UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003 | ||
or | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 0-9756
Riggs National Corporation
Delaware
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52-1217953 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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1503 Pennsylvania Avenue, N.W., Washington, D.C. (Address of principal executive offices) |
20005 (Zip Code) |
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
None
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None |
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class | ||||
Common Stock, par value $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 such 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 þ No o
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 registrants 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)2 of the Act). Yes þ No o
The aggregate market value of the Companys voting equity held by non-affiliates was $280,758,759 on June 30, 2003, based on the last sales price that day.
The number of shares outstanding of the registrants common stock as of January 31, 2004 was 28,729,496.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Riggs National Corporations definitive Proxy Statement dated March 19, 2004 to Shareholders are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
FORM 10-K INDEX
Page(s) | ||||||
PART I | ||||||
Item 1
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Business | 3 | ||||
Item 2
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Properties | 14 | ||||
Item 3
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Legal Proceedings | 14 | ||||
Item 4
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Submission of Matters to a Vote of Security Holders | 14 | ||||
PART II | ||||||
Item 5
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 14 | ||||
Item 6
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Selected Consolidated Financial Data | 15 | ||||
Item 7
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||||
Item 7A
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Quantitative & Qualitative Disclosures about Market Risk | 16 | ||||
Item 8
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Financial Statements and Supplementary Data | 44 | ||||
Item 9
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 88 | ||||
Item 9A
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Controls and Procedures | 88 | ||||
PART III | ||||||
Item 10
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Directors and Executive Officers of the Registrant | 89 | ||||
Item 11
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Executive Compensation | 89 | ||||
Item 12
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 89 | ||||
Item 13
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Certain Relationships and Related Transactions | 90 | ||||
Item 14
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Principal Accountant Fees and Services | 90 | ||||
PART IV | ||||||
Item 15
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Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 90 | ||||
Signatures, Certifications and Index to Exhibits | 91 |
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FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
Riggs National Corporation
The Company has six reportable business segments which are: Banking, International Banking, Riggs & Co. (wealth management), Treasury, Riggs Capital Partners (venture capital) and Other, which are described in Note 17 of Notes to Consolidated Financial Statements. For the three years ended December 31, 2003, key elements of the Companys business strategy have been: the continued focus on growth opportunities through the additional accumulation of assets under management and fee income in the wealth management division (Riggs & Co.); the orientation of its retail banking branches toward money management relationships; the development and specialization of banking products and services in specific growth industries; and the continuation of Riggs pre-eminent embassy banking operations coupled with growth in the international private banking business lines. As a complement to internally developed programs, Riggs may also pursue alliances or acquisitions that further its strategic goals. In 2004 the Companys Riggs & Co. segment will be absorbed into the Banking segment.
Riggs Bank N.A.
Riggs Bank operates twenty-eight branches and an investment advisory subsidiary in Washington, D.C.; thirteen branches in Virginia; six branches in Maryland; a second investment advisory subsidiary in New Haven, Connecticut; a commercial bank and a portfolio management services company in London, England; an Edge Act (federally-chartered corporation allowed to engage only in international banking or other financial transactions related to international business) subsidiary in
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As a commercial bank, Riggs Bank provides a wide array of financial products and services primarily to customers in the Washington, D.C. metropolitan area and, to a lesser extent, throughout the United States and internationally.
Riggs Banks Corporate & Institutional Banking Group provides services to customers ranging from small businesses to major multinational companies and non-profit organizations. These services include lines of credit, secured and unsecured term loans, letters of credit, credit support facilities, foreign currency transactions and cash management.
The Banks wealth management 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, as well as estate planning and trust administration. Riggs & Co. provides domestic investment advisory services through Riggs Investment Advisors Inc. (RIA) and J. Bush & Co. Incorporated, both of which are wholly-owned subsidiaries incorporated in the State of Delaware and registered under the Investment Advisers Act of 1940, as amended. Internationally, Riggs provides these services through Riggs and Co. International Ltd. (RCIL).
Riggs Banks Community Banking Group provides a variety of traditional services including checking, NOW, savings and money market accounts, personal loans and lines of credit, certificates of deposit, individual retirement accounts and investment sales. Additionally, the Community Banking Group provides 24-hour banking services through its telebanking operations and a network of 143 automated teller machines (ATMs) that is linked to national and regional ATM networks.
The Banks International Banking Group also provides a variety of financial services, including issuing letters of credit in connection with trade and other transactions, taking deposits, foreign currency exchange, private banking and cash management. Customers include embassies and foreign missions in Washington, D.C. and elsewhere, foreign governments, central banks of foreign governments and other banks. Because of these relationships, Riggs has also developed secondary relationships with diplomats, embassy employees and other representatives of such entities that may be perceived as closely aligned with the Companys primary customers. These services are provided through both domestic and international offices.
International operations of Riggs Bank include:
| Riggs Bank Europe Ltd. (RBEL), located in London (England), which provides corporate banking, expatriate and embassy banking services. RBELs main office is located in the West End of London. It also has a branch in Berlin (Germany); | |
| RCIL, located in London (England), provides portfolio management services to international customers; | |
| Riggs Bank London Branch, which has three locations in London, provides banking services to embassy and private banking clients; | |
| Riggs Bank and Trust Company Limited, located in Jersey (Channel Islands), which provides offshore banking and trust services to international clients; and | |
| Riggs Bank Nassau Branch (Bahamas) which provides limited offshore banking services. |
The Company estimates that for 2003, 2002 and 2001, approximately 10%, 9% and 17%, respectively, of its consolidated revenues are attributable to foreign operations. For 2003, 2002 and 2001, 9%, 7% and 11%, respectively, of the consolidated assets at December 31 are attributable to its foreign operations. See Note 15 of Notes to the Consolidated Financial Statements.
Riggs Capital
Riggs Capital II issued 200,000 shares of 8.875% guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures, Series C (trust preferred securities), with a liquidation preference of $1,000 per share, in March 1997. The securities also currently qualify as tier I capital with certain limitations.
In accordance with an accounting interpretation which was adopted by the Company on October 1, 2003 (FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities or FIN 46R), the Company no longer consolidates Riggs Capital and Riggs Capital II. At the time of adoption of this new accounting interpretation and at
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Because of this deconsolidation, regulatory authorities may conclude at a future date that the trust preferred securities should no longer be included as a component of tier I regulatory capital. The Company has determined that it and the Bank would continue to be well capitalized under regulatory guidelines at December 31, 2003 without including the trust preferred securities as a component of regulatory capital. See Capital Resources and Notes 10 and 11 of Notes to Consolidated Financial Statements.
Riggs Capital Partners
Regulation-General
Certain regulatory requirements and restrictions are discussed below or elsewhere in this document.
Federal Regulation of National Banks
The OCC also has extensive enforcement authority over all national banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, to initiate injunctive actions and to appoint the FDIC as conservator or receiver. In general, these enforcement actions may be initiated for violations of laws and regulations as well as unsafe or unsound practices, or with respect to receivership or conservatorship upon the determination that certain statutory criteria exist such as insolvency, substantial dissipation of assets, an unsafe or unsound condition in which to transact business, willful violation of cease and desist orders, concealment, losses or the likelihood of losses that will deplete substantially all capital, undercapitalization, similar factors, or upon notification by the U.S. Attorney General of guilt by a bank of a criminal offense arising under the money laundering laws of the United States. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required.
The OCC, as well as the other federal banking agencies, have adopted regulations and guidelines establishing safety and soundness standards including but not limited to such matters as loan underwriting and documentation, internal controls and audit systems, interest rate risk exposure, asset quality and earnings, and compensation and other employee benefits.
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Insurance of Accounts and Regulation by the FDIC
Payment of Dividends
Banking regulators have indicated that banking organizations should generally pay dividends only if the organizations net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organizations capital needs, asset quality and overall financial condition.
Neither the Bank nor RNC may make any capital distribution (or, also, in the case of the Bank, pay any management fee to RNC) if the Bank or RNC would thereafter be undercapitalized. Undercapitalized depository institutions and holding companies are subject to increased regulatory monitoring and asset growth limitations and are required to submit capital restoration plans. Both the Bank and the Company are considered well capitalized under federal banking regulations at December 31, 2003.
The Banks ability to pay dividends is governed by the National Bank Act and OCC regulations. Under such statute and regulations, all dividends by a national bank must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. Various provisions of the National Bank Act further restrict the payment of dividends. In addition, the OCC has the authority to prohibit the payment of dividends by a national bank when it determines such payment to be an unsafe and unsound banking practice. In addition, the bank would be prohibited by federal statute and the OCCs prompt corrective action regulations from making any capital distribution if, after giving effect to the distribution, the bank would be classified as undercapitalized under OCC regulations. See Prompt Corrective Action.
Capital Adequacy
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Prompt Corrective Action
Any national bank that fails to comply with its capital restoration plan or is significantly undercapitalized (i.e., tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the bank. A national bank that becomes critically undercapitalized (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized institutions. In addition, the OCC must appoint a receiver (or conservator with the concurrence of the FDIC) for an institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized institution is also subject to the general enforcement authority of the OCC, including the appointment of a conservator or a receiver.
The OCC is also generally authorized to reclassify a bank into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OCC of any of these measures on the Bank may have a substantial adverse effect on the Banks operations and profitability and the value of the Companys outstanding securities, including its common stock.
Deposit Insurance Assessments
Under the risk-based assessment system, there are nine assessment risk classifications (i.e., three supervisory subgroups within each capital category) to which different deposit insurance assessment rates are applied. Assessment rates for deposit insurance currently range from 0 to 27 basis points (bp) per $100 of deposits. The capital and supervisory subgroup to which an institution is assigned by the FDIC is confidential and may not be disclosed. The Banks rate of deposit insurance assessments depends upon the category and subcategory to which it is assigned by the FDIC. Any increase in insurance assessments would have an adverse effect on the earnings of the Bank and the Company. Under the Deposit Insurance Funds Act of 1996, deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act
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Related Party Transactions
In addition, the bank may not acquire the securities of most affiliates. Subsidiaries of the bank are not deemed affiliates. However, the Board has the discretion to treat subsidiaries of national banks as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons (insiders) are also subject to conflict of interest rules enforced by the OCC. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, as a general matter, loans to insiders must be made on terms substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation
Under Board policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy, the Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank.
Any loans made by RNC to the Bank are subordinate to deposits and to certain other indebtedness of the Bank. In the event of the RNCs bankruptcy, a commitment by it to a bank regulatory agency to maintain the capital adequacy of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the BHCA, a bank holding company must obtain Board approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks.
Bank holding companies are required to get the Boards prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Board order, or any condition imposed by, or written agreement with, the Board. This notification requirement does not apply to any company that meets the well capitalized standard for banks, is well managed and is not subject to any unresolved supervisory issues.
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Federal Home Loan Bank System
As a member, the Bank is required to purchase and maintain stock in the FHLB. At December 31, 2003, the Bank had $25.6 million in FHLB stock, which was in compliance with this requirement. In the past year, the Bank has received dividends on its FHLB stock. Recent legislative changes will require the FHLB to change the characteristics and amount of stock held by its members. It is also anticipated that these changes will restrict somewhat the ability of FHLB members to redeem their shares of FHLB stock.
Legislation
In recent years, federal regulators have increased the attention paid to compliance with the provisions of BSA and related laws, with particular attention paid to Know Your Customer practices, which are now known commonly as Enhanced Due Diligence. Banks have been encouraged, by both regulators and by various industry groups, to enhance their identification procedures prior to accepting new customers in order to deter criminal elements from using the banking system to move and hide illicit profits and activities.
In 2001, the President of the United States signed into law the USA PATRIOT Act of 2001 that increases certain responsibilities for banks to, among other things, enhance due diligence in monitoring accounts related to certain terrorist activities. The USA PATRIOT Act also applies BSA procedures to broker-dealers. The Bank also is responsible for compliance with restrictions from the U.S. Treasurys Office of Foreign Assets Control (OFAC). Accordingly, Riggs Bank restricts transactions with certain countries except as permitted by OFAC or in accordance with a license from OFAC.
The Patriot Act is intended to strengthen U.S. law enforcements and the intelligence communities abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. See Consent Order and Notification of Possible Assessment of Civil Money Penalties.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the SOA). The SOA is the most far-reaching U.S. securities legislation enacted in many years, and includes many substantive and disclosure-based requirements. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities law. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the Exchange Act). Given the extensive and continuing SEC role in implementing rules relating to many of the SOAs new requirements, it is likely that the Companys costs will increase, at least in the short term, as a result of SOA implementation.
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Consent Order and Notification of Possible Assessment of Civil Money Penalties
In July 2003, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order and a Consent Order (collectively the Consent Order) with the OCC. The provisions of the Consent Order are effective until such time as they are amended, suspended, waived or terminated by the OCC. The Consent Order requires the Bank to take various actions to ensure compliance and improve the monitoring of compliance with BSA and related rules and regulations. The Consent Order allows the OCC to take whatever future actions it deems necessary to fulfill its regulatory responsibilities. These actions could include the imposition of a monetary penalty, including a civil money penalty.
On March 2, 2004, the OCC advised the Bank that it was considering whether to institute a civil money penalty action against the Bank and that such action would be based upon the OCCs allegations that the Bank violated the BSA and related rules and regulations, failed to comply with the Consent Order discussed above and failed to implement adequate controls to ensure that the Bank operates in a safe and sound manner with respect to BSA matters. The amount of the civil money penalty being considered was not specified by the OCC. The OCC also informed the Bank that it may seek unspecified modifications to the Consent Order and/or an additional consent order. Many of the regulatory violations alleged by the OCC predate the Consent Order. Under OCC procedures, the Bank is afforded the opportunity to submit information bearing on the appropriate amount of any penalty to be assessed before the imposition of such a penalty.
The OCC also informed the Bank that it is considering whether to take measures that would generally subject the Bank to increased regulatory supervision and operational restrictions. In particular, the OCC advised the Bank that primarily as a direct result of its BSA criticisms, that it expects to designate the Bank as being in a troubled condition. A bank that is classified as being in a troubled condition must have any new director or executive officer approved in advance by the OCC and is subject, along with its holding company, to a prohibition on making severance payments to the Banks directors, officers and employees under the FDICs golden parachute rules. The increased regulatory supervision is expected to result in more frequent and intensive examinations.
Also on March 2, 2004, the Bank was advised by the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury that it was evaluating whether it is appropriate for FinCEN to assess a civil monetary penalty and/or take additional enforcement action against the Bank for alleged apparent willful violations of BSA and related rules and regulations. FinCEN generally categorizes its concerns as (1) failure to establish and implement an adequate anti-money laundering program, (2) failure to properly prepare and file suspicious activity reports, and (3) failure to file accurate currency transaction reports. The amount of the civil money penalty being considered was not specified by FinCEN. Under FinCENs procedures, before it makes a determination as to the existence and willfulness of the Banks violations, the Bank is allowed to submit further information that is relevant to FinCENs evaluation of whether a civil money penalty and/or additional enforcement action is warranted for the alleged violations. The Company understands that the OCC and FinCEN are reviewing the involvement of employees, officers, and directors of the Bank with respect to the foregoing.
The Company cannot currently estimate the amount of any civil monetary penalty, if any, that either the OCC or FinCEN may assess.
The Bank expects these actions will increase the Banks costs of doing business.
