Policies"). Accordingly, the stated
net income and earnings per share in the Consolidated Statements of Income, in
addition to the proforma net income and earnings per share reflecting the
compensation costs for stock options granted in 1997, 1996 and 1995, are
disclosed in the table to the right.
1997 1996 1995
- -------------------------------------------------------------------------------
NET INCOME:
As Reported $50,879 $65,943 $87,802
Proforma 42,039 55,687 86,699
EARNINGS PER SHARE:
As Reported - Basic $ 1.32 $ 1.82 $ 2.55
- Diluted 1.27 1.79 2.54
Proforma - Basic $ 1.03 $ 1.48 $ 2.51
- Diluted 0.99 1.46 2.50
WEIGHTED-AVERAGE FAIR
VALUE OF OPTIONS
GRANTED $ 10.24 $ 6.62 $ 4.80
WEIGHTED-AVERAGE
ASSUMPTIONS:
Expected Lives (Years) 9.87 9.89 7.02
Risk-Free Interest Rate 5.80% 6.44% 6.28%
Expected Volatility 35.43% 46.27% 46.27%
Expected Dividends
(annual per share) $ 0.20 $ 0.20 $ 0.20
-----------------------------------------------------------
The Corporation did not record any compensation costs in 1997, 1996 or 1995
relating to any of its stock option plans. In addition, no significant
modifications to the plans were made during the periods. The fair values of the
stock options outstanding used to determine the proforma impact of the options
to compensation expense, and thus, net income and earnings per share, were based
on the Black-Scholes option pricing model for each grant made in 1997, 1996 and
1995, using the key assumptions detailed above.
At December 31, 1997, additional weighted-average details for all stock
options outstanding which were granted in 1995, 1996 and 1997, follow:
VESTED OPTIONS
---------------------------------
STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS
EXERCISE OUTSTANDING EXPIRATION AVERAGE OUTSTANDING AVERAGE
PRICE AT YEAR-END (YEARS) (1) PER SHARE (1) AT YEAR-END PER SHARE (1)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.01 to $10.00 127,333 6.30 $ 9.97 40,032 $ 9.91
$10.01 to $15.00 1,758,150 8.25 11.98 1,573,673 12.06
$15.01 to $20.00 214,000 9.25 19.75 -- --
$20.01 to $20.50 857,500 9.50 20.50 557,500 20.50
===================================================================================================================================
Total 2,956,983 8.60 $14.93 2,171,205 $14.19
[FN]
(1)--Weighted-Average.
56
OTHER BENEFIT PLANS
Effective January 1, 1993, the Corporation adopted a Supplemental Executive
Retirement plan to provide supplemental retirement income and preretirement
death benefits to certain key employees. The amount of benefits is based on the
participant's corporate title, functional responsibility and service as a member
of the Board of Directors. Upon the later of a participant's termination of
employment or attainment of age 62, the participant will receive the vested
portion of the supplemental retirement benefit, payable for the life of the
participant, but for no more than 15 years. At December 31, 1997, the
Corporation had a $2.5 million pension benefit obligation for this supplemental
plan, compared with $2.3 million at year-end 1996. Accrued pension costs were
$1.6 million at year-end 1997 and $1.2 million at year-end 1996. This
supplemental plan has no assets and incurred $369 thousand in net periodic costs
in 1997, compared with $339 thousand and $362 thousand for 1996 and 1995,
respectively.
In October 1993, the Corporation began sponsorship of a defined contribution
plan under Section 401(k) of the Internal Revenue Code, that is available to
substantially all employees (the "401(k) Plan"). The Board of Directors of the
Corporation approved a matching program for the 401(k) Plan in 1996, equating to
100% of the first one-hundred dollars contributed and 50% on the balance of
contributions made thereafter, up to 6% of the employees' eligible earnings. The
Board of Directors also approved a discretionary profit sharing contribution
into the 401(k) Plan of up to 2% of the employees' eligible earnings in 1997 and
1996, based on the Corporation's financial performance during those years.
Expenses relating to both of these programs totaled $1.7 million and $1.6
million for 1997 and 1996, respectively. The Corporation did not provide a
matching contribution to the 401(k) Plan in 1995.
57
NOTE 15. FOREIGN ACTIVITIES
Foreign activities are those conducted with customers domiciled outside the
United States, regardless of the location of the banking office. Foreign
business activity is integrated within the Corporation. As a result, it is not
possible to definitively classify the business of most operating activities as
entirely domestic or foreign. The Foreign Consolidated Statements of Condition
shown below reflect the portion of the Corporation's consolidated statements of
condition derived from transactions with customers that are domiciled outside
the United States.