Competition and Environment
While Riggs is not dependent on any individual loan, deposit or wealth management customer, the withdrawal of funds by a combination of large depositors or the repayments of loans by a combination of large borrowers or the termination of several large wealth management relationships could negatively impact operating results, financial condition or liquidity. See Risk Factors on page 18.
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Additional Information
Beginning in 2003, the Company also makes available free of charge on or through its Internet website (www.riggsbank.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officer* | Position | Age | ||||
Robert L. Allbritton
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Chairman of the Board and Chief Executive Officer
of the Corporation since 2001, Chairman of the Board of Riggs
Bank N.A. since 2001
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34 | ||||
Timothy C. Coughlin
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President of the Corporation since 1992 and
Chairman of Riggs Investment Advisors Inc. since 2001
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61 | ||||
Joseph M. Cahill
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General Counsel of the Corporation since 2000 and
Executive Vice President and General Counsel of Riggs Bank N.A.
since 2001
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50 | ||||
David B. Caruso
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Executive Vice President of Riggs Bank N.A.,
Compliance and Security since 2003
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34 | ||||
William A. Craig#
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Executive Vice President of Riggs Bank N.A.,
Human Resources since 2000
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61 | ||||
Jeffrey T. Glynn#
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Executive Vice President of Riggs Bank N.A.,
Community Banking since 2000
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45 | ||||
Lawrence I. Hebert
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President and Chief Executive Officer of Riggs
Bank N.A. since 2001
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57 | ||||
Mark N. Hendrix
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Executive Vice President of Riggs Bank N.A.,
Marketing since 1998
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44 | ||||
Shaun V. Kelley#
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Executive Vice President and Chief Credit Officer
of Riggs Bank N.A. since 2001
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50 | ||||
Glenn E. Kinard
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Executive Vice President of Riggs Bank N.A.
Corporate and Institutional Banking since 2003
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56 | ||||
R. Ashley Lee
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Executive Vice President and Chief Risk Officer
of Riggs Bank N.A. and Vice President and Chief Risk Officer of
the Corporation since 2003
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59 | ||||
Raymond M. Lund#
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Executive Vice President of Riggs Bank N.A.,
International Banking Group since 1996
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42 | ||||
Henry D. Morneault
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Executive Vice President of Riggs Bank N.A. and
Chairman of Riggs & Co. since 2001
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53 | ||||
Eartha C. Morris+
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Executive Vice President of Riggs Bank N.A.,
Operations since 2000
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46 | ||||
Robert C. Roane
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Executive Vice President and Chief Operating
Officer of Riggs Bank N.A. since 1999
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47 | ||||
Wendy J. Ross#
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Executive Vice President of Riggs Bank N.A.,
Technology since 2003
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56 | ||||
Steven T. Tamburo
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Chief Financial Officer and Treasurer of the
Corporation since 2001 Executive Vice President and Chief
Financial Officer of Riggs Bank N.A. since 2001
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35 |
* | Executive officers of Riggs National Corporation, including certain executive officers of Riggs Bank N.A., as of December 31, 2003. |
+ | No longer employed by the Company effective February 2004 |
# | Divisional Senior Vice President effective February 2004 |
EXPERIENCE OF MANAGEMENT
Timothy C. Coughlin has served as President of the Company since 1992. He has been a director of the Company since 1988, Chairman of Riggs Investment Advisors Inc. since 2001, and was a Director of Riggs Bank N.A. from 1983 to 1996.
Joseph M. Cahill was appointed General Counsel of the Company in 2000 and has served as Executive Vice President and General Counsel of Riggs Bank N.A. since 2001. Mr. Cahill also served as Executive Director of Legal Affairs of Riggs Bank N.A. from 1998 to 2001, Litigation Manager of Riggs Bank N.A. from 1996 to 1997, and Associate Litigation Manager from 1993 to 1995.
David B. Caruso has served as Executive Vice President, Compliance and Security of Riggs Bank N.A. since June of 2003. Mr. Caruso is accountable for the Banks compliance with Department of Treasury regulations. Prior to joining Riggs, Mr. Caruso was a Director in KPMGs Investigation and Integrity Advisory Services practice and the Director of Ernst & Youngs Anti-Money Laundering Compliance Practice. Prior to Ernst & Young he served as Manager of the Fraud and Money Laundering Prevention Group at JP Morgan & Company. From 1991 to 1996 Mr. Caruso served as a Special Agent with the U.S. Secret Service where he was assigned to the New York Field Offices Financial Institution Fraud Group.
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William A. Craig, Executive Vice President of the Bank, has served as head of Human Resources since 2000. Prior to joining Riggs Bank, Mr. Craig served as Senior Vice President and Chief Administrative Officer at Merchants Inc., and held similar positions at Perpetual Financial Corporation, Woodward and Lothrop, and Giant Food.
Jeffrey T. Glynn has served as Executive Vice President of Community Banking since April of 2000. Mr. Glynn has served in various management positions with the Bank during the past 9 years. He held the position of Senior Vice President of RiggsDirect, the Banks telephone banking group, from 1995 to 2000.
Lawrence I. Hebert, has served as President and Chief Executive Officer of Riggs Bank N.A. since 2001. He has served as a director of Riggs National Corporation since 1988 and as a director of Riggs Bank N.A. from 1981-1988, from 1989-1996, and since 2001. Mr. Hebert also serves as President and a director of Perpetual Corporation (indirect owner of Allbritton Communications Company and 99.7% owner of ALLNEWSCO, Inc.), director of ALLNEWSCO, Inc. and President of Westfield News Advertiser, Inc. Prior to joining Riggs Mr. Hebert served as Chairman and Chief Executive Officer of Allbritton Communications Company.
Mark N. Hendrix, has served as Executive Vice President and Chief Marketing Officer of Riggs Bank N.A. since 1998. Prior to joining the Bank, Mr. Hendrix served as Director of Marketing Communications for Barnett Banks, Inc.
Shaun V. Kelley, has served as Executive Vice President and Chief Credit Officer since 2001. Prior to joining Riggs Bank, Mr. Kelley was at First Union National Bank in Northern Virginia, serving as Managing Director of the Private Capital Management Group from 2000 to 2001, and as Senior Vice President and Senior Credit Officer from 1993 to 2000.
Glenn E. Kinard, was appointed Executive Vice President of Corporate and Institutional Banking in 2003. Mr. Kinard served as Senior Vice President, Deputy Group Head, Corporate and Institutional Banking from 2001 to 2003. Prior to joining the Bank, Mr. Kinard served as Executive Vice President, Retail Banking of United Bank of Virginia from 1995 to 2001 and held similar positions at First Union National Bank, Dominion Bankshares and American Security Bank.
R. Ashley Lee was appointed Executive Vice President and Chief Risk Officer for Riggs Bank, N.A. and Vice President and Chief Risk Officer for Riggs National Corporation with responsibility for enterprise-wide risk management in October 2003. Mr. Lee joined the Bank in 2002 as a Group Vice President and Loan Review Manager in the Credit Administration Department. Prior to joining Riggs he was with the Office of the Comptroller of the Currency from 1968 to 2002.
Raymond M. Lund has served as Executive Vice President of the International Banking Group since 1996. Mr. Lund has served in various management positions with the Bank during the past 15 years, including Head of the International and Domestic Private Banking Divisions.
Henry D. Morneault, has served as Executive Vice President and Chairman of Riggs & Co. since 2001. Mr. Morneault joined the Bank from FleetBoston Financial, where he was Group Manager and Managing Director of the Media and Entertainment Group.
Eartha C. Morris has served as Executive Vice President of Operations since April of 2000. Ms. Morris has served in various management positions within the Bank during the past eleven years. Prior to joining Riggs Bank, Ms. Morris held similar positions at James Madison Ltd., Equitable Bank, Provident Bank and First American Bank.
Robert C. Roane, Executive Vice President, has served as Chief Operating Officer of Riggs Bank N.A. since May of 1999. Mr. Roane has served in various management positions with Riggs Bank during the past twenty-five years.
Wendy J. Ross has served as Executive Vice President of Technology of the Bank since October of 2003. Ms. Ross has served in various management positions within the Bank since 1986.
Steven T. Tamburo has served as Chief Financial Officer and Treasurer of the Company and Executive Vice President and Chief Financial Officer of Riggs Bank N.A. since 2001. Mr. Tamburo also served as Deputy Chief Financial Officer of the Company and as Senior Vice President and Deputy Chief Financial Officer of Riggs Bank N.A. from 2000 to 2001, as Senior Vice President and Controller of Riggs Bank N.A. from 1999 to 2000, and as Group Vice President-Management and Regulatory Reporting-Riggs Bank N.A. from 1998 to 1999. Prior to joining Riggs, Mr. Tamburo was a Senior Manager in the financial services practice at KPMG.
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ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business the Company is involved in various types of litigation and disputes which may lead to litigation. The Company, based upon its assessment of the facts and circumstances of actual, threatened and unasserted legal actions and, when deemed necessary, after consultation with outside counsel, has determined that pending and threatened legal actions will not have a material impact on its financial condition or future operations (see Note 9 of Notes to Consolidated Financial Statements). As reported on Form 10-Q for the quarter ended September 30, 2003, the Company was informed on November 12, 2003 that it was, along with other financial institutions, a defendant in two consumer class action lawsuits which alleged that the Company, the Bank and the other defendants violated several state antitrust laws since merchants were required to accept Visa and MasterCard debit cards as a condition of accepting Visa and MasterCard credit cards, thereby inflating costs which were passed along to consumers. The Company has subsequently been advised that the plaintiffs in the two cases will not proceed against any of the banking organizations previously named as defendants, including Riggs Bank and the Company.
As discussed elsewhere in this Form 10-K on pages 10 and 61, the Companys primary subsidiary, Riggs Bank N.A. received notifications from the OCC and FinCEN that they are considering whether to assess civil money penalties.
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 2003.
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The common stock of the Company is traded on The Nasdaq National Market under the symbol: RIGS. A history of the Companys stock prices and dividends is as follows:
PRICE RANGE | DIVIDENDS | |||||||||||||||
DECLARED | ||||||||||||||||
HIGH | LOW | AND PAID | ||||||||||||||
2003
|
Fourth Quarter | $ | 17.41 | $ | 15.73 | $ | 0.05 | |||||||||
Third Quarter | 16.58 | 14.92 | 0.05 | |||||||||||||
Second Quarter | 15.90 | 13.25 | 0.05 | |||||||||||||
First Quarter | 16.20 | 13.51 | 0.05 | |||||||||||||
2002
|
Fourth Quarter | $ | 16.99 | $ | 12.90 | $ | 0.05 | |||||||||
Third Quarter | 16.47 | 11.30 | 0.05 | |||||||||||||
Second Quarter | 17.02 | 13.47 | 0.05 | |||||||||||||
First Quarter | 16.88 | 13.26 | 0.05 | |||||||||||||
As of January 31, 2004 there were 1,749 shareholders of record.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Read the following information along with Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included in this Annual Report on Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Interest Income
|
$ | 236,642 | $ | 259,537 | $ | 301,962 | $ | 354,678 | $ | 334,443 | ||||||||||||
Interest Expense
|
65,034 | 66,729 | 110,846 | 163,308 | 147,503 | |||||||||||||||||
Net Interest Income
|
171,608 | 192,808 | 191,116 | 191,370 | 186,940 | |||||||||||||||||
Less: Provision for Loan Losses
|
5,146 | 421 | 2,526 | 18,791 | 2,500 | |||||||||||||||||
Net Interest Income after Provision for Loan
Losses
|
166,462 | 192,387 | 188,590 | 172,579 | 184,440 | |||||||||||||||||
Noninterest Income Excluding Securities Gains, Net
|
96,959 | 83,950 | 73,272 | 117,686 | 105,472 | |||||||||||||||||
Securities Gains, Net
|
13,331 | 9,450 | 12,037 | 327 | 1,154 | |||||||||||||||||
Noninterest Expense
|
260,808 | 240,384 | 266,341 | 224,350 | 207,244 | |||||||||||||||||
Income before Taxes, Minority Interest and
Extraordinary Loss
|
15,944 | 45,403 | 7,558 | 66,242 | 83,822 | |||||||||||||||||
Applicable Income Tax Expense
|
4,386 | 15,471 | 11,075 | 25,053 | 26,953 | |||||||||||||||||
Minority Interest in Income of Subsidiaries, Net
of Taxes
|
10,579 | 16,911 | 19,860 | 19,588 | 20,214 | |||||||||||||||||
Net Income (Loss) before Extraordinary Loss
|
979 | 13,021 | (23,377 | ) | 21,601 | 36,655 | ||||||||||||||||
Extraordinary Loss, Net of Taxes
|
| | | | 5,061 | |||||||||||||||||
Net Income (Loss)
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | $ | 21,601 | $ | 31,594 | |||||||||||
Earnings (Loss) Per Share
|
||||||||||||||||||||||
Basic before Extraordinary Loss
|
$ | 0.03 | $ | 0.46 | $ | (0.82 | ) | $ | 0.76 | $ | 1.29 | |||||||||||
Diluted before Extraordinary Loss
|
0.03 | 0.45 | (0.82 | ) | 0.76 | 1.26 | ||||||||||||||||
Basic
|
0.03 | 0.46 | (0.82 | ) | 0.76 | 1.11 | ||||||||||||||||
Diluted
|
0.03 | 0.45 | (0.82 | ) | 0.76 | 1.09 | ||||||||||||||||
Dividends Declared and Paid Per Common
Share
|
0.20 | 0.20 | 0.20 | 0.20 | 0.20 | |||||||||||||||||
YEAR-END
|
||||||||||||||||||||||
Assets
|
$ | 6,369,558 | $ | 6,825,695 | $ | 6,099,402 | $ | 5,554,472 | $ | 5,830,149 | ||||||||||||
Long-Term Debt
|
1,052,333 | 358,525 | 66,525 | 66,525 | 66,525 | |||||||||||||||||
Shareholders Equity
|
373,520 | 389,241 | 360,823 | 382,746 | 337,713 | |||||||||||||||||
15
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
OVERVIEW
This overview is a summary-level presentation of those factors that are deemed most relevant to understanding the Companys financial condition and results of operations. For a more complete understanding of the significant factors that influenced the Companys performance during the past three years, read all of the following discussion and analysis and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that are subject to risks, uncertainties and other factors that could cause actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. See Forward-Looking Statements.
As previously described, Riggs National Corporation is a bank holding company headquartered in Washington, D.C. The Company engages in a variety of banking and financial services including community, commercial and international banking, trust and investment management services and venture capital investing. The Company has conducted its activities through six reportable segments: Banking, International Banking, Riggs & Co. (wealth management), Treasury, Riggs Capital Partners (venture capital) and Other. With the exception of venture capital investing, the activities of the Company are conducted through its principal operating subsidiary, Riggs Bank, and its subsidiaries and divisions. Venture capital investing is performed through two investments of RNC, Riggs Capital Partners LLC and Riggs Capital Partners II LLC.
The Company has forty-seven branch locations and 143 ATMs in the metropolitan Washington, D.C. area and a bank in the United Kingdom. There are additional operations or subsidiaries in London (England), Miami (Florida), Berlin (Germany), Jersey (Channel Islands) and Nassau (Bahamas). Riggs serves an array of customers including individuals, partnerships, corporations, foundations, not-for-profit organizations and foreign embassies and delegations.