FOREIGN CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
-------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Deposits with Banks in Foreign Countries:
Interest-Bearing $ 173,963 $ 161,982 $118,982
Other 6,633 5,257 3,430
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits with Banks in Foreign Countries 180,596 167,239 122,412
Loans to Foreign Customers:
Governments and Official Institutions 50,606 17,095 30,849
Banks and Financial Institutions 8,506 5,445 6,570
Commercial and Industrial and Commercial Property 291,077 211,928 170,831
Other 36,911 15,924 15,760
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans, Net of Unearned Discount 387,100 250,392 224,010
Less: Reserve for Loan Losses 15,219 15,218 11,968
- ---------------------------------------------------------------------------------------------------------------------------------
Total Net Loans 371,881 235,174 212,042
Pool Funds Provided, Net (1) 831,292 704,957 582,793
Other Assets 44,334 45,934 44,560
=================================================================================================================================
TOTAL ASSETS $1,428,103 $1,153,304 $961,807
LIABILITIES
Foreign Deposits:
Banks in Foreign Countries $ 164,160 $ 99,941 $ 35,130
Governments and Official Institutions 254,215 255,818 341,677
Other 723,768 570,236 425,514
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits (2) 1,142,143 925,995 802,321
Short-Term Borrowings 161,805 99,337 45,034
Other Liabilities 124,155 127,972 114,452
=================================================================================================================================
TOTAL LIABILITIES $1,428,103 $1,153,304 $961,807
SUPPLEMENTAL DATA ON FOREIGN DEPOSITS
Demand $ 149,287 $ 158,725 $150,284
Savings, NOW and Money Market 468,821 382,409 278,563
Time (3) 524,035 384,861 373,474
=================================================================================================================================
Total Foreign Deposits $1,142,143 $ 925,995 $802,321
[FN]
(1)--Pool Funds Provided, Net are amounts contributed by foreign activities to
fund domestic activities.
(2)--Foreign deposits in domestic offices totaled $656.9 million, $553.2 million
and $510.6 million at December 31, 1997, 1996 and 1995, respectively.
(3)--A majority of time deposits are in amounts of $100 thousand or more.
58
The table to the right reflects changes in the reserve for loan losses on
loans to customers domiciled outside the United States. Allocations of the
provision for loan losses are based upon actual charge-off experience and
additional amounts deemed necessary in relation to risks inherent in the foreign
loan portfolio.
FOREIGN RESERVE FOR LOAN LOSSES
1997 1996 1995
- ------------------------------------------------------------------------------
Balance, January 1 $15,218 $11,968 $ 22,899
Provision for Loan Losses 221 (3,368) (13,192)
Loans Charged Off 593 260 6,107
Less: Recoveries on
Charged-Off Loans 666 5,513 8,399
- ------------------------------------------------------------------------------
Net (Recoveries) Charge-Offs (73) (5,253) (2,292)
Foreign Exchange
Translation Adjustments (293) 1,365 (31)
==============================================================================
Balance, December 31 $15,219 $15,218 $ 11,968
The table below reflects foreign assets by geographical location for the last
three years and selected categories of the Consolidated Statements of Income.
Loans made to, or deposits placed with, a branch of a foreign bank located
outside the foreign bank's home country are considered as loans to, or deposits
with, the foreign bank. To measure profitability of foreign activity, the
Corporation has established a funds pricing system for units that are users or
providers of funds. Noninterest income and expense allocations are based on
earning assets identified in each geographical area.
GEOGRAPHICAL PERFORMANCE
INCOME
TOTAL ASSETS TOTAL TOTAL BEFORE TAXES AND NET
DECEMBER 31, REVENUE EXPENSES MINORITY INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Middle East and Africa 1997 $ 45,895 $ 6,188 $ 5,276 $ 912 $ 670
1996 33,747 9,404 7,480 1,924 1,760
1995 52,980 7,925 4,706 3,219 3,206
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 1997 $454,233 $65,880 $56,181 $ 9,699 $ 7,129
1996 376,890 44,803 35,637 9,166 8,387
1995 266,821 37,451 22,242 15,209 15,150
- ----------------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 1997 $ 7,129 $ 1,056 $ 900 $ 156 $ 115
1996 7,696 3,057 2,431 626 572
1995 11,425 1,557 925 632 630
- ----------------------------------------------------------------------------------------------------------------------------------
South and Central America 1997 $ 48,285 $ 6,575 $ 5,607 $ 968 $ 711
1996 5,067 926 736 190 174
1995 3,911 467 277 190 189
- ----------------------------------------------------------------------------------------------------------------------------------
Caribbean 1997 $ 32,369 $ 1,496 $ 1,276 $ 220 $ 162
1996 13,042 3,721 2,960 761 696
1995 28,819 11,078 6,579 4,499 4,482
- ----------------------------------------------------------------------------------------------------------------------------------
Other 1997 $ 8,900 $ 2,686 $ 2,290 $ 396 $ 291
1996 11,905 2,012 1,600 412 377
1995 15,058 1,374 815 559 557
==================================================================================================================================
Total Foreign (1) 1997 $596,811 $83,881 $71,530 $12,351 $ 9,078
1996 448,347 63,923 50,844 13,079 11,966
1995 379,014 59,852 35,544 24,308 24,214
- ----------------------------------------------------------------------------------------------------------------------------------
Percentage of Foreign 1997 10% 20% 22% 13% 18%
To Consolidated 1996 9 16 16 18 18
1995 8 16 12 28 28
[FN]
(1)--Foreign assets at December 31, 1997, 1996 and 1995, exclude net pool funds
contributed by foreign activities to fund domestic activities.