The Companys principal source of revenue is net interest income, or the difference between what the Company earns on interest earning assets, such as loans, securities available for sale, securities held to maturity and short-term investments, and what it pays on interest bearing liabilities, such as deposits and the Companys short-term borrowings and long-term debt. Noninterest income, the next largest component of revenue, primarily represents service charges and fees earned on loans, deposits and assets under management, venture capital gains or losses and net securities gains or losses. Noninterest expense, the Companys largest source of expenditures, comprises the Companys operating expenses and includes salaries and benefits, occupancy, data processing, consulting, advertising and public relations, furniture, fixture and software and other operating expenses.
For the three years ended December 31, 2003, the Companys net interest income and net interest margin, or net interest income on a tax-equivalent basis as a percent of average earning assets, has been:
Net Interest | Net Interest | |||||
Income | Margin | |||||
2003
|
$171.6 million | 3.09 | % | |||
2002
|
192.8 million | 3.59 | ||||
2001
|
191.1 million | 3.91 |
During this same three year period, the Companys interest rate spread, or the difference between the rate it earns on interest-earning assets and the rate it pays on interest-bearing liabilities, has been:
2003
|
2.95 | % | ||
2002
|
3.41 | |||
2001
|
3.49 |
The three years ended December 31, 2003 were generally a period of declining interest rates during which it became increasingly difficult to adjust the pricing of funding sources as rapidly as earning assets. This led to rate compression which over this same period caused net interest income, net interest margin and interest rate spread to decrease. As explained in Results of Operations beginning on page 22, declining interest rates also adversely impacted the Banks
16
Noninterest income excluding net security gains, which is excluded because it is deemed to be discretionary on the part of Riggs management, has been:
2003
|
$97.0 million | |
2002
|
84.0 million | |
2001
|
73.3 million |
Noninterest income has been positively impacted by the decreasing losses in its venture capital operations during the last three years. These losses were $4.2 million in 2003, $14.8 million and $31.1 million in 2002 and 2001, respectively. Significant factors impacting noninterest income are discussed in Results of Operations commencing on page 17.
Noninterest expense for the three years ended December 31, 2003 has been:
2003
|
$260.8 million | |
2002
|
240.4 million | |
2001
|
266.3 million |
Included in the 2001 noninterest expense is $34.1 million of restructuring and other charges. The 2003 expense includes significant amounts related to the implementation of Project EPS, a two-year effort by the Company to upgrade its technology and operations. See Results of Operations on page 22 for additional analysis of noninterest expenses.
Primarily because of the above factors, the Companys net income (loss) for the three years ended December 31, 2003 has been:
2003
|
$ 1.0 million | |
2002
|
13.0 million | |
2001
|
(23.4) million |
The Companys asset quality at December 31, 2003 is good with nonaccrual and renegotiated loans of $2.3 million, which represents 0.07% of all loans. At December 31, 2003 the Companys reserve for loan losses is approximately twice the total of nonaccrual, renegotiated and ninety-day past-due loans. The Companys regulatory capital exceeds regulatory requirements and the Company and the Bank are well-capitalized under regulatory guidelines.
Based upon mid-year data the Company believes it has approximately 23% of the Washington, D.C. FDIC-insured deposit market and approximately 5% of the FDIC-insured deposit market in the greater Washington D.C. metropolitan area. The Company cautions that this market share data may not be indicative of future deposit market share because of the change in the methodology by which Riggs is compensated as a financial agent bank by the U.S. Treasury. See Results of Operations commencing on page 22. The Company plans to open ten branches per year during the next three years. This plan is, however, dependent upon the Company identifying acceptable branch sites, procuring these sites on reasonable terms and obtaining regulatory approval. A new branch facility typically requires an investment of between $500 thousand and $1.5 million depending upon the location and type of branch. In addition, during 2004 and 2005 the Company will remodel all of its existing branches. The Company anticipates that these upgrades will cost approximately $500 thousand to $700 thousand per location.
17
RISK FACTORS
Like all regulated financial institutions, the Company is exposed to numerous risks that could adversely impact profits, financial condition and cash flows, and, ultimately, franchise value. In order to mitigate these risks somewhat, the Company has various policies, personnel and committees that establish limits for and monitor various aspects of its risk profile. Moreover, in 2003, the Company created and staffed the position of Chief Risk Officer, an executive level position. The Chief Risk Officer develops and implements entity-wise risk management policies, serves as internal consultant regarding risk management matters and works with other management members to identify and resolve potential risk management issues.
Geographic Risks
Exposure to International Events
Fluctuations in Interest Rates (Market Risk)
Competition Risk
Credit Risk
Legislative and Regulatory Risk
18
Dividend Limitation Risk
Liquidity Risk
Operational Risk
Bank Secrecy Act and Money Laundering Compliance; Consent Order
Reputation Risk
Risk Caused by Fluctuations in Currency Values
19
Reliance on Outside Vendors for Significant Overhead-Related Activities
Disintermediation
Concentration of Ownership
Critical Accounting Policies and Estimates
Reserve for Loan Losses
The analytical review of the loan portfolio performed to determine the adequacy of the reserve for loan losses includes a review of loans with balances over $250 thousand for impairment, an analysis of historical loss experience by loan type and, for groups of loans with similar characteristics, an evaluation of current economic conditions and all other factors considered pertinent to the analysis. Impaired loans are defined as those credits where the Company has determined it probable that all amounts due in accordance with the loan agreements will not be collected or recovered from the disposition of collateral. Impaired loans are generally commercial and financial loans and commercial real estate loans and are usually on non-accrual status. Each impaired loan with an outstanding balance equal to or greater than $250 thousand has a specific, identified loan loss reserve associated with it. Impaired loans do not include groups of smaller balance homogeneous loans with similar collateral characteristics, such as residential mortgage and home equity loans. Loss reserves for these types of loans are established on an aggregate basis using historical loss experience. Balances related to impaired loans for which there are specific reserves are excluded when applying historical loss ratios to determine loan loss reserves.
20
The specific reserves for impaired loans are included in the reserve for loan losses. Impaired loans are valued based upon the fair value of the related collateral if the loans are collateral dependent. For all other impaired loans, the specific reserves are based on the present values of expected cash flows discounted at each loans initial effective interest rate.
Provisions to the reserve for loan losses are charged against, or credited to, earnings in amounts necessary to maintain an adequate reserve for loan losses. Commercial loans are charged-off when it is determined that they cannot be fully recovered and non-commercial loans are generally charged-off or loan foreclosure proceedings begun upon becoming 120 days delinquent or at such time as permitted by law or other regulations. Recoveries of loans previously charged-off are credited to the reserve for loan losses.
The Company maintains its reserve for loan losses in accordance with a policy approved by the Board of Directors. The Company has an established methodology for analyzing its reserve for loan losses that includes an internal loan classification policy. The Company periodically reviews its loan loss methodology to ascertain that it produces accurate assessments of probable loan losses. Domestic and international loans are subjected to similar review procedures.
While the Company believes its credit monitoring procedures are adequate, credit losses are, however, inherent to the business, and it is possible there may be unidentified losses in the loan portfolio at December 31, 2003 that may become apparent at a later date pursuant to internal analysis or pursuant to comment following regulatory examination. The establishment of loan loss reserves for problem credits that are currently unidentified or unanticipated would negatively impact future earnings. A charge, if any is needed, would generally be recorded in the segment in which the loan is recorded.
Venture Capital Investments
At December 31, 2003, the Company valued its venture capital portfolio at $43.4 million. This valuation was arrived at using a variety of factors including, but not limited to: market prices, where available, and discounted, if necessary, to reflect trading history, lock-up provisions, lack of market liquidity and other factors; cost, if there is no readily determinable market price and there has not been a material event, such as a follow-on round of financing or strategic sale; a value higher than cost if indicated by additional financing which fulfills certain requirements; and analysis and commentary from a funds Investment Manager/ General Partner. The largest investment in the venture capital portfolio is valued at $3.7 million at December 31, 2003.
Since the Company has no present intention to sell or liquidate the venture capital portfolio, the valuation of venture capital investments is subject to uncertainty in that it does not represent a negotiated value between the Company, as seller, and an independent, willing buyer that has the necessary knowledge and financial ability to complete the purchase. Additionally, if the Company attempted to sell its venture capital portfolio, particularly if it deemed it necessary to liquidate the investments within a short period of time, the actual proceeds from the sale could differ significantly from the recorded carrying value. The market for the type of venture capital investments Riggs holds has since 2000 been impacted by a slowing economy, a depressed domestic equity market in which, not withstanding the recent recovery of stock prices, the values of publicly traded companies have declined, and, because of these market conditions, there has been a decline in the number of initial public offerings and acquisitions of private companies by publicly traded firms. The gradual improvement in these sectors has begun to afford the Company better liquidation opportunities and it continues to actively manage the portfolio to maximize current valuations. Although these and other factors have been assessed in determining current values, because of the subjectivity in determining values, it is possible that the Company would experience a loss if it chose to liquidate its venture capital portfolio, particularly if it attempted to do so quickly. The loss, if any, would be recorded in the Riggs Capital Partners segment.
Deferred Taxes
21
Unrealized losses in venture capital operations have resulted in the maintenance of $12.9 million of deferred tax assets as of December 31, 2003. Of this amount, $1.5 million was established in 2003. These assets can be utilized to reduce taxes payable on future capital gains but must be utilized within five years of the year in which the loss is realized for tax return purposes. Because of continuing losses in the venture capital portfolio and the lack of current suitability of alternatives to generate capital gains, Riggs has established a valuation allowance of $6.9 million against the deferred tax asset at December 31, 2003. Of the $6.9 million, $1.5 million was established in 2003. The Company believes that the unreserved deferred tax asset balance of $6.0 million at December 31, 2003, which includes a deferred tax asset related to realized losses of $3.3 million, will be realized through generation of future net capital gains within its venture capital operations or the implementation of alternative business strategies that generate net capital gains. Management has identified several alternative business strategies that could produce sufficient capital gains to allow the deferred tax asset balance to be realized.
If sufficient net capital gains within the Companys venture capital operations are not realized in a timely manner, or if business conditions or other factors make it impossible, impractical or imprudent to implement alternative strategies, an additional valuation allowance, resulting in a charge against income for that portion of the deferred tax asset which will not be utilized, will be recorded in the Other segment.
Uncertainty related to the utilization of deferred tax amounts generated by foreign subsidiaries resulted in the maintenance of a 100% valuation allowance of $7.6 million and $6.4 million as of December 31, 2003 and 2002, respectively.
Impairment of Long-Lived Assets
In 1999, the Company contracted to develop, implement and maintain a computer system to be utilized by the United States Department of the Treasury (Treasury) in its cash management and reporting. Because of cost overruns and significant uncertainties relating to costs required to complete the system, the willingness of the Treasury to fund these additional costs and the recurring revenues to be realized upon implementation of the system, the Company recorded impairment charges of $8.4 million and $1.0 million in 2001 and 2002, respectively. There was no impairment charge in 2003 related to this asset. This system became operational in September 2003 and, subsequent to December 31, 2003, Riggs and the government have substantially concluded negotiations that significantly reduce the uncertainties regarding recovery of costs incurred on the contract. Accordingly, beginning in the first quarter of 2004 the Company will no longer report this matter as a component of its Critical Accounting Policies and Estimates.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is affected by changes in the level of interest rates and the composition of interest-earning assets and interest-bearing liabilities. While the Company can exert some effect on its net interest income through its product pricing and promotional decisions, many factors, such as the overall condition of the economy, monetary policy, tax laws, credit demand and competition impact net interest income and are beyond the control of the Company (see Tables A and B of this Form 10-K).
Net interest income decreased $21.2 million, or 11%, in 2003 compared to 2002 and in 2002 increased $1.7 million, or less than 1%, from 2001. In general, across almost all components of interest income, decreases in rates more than offset increases in interest income due to increases in volume. As a result, interest income decreased $22.9 million, from $259.5 million in 2002 to $236.6 million in 2003. A similar analysis applies to the comparison of 2001 to 2002, when interest income decreased $42.4 million from $302.0 million in 2001 to $259.5 million in 2002. The decline in net interest income in 2003 from the prior year is due primarily to the rapid repayment of existing loans, particularly mortgage loans,
22
Net interest income was also adversely impacted by a mid-year change in the methodology by which the Treasury compensates financial agent banks. Prior to July 14, 2003, Riggs was compensated by net interest earned on Treasury deposits, which was reflected in net interest income. Beginning on this date, Riggs utilizes non-interest earning Treasury deposits to purchase a non-marketable, Treasury-issued depositary compensation security (DCS) for the same amount as the Treasury deposits. The DCS and deposit balances are netted in the Statements of Financial Condition in accordance with FIN 39 (Offsetting of Amounts Related to Certain Contracts) and income earned on the DCS, which was $3.3 million in 2003, is reflected in the Statements of Operations as non-interest income, rather than a component of net interest income. The average deposit balance that the Treasury maintained at Riggs to compensate it as a financial agent bank was $472.0 million, $895.1 million and $233.1 million in 2003, 2002 and 2001, respectively.
Beginning October 1, 2003, due to the adoption of FIN 46R, the Company does not consolidate the two trusts that previously issued $350.0 million of trust preferred securities, of which $107.9 million have been repurchased by the Company. As a result, the debt from the Company to these trusts no longer eliminates in consolidation and, consequently, the interest on this debt, which was $5.4 million for the fourth quarter of 2003, negatively impacts net interest income in 2003, but not prior years.
Net interest margin was 3.09% in 2003 compared to 3.59% and 3.91% in 2002 and 2001, respectively. As noted in Table B, the net interest margin decreases in both 2003 compared to 2002 and 2002 compared to 2001 are attributable to decreases in interest rates which were partially offset by volume increases.
As reported in the 2002 Annual Report on Form 10-K, the Company completed a leveraging program whereby it borrowed funds from the Federal Home Loan Bank of Atlanta (FHLB) and utilized those funds to purchase mortgage-backed securities. Riggs had $419.0 million and $292.0 million of borrowings from the FHLB at December 31, 2003 and 2002, respectively. These borrowings generally are not repayable prior to maturity and, hence, as the mortgages in the mortgage-backed securities paid off or refinanced into a lower rate it was not possible for Riggs to concurrently lower its funding costs, thereby negatively impacting net interest income. The leveraging program was expanded during 2003 and the average assets in this program were approximately $545.1 million. The Company anticipated earning a minimum interest rate spread of 1.75% on these leveraged assets but, because of rapid repayments, estimates its actual spread was approximately 1.38%. The Company anticipates that interest rates will not decline further and will begin to rise in 2004. As a result, the Company expects reduced loan pay-offs and refinancings in 2004 and anticipates improvement in its net interest margin.
Interest income on a tax equivalent basis in 2003 was $241.4 million, a decline of $22.1 million, or 8%, from $263.5 million in 2002. On a tax equivalent basis, interest income decreased $41.2 million from 2001 to 2002. As indicated in Table A of this Form 10-K, average earning assets have increased from $4.96 billion in 2001 to $5.70 billion in 2003. The rates earned on these assets decreased from 6.14% in 2001 to 4.81% in 2002 and 4.23% in 2003.
Average loan balances increased by $157.7 million in 2003 compared to 2002 and decreased by $34.6 million in 2002 compared to 2001. In 2002 Riggs realigned its RBEL operations to focus on expatriate and embassy banking rather than on corporate lending and, consequently, sold $138.3 million in loans and loan commitments. The next largest average earning asset category, securities available for sale, increased $167.8 million or 9% from 2002 to 2003 and $596.0 million in 2002 compared to 2001. As with loan yields discussed above, rates earned on available for sale securities declined from 5.27% in 2001 to 3.74% in 2002 and further decreased to 3.26% in 2003. Because of attractive tax equivalent rates, Riggs acquired state and municipal securities in 2003. Riggs had an average balance of $947 thousand of these securities in 2003 which are classified as securities available for sale and yield 4.52% on a tax equivalent basis.
23
The composition of average earning assets for the past three years is as follows:
2003 | 2002 | 2001 | ||||||||||||
Loans
|
52.9 | % | 52.2 | % | 58.3 | % | ||||||||
Securities Available for Sale
|
36.2 | 34.6 | 26.3 | |||||||||||
Securities Held to Maturity
|
0.5 | | | |||||||||||
Time Deposits with Other Banks
|
4.4 | 3.9 | 6.7 | |||||||||||
Federal Funds Sold and Reverse Repurchase
Agreements
|
6.0 | 9.3 | 8.7 | |||||||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Interest expense decreased by $1.7 million from 2002 to 2003. Decreases in interest expense allocated to decreases in rates occurred across all components of interest expense. These decreases, along with decreases in the volume of time deposits in domestic offices, were almost entirely offset by increases in interest expense due to a higher volume of long-term debt. The average cost of all interest-bearing funds decreased to 1.40% in 2002 from 2.65% in 2001 and further decreased to 1.28% in 2003. This result contrasts with the comparison between 2001 and 2002, when the $52.8 million decrease in interest expense attributable to decreases in rates were far greater than the $8.7 million increase in interest expense attributable to increases in volume.
The composition of average interest-bearing liabilities for the past three years is as follow:
2003 | 2002 | 2001 | ||||||||||||
Interest-Bearing Deposits
|
78.9 | % | 89.0 | % | 86.6 | % | ||||||||
Federal Funds Purchased and Repurchase Agreements
|
8.6 | 9.2 | 11.5 | |||||||||||
Other Short-Term Borrowings
|
0.1 | 0.3 | 0.3 | |||||||||||
Long-Term Debt
|
12.4 | 1.5 | 1.6 | |||||||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Provision for Loan Losses
Noninterest Income
Excluding net securities gains, noninterest income increased by $13.0 million, or 15% in 2003 from 2002. Including net securities gains, noninterest income increased by $16.9 million, or 18% from the prior year. The increase in noninterest income in 2003 was primarily attributable to a $10.6 million reduction in venture capital losses from 2002. Similarly, venture capital losses decreased to $14.8 million in 2002 from $31.1 million in 2001. Also contributing to the increase in noninterest income was a $4.1 million increase in service charges and fee income in 2003 compared to 2002. This increase was primarily the result of new fee initiatives initiated as part of Project EPS. Partially offsetting these improvements was a $5.2 million, or 12% decrease in trust and investment advisory income. Trust and investment advisory income was adversely impacted by the second quarter 2002 renegotiation of a 10-year agreement with the real estate advisor to the Multi-Employer Property Trust (MEPT), an open commingled real estate fund. This advisor will now perform all asset management services for the fund but Riggs will continue to act as trustee, investment manager and custodian, and will provide portfolio-level financial and valuation reporting. The new agreement, which became effective July 15, 2002, resulted in a reduction in revenue of approximately $3.5 million from 2002. Noninterest income in 2003 also includes $2.2 million of life insurance proceeds and a $1.2 million gain on the sale of the Riggs mutual funds.
24
Securities gains were $13.3 million and $9.5 million in 2003 and 2002, respectively. Substantially all of the 2001s securities gains were attributable to the sale of Concord EFS, Inc., a company in which Riggs had an equity investment for many years.
Trust and investment advisory income impacts the Riggs & Co. segment while venture capital losses impact the Riggs Capital Partners segment. Securities gains impact the Treasury segment. Service charges and fee income primarily impacts the Banking segment.
Noninterest Expense
In 2003 and 2002, respectively, the Company approved for award 210,407 and 161,909 shares to certain key executives under a deferred Stock Award Agreement subject to performance and time vesting. Based on achieved 2003 and 2002 performance targets, 76,466 shares were awarded at December 31, 2003 and none at December 31, 2002. The 76,466 deferred shares earned at December 31, 2003 will vest in three equal annual installments, beginning in January of 2004. A total of $325 thousand in stock compensation expense was recorded at December 31, 2003 and is included in pension and other employee benefits in the Consolidated Statements of Operations. Future expense amounts could vary since the individual to whom the award was granted must be employed by the Company on the distribution date each year and new participants could be added.
In 2002 Riggs increased its matching of employee 401(k) Plan contributions from $0.50 for every dollar contributed (up to 6% of eligible wages) to a dollar-for-dollar match (up to 6% of eligible wages). This change in matching resulted in an increase in pension and other employee benefits expense of $2.1 million in 2002 compared to 2001. Pension and other employee benefits costs affect all segments with the exception of Riggs Capital Partners.
In 2003 and 2002, respectively, the Company awarded 73,000 and 370,000 shares of its common stock to certain key executives under the terms of a plan approved by shareholders in April 2002. This award will vest annually in equal amounts over a period of four to five years, beginning in January 2003 and January 2004. For the years ended 2003 and 2002, respectively, Riggs recorded $1.2 million and $646 thousand of expense related to this award which is recorded in pension and other employee benefits in the Consolidated Statements of Operations. New participants may be added and, in addition, to obtain this award, the individual to whom it was granted must be employed by the Company on the date of distribution each year. Projected expense amounts, therefore, could vary.
The Company recorded impairment charges amounting to approximately $4.8 million in 2003 and $4.5 million in 2002. The 2003 impairment charge includes a $950 thousand write-down of goodwill and also includes a $3.8 million write-down of a facility in London that the Company is attempting the sell. This facility was written down by $1.3 million in 2002. The amount of these facility write-downs was determined based upon consultation with real estate experts. In 2002, as part of Project EPS, Riggs also wrote off $1.1 million in costs related to prior development of an information system to support bank tellers when it was determined that this development would not be compatible with the Companys new technology. In London, the Company incurred a charge of $1.1 million to exit long-term maintenance contracts in 2002 and domestically, it wrote down a long-term, fixed price, non-cancelable technology contract by $1.0 million due to cost overruns that will not be passed on to subcontractors or other parties to the contract.
Noninterest expense increased by $42.0 million, or 19% to $266.3 million in 2001 compared to $224.4 million in 2000. Approximately $34.1 million of this increase, or 81%, is attributable to the restructuring and other charges described in Note 2 of Notes to Consolidated Financial Statements. Other significant changes from the prior year include an additional $5.3 million or 6% increase in salaries and wages, a $1.9 million increase in pension and other employee benefits that is primarily attributable to a $2.4 million increase in the actuarially determined domestic pension plan expense and a $2.1 million increase in consultants and outsourcing fees, which is primarily due to increased management fees related to an additional venture capital partnership. Decreases in advertising and public relations expense of $1.2 million partially offset these increases.
25
In 2003, the Company reduced its workforce by 5%, from 1,522 full-time equivalent positions at December 31, 2002 to 1,450 at December 31, 2003.
FINANCIAL POSITION AND LIQUIDITY
Summary
Earning Assets
Loans represent the largest earning asset category. At December 31, 2003, 2002 and 2001 loans were 59%, 49% and 52% of earning assets and 53%, 52% and 58% of average earning assets for those years, respectively. The primary reason for the decrease in 2002 compared with 2001 was the sale of $138.3 million of loans and loan commitments by RBEL as well as growth in the securities portfolio to secure the additional U.S. Government Agency deposits.
Securities available for sale, the next largest component of earning assets, were 34%, 38% and 31% of earning assets at December 31, 2003, 2002 and 2001, respectively, and represented 36%, 35% and 26% of average earning assets for those years.
The third component of the Companys earning asset mix, short-term investments, was 5%, 13% and 17% of earning assets at December 31, 2003, 2002 and 2001, respectively, and represented 10%, 13% and 16% of average earning assets for the those years.
Securities held to maturity represent 2% of the Companys earning assets at December 31, 2003 and an insignificant portion of average earning assets in 2003. The Company did not have securities held to maturity in 2002 or 2001.
Loans
Total loans at December 31, 2003 were $3.23 billion, a $217.2 million or 7% increase from December 31, 2002. The largest increases were in commercial real estate loans, which increased $255.6 million or 46%, home equity loans, which increased $26.9 million or 10%, loans to foreign governments and official institutions, which increased $14.9 million or 14%, and loans to foreign commercial and industrial customers, which increased by $33.1 million or 30%. Offsetting these increases were decreases in: commercial and financial loans of $32.6 million or 5%; residential mortgage loans of $70.1 million or 6%; and other foreign loans of $8.3 million or 20%.
Total loans at December 31, 2002 were $3.01 billion, a $139.3 million, or 5% increase from December 31, 2001. The largest increase occurred in commercial and financial and commercial real estate loans which increased $134.5 million and $65.2 million or 28% and 13%, respectively. Partially offsetting these increases was a $156.6 million decrease (38%) in total foreign loans primarily attributable to the previously noted sale of loans and commitments at RBEL.
At December 31, 2003, approximately 25% of the loan portfolio matures in less than one year. This compares to 27% at the end of the prior year. At December 31, 2003, approximately 35% of the loan portfolio has fixed interest rates that do not adjust during the term of the loan and 65% has floating or adjustable interest rates that adjust prior to the loans maturity.
Cross-Border Outstandings
26
At December 31, 2003, Riggs had no cross-border outstandings exceeding 1% of total assets to countries experiencing difficulties in repaying their external debt. At December 31, 2003 and at December 31, 2001, the United Kingdom was the only foreign country with cross-border outstandings in excess of 1% of total assets that had loans in either a nonperforming or past-due loan status. There were no foreign countries with cross-border outstandings in excess of 1% that had loans in a nonperforming or past-due loan status at December 31, 2002 (see Tables E and F of this Form 10-K and Note 15 of Notes to Consolidated Financial Statements).
Short-Term Investments
At December 31, 2003, short-term investments totaled $287.1 million, a decrease of $526.2 million from December 31, 2002. At December 31, 2002, short-term investments totaled $813.3 million, a decrease of $105.2 million when compared to year-end 2001. Average short-term investments was $594.1 million, $722.6 million and $764.1 million for 2003, 2002 and 2001, respectively. The average yield on short-term investments was 1.60% in 2003, 1.63% in 2002 and 3.74% in 2001.
Securities Available for Sale and Securities Held to Maturity
The securities available for sale portfolio is managed by the Treasury segment as part of the Companys liquidity and interest-rate risk management process. Securities available for sale are reflected in the Consolidated Statements of Condition at fair value. Differences between amortized cost and fair value are reported net of applicable taxes as a component of other comprehensive income or loss within shareholders equity. On a tax equivalent basis the securities available for sale portfolio yielded 3.26%, 3.74% and 5.27% in 2003, 2002 and 2001, respectively.
The percentage composition at fair value of the securities available for sale portfolio at December 31 is as follows:
2003 | 2002 | 2001 | ||||||||||||
U.S. Treasury Securities
|
1.4 | % | 0.2 | % | 6.1 | % | ||||||||
State and Municipal Securities
|
1.4 | | | |||||||||||
Government Agency Securities
|
39.3 | 54.9 | 55.4 | |||||||||||
Mortgage-Backed Securities
|
55.1 | 42.5 | 35.6 | |||||||||||
Other Securities
|
2.8 | 2.4 | 2.9 | |||||||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Gross unrealized gains and losses at December 31, 2003 were $2.3 million and $10.2 million, respectively.
Approximately 98.6% of the available for sale securities have been issued by the U.S. Treasury, an agency of the U.S. Government or a government sponsored entity (such as the Federal National Mortgage Association or the Federal Home
27
At December 31, 2003, 2002 and 2001, 10%, 21% and 43% of the available for sale portfolio matures within one year and the portfolio duration is 2.3, 1.0, and 1.8 years, respectively. Although most of the securities have contractual maturity dates that are greater than one year, many have call features which allow the issuer to call the securities away from the Bank. Anticipated calls of securities and estimated mortgage prepayments on mortgage-backed securities have been factored into the overall portfolio duration calculation (see Note 3 of Notes to Consolidated Financial Statements).
See Minority Interest in Trust Preferred Securities for a discussion of securities held to maturity on page 32.
Venture Capital Investments
The losses in 2003 and 2002 are attributable to several factors. First, there has been a general slowing of the domestic economy that was exacerbated by the terrorist attacks in September 2001 and continued uncertainty about potential military conflict. This slowing resulted in large corporations reducing their spending on information technology assets which in turn affected the financial performance and valuations of information technology vendors to which the Companys venture capital portfolio was exposed. While the technology sector of the stock market experienced a rebound in 2003, it remains at depressed levels relative to prior years. Second, the domestic stock market in general declined in 2002 and 2001 and, in particular, the valuations of publicly-traded technology companies declined dramatically. As a result, the Company reduced the carrying value of a number of privately-held investments in order to better align its valuations with those of comparable publicly-traded companies. Third, initial public offerings (IPOs) and acquisitions by public companies of private companies has declined significantly from prior years. Since venture capital investors typically look to the IPO process and acquisitions as a means of liquidating investments, the lack of such markets was detrimental to the value of investments held.
As previously noted, at December 31, 2003 the Company maintained a $6.9 million valuation allowance against total deferred tax assets of $12.9 million relating to venture capital losses. The Company has concluded that it is more likely than not that the remaining deferred tax assets which are attributable to losses from venture capital operations will be realized through capital gains generated by its venture capital operations or through such gains generated elsewhere within the Company.
Commitments and Liquidity
At December 31, 2003, the Company believes it has the necessary liquidity to meet these obligations. As noted previously, the Company had $287.1 million of short-term investments and has approximately $567.8 million of unused credit lines at December 31, 2003. The securities available for sale portfolio has a relatively short duration of 2.3 years which can, with the exception of the state and municipal securities, be pledged to secure borrowings. The Company has $982.4 million of loans and securities available for sale maturing in 2004. In addition, despite the fact that average interest-bearing deposits declined by $228.0 million from 2002 to 2003, substantially all of this decline is due to a $424.5 million decline in average time deposits in domestic offices from 2002 to 2003. The decrease in average time deposits is domestic offices from 2002 to 2003 is almost entirely attributable to the change in the previously described change in the methodology by which the Treasury compensates financial agent banks. As a result of this change, average Treasury time deposits utilized to compensate Riggs as a financial agent bank were $423.0 million less in 2003 than 2002. Average non-interest bearing
28
In late February 2004 the Bank informed a large depositor that it was terminating its depositary relationship with the customer. At the end of February 2004 this depositor and related parties had approximately $360.0 million of deposits at the Bank, or approximately 8% of the Banks total deposits. The Bank has adequate liquidity to fund this withdrawal.
Changes in the stability of the economic, social or political environments culminating in further withdrawals by several of the Banks largest depositors, or a deterioration of the publics confidence in the banking system in general or the Company in particular, could be very detrimental. The further withdrawal of funds by a combination of large depositors could have an adverse impact on the Companys liquidity and operations as would the withdrawal of funds by a significant portion of the Companys smaller balance depositors. In addition, the FHLB has the authority to cancel the Companys unused lines of credit.