59
NOTE 16. PARENT CORPORATION FINANCIAL STATEMENTS
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES
Distributed Earnings from Subsidiaries (1) $63,819 $ 481 $ 1,674
Interest on Reverse Repurchase Agreements 26,187 5,228 6,153
Interest and Dividends on Securities Available for Sale -- 233 471
Other Operating Income 1,065 2,989 2,329
- ---------------------------------------------------------------------------------------------------------------------------------
Total Revenues 91,071 8,931 10,627
OPERATING EXPENSES
Interest Expense 45,411 19,280 19,176
Other Operating Expenses 1,334 2,556 3,082
- ---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 46,745 21,836 22,258
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Taxes 44,326 (12,905) (11,631)
Applicable Income Tax Benefit (2) (6,553) (5,501) (4,886)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Undistributed Earnings of Subsidiaries 50,879 (7,404) (6,745)
Undistributed Earnings of Subsidiaries (1) -- 73,347 94,547
=================================================================================================================================
NET INCOME $50,879 $ 65,943 $ 87,802
[FN]
(1)--For the purpose of parent company only financial activity, "Distributed
Earnings from Subsidiaries" are included in the revenues of the parent
corporation.
(2)--Applicable income taxes are provided for based on parent
corporation income only and do not reflect the tax expense or benefit of the
subsidiaries' operations.
STATEMENTS OF CONDITION
DECEMBER 31,
--------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 977 $ 1,374
Intercompany Reverse Repurchase Agreements 497,375 218,650
Securities Available for Sale (at Market Value) 5,197 --
Premises and Equipment, Net -- 4,457
Investment in Subsidiaries 496,522 538,528
Other Assets 21,129 16,036
===================================================================================================================================
TOTAL $1,021,200 $779,045
LIABILITIES
Other Liabilities $ 5,685 $ 7,104
Long-Term Debt:
Subordinated Debentures due 2009 66,525 66,525
Subordinated Notes due 2006 125,000 125,000
Junior Subordinated Deferrable Interest Debentures, Series A, due 2026 154,640 154,640
Junior Subordinated Deferrable Interest Debentures, Series C, due 2027 206,168 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt 552,333 346,165
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 558,018 353,269
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 463,182 425,776
===================================================================================================================================
TOTAL $1,021,200 $779,045
60
PARENT CORPORATION FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 50,879 $ 65,943 $ 87,802
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used In) Operating Activities:
Depreciation and Purchase Accounting Adjustments -- 592 1,349
Gain on Securities Available for Sale -- (1,200) --
(Increase) Decrease in Other Assets (5,512) 961 6,785
(Decrease) Increase in Other Liabilities (1,419) 1,784 (718)
Undistributed Earnings of Subsidiaries -- (73,347) (94,547)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Adjustments (6,931) (71,210) (87,131)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 43,948 (5,267) 671
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Securities Available for Sale (4,000) -- --
Proceeds from Maturities of Securities Available for Sale -- 5,000 5,000
Dividends from Subsidiaries in Excess of Earnings 48,181 -- --
Net Decrease (Increase) in Premises 4,457 (10) (21)
Net Increase in Investment in Subsidiaries (6,168) (4,640) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities 42,470 350 4,979
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from the Issuance of Long-Term Debt 206,168 154,640 --
Repayments of Long-Term Debt -- (26,100) --
Net Proceeds from Issuance of Common Stock 2,571 985 272
Dividend Payments - Preferred Shares (10,750) (10,750) (10,750)
- Common Shares (6,079) (4,549) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 191,910 114,226 (10,478)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes -- -- 44
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 278,328 109,309 (4,784)
Cash and Cash Equivalents at Beginning of Year 220,024 110,715 115,499
=================================================================================================================================
Cash and Cash Equivalents at End of Year $498,352 $220,024 $110,715
Supplemental Disclosures:
Interest Paid $ 46,334 $ 18,295 $ 19,181
Income Tax Refunds (4,842) (5,042) (7,870)
61
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
TO OUR STOCKHOLDERS:
Management is responsible for the integrity of all financial data included in
this Annual Report. The financial statements and related notes are prepared in
accordance with generally accepted accounting principles and include certain
amounts based on management's best estimates and judgment. Financial information
beyond the financial statements is presented in a manner consistent with the
Corporation's financial statements.
Management maintains a system of accounting internal control that includes an
internal audit program. The internal control system provides reasonable
assurance that assets are safeguarded against loss from unauthorized use or
disposition, transactions are properly authorized and accounting records are
reliable for the timely preparation of financial statements. The foundation of
the internal control system is the Corporation's Code of Ethics, which provides
a guide to all employees consistent with the highest standards of business
conduct. The internal control system is further supported by management's
policies and established accounting procedures. The internal control system is
monitored and modified continually to improve the system and respond to changes
in business environment and operations.
The Board of Directors has an Audit Committee composed of three outside and
independent directors. The Committee meets periodically with the independent
public accountants, internal auditors and management to determine the
effectiveness of the internal control system and to review the scope and/or
results of audits and other related matters. The independent public accountants
and internal auditors have direct access to the Corporation's Audit Committee.
The consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants, in accordance with generally accepted
auditing standards, whose audit includes a review of the system of internal
controls, test of accounting records and other auditing procedures considered
necessary to formulate an opinion on the consolidated financial statements.
Management recognizes that there are inherent limitations within any system of
internal controls, including the Corporation's, which relate to the overall cost
of the internal control system and the resulting effectiveness thereof.
Management believes that the Corporation's system of internal controls provides
reasonable assurance that financial data are recorded properly and in a timely
manner for the preparation of reliable financial statements.
/s/ JOE L. ALLBRITTON /s/ TIMOTHY C. COUGHLIN /s/ JOHN L. DAVIS
Joe L. Allbritton Timothy C. Coughlin John L. Davis
Chairman of the Board and President Chief Financial Officer
Chief Executive Officer
62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO RIGGS NATIONAL CORPORATION:
We have audited the accompanying consolidated statements of condition of RIGGS
NATIONAL CORPORATION (a Delaware corporation) and its subsidiaries as of
December 31, 1997, and 1996, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of Riggs National Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Riggs
National Corporation and its subsidiaries as of December 31, 1997, and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.,
January 21, 1998
63
SUPPLEMENTAL FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION
1997
-----------------------------------------------------
Unaudited for the Years Ended December 31, 1997, 1996 and 1995 FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Income $77,069 $83,120 $83,717 $ 86,886
Interest Expense 35,652 37,527 38,529 39,793
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 41,417 45,593 45,188 47,093
Less: Provision for Loan Losses -- -- -- (12,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 41,417 45,593 45,188 59,093
Noninterest Income 19,641 21,089 24,242 22,952
Noninterest Expense 43,812 45,660 44,998 51,560
- ----------------------------------------------------------------------------------------------------------------------------------
Income before Taxes and Minority Interest 17,246 21,022 24,432 30,485
Applicable Income Tax Expense (Benefit) 4,069 5,454 6,625 8,542
Minority Interest in Income of Subsidiaries, Net of Taxes 2,711 4,932 4,986 4,987
=================================================================================================================================
NET INCOME 10,466 10,636 12,821 16,956
Less: Dividends on Preferred Stock 2,688 2,687 2,688 2,687
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stock $ 7,778 $ 7,949 $10,133 $ 14,269
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC $ .26 $ .26 $ .33 $ .47
- DILUTED .25 .25 .32 .45
CONSOLIDATED FINANCIAL RATIOS AND OTHER INFORMATION
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME TO AVERAGE:
Earning Assets 1.06% 1.56% 2.13% .84% (2.18)%
Total Assets .97 1.40 1.92 .76 (1.91)
Stockholders' Equity 11.69 16.48 28.25 12.01 (42.84)
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE:
Loans to Deposits 66.97% 67.19% 67.91% 69.80% 51.65 %
Stockholders' Equity to Loans 16.35 15.64 12.22 10.89 10.08
Stockholders' Equity to Deposits 10.95 10.51 8.30 7.60 5.21
Stockholders' Equity to Assets 8.28 8.48 6.80 6.29 4.46
- ----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31:
Reserve for Loan Losses to Net Loans 1.82% 2.44% 2.20% 3.81% 3.42 %
Common Stockholders 2,754 3,058 3,236 3,712 4,488
Employees 1,580 1,519 1,576 1,624 1,667
Banking Offices 62 63 65 68 75
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Dividend Payout Ratio 15.75% 8.38% n/a n/a n/a
Average Common Shares Outstanding 30,422,822 30,317,572 30,257,585 30,230,213 26,208,315
Book Value per Common Share $12.04 $10.88 $9.30 $5.70 $5.92