Another potential constraint on liquidity is the regulatory limitations on dividends that the Bank can pay to RNC. Generally, such dividends are limited to the earnings of the Bank for the current and prior two years less any dividend payments during the same period. However, dividends payable by the Bank and its subsidiaries are further limited by requirements for the maintenance of adequate capital and the underlying strength of the Bank. Any restrictions on dividends that the Bank can pay to RNC could adversely impact the holding companys cash flow and its ability to fund future debt payments and dividends. Since regulatory authorities maintain that a holding company should be a source of financial strength for its subsidiary bank, dividends paid by the Bank to the Company, or by the Company to its shareholders, may be restricted if the regulators conclude that the Companys operating condition so warrants.
ASSET QUALITY
Credit Risk Administration
Provision and Reserve for Loan Losses
For loan pools with homogeneous characteristics, such as residential mortgage, home equity and consumer loans, provisions are determined using historical loss factors. For non-homogeneous loans, the Company allocates specific reserves for loan losses to individual loans in the highest risk categories and provides for the remainder using historical factors. In addition, the Company maintains a qualitative component in its reserve for loan losses. This portion of the reserve is adjusted when the Company concludes that recent charge-off experience may not be indicative of future experience, either adverse general economic or industry-specific conditions are not manifested as specific problem credits or in delinquency ratios, or the Company knows of specific potentially adverse events or conditions of a borrower. The Company maintains its reserve for loan losses in accordance with a Board of Directors approved policy.
29
Based upon the above, the Company recorded a loan loss provision of $5.1 million in 2003. At December 31, 2003, the reserve for loan losses was $28.3 million, or approximately 0.88% of loans and 195% of the Companys nonaccrual, renegotiated, and 90 days past due credits. Foreign nonperforming assets represent approximately 33% of consolidated nonperforming assets (including 90 days past due credits).
The Company recorded a loan loss provision of $421 thousand in 2002. At December 31, 2002, the reserve for loan losses was $26.0 million, or approximately .86% of loans and 224% of the Companys nonaccrual, renegotiated and 90 days past due credits. The foreign loan loss provision in 2002 was approximately $(4.2) million and the domestic provision was $4.6 million. The foreign reversal was taken as those reserves were no longer necessary since foreign nonperforming assets decreased by $2.0 million, or 77%, from the prior year end, aggregate loan balances decreased due to significant pay-downs and maturities and the Company sold $138.3 million in commercial loans and commitments from its London operations.
Riggs recorded a loan loss provision of $2.5 million in 2001. This provision was comprised of a $5.9 million foreign provision and a $(3.4) million domestic provision. The domestic provision was the result of a reduction in domestic nonperforming loans from $34.3 million at December 31, 2000 to $472 thousand a year later.
During the three years ended December 31, 2003, the reserve for loan losses as a percentage of loans has decreased from 1.23% to .88%. During this same period, nonaccrual, renegotiated and 90 days past due credits decreased from $47.2 million to $14.5 million. In addition, 45% of the Companys portfolio is secured by residential real estate at December 31, 2003. Traditionally, net losses on such loans have been minimal (see Table H of this Form 10-K).
Foreign exchange translation adjustments in the reserve for loan losses were $251 thousand and $717 thousand in 2003 and 2002, respectively. These adjustments relate to reserves recorded in British pounds sterling, and are made to account for changes in our reserve for loan losses resulting from fluctuating foreign exchange rates.
The estimated allocation of the reserve for loan losses by loan category is detailed in Table I of this Form 10-K and represents the Companys assessment of existing conditions and risk factors within these categories. Changes in the risk characteristic and loan amounts within the loan portfolio affect the overall level of required reserves.
Nonperforming Assets and Past Due Loans
Riggs evaluates each past due commercial loan (commercial and financial loans and commercial real estate loans) and discontinues the accrual of interest based on the delinquency status, an evaluation of any collateral and the financial condition of the borrower. If there is doubt as to the collection of either principal or interest, or when interest or principal is 90 days past due and the commercial loan is not well-secured and in the process of collection, it is placed into nonaccrual status. A nonaccrual loan may be restored to accrual status when interest and principal payments are brought current and the collection of future payments is not in doubt. Nonaccrual loans totaled $2.3 million at December 31, 2003, an increase of $1.8 million from December 31, 2002.
Income recognition on non-commercial loans is discontinued and the loans are generally charged off or loan foreclosure proceedings begun upon becoming 120 days delinquent or at such time as permitted by law or other regulations. At this point, any uncollected interest is eliminated from income.
Renegotiated loans are those loans where there has been an extension of the original repayment period or a reduction of the obligation to pay principal or interest because of a deterioration in the borrowers financial position. There were no renegotiated loans at December 31, 2003 or 2002.
Loans are transferred into other real estate owned and other repossessed assets owned when collateral securing the loans is acquired through foreclosure. Other real estate and other repossessed assets owned totaled $40 thousand on December 31, 2003 compared to $122 thousand on December 31, 2002.
The 90 days past due loan category amounted to $12.2 million and $11.0 million at December 31, 2003 and 2002, respectively. The balances are primarily attributable to secured residential real estate loans that are in the process of collection and are accruing interest.
30
At December 31, 2003, the Company identified $814 thousand of potential problem loans compared to $5.3 million of such loans at December 31, 2002. The current year balance consists of six mortgage credits. Potential problem loans are defined as loans that are currently performing but which have certain attributes that may lead to nonaccrual or past due status in the foreseeable future.
Foreign loans and other credits may be adversely affected by social, economic and political instabilities, including military confrontations. The Company cannot estimate the losses, if any, associated with any such instabilities (see Note 15 of Notes to Consolidated Financial Statements).
DEPOSITS AND FUNDING SOURCES
Deposits, short-term borrowings, FHLB and long-term debt and, until October 1, 2003, trust preferred securities were the Companys principal funding sources. For 2003, these funding sources averaged $5.84 billion, an increase of $268.9 million from the $5.57 billion for 2002. In 2001, these funding sources averaged $5.04 billion. Beginning on October 1, 2003, trust preferred securities are no longer a funding source for the Company but, rather, because of the Companys previously discussed adoption of FIN 46R, the debt the Company has to the two trusts that issued the trust preferred securities is considered a funding source.
Deposits
Average demand deposits were $571.1 million, $509.5 million and $509.6 million in 2003, 2002 and 2001. As a means of reducing deposit reserve requirements, the Company periodically sweeps excess demand funds into money market accounts. The average balances transferred, which are not included in demand deposits in Table A of this Form 10-K, were $480.8 million in 2003 compared to $468.4 million and $440.2 million in 2002 and 2001, respectively.
The average cost of interest-bearing deposits was ..85%, 1.25% and 2.40% in 2003, 2002 and 2001, respectively. The change in the cost of these funds is primarily attributable to actions of the Federal Reserve. From December 31, 2000 to year-end 2003, the Federal Reserve lowered its target federal funds rate by 550 bps, from 6.50% to 1.00%.
Short-Term Borrowings
FHLB Borrowings and Other Long-Term Debt
The $66.5 million subordinated debentures have a fixed interest rate of 9.65% and are not callable in advance of maturity. The effective cost of this debt is 9.73%. The FHLB advances have maturity dates through 2007 and carry a blended interest rate of 2.58%. The FHLB may exercise its option to call $75.0 million of these advances prior to scheduled
31
Minority Interest in Trust Preferred Securities
As previously noted, on October 1, 2003 the Company adopted FIN 46R and no longer consolidates the two entities that issued its trust preferred securities. Because of this, the Company no longer has minority interest expense attributable to the trust preferred securities. Rather, at December 31, 2003 the Consolidated Statements of Condition reflect long-term debt of $360.8 million which is payable by the Company to the entities that have issued the trust preferred securities. Beginning October 1, 2003 interest on this debt is included in interest expense in the Consolidated Statements of Operations. Trust preferred securities that the Company has repurchased, totaling $107.9 million are now reflected as securities held to maturity in the Consolidated Statements of Condition and interest earned on these securities is included in interest income in the Consolidated Statements of Operations. The market value of these securities is $115.3 million at December 31, 2003.
Since the rate on both the Series A and Series C trust preferred securities is generally above yields that the Company can earn on its short term investments, loans and securities, the Company is attempting to repurchase additional trust preferred securities but will only do so if the repurchase terms are acceptable. During the first quarter of 2004, the Company acquired more than 50% of the debentures of one of the series, and the Company intends to reconsolidate the subsidiary that issued the guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures.
Sensitivity to Market and Other Risk
Riggs 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. Most likely is defined as the outlook of the Banks Treasury segment on the path of future interest rates. As of December 31, 2003, the most likely interest rate scenario calls for the federal funds target rate to be 1.00% through July 2004. The federal funds target rate then rises gradually to 3.75% by June 2006, holding at that level for the remainder of the forecast horizon. The results are compared to risk tolerance limits set by corporate policy. The models results as of December 31, 2003 are shown in Table M of this Form 10-K. 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 bp (1%) gradual increase or decrease in rates over a 12-month time period versus the most likely scenario and a 300 bp (3%) gradual increase or decrease in rates over a 36-month time period versus the most likely scenario.
As of December 31, 2003, the forecasted impact of rates rising or falling 100 bp versus the most likely scenario over a 12-month time period was a change in net interest income not exceeding 3%. For a 300 bp movement in rates versus the most likely scenario over a 36-month period, the impact on net interest income did not exceed 4.50%. The results of the
32
In managing interest-rate risk, ALCO uses financial derivative instruments, such as interest-rate swaps. Financial derivatives are employed to assist in the management and/ or reduction of interest-rate risk and can effectively alter the interest-rate sensitivity of the Company. Along with financial derivative instruments, the income simulation model includes assumptions about short-term financial instruments, investment securities, loans, deposits, and other borrowings.
At December 31, 2003 and 2002, the Companys cumulative one year gap was $(1.28) billion and $(51.0) million, respectively. A negative gap position indicates that the Company would be adversely impacted by rising interest rates since interest bearing deposits would reprice more quickly than interest earning assets. The Company does not monitor its interest rate risk exposure through gap measurement techniques but rather utilizes the income simulation techniques discussed above.
At December 31, 2003, Riggs had $33.7 million in commitments to purchase foreign currency and $110.4 million in commitments to sell foreign currency. Included in the commitments to sell foreign currency was a foreign exchange contract for a notional amount of $76.1 million to hedge the investment in London-based legal entities. In addition, interest rate swaps were used to hedge interest rate risk. At December 31, 2003, there were 17 interest rate swaps totaling $102.0 million in notional principal balances of which $47.0 million was used to hedge cash flows from variable rate liabilities (see Note 19 to Consolidated Financial Statements).
CAPITAL RESOURCES
One of the Companys fundamental objectives is to maintain a level of capitalization that promotes depositor and investor confidence. In addition to maintaining conservative loan underwriting standards, the Company places an emphasis on capital strength and its ability to withstand unfavorable economic conditions and business losses.
The Companys policy is to ensure that the Bank is capitalized in accordance with regulatory guidelines. As previously discussed, the Bank is subject to minimum capital ratios as prescribed by the OCC, which are essentially the same as those prescribed by the Federal Reserve Board for bank holding companies. However, as previously noted, the Company has changed the method by which it accounts for trust preferred securities. Because of this change, banking regulators, which currently allow trust preferred securities to be included in regulatory capital to a limited extent, may in the future exclude trust preferred securities from the calculation of regulatory capital.
Total shareholders equity at December 31, 2003 was $373.5 million, a $15.7 million decrease from year-end 2002. The decrease was primarily the result of unrealized securities losses, net of taxes of $17.9 million and $5.7 million in dividend payments for the year. Offsetting these decreases to equity were increases of $4.2 million related to issuance of the Companys common stock, a $1.6 million unrealized gain after tax on the Companys hedging activities, a $1.5 million foreign exchange after tax translation gain and net income of $979 thousand. Total shareholders equity at December 31, 2002 was $389.2 million, a $28.4 million increase from year-end 2001. The increase was primarily the result of net income of $13.0 million, unrealized after tax securities gains of $12.8 million, and a $7.4 million increase in paid in capital due to the previously described trust preferred securities repurchases. These increases were partially offset by $5.7 million in dividend payments for the year.
Banking regulators have issued risk-based capital guidelines for banks and bank holding companies. These requirements provide minimum total, tier I, and leverage capital ratios that measure capital adequacy. The total capital ratio measures combined tier I and tier II capital to risk-weighted assets. The tier I capital ratio measures tier I capital to risk-weighted assets. The leverage capital ratio measures tier I capital to average assets. At December 31, 2003 and 2002, the Companys and Banks capital ratios significantly exceeded the well-capitalized levels under each of the regulatory ratios (see Table N of this Form 10-K and Note 10 of Notes to Consolidated Financial Statements).
As previously noted, because of FIN 46R and the deconsolidation of the two entities that have issued trust preferred securities, regulatory authorities may conclude at a future date that the trust preferred securities should no longer be included as a component of tier I regulatory capital. The Company has determined that it and the Bank would continue to
33
FOURTH QUARTER 2003 VS. FOURTH QUARTER 2002
For the quarter ended December 31, 2003, the Company reported a net loss of $6.9 million, or $.24 per share, compared to net income of $2.2 million, or $0.08 per diluted share, in the fourth quarter of 2002.
Net interest income was $37.7 million in the fourth quarter of 2003 compared to $49.4 million in the comparable quarter of the prior year, a decrease of 24%. This decrease is primarily attributable to the previously discussed changes as a result of the Companys adoption of FIN 46R on October 1, 2003 and mid-year changes in the methodology by which Riggs, as a financial agent bank, is compensated by the Treasury. Average earning assets were $5.36 billion and $5.77 billion and the net interest margin was 2.88% and 3.48% for the fourth quarter of 2003 and 2002, respectively.
The Company provided $2.8 million and $689 thousand for loan losses in the fourth quarter of 2003 and 2002, respectively, reflecting strong loan growth in the fourth quarter of 2003 compared to the comparable quarter of the prior year.
Noninterest income totaled $25.4 million in the fourth quarter of 2003, an increase of $728 thousand from the $24.7 million in the comparable quarter of the prior year primarily due to the decreases in venture capital losses noted previously. Net securities gains in the fourth quarter of 2003 were $774 thousand compared to $2.1 million in the prior years fourth quarter.
Noninterest expense for the 2003 fourth quarter was $70.2 million, compared to $64.4 million in the year-ago quarter, an increase of 9%. The increase is attributable to residual Project EPS expenses and a $950 thousand impairment charge.