- ---------------------------------------------------------------------------------------------------------------------------------
64
1996 1995
- ----------------------------------------------------------- -------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------------------
$74,570 $71,740 $72,811 $74,077 $72,225 $76,475 $ 75,863 $74,236
35,638 34,467 35,059 34,727 34,173 38,488 38,508 36,652
- ---------------------------------------------------------------------------------------------------------------------------------
38,932 37,273 37,752 39,350 38,052 37,987 37,355 37,584
-- -- -- -- -- -- (55,000) --
- ---------------------------------------------------------------------------------------------------------------------------------
38,932 37,273 37,752 39,350 38,052 37,987 92,355 37,584
25,575 25,742 21,174 23,686 17,998 18,338 18,345 19,323
43,004 43,931 44,047 45,965 47,151 46,870 53,994 43,819
- ---------------------------------------------------------------------------------------------------------------------------------
21,503 19,084 14,879 17,071 8,899 9,455 56,706 13,088
52 (2,370) 3,062 5,430 104 87 64 91
-- -- -- 420 -- -- -- --
=================================================================================================================================
21,451 21,454 11,817 11,221 8,795 9,368 56,642 12,997
2,688 2,687 2,688 2,687 2,688 2,687 2,688 2,687
- ---------------------------------------------------------------------------------------------------------------------------------
$18,763 $18,767 $ 9,129 $ 8,534 $ 6,107 $ 6,681 $ 53,954 $10,310
- ---------------------------------------------------------------------------------------------------------------------------------
$ .62 $ .62 $ .30 $ .28 $ .20 $ .22 $ 1.78 $ .34
.61 .62 .29 .27 .20 .22 1.78 .34
QUARTERLY STOCK INFORMATION (1)
DIVIDENDS
PRICE RANGE DECLARED
HIGH LOW AND PAID
- ----------------------------------------------------------------------------------------------------------------------------------
1997 FOURTH QUARTER $28.50 $21.625 $.05
THIRD QUARTER 24.00 19.75 .05
SECOND QUARTER 20.625 17.375 .05
FIRST QUARTER 22.00 17.25 .05
- ----------------------------------------------------------------------------------------------------------------------------------
1996 Fourth Quarter $18.00 $15.625 $.05
Third Quarter 17.125 11.50 .05
Second Quarter 12.75 11.875 .05
First Quarter 14.25 11.75 --
- ----------------------------------------------------------------------------------------------------------------------------------
1995 Fourth Quarter $14.625 $12.25 $--
Third Quarter 13.625 9.75 --
Second Quarter 10.50 9.125 --
First Quarter 9.50 7.875 --
- ----------------------------------------------------------------------------------------------------------------------------------
[FN]
(1)--The high and low information listed above represents high and low sales
prices as reported on the NASDAQ National Market System.
65
THREE-YEAR FOREIGN AVERAGE CONSOLIDATED STATEMENTS OF
CONDITION AND RATES
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
(IN THOUSANDS) BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans, Net of Unearned Discounts $ 299,367 $23,574 7.87% $232,716 $18,064 7.76% $195,058 $16,229 8.32%
Time Deposits with Other Banks 124,979 7,350 5.88 153,717 8,623 5.61 158,063 10,200 6.45
Pool Funds Provided, Net (1) 822,831 47,065 5.72 536,683 29,517 5.50 462,003 27,905 6.04
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS AND
AVERAGE RATE EARNED 1,247,177 77,989 6.25 923,116 56,204 6.09 815,124 54,334 6.66
Less: Reserve for Loan Losses 15,197 13,162 18,436
Cash and Due from Banks 24,526 26,946 24,501
Premises and Equipment, Net 15,587 15,025 15,607
Other Assets 9,231 8,121 9,380
===================================================================================================================================
TOTAL ASSETS $1,281,324 $960,046 $846,176
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits:
Savings, NOW and Money Market $ 445,874 $18,186 4.08% $302,031 $10,189 3.37% $247,755 $ 7,750 3.13%
Other Time 451,864 25,927 5.74 340,215 19,728 5.80 311,832 18,975 6.09
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 897,738 44,113 4.91 642,246 29,917 4.66 559,587 26,725 4.78
Short-Term Borrowings 111,558 5,631 5.05 52,492 2,525 4.81 36,062 1,883 5.22
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING FUNDS AND
AVERAGE RATE INCURRED 1,009,296 49,744 4.93 694,738 32,442 4.67 595,649 28,608 4.80
Demand Deposits 152,382 155,205 144,322
Other Liabilities and
Stockholders' Equity 119,646 110,103 106,205
===================================================================================================================================
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,281,324 $960,046 $846,176
===================================================================================================================================
NET INTEREST INCOME AND SPREAD $28,245 1.32% $23,762 1.42% $25,726 1.86%
NET INTEREST MARGIN ON EARNING ASSETS 2.26% 2.57% 3.16%
[FN]
(1)--Pool Funds Provided, Net, are amounts contributed by foreign activities
to fund domestic activities.