34
TABLE A:
THREE-YEAR AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES(1)
2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||||||
AVERAGE | INCOME/ | YIELDS/ | AVERAGE | INCOME/ | YIELDS/ | AVERAGE | INCOME/ | YIELDS/ | |||||||||||||||||||||||||||||||
(IN THOUSANDS, EXCEPT RATES) | BALANCE | EXPENSE | RATE | BALANCE | EXPENSE | RATE | BALANCE | EXPENSE | RATE | ||||||||||||||||||||||||||||||
ASSETS
|
|||||||||||||||||||||||||||||||||||||||
Loans(2)
|
|||||||||||||||||||||||||||||||||||||||
Commercial-Taxable
|
$ | 356,098 | $ | 17,296 | 4.86 | % | $ | 341,450 | $ | 17,584 | 5.15 | % | $ | 295,754 | $ | 19,794 | 6.69 | % | |||||||||||||||||||||
Commercial-Tax-Exempt
|
180,510 | 14,058 | 7.79 | 161,036 | 12,539 | 7.79 | 145,250 | 10,608 | 7.30 | ||||||||||||||||||||||||||||||
Commercial Real Estate
|
628,123 | 34,198 | 5.44 | 529,417 | 33,426 | 6.31 | 477,799 | 34,607 | 7.24 | ||||||||||||||||||||||||||||||
Residential Mortgage
|
1,250,934 | 66,139 | 5.29 | 1,117,380 | 74,443 | 6.66 | 1,165,801 | 82,239 | 7.05 | ||||||||||||||||||||||||||||||
Home Equity
|
279,908 | 11,632 | 4.16 | 292,994 | 15,713 | 5.36 | 326,026 | 23,348 | 7.16 | ||||||||||||||||||||||||||||||
Consumer
|
63,778 | 6,673 | 10.46 | 66,104 | 7,003 | 10.59 | 65,882 | 8,156 | 12.38 | ||||||||||||||||||||||||||||||
Foreign
|
257,612 | 12,105 | 4.70 | 350,910 | 20,033 | 5.73 | 417,344 | 28,752 | 6.89 | ||||||||||||||||||||||||||||||
Total Loans
|
3,016,963 | 162,101 | 5.37 | % | 2,859,291 | 180,741 | 6.32 | % | 2,893,856 | 207,504 | 7.17 | % | |||||||||||||||||||||||||||
Securities Available for Sale(3)
|
2,065,573 | 67,432 | 3.26 | 1,897,742 | 71,045 | 3.74 | 1,301,752 | 68,630 | 5.27 | ||||||||||||||||||||||||||||||
Securities Held to Maturity
|
27,194 | 2,357 | 8.67 | | | | | | | ||||||||||||||||||||||||||||||
Time Deposits with Other Banks
|
253,471 | 5,475 | 2.16 | 212,663 | 3,146 | 1.48 | 330,283 | 12,712 | 3.85 | ||||||||||||||||||||||||||||||
Federal Funds Sold and Reverse
Repurchase Agreements
|
340,603 | 4,053 | 1.19 | 509,910 | 8,547 | 1.68 | 433,834 | 15,823 | 3.65 | ||||||||||||||||||||||||||||||
Total Earning Assets and Average Rate
Earned(4)
|
5,703,804 | 241,418 | 4.23 | 5,479,606 | 263,479 | 4.81 | 4,959,725 | 304,669 | 6.14 | ||||||||||||||||||||||||||||||
Less: Reserve for Loan Losses
|
26,143 | 26,728 | 33,998 | ||||||||||||||||||||||||||||||||||||
Cash and Due from Banks
|
187,670 | 170,116 | 142,579 | ||||||||||||||||||||||||||||||||||||
Premises and Equipment, Net
|
181,801 | 183,303 | 196,851 | ||||||||||||||||||||||||||||||||||||
Other Assets
|
304,013 | 256,280 | 272,250 | ||||||||||||||||||||||||||||||||||||
Total Assets
|
$ | 6,351,145 | $ | 6,062,577 | $ | 5,537,407 | |||||||||||||||||||||||||||||||||
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS EQUITY
|
|||||||||||||||||||||||||||||||||||||||
Interest-Bearing Deposits
|
|||||||||||||||||||||||||||||||||||||||
Savings and NOW Accounts
|
$ | 232,607 | $ | 543 | 0.23 | % | $ | 204,151 | $ | 981 | 0.48 | % | $ | 205,381 | $ | 1,711 | 0.83 | % | |||||||||||||||||||||
Money Market Deposit Accounts
|
2,384,200 | 11,877 | 0.50 | 2,210,446 | 18,257 | 0.83 | 1,879,070 | 26,224 | 1.40 | ||||||||||||||||||||||||||||||
Time Deposits in Domestic Offices
|
1,061,435 | 16,195 | 1.53 | 1,485,946 | 26,561 | 1.79 | 888,513 | 32,071 | 3.61 | ||||||||||||||||||||||||||||||
Time Deposits in Foreign Offices
|
329,393 | 5,335 | 1.62 | 335,083 | 7,313 | 2.18 | 650,611 | 26,974 | 4.15 | ||||||||||||||||||||||||||||||
Total Interest-Bearing Deposits
|
4,007,635 | 33,950 | 0.85 | 4,235,626 | 53,112 | 1.25 | 3,623,575 | 86,980 | 2.40 | ||||||||||||||||||||||||||||||
Short-Term Borrowings:
|
|||||||||||||||||||||||||||||||||||||||
Federal Funds Purchased and
Repurchase Agreements
|
436,264 | 4,805 | 1.10 | 437,934 | 6,744 | 1.54 | 482,412 | 17,050 | 3.53 | ||||||||||||||||||||||||||||||
Other Short-Term Borrowings
|
5,916 | 37 | 0.63 | 13,134 | 200 | 1.52 | 10,870 | 344 | 3.16 | ||||||||||||||||||||||||||||||
Long-Term Debt
|
629,821 | 26,242 | 4.17 | 73,435 | 6,673 | 9.09 | 66,525 | 6,472 | 9.73 | ||||||||||||||||||||||||||||||
Total Interest-Bearing Funds & Average
Rate Incurred
|
5,079,636 | 65,034 | 1.28 | 4,760,129 | 66,729 | 1.40 | 4,183,382 | 110,846 | 2.65 | ||||||||||||||||||||||||||||||
Demand Deposits(5)
|
571,107 | 509,463 | 509,586 | ||||||||||||||||||||||||||||||||||||
Other Liabilities
|
132,451 | 120,654 | 99,794 | ||||||||||||||||||||||||||||||||||||
Minority Interest in Preferred Stock of
Subsidiaries
|
185,345 | 297,627 | 350,000 | ||||||||||||||||||||||||||||||||||||
Shareholders Equity
|
382,606 | 374,704 | 394,645 | ||||||||||||||||||||||||||||||||||||
Total Liabilities, Minority Interest and
Shareholders Equity
|
$ | 6,351,145 | $ | 6,062,577 | $ | 5,537,407 | |||||||||||||||||||||||||||||||||
NET INTEREST INCOME AND SPREAD
|
$ | 176,384 | 2.95 | % | $ | 196,750 | 3.41 | % | $ | 193,823 | 3.49 | % | |||||||||||||||||||||||||||
NET INTEREST MARGIN ON EARNING
ASSETS
|
3.09 | % | 3.59 | % | 3.91 | % | |||||||||||||||||||||||||||||||||
(1) | Income and rates are computed on a tax-equivalent basis using a Federal income tax rate of 35% and local tax rates as applicable. Net interest income on a tax equivalent basis, or net interest income plus an amount equal to the tax savings on tax-exempt interest, is utilized in this table to improve year to year comparability as well as facilitate comparison with other banking organizations. |
(2) | Nonperforming loans are included in average balances used to determine rates. |
(3) | The averages and rates for the securities available for sale portfolio are based on amortized cost. |
(4) | Excludes venture capital investments |
(5) | Demand deposit balances for all periods presented exclude certain accounts transferred to the money market classification to reduce the level of deposit reserves required. |
35
TABLE B:
NET INTEREST INCOME CHANGES(1)
2003 VS. 2002 | 2002 VS. 2001 | ||||||||||||||||||||||||||
(TAX-EQUIVALENT BASIS) | DUE TO | DUE TO | TOTAL | DUE TO | DUE TO | TOTAL | |||||||||||||||||||||
(IN THOUSANDS) | RATE | VOLUME | CHANGE | RATE | VOLUME | CHANGE | |||||||||||||||||||||
Interest Income:
|
|||||||||||||||||||||||||||
Loans, Including Fees
|
$ | (28,218 | ) | $ | 9,578 | $ | (18,640 | ) | $ | (24,314 | ) | $ | (2,449 | ) | $ | (26,763 | ) | ||||||||||
Securities Available for Sale
|
(9,571 | ) | 5,958 | (3,613 | ) | (23,439 | ) | 25,854 | 2,415 | ||||||||||||||||||
Securities Held to Maturity(2)
|
| 2,357 | 2,357 | | | | |||||||||||||||||||||
Time Deposits with Other Banks
|
1,643 | 686 | 2,329 | (6,060 | ) | (3,506 | ) | (9,566 | ) | ||||||||||||||||||
Federal Funds Sold and Reverse
Repurchase Agreements
|
(2,102 | ) | (2,392 | ) | (4,494 | ) | (9,684 | ) | 2,408 | (7,276 | ) | ||||||||||||||||
Total Interest Income
|
(38,248 | ) | 16,187 | (22,061 | ) | (63,497 | ) | 22,307 | (41,190 | ) | |||||||||||||||||
Interest Expense:
|
|||||||||||||||||||||||||||
Savings and NOW Accounts
|
(561 | ) | 123 | (438 | ) | (720 | ) | (10 | ) | (730 | ) | ||||||||||||||||
Money Market Deposit Accounts
|
(7,735 | ) | 1,355 | (6,380 | ) | (12,033 | ) | 4,066 | (7,967 | ) | |||||||||||||||||
Time Deposits in Domestic Offices
|
(3,494 | ) | (6,872 | ) | (10,366 | ) | (20,844 | ) | 15,334 | (5,510 | ) | ||||||||||||||||
Time Deposits in Foreign Offices
|
(1,855 | ) | (123 | ) | (1,978 | ) | (9,725 | ) | (9,936 | ) | (19,661 | ) | |||||||||||||||
Federal Funds Purchased and Repurchase Agreements
|
(1,913 | ) | (26 | ) | (1,939 | ) | (8,857 | ) | (1,449 | ) | (10,306 | ) | |||||||||||||||
Other Short-Term Borrowings
|
(84 | ) | (79 | ) | (163 | ) | (205 | ) | 61 | (144 | ) | ||||||||||||||||
Long-Term Debt
|
(5,439 | ) | 25,008 | 19,569 | (443 | ) | 644 | 201 | |||||||||||||||||||
Total Interest Expense
|
(21,081 | ) | 19,386 | (1,695 | ) | (52,827 | ) | 8,710 | (44,117 | ) | |||||||||||||||||
Net Interest Income
|
$ | (17,167 | ) | $ | (3,199 | ) | $ | (20,366 | ) | $ | (10,670 | ) | $ | 13,597 | $ | 2,927 | |||||||||||
(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% and local tax rates as applicable. |
(2) | Effective October 1, 2003, trust preferred securities are classified as held to maturity securities due to the adoption of FIN 46R. Consequently, the change in interest income from 2002 to 2003 is entirely due to volume. |
36
TABLE C:
YEAR-END LOANS
(IN THOUSANDS) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Domestic:
|
||||||||||||||||||||||
Commercial and Financial
|
$ | 581,223 | $ | 613,786 | $ | 479,285 | $ | 479,443 | $ | 667,393 | ||||||||||||
Commercial Real Estate
|
815,004 | 559,384 | 494,192 | 440,900 | 415,304 | |||||||||||||||||
Residential Mortgage
|
1,155,079 | 1,225,211 | 1,112,409 | 1,168,243 | 1,219,740 | |||||||||||||||||
Loans Held for Sale
|
524 | 1,247 | 8,671 | 15,433 | | |||||||||||||||||
Home Equity
|
306,599 | 279,737 | 297,637 | 335,825 | 315,520 | |||||||||||||||||
Consumer
|
64,403 | 65,437 | 64,888 | 68,010 | 73,158 | |||||||||||||||||
Total Domestic
|
2,922,832 | 2,744,802 | 2,457,082 | 2,507,854 | 2,691,115 | |||||||||||||||||
Foreign:
|
||||||||||||||||||||||
Governments and Official Institutions
|
122,831 | 107,940 | 93,300 | 69,119 | 67,555 | |||||||||||||||||
Banks and Other Financial Institutions
|
159 | 30 | 1,531 | 1,717 | 2,730 | |||||||||||||||||
Commercial and Industrial
|
142,443 | 109,366 | 284,293 | 329,903 | 395,120 | |||||||||||||||||
Other
|
33,622 | 41,954 | 36,717 | 37,086 | 51,607 | |||||||||||||||||
Total Foreign
|
299,055 | 259,290 | 415,841 | 437,825 | 517,012 | |||||||||||||||||
Total Loans
|
3,221,887 | 3,004,092 | 2,872,923 | 2,945,679 | 3,208,127 | |||||||||||||||||
Net Deferred Loan Fees, Costs,
Premiums and Discounts |
3,267 | 3,813 | (4,331 | ) | (4,941 | ) | (6,146 | ) | ||||||||||||||
Loans
|
$ | 3,225,154 | $ | 3,007,905 | $ | 2,868,592 | $ | 2,940,738 | $ | 3,201,981 | ||||||||||||
Reserve for Loan Losses
|
(28,285 | ) | (25,958 | ) | (29,540 | ) | (36,197 | ) | (41,455 | ) | ||||||||||||
Total Net Loans
|
$ | 3,196,869 | $ | 2,981,947 | $ | 2,839,052 | $ | 2,904,541 | $ | 3,160,526 | ||||||||||||
37
TABLE D:
YEAR-END MATURITIES AND RATE SENSITIVITY
LESS THAN | OVER | ||||||||||||||||||
(IN THOUSANDS) | 1 YEAR | 1-5 YEARS | 5 YEARS | TOTAL | |||||||||||||||
Maturities:
|
|||||||||||||||||||
Commercial and Financial
|
$ | 246,880 | $ | 140,310 | $ | 194,033 | $ | 581,223 | |||||||||||
Commercial Real Estate
|
90,446 | 544,880 | 179,678 | 815,004 | |||||||||||||||
Residential Mortgage
|
24,938 | 108,969 | 1,021,172 | 1,155,079 | |||||||||||||||
Loans Held for Sale
|
| | 524 | 524 | |||||||||||||||
Home Equity
|
265,538 | 21,146 | 19,915 | 306,599 | |||||||||||||||
Consumer
|
52,611 | 11,792 | | 64,403 | |||||||||||||||
Foreign
|
122,875 | 131,864 | 44,316 | 299,055 | |||||||||||||||
Total Loans
|
$ | 803,288 | $ | 958,961 | $ | 1,459,638 | $ | 3,221,887 | |||||||||||
Rate Sensitivity:
|
|||||||||||||||||||
With Fixed Interest Rates
|
123,720 | 227,151 | 772,625 | 1,123,496 | |||||||||||||||
With Floating and Adjustable Interest Rates
|
679,569 | 731,809 | 687,013 | 2,098,391 | |||||||||||||||
Total Loans
|
$ | 803,289 | $ | 958,960 | 1,459,638 | 3,221,887 | |||||||||||||
TABLE E:
CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS1
BANKS AND | COMMERCIAL | |||||||||||||||||
OTHER FINANCIAL | AND | |||||||||||||||||
(IN THOUSANDS) | INSTITUTIONS | INDUSTRIAL | OTHER | TOTAL | ||||||||||||||
As of December 31, 2003
|
||||||||||||||||||
United Kingdom
|
$ | 29,325 | $ | 13,939 | $ | 83,850 | $ | 127,114 | ||||||||||
United States2
|
54,019 | | 23,592 | 77,611 | ||||||||||||||
Portugal
|
55,932 | | 7,593 | 63,525 | ||||||||||||||
As of December 31, 2002
|
||||||||||||||||||
United States2
|
$ | 35,010 | $ | | $ | 48,904 | $ | 83,914 | ||||||||||
Saudi Arabia
|
41 | | 75,475 | 75,516 | ||||||||||||||
As of December 31, 2001
|
||||||||||||||||||
United Kingdom
|
$ | 15,750 | $ | 234,443 | $ | 3,870 | $ | 254,063 | ||||||||||
United States2
|
149,860 | | 18,328 | 168,188 | ||||||||||||||
Saudi Arabia
|
28 | | 89,268 | 89,296 | ||||||||||||||
1 | Cross-border outstandings include loans, acceptances, investments, accrued interest and other monetary assets, net of interest-bearing deposits with other banks that are denominated in U.S. dollars or other non-local currencies. |
2 | United States cross-border outstandings consist of deposits placed by the Company in foreign branches of United States banks. |
38
TABLE F:
CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF
TOTAL ASSETS
WITH NONPERFORMING OR PAST-DUE LOANS
TOTAL | ||||||||||||||
NONACCRUAL | NONPERFORMING | PAST-DUE | ||||||||||||
(IN THOUSANDS) | LOANS | LOANS | LOANS | |||||||||||
As of December 31, 2003
United Kingdom |
$ | 2,193 | $ | | $ | 68 | ||||||||
As of December 31, 2002
|
$ | | $ | | $ | | ||||||||
As of December 31, 2001
United Kingdom |
$ | 1,430 | 1 | $ | 1,430 | $ | 2,406 | |||||||
1 | As of December 31, 2001, $529 thousand of nonaccrual loans were classified as renegotiated loans. |
TABLE G:
MATURITIES OF SECURITIES AVAILABLE FOR SALE
GROSS | GROSS | ||||||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | ||||||||||||||||
(IN THOUSANDS) | COST | GAINS | LOSSES | VALUE | |||||||||||||||
U.S. Treasury Securities:
|
|||||||||||||||||||
Due within 1 year
|
$ | 25,103 | $ | | $ | 29 | $ | 25,074 | |||||||||||
State & Municipal Securities
|
|||||||||||||||||||
Due after 5 years but within 10 years
|
17,076 | 123 | 33 | 17,167 | |||||||||||||||
Due after 10 years
|
7,841 | 22 | 11 | 7,851 | |||||||||||||||
Government Agencies Securities:
|
|||||||||||||||||||
Due within 1 year
|
137,514 | 8 | | 137,522 | |||||||||||||||
Due after 1 year but within 5 years
|
582,698 | 498 | 3,191 | 580,005 | |||||||||||||||
Mortgage-Backed Securities:
|
|||||||||||||||||||
Due after 10 years
|
1,012,635 | 1,547 | 6,933 | 1,007,249 | |||||||||||||||
Other Securities:
|
|||||||||||||||||||
Due within 1 year
|
16,563 | | | 16,563 | |||||||||||||||
Due after 10 years
|
35,268 | 119 | | 35,387 | |||||||||||||||
Total Securities Available for Sale
|
1,834,698 | $ | 2,317 | $ | 10,197 | 1,826,818 | |||||||||||||
This table reflects the carrying values, by contractual maturity, of securities available for sale. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
39
TABLE H:
RESERVE FOR LOAN LOSSES AND SUMMARY OF
CHARGE-OFFS (RECOVERIES)
DECEMBER 31,
(IN THOUSANDS) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
Balance, January 1
|
$ | 25,958 | $ | 29,540 | $ | 36,197 | $ | 41,455 | $ | 54,455 | |||||||||||||
Provision for Loan Losses
|
5,146 | 421 | 2,526 | 18,791 | 2,500 | ||||||||||||||||||
Loans Charged Off:
|
|||||||||||||||||||||||
Commercial and Financial
|
854 | 69 | 4,071 | 9,059 | 12,251 | ||||||||||||||||||
Commercial Real Estate
|
| 255 | | 148 | 90 | ||||||||||||||||||
Residential Mortgage
|
| | 10 | 30 | 178 | ||||||||||||||||||
Home Equity
|
9 | 81 | 48 | 63 | 220 | ||||||||||||||||||
Consumer
|
2,085 | 2,473 | 2,422 | 2,699 | 2,238 | ||||||||||||||||||
Foreign
|
2,932 | 4,094 | 4,913 | 14,168 | 1,970 | ||||||||||||||||||
Total Loans Charged Off
|
5,880 | 6,972 | 11,464 | 26,167 | 16,947 | ||||||||||||||||||
Recoveries on Charged-Off Loans:
|
|||||||||||||||||||||||
Commercial and Financial
|
| 62 | 70 | 568 | 399 | ||||||||||||||||||
Commercial Real Estate
|
204 | 341 | 85 | 548 | 207 | ||||||||||||||||||
Residential Mortgage
|
| | 37 | 49 | | ||||||||||||||||||
Home Equity
|
68 | 62 | 126 | 117 | 105 | ||||||||||||||||||
Consumer
|
676 | 950 | 791 | 715 | 472 | ||||||||||||||||||
Foreign
|
1,862 | 837 | 1,376 | 626 | 526 | ||||||||||||||||||
Total Recoveries on Charged-Off Loans
|
2,810 | 2,252 | 2,485 | 2,623 | 1,709 | ||||||||||||||||||
Net Charge-offs (Recoveries)
|
3,070 | 4,720 | 8,979 | 23,544 | 15,238 | ||||||||||||||||||
Foreign Exchange Translation Adjustments
|
251 | 717 | (204 | ) | (505 | ) | (262 | ) | |||||||||||||||
Balance, December 31
|
$ | 28,285 | $ | 25,958 | $ | 29,540 | $ | 36,197 | $ | 41,455 | |||||||||||||
Ratio of Net Charge-Offs (Recoveries) to Average
Loans
|
0.10% | 0.17% | 0.31% | 0.76% | 0.48% | ||||||||||||||||||
Ratio of Reserve for Loan Losses to Total Loans
|
0.88% | 0.86% | 1.03% | 1.23% | 1.29% | ||||||||||||||||||
TABLE I:
RESERVE FOR LOAN LOSSES ALLOCATION AND LOAN DISTRIBUTION
(IN THOUSANDS)
Allocation of the Reserve for Loan Losses | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Commercial and Financial
|
$ | 5,353 | $ | 6,390 | $ | 5,518 | $ | 15,755 | $ | 21,807 | ||||||||||||
Commercial Real Estate
|
8,199 | 5,995 | 4,015 | 5,446 | 3,768 | |||||||||||||||||
Residential Mortgage
|
1,718 | 2,416 | 1,112 | 1,176 | 1,218 | |||||||||||||||||
Home Equity and Consumer
|
2,991 | 3,581 | 3,709 | 2,851 | 2,780 | |||||||||||||||||
Foreign
|
3,573 | 3,334 | 8,243 | 7,036 | 6,006 | |||||||||||||||||
Based on Qualitative Factors
|
6,451 | 4,242 | 6,943 | 3,933 | 5,876 | |||||||||||||||||
Balance, December 31
|
28,285 | 25,958 | 29,540 | 36,197 | 41,455 | |||||||||||||||||
Distribution of Year-End Loans | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Commercial and Financial
|
18.0 | % | 20.4 | % | 16.7 | % | 16.3 | % | 20.8 | % | ||||||||||||
Commercial Real Estate
|
25.3 | 18.6 | 17.2 | 15.0 | 13.0 | |||||||||||||||||
Residential Mortgage
|
35.9 | 40.9 | 39.0 | 40.1 | 38.0 | |||||||||||||||||
Home Equity and Consumer
|
11.5 | 11.5 | 12.6 | 13.7 | 12.1 | |||||||||||||||||
Foreign
|
9.3 | 8.6 | 14.5 | 14.9 | 16.1 | |||||||||||||||||
Total, December 31
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
40
TABLE J:
NONPERFORMING ASSETS AND PAST-DUE LOANS
(IN THOUSANDS) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
Nonperforming Assets:
|
|||||||||||||||||||||||
Nonaccrual Loans:
|
|||||||||||||||||||||||
Domestic
|
$ | 115 | $ | 87 | $ | 472 | $ | 34,228 | $ | 40,559 | |||||||||||||
Foreign
|
2,193 | 461 | 901 | 957 | 975 | ||||||||||||||||||
Total Nonaccrual Loans
|
2,308 | 548 | 1,373 | 35,185 | 41,534 | ||||||||||||||||||
Renegotiated Loans:
|
|||||||||||||||||||||||
Domestic
|
| | | 31 | 53 | ||||||||||||||||||
Foreign
|
| | 529 | 822 | 1,210 | ||||||||||||||||||
Total Renegotiated Loans
|
| | 529 | 853 | 1,263 | ||||||||||||||||||
Other Real Estate & Repossessed Assets
|
|||||||||||||||||||||||
Domestic
|
| | 600 | 1,133 | 908 | ||||||||||||||||||
Foreign
|
40 | 122 | 1,156 | | | ||||||||||||||||||
Total Other Real Estate & Repossessed Assets
|
40 | 122 | 1,756 | 1,133 | 908 | ||||||||||||||||||
Total Nonperforming Assets, Net
|
$ | 2,348 | $ | 670 | $ | 3,658 | $ | 37,171 | $ | 43,705 | |||||||||||||
Past-Due Loans:
|
|||||||||||||||||||||||
Domestic
|
$ | 9,590 | $ | 10,457 | $ | 10,909 | $ | 11,100 | $ | 7,429 | |||||||||||||
Foreign
|
2,588 | 588 | 2,406 | 19 | | ||||||||||||||||||
Total Past-Due Loans
|
$ | 12,178 | $ | 11,045 | $ | 13,315 | $ | 11,119 | $ | 7,429 | |||||||||||||
Total Loans
|
$ | 3,225,154 | $ | 3,007,905 | $ | 2,868,592 | 2,940,738 | $ | 3,201,981 | ||||||||||||||
Ratio of Nonaccrual Loans to Total Loans
|
0.07 | % | 0.02 | % | 0.05 | % | 1.20 | % | 1.30 | % | |||||||||||||
Ratio of Nonperforming Assets to Total Loans and
Other Real Estate Owned, Net
|
0.07 | % | 0.02 | % | 0.13 | % | 1.26 | % | 1.36 | % | |||||||||||||
TABLE K:
INTEREST INCOME ON NONACCRUAL AND RENEGOTIATED LOANS
(IN THOUSANDS) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||
Interest Income at Original Terms:
|
||||||||||||||||||||||||
Nonaccrual Loans:
|
||||||||||||||||||||||||
Domestic
|
$ | 20 | $ | 46 | $ | 1,151 | $ | 3,346 | $ | 3,168 | ||||||||||||||
Foreign
|
195 | 17 | 228 | 332 | | |||||||||||||||||||
Renegotiated Loans
|
| 23 | 109 | 201 | 222 | |||||||||||||||||||
Total
|
$ | 215 | $ | 86 | $ | 1,488 | $ | 3,879 | $ | 3,390 | ||||||||||||||
Actual Interest Income Recognized:
|
||||||||||||||||||||||||
Nonaccrual Loans:
|
||||||||||||||||||||||||
Domestic
|
$ | 4 | $ | 49 | $ | 105 | $ | 41 | $ | 249 | ||||||||||||||
Foreign
|
| | | | | |||||||||||||||||||
Renegotiated Loans
|
| | 10 | 19 | | |||||||||||||||||||
Total
|
$ | 4 | $ | 49 | $ | 115 | $ | 60 | $ | 249 | ||||||||||||||
41
TABLE L:
SHORT-TERM BORROWINGS
FEDERAL FUNDS PURCHASED | ||||||||||||||||||||||||||
AND REPURCHASE | OTHER SHORT-TERM | |||||||||||||||||||||||||
AGREEMENTS | BORROWINGS | |||||||||||||||||||||||||
(IN THOUSANDS, EXCEPT RATES) | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||||||
Balance, December 31
|
$ | 518,711 | $ | 459,098 | $ | 584,706 | $ | 11,671 | $ | 11,274 | $ | 11,914 | ||||||||||||||
Average Amount Outstanding1
|
436,264 | 437,934 | 482,412 | 5,916 | 13,134 | 10,870 | ||||||||||||||||||||
Weighted-Average Rate Paid1
|
1.10 | % | 1.54 | % | 3.53 | % | 0.63 | % | 1.52 | % | 3.16 | % | ||||||||||||||
Maximum Amount Outstanding at any Month- End
|
518,711 | 567,286 | 584,706 | 13,544 | 11,832 | 16,632 | ||||||||||||||||||||
1 | Average amounts are based on daily balances. Average rates are computed by dividing actual interest expense by average amounts outstanding. |
TABLE M:
INTEREST-RATE SENSITIVITY ANALYSIS1
MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 2003
SIMULATED IMPACT OVER | SIMULATED IMPACT OVER | ||||||||||||||||||||
(IN THOUSANDS, EXCEPT RATES) | NEXT TWELVE MONTHS | NEXT THIRTY-SIX MONTHS | |||||||||||||||||||
(IN THOUSANDS) | +100BP | -100BP | +300BP | -300BP | |||||||||||||||||
Simulated Impact Compared with a Most Likely
Scenario:
|
|||||||||||||||||||||
Net Interest Income
|
|||||||||||||||||||||
Increase (Decrease)
|
(1.3 | )% | 2.7 | % | (3.6 | )% | 4.4 | % | |||||||||||||
Net Interest Income
|
|||||||||||||||||||||
Increase (Decrease)
|
$ | (2,170 | ) | $ | 4,348 | $ | (17,650 | ) | $ | 21,527 | |||||||||||
Assumptions with respect to the models projection of the effect of changes in interest rates on net interest income include: |
1. | Target balances for various asset and liability classes, which are solicited from the management of the various units of the Company. |
2. | A most likely federal funds rate and U.S. Treasury yield curve which are determined by an authorized committee and variances from this rate which are established by policy. |
3. | Spread relationships between various interest rate indices which are generated by the analysis of historical data and committee 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 Company. |
42
TABLE N:
CAPITAL RATIOS
REQUIRED | WELL | ||||||||||||||||||
2003 | 2002 | MINIMUMS | CAPITALIZED | ||||||||||||||||
Riggs National Corporation
|
|||||||||||||||||||
Tier I
|
12.52 | % | 14.13 | % | 4.00 | % | 6.00 | % | |||||||||||
Combined Tier I and Tier II
|
17.81 | 20.25 | 8.00 | 10.00 | |||||||||||||||
Leverage
|
8.41 | 7.85 | 4.00 | 5.00 | |||||||||||||||
Riggs Bank National Association
|
|||||||||||||||||||
Tier I
|
11.08 | % | 12.76 | % | 4.00 | % | 6.00 | % | |||||||||||
Combined Tier I and Tier II
|
11.82 | 13.52 | 8.00 | 10.00 | |||||||||||||||
Leverage
|
7.52 | 7.17 | 4.00 | 5.00 | |||||||||||||||
TABLE O:
CONTRACTUAL OBLIGATIONS
LESS | MORE | |||||||||||||||||||||
THAN | 1-3 | 3-5 | THAN | |||||||||||||||||||
(IN THOUSANDS) | TOTAL | ONE YEAR | YEARS | YEARS | 5 YEARS | |||||||||||||||||
Long-Term Debt
|
$ | 1,850,665 | $ | 191,426 | $ | 483,052 | $ | 172,768 | $ | 1,003,419 | ||||||||||||