FOREIGN NET INTEREST INCOME CHANGES (1)
1997 VERSUS 1996 1996 VERSUS 1995
- -----------------------------------------------------------------------------------------------------------------------------------
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
(IN THOUSANDS) RATE VOLUME CHANGE RATE VOLUME CHANGE
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $ 265 $ 5,245 $ 5,510 $(1,147) $2,982 $ 1,835
Time Deposits with Other Banks 401 (1,674) (1,273) (1,302) (275) (1,577)
Pool Funds Provided, Net 1,224 16,324 17,548 (2,648) 4,260 1,612
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,890 19,895 21,785 (5,097) 6,967 1,870
Interest Expense:
Savings, NOW and Money Market Accounts 2,439 5,558 7,997 639 1,800 2,439
Other Time Deposits (209) 6,408 6,199 (935) 1,688 753
Short-Term Borrowings 131 2,975 3,106 (158) 800 642
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 2,361 14,941 17,302 (454) 4,288 3,834
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ (471) $ 4,954 $ 4,483 $(4,643) $2,679 $(1,964)
[FN]
(1)--The dollar amount of changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change in
volume) has been allocated between rate and volume variances based on the
percentage relationship of such variances to each other.
66
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item pertaining to directors of the Corporation
and compliance with Section 16 (a) of the Exchange Act, is included in the
Corporation's proxy statement for its 1998 Annual Meeting of Stockholders. The
information required by this Item pertaining to executive officers of the
Corporation is as follows:
EXECUTIVE OFFICER* POSITION AGE
Joe L. Allbritton Chairman of the Board and Chief Executive Officer of the Corporation
and Chairman of the Board and Chief Executive Officer of Riggs Bank N.A. 73
Robert L. Sloan Vice Chairman of the Board 51
Timothy C. Coughlin President of the Corporation 55
John L. Davis Chief Financial Officer of the Corporation and Executive Vice
President and Chief Financial Officer of Riggs Bank N.A. 56
Joseph W. Barr Executive Vice President of Riggs Bank N.A.
Community Banking 48
Joseph M. Cahill Executive Director of Legal Affairs, Riggs Bank N.A. 44
Henry A. Dudley, Jr. Executive Vice President and Chief Trust Officer of Riggs Bank N.A. 51
J. David Hoffman Executive Vice President and Chief Infomation Officer of Riggs Bank N.A. 35
Timothy A. Lex Executive Vice President and Chief Operating Officer of Riggs Bank N.A. 40
Raymond M. Lund Executive Vice President of Riggs Bank N.A.
International Banking Group 36
David W. Scott Executive Vice President and Chief Credit Officer of Riggs Bank N.A. 36
Alfred J. Serafino Executive Vice President of Riggs Bank N.A.
Relationship Banking 49
[FN]
* Executive officers of Riggs National Corporation, including certain executive
officers of Riggs Bank N.A., As of March 1, 1998.
67
EXPERIENCE OF MANAGEMENT
JOE L. ALLBRITTON has been Chairman of the Board and Chief Executive Officer of
the Corporation since 1981. He has served as Chairman of the Board of Riggs Bank
N.A. since 1983 and was re-appointed Chief Executive Officer of Riggs Bank N.A.
in 1997. He also served as Chief Executive Officer of Riggs Bank N.A. from 1982
to June 1993. Mr. Allbritton is the beneficial owner of approximately 37% of the
Common Stock of the Corporation as of February 27, 1998. He also serves as
Chairman of the Board of, and is the owner of, Perpetual Corporation, Allbritton
Communications Company, Westfield News Advertiser, Inc. and University
Bancshares, Inc.
ROBERT L. SLOAN was appointed Vice Chairman of the Board in July, 1994. Mr.
Sloan has served as a Director of the Corporation since May 1993. Mr. Sloan also
is Chief Executive Officer of Sibley Memorial Hospital.
TIMOTHY C. COUGHLIN has served as President of the Corporation since 1992. He
served as President and Chief Operating Officer of Riggs Bank N.A. from 1983 to
1992. He has been a Director of the Corporation since 1988 and was a Director of
Riggs Bank N.A. from 1983 to 1996.
JOHN L. DAVIS has served as Chief Financial Officer of the Corporation and
Executive Vice President and Chief Financial Officer of Riggs Bank N.A. since
June 1993. Mr. Davis served as Senior Vice President and Controller of First
Florida Bank, N.A. from 1990 to 1992 and as Senior Vice President and Chief
Financial Officer of First Union National Bank of Georgia from 1987 to 1990.
JOSEPH W. BARR has served as Executive Vice President in charge of Community
Banking since July 1993. He served as Executive Vice President in charge of
Retail Banking at First American Metro Corp. from 1992 to June 1993 and as
Executive Vice President in charge of Community Banking at Perpetual Savings
Bank, F.S.B. from 1989 to 1992.
JOSEPH M. CAHILL was appointed Executive Director of Legal Affairs of Riggs Bank
N.A. in 1998. Mr. Cahill served as the Litigation Manager of Riggs Bank N.A.
from 1996 to 1997, and Associate Litigation Manager from 1993 to 1995. Prior to
1993, Mr. Cahill practiced law in private practice.
HENRY A. DUDLEY, JR., Executive Vice President, has served as Chief Trust
Officer in charge of Financial Services, which includes the Trust Division,
Riggs Investment Management Corporation (RIMCO), and the Domestic Private
Banking Division, since 1994. He previously served as Executive Vice President
of the Domestic Private Banking Division, Senior Vice President of Corporate
Banking and Vice President of the International Division.
J. DAVID HOFFMAN, Executive Vice President, has served as Chief Information
Officer since June 1997. Prior to joining Riggs, Mr. Hoffman was with the
Financial Markets Business Consulting practice of Arthur Andersen LLP from 1986
to May 1997.
TIMOTHY A. LEX, Executive Vice President, has served as Chief Operating Officer
of Riggs Bank N.A. since 1995. Mr. Lex has served in various management
positions during the past 13 years, including such positions as Managing
Director of Riggs Bank Europe Limited and President and Chief Executive Officer
of the subsidiary formerly known as The Riggs National Bank of Virginia.
RAYMOND M. LUND serves as Executive Vice President-International Banking Group.
Mr. Lund has served in various management positions during the past 10 years,
including Head of the International and Domestic Private Banking Divisions.
Prior to 1988, Mr. Lund was an Assistant Vice President and Trust Officer with
First RepublicBank in Texas.
DAVID W. SCOTT, Executive Vice President, has served as Chief Credit Officer of
Riggs Bank N.A. since 1995. Mr. Scott has served in various management positions
during the past 11 years, including such positions as Head of Loan Review and
Chief Credit Officer of Riggs Bank Europe Limited.
ALFRED J. SERAFINO serves as Executive Vice President-Relationship Banking. He
also has served as Executive Vice President in Commercial Banking and President
and Chief Executive Officer of the subsidiary formerly known as The Riggs
National Bank of Maryland. Mr. Serafino served as Regional Executive Officer in
charge of the Maryland West Commercial Division at Sovran Bank for 12 years.
68
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is included in Riggs National
Corporation's definitive Proxy Statement to Stockholders, which is incorporated
by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in Riggs National
Corporation's definitive Proxy Statement to Stockholders, which is incorporated
by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the "Notes to Consolidated
Financial Statements-Note 4" of this Form 10-K and in Riggs National
Corporation's definitive Proxy Statement to Stockholders, which is incorporated
by reference.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
14(A) FINANCIAL STATEMENTS PAGE(S)
The following are submitted under Item 8:
Consolidated Statements of Income--Years Ended
December 31, 1997, 1996 and 1995. 30
Consolidated Statements of Condition--At
December 31, 1997 and 1996. 31
Consolidated Statements of Changes in Stockholders'
Equity--Years Ended December 31, 1997, 1996 and 1995. 32
Consolidated Statements of Cash Flows--Years Ended
December 31, 1997, 1996 and 1995. 33
Notes to Consolidated Financial Statements as of
December 31, 1997, 1996 and 1995. 34-61
Management's Report on Financial Statements 62
Report of Independent Public Accountants 63
14(B) REPORTS ON FORM 8-K
None.
14(C) EXHIBITS
The exhibits listed on the Index to Exhibits on Pages 71 through 72 hereof are
incorporated by reference or filed herewith in response to this item.
69
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RIGGS NATIONAL CORPORATION JOE L. ALLBRITTON*
-------------------------
Joe L. Allbritton,
Chairman of the Board and
Chief Executive Officer
March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the date indicated.
TIMOTHY C. COUGHLIN* President
- ------------------------
Timothy C. Coughlin
/s/ JOHN L. DAVIS Chief Financial Officer
- ------------------------ (Principal Financial
John L. Davis and Accounting Officer)
ROBERT L. ALLBRITTON* Director
- ------------------------
(Robert L. Allbritton)
JOHN M. FAHEY, JR.* Director
- ------------------------
(John M. Fahey, Jr.)
LAWRENCE I. HEBERT* Director
- ------------------------
(Lawrence I. Hebert)
STEVEN B. PFEIFFER* Director
- ------------------------
(Steven B. Pfeiffer)
ROBERT L. SLOAN* Vice Chairman
- ------------------------ of the Board
(Robert L. Sloan)
JACK VALENTI* Director
- ------------------------
(Jack Valenti)
EDDIE N. WILLIAMS* Director
- ------------------------
(Eddie N. Williams)
*By: /s/ JOSEPH M. CAHILL
----------------------------------
Joseph M. Cahill, Attorney-in-fact
March 20, 1998
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION PAGES
=================================================================================================================================
(2.1) Agreement and Plan of Reorganization by and between Riggs National Corporation and
Guaranty Bank and Trust Company dated June 11, 1986 and related Stock Purchase Agreement
(Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 1986,
SEC File No. 0-9756.)
(2.2) Agreement and Plan of Reorganization by and between Riggs National Corporation and First
Fidelity Bank, dated June 17, 1987 and related Stock Purchase Agreement (Incorporated by
reference to Exhibit 2.1 and Appendix B of Registration Statement on Form S-4, Registration
No. 33-16473, filed September 4, 1987, SEC File No. 0-9756.)
(2.3) Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver
of the National Bank of Washington, Federal Deposit Insurance Corporation and The Riggs
National Bank of Washington, D.C. dated as of August 10, 1990. Indemnity Agreement
between Federal Deposit Insurance Corporation and The Riggs National Bank of Washington,
D.C. dated as of August 10, 1990. (Incorporated by reference to the Registrant's Form 10-Q
for the quarter ended June 30, 1990, SEC File No. 0-9756.)
(3.1) Certificate of Incorporation as Amended (Incorporated by reference to the Registrant's Form
10-Q for the quarter ended September 30, 1989, SEC File No. 0-9756.)
(3.2) By-laws of the Registrant with amendments through February 12, 1992. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K for the year 1993, SEC File No. 0-9756.)
(4.1) Indenture dated September 15, 1984 with respect to $60 million Floating Rate Subordinated
Notes due 1996 (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended
September 30, 1984, SEC File No. 0-9756.)
(4.2) Indenture dated December 18, 1985 with respect to $100 million Floating Rate Subordinated Capital
Notes due 1996 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the
year 1985, SEC File No. 0-9756.)
(4.3) Indenture dated June 1, 1989 with respect to $100 million 9.65% Subordinated Debentures due 2009
(Incorporated by reference to the Registrant's Form 8-K dated June 20, 1989, SEC File No. 0-9756.)
(4.4) Indenture dated January 1, 1994 with respect to $125 million, 8.5% Subordinated Debentures due
2006. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1994,
SEC File No. 0-9756.)
(10.1) Agreement dated April 22, 1981 between 1120 Vermont Avenue Associates and The Riggs National
Bank of Washington, D.C. (Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year 1981, SEC File No.0-9756.)
(10.2) Corrected Version of Riggs National Corporation 1984 Stock Appreciation Rights Plan as Amended
February 15, 1989 and previously filed with the Registrant's Annual Report on Form 10-K for the year
1988, SEC File No. 0-9756. (Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year 1989, SEC File No. 0-9756.)
(10.3) Split Dollar Life Insurance Plan Agreements. (Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year 1989, SEC File No. 0-9756.)
71
EXHIBIT
NO. DESCRIPTION PAGES
=================================================================================================================================
(10.5) Supplemental Executive Retirement Plan as amended September 15, 1993. (Incorporated
by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1993,
SEC File No. 0-9756.)
(10.6) Management Employment Arrangement dated June 9, 1993. (Incorporated by reference
to the Registrant's Form 10-Q for the quarter ended June 30, 1993, SEC File No. 0-9756.)
(10.7) 1993 Stock Option Plan as amended May 11, 1994, and the 1994 Stock Option Plan
(Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30,
1994, SEC File No. 0-9756.)
(10.8) Letter Confirming Compensation of the President of The Riggs National Bank of
Washington, D.C, dated October 5, 1994. (Incorporated by reference to the Registrant's
Form 10-Q for the quarter ended September 30, 1994, SEC File No. 0-9756.)
(10.9) Deferred Compensation Plan for Directors. (Incorporated by reference to the Registrant's
Form 10-Q for the quarter ended September 30, 1994, SEC File No. 0-9756.)
(10.10) Description of 1994 Bonus Plan. (Incorporated by reference to the Registrant's Form 10-Q
for the quarter ended September 30, 1994, SEC File No. 0-9756.)
(10.11) Supplemental Executive Retirement Plan, as amended December 14, 1994. (Incorporated
by reference to the Registrant's Form 10-K for the year ended 1994, SEC File No. 0-9756.)
(10.12) Trust Agreement, dated December 14, 1994, for the Supplemental Executive Retirement Plan
and the Split Dollar Life Insurance and Supplemental Death Benefit Plans. (Incorporated
by reference to the Registrant's Form 10-K for the year ended 1994, SEC File No. 0-9756.)
(10.13) Description of 1995 Incentive Plan. (Incorporated by reference to the Registrant's Form 10-Q
for the quarter ended March 31, 1995, SEC File No. 0-9756.)
(11) Computation of Per Share Earnings
(18) Letter from Arthur Andersen &Co. regarding change in accounting principle (Incorporated
by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1990, SEC
File No. 0-9756.)
(21) Subsidiaries of the Registrant: The Corporation's only significant subsidiaries, as defined
in Regulation S-X, are Riggs Bank N.A., organized under the national banking laws of
the United States and Riggs Bank Europe Limited, organized under the laws of the
United Kingdom.
(22) Proxy Statement dated October 6, 1989 and incorporated by reference (Commission
File No. 0-9756.)
(24) Power of Attorney Exhibit 24
1-9
(27) Financial Data Schedule
Exhibits omitted are not required or not applicable.
Portions of Riggs National Corporation's definitive Proxy Statement to
Stockholders, except for Items 402 (k) and (l) of Regulation S-K are
incorporated by reference in Parts I And III of this Annual Report.
72