Capital Lease Obligations
|
| | | | | |||||||||||||||||
Operating Leases
|
44,478 | 8,472 | 13,560 | 9,479 | 12,967 | |||||||||||||||||
Purchase Obligations
|
61,336 | 26,070 | 16,126 | 10,272 | 8,868 | |||||||||||||||||
Other Long-Term Liabilities
|
361,993 | 17,852 | 16,946 | 16,672 | 310,523 | |||||||||||||||||
Total
|
$ | 2,318,472 | $ | 243,820 | $ | 529,684 | $ | 209,191 | $ | 1,335,777 | ||||||||||||
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) | 2003 | 2002 | 2001 | |||||||||||||
INTEREST INCOME
|
||||||||||||||||
Interest and Fees on Loans
|
$ | 157,339 | $ | 176,799 | $ | 204,797 | ||||||||||
Interest and Dividends on Securities Available
for Sale
|
67,418 | 71,045 | 68,630 | |||||||||||||
Interest and Dividends on Securities Held to
Maturity
|
2,357 | | | |||||||||||||
Interest on Time Deposits with Other Banks
|
5,475 | 3,146 | 12,712 | |||||||||||||
Interest on Federal Funds Sold and Reverse
Repurchase Agreements
|
4,053 | 8,547 | 15,823 | |||||||||||||
Total Interest Income
|
236,642 | 259,537 | 301,962 | |||||||||||||
INTEREST EXPENSE
|
||||||||||||||||
Interest on Deposits:
|
||||||||||||||||
Savings, NOW and Money Market Accounts
|
12,420 | 19,238 | 27,935 | |||||||||||||
Time Deposits in Domestic Offices
|
16,195 | 26,561 | 32,071 | |||||||||||||
Time Deposits in Foreign Offices
|
5,335 | 7,313 | 26,974 | |||||||||||||
Total Interest on Deposits
|
33,950 | 53,112 | 86,980 | |||||||||||||
Interest on Short-Term Borrowings and Long-Term
Debt:
|
||||||||||||||||
Repurchase Agreements and Other Short-Term
Borrowings
|
4,842 | 6,944 | 17,394 | |||||||||||||
Long-Term Debt
|
26,242 | 6,673 | 6,472 | |||||||||||||
Total Interest on Short-Term Borrowings and
Long-Term Debt
|
31,084 | 13,617 | 23,866 | |||||||||||||
Total Interest Expense
|
65,034 | 66,729 | 110,846 | |||||||||||||
Net Interest Income
|
171,608 | 192,808 | 191,116 | |||||||||||||
Provision for Loan Losses
|
5,146 | 421 | 2,526 | |||||||||||||
Net Interest Income after Provision for Loan
Losses
|
166,462 | 192,387 | 188,590 | |||||||||||||
NONINTEREST INCOME
|
||||||||||||||||
Trust and Investment Advisory Income
|
37,505 | 42,729 | 50,290 | |||||||||||||
Service Charges and Fees
|
49,474 | 45,401 | 43,591 | |||||||||||||
Venture Capital Investment Losses, Net
|
(4,206 | ) | (14,822 | ) | (31,103 | ) | ||||||||||
Other Noninterest Income
|
14,186 | 10,642 | 10,494 | |||||||||||||
Securities Gains, Net
|
13,331 | 9,450 | 12,037 | |||||||||||||
Total Noninterest Income
|
110,290 | 93,400 | 85,309 | |||||||||||||
NONINTEREST EXPENSE
|
||||||||||||||||
Salaries and Wages
|
93,660 | 86,794 | 90,971 | |||||||||||||
Pension and Other Employee Benefits
|
23,968 | 23,236 | 18,852 | |||||||||||||
Occupancy, Net
|
21,332 | 21,360 | 21,092 | |||||||||||||
Data Processing Services
|
19,661 | 21,124 | 20,916 | |||||||||||||
Furniture, Equipment and Software
|
13,681 | 15,335 | 19,119 | |||||||||||||
Credit Card Processing
|
10,121 | 9,092 | 8,118 | |||||||||||||
Consultants and Outsourcing Fees
|
20,783 | 13,486 | 12,880 | |||||||||||||
Advertising and Public Relations
|
3,900 | 4,585 | 4,175 | |||||||||||||
Restructuring Expense
|
| | 4,327 | |||||||||||||
Legal Fees
|
4,918 | 4,127 | 2,769 | |||||||||||||
Communications Expense
|
3,491 | 3,123 | 2,558 | |||||||||||||
Other Noninterest Expense
|
45,293 | 38,122 | 60,564 | |||||||||||||
Total Noninterest Expense
|
260,808 | 240,384 | 266,341 | |||||||||||||
Income before Taxes and Minority Interest
|
15,944 | 45,403 | 7,558 | |||||||||||||
Applicable Income Tax Expense
|
4,386 | 15,471 | 11,075 | |||||||||||||
Minority Interest in Income of Subsidiaries, Net
of Taxes
|
10,579 | 16,911 | 19,860 | |||||||||||||
Net Income (Loss)
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | |||||||||
EARNINGS (LOSS) PER SHARE-
|
||||||||||||||||
Basic
|
$ | 0.03 | $ | 0.46 | $ | (0.82 | ) | |||||||||
Diluted
|
0.03 | 0.45 | (0.82 | ) |
The Accompanying Notes Are An Integral Part Of These Statements
44
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) | 2003 | 2002 | ||||||||||
ASSETS
|
||||||||||||
Cash and Due from Banks
|
$ | 325,975 | $ | 244,703 | ||||||||
Federal Funds Sold and Reverse Repurchase
Agreements
|
| 610,000 | ||||||||||
Total Cash and Cash Equivalents
|
325,975 | 854,703 | ||||||||||
Time Deposits with Other Banks
|
287,077 | 203,267 | ||||||||||
Securities Available for Sale
|
1,826,818 | 2,319,917 | ||||||||||
Securities Held to Maturity (Fair Value-$115,319)
|
107,891 | | ||||||||||
Venture Capital Investments
|
43,356 | 49,419 | ||||||||||
Loans
|
3,225,154 | 3,007,905 | ||||||||||
Reserve for Loan Losses
|
(28,285 | ) | (25,958 | ) | ||||||||
Total Net Loans
|
3,196,869 | 2,981,947 | ||||||||||
Premises and Equipment, Net
|
226,502 | 203,253 | ||||||||||
Other Assets
|
355,070 | 213,189 | ||||||||||
Total Assets
|
$ | 6,369,558 | $ | 6,825,695 | ||||||||
LIABILITIES
|
||||||||||||
Deposits:
|
||||||||||||
Noninterest-Bearing Demand Deposits
|
$ | 673,610 | $ | 683,338 | ||||||||
Interest-Bearing Deposits:
|
||||||||||||
Savings and NOW Accounts
|
294,546 | 331,656 | ||||||||||
Money Market Deposit Accounts
|
2,378,779 | 2,165,449 | ||||||||||
Time Deposits in Domestic Offices
|
585,260 | 1,723,474 | ||||||||||
Time Deposits in Foreign Offices
|
354,037 | 335,080 | ||||||||||
Total Interest-Bearing Deposits
|
3,612,622 | 4,555,659 | ||||||||||
Total Deposits
|
4,286,232 | 5,238,997 | ||||||||||
Short-Term Borrowings
|
530,382 | 470,372 | ||||||||||
Other Liabilities
|
127,091 | 119,976 | ||||||||||
Long-Term Borrowings
|
1,052,333 | 358,525 | ||||||||||
Total Liabilities
|
5,996,038 | 6,187,870 | ||||||||||
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES |
| 248,584 | ||||||||||
COMMITMENTS AND CONTINGENCIES
|
||||||||||||
SHAREHOLDERS EQUITY
|
||||||||||||
Common Stock-$2.50 Par Value
|
2003 | 2002 | ||||||||||||||||||
Authorized
|
50,000,000 | 50,000,000 | |||||||||||||||||
Issued
|
31,998,260 | 31,812,022 | |||||||||||||||||
Outstanding
|
28,680,138 | 28,510,224 | 79,996 | 79,530 | |||||||||||||||
Treasury Stock
|
3,318,122 | 3,301,798 | |||||||||||||||||
Additional Paid in Capital
|
174,396 | 170,747 | |||||||||||||||||
Retained Earnings
|
200,131 | 204,865 | |||||||||||||||||
Accumulated Other Comprehensive Income (Loss) | (9,380 | ) | 5,468 | ||||||||||||||||
Treasury Stock
|
(71,623 | ) | (71,369 | ) | |||||||||||||||
Total Shareholders Equity
|
373,520 | 389,241 | |||||||||||||||||
Total Liabilities and Shareholders Equity | $ | 6,369,558 | $ | 6,825,695 |
The Accompanying Notes Are An Integral Part Of These Statements
45
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED | ||||||||||||||||||||||||||
COMMON | ADDITIONAL | OTHER | TOTAL | |||||||||||||||||||||||
(IN THOUSANDS, EXCEPT SHARE | STOCK | PAID IN | RETAINED | COMPREHENSIVE | TREASURY | SHAREHOLDERS | ||||||||||||||||||||
AMOUNTS) | $2.50 PAR | CAPITAL | EARNINGS | INCOME (LOSS) | STOCK | EQUITY | ||||||||||||||||||||
Balance, January 1, 2001
|
$ | 79,254 | $ | 162,206 | $ | 226,616 | $ | (13,973 | ) | $ | (71,357 | ) | $ | 382,746 | ||||||||||||
Comprehensive Income:
|
||||||||||||||||||||||||||
Net Loss
|
(23,377 | ) | (23,377 | ) | ||||||||||||||||||||||
Other Comprehensive Income, Net of Tax:
|
||||||||||||||||||||||||||
Unrealized Gain on Securities Available for Sale,
Net of Reclassification Adjustments
|
9,247 | 9,247 | ||||||||||||||||||||||||
Unrealized Loss on Derivatives, Net of
Reclassification Adjustments
|
(2,231 | ) | (2,231 | ) | ||||||||||||||||||||||
Foreign Exchange
|
||||||||||||||||||||||||||
Translation Adjustments
|
(1,022 | ) | (1,022 | ) | ||||||||||||||||||||||
Total Other Comprehensive Income
|
5,994 | |||||||||||||||||||||||||
Total Comprehensive Loss
|
(17,383 | ) | ||||||||||||||||||||||||
Issuance of Common Stock for Stock Option
Plans-94,239 Shares
|
235 | 919 | 1,154 | |||||||||||||||||||||||
Cash Dividends Declared, $.20 per share
|
(5,694 | ) | (5,694 | ) | ||||||||||||||||||||||
Balance, December 31, 2001
|
$ | 79,489 | $ | 163,125 | $ | 197,545 | $ | (7,979 | ) | $ | (71,357 | ) | $ | 360,823 | ||||||||||||
Comprehensive Income:
|
||||||||||||||||||||||||||
Net Income
|
13,021 | 13,021 | ||||||||||||||||||||||||
Other Comprehensive Income, Net of Tax:
|
||||||||||||||||||||||||||
Unrealized Gain on Securities Available for Sale,
Net of Reclassification Adjustments
|
12,815 | 12,815 | ||||||||||||||||||||||||
Unrealized Loss on Derivatives,
|
||||||||||||||||||||||||||
Net of Reclassification Adjustments
|
(893 | ) | (893 | ) | ||||||||||||||||||||||
Foreign Exchange Translation Adjustments
|
1,525 | 1,525 | ||||||||||||||||||||||||
Total Other Comprehensive Income
|
13,447 | |||||||||||||||||||||||||
Total Comprehensive Income
|
26,468 | |||||||||||||||||||||||||
Issuance of Common Stock for Stock Option
Plans-16,319 Shares
|
41 | 174 | 215 | |||||||||||||||||||||||
Repurchase of Trust Preferred Securities
|
7,448 | 7,448 | ||||||||||||||||||||||||
Repurchase of 1,000 shares of Common Stock
|
(12 | ) | (12 | ) | ||||||||||||||||||||||
Cash Dividends Declared, $.20 per share
|
(5,701 | ) | (5,701 | ) | ||||||||||||||||||||||
Balance, December 31, 2002
|
$ | 79,530 | $ | 170,747 | $ | 204,865 | $ | 5,468 | $ | (71,369 | ) | $ | 389,241 | |||||||||||||
Comprehensive Income:
|
||||||||||||||||||||||||||
Net Income
|
979 | 979 | ||||||||||||||||||||||||
Other Comprehensive Income, Net of Tax:
|
||||||||||||||||||||||||||
Unrealized Loss on Securities Available for Sale,
Net of Reclassification Adjustments
|
(17,949 | ) | (17,949 | ) | ||||||||||||||||||||||
Unrealized Gain on Derivatives, Net of
Reclassification Adjustments
|
1,634 | 1,634 | ||||||||||||||||||||||||
Foreign Exchange Translation Adjustments
|
1,467 | 1,467 | ||||||||||||||||||||||||
Total Other Comprehensive Loss
|
(14,848 | ) | ||||||||||||||||||||||||
Total Comprehensive Loss
|
(13,869 | ) | ||||||||||||||||||||||||
Issuance of Common Stock for Stock Option
Plans-186,238 Shares
|
466 | 3,746 | 4,212 | |||||||||||||||||||||||
Repurchase of Trust Preferred Securities
|
(97 | ) | (97 | ) | ||||||||||||||||||||||
Repurchase of 16,324 shares of Common Stock
|
(254 | ) | (254 | ) | ||||||||||||||||||||||
Cash Dividends Declared, $.20 per share
|
(5,713 | ) | (5,713 | ) | ||||||||||||||||||||||
Balance, December 31, 2003
|
$ | 79,996 | $ | 174,396 | $ | 200,131 | $ | (9,380 | ) | $ | (71,623 | ) | $ | 373,520 | ||||||||||||
The Accompanying Notes Are An Integral Part Of These Statements
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||||
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
||||||||||||||||
Net Income (Loss)
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | |||||||||
Adjustments to Reconcile Net Income to Cash
Provided By Operating Activities: |
||||||||||||||||
Non-cash Restructuring and Other Charges
|
| | 39,977 | |||||||||||||
Provision for Loan Losses
|
5,146 | 421 | 2,526 | |||||||||||||
Provision for Other Real Estate Owned Losses, Net
of Realized Gains
|
| | 251 | |||||||||||||
Unrealized (Gains) Losses on Venture Capital
Investments
|
(4,691 | ) | 11,690 | 31,284 | ||||||||||||
(Gains) Losses on Sales of Venture Capital
Investments
|
8,897 | 3,132 | (181 | ) | ||||||||||||
Depreciation Expense and Other Amortization
|
19,994 | 17,688 | 18,920 | |||||||||||||
Net Gains on Sales of Securities Available for
Sale
|
(13,331 | ) | (9,450 | ) | (12,037 | ) | ||||||||||
(Increase) Decrease in Other Assets
|
11,807 | (47,077 | ) | (8,082 | ) | |||||||||||
Increase (Decrease) in Other Liabilities
|
1,266 | 15,045 | (3,526 | ) | ||||||||||||
Total Adjustments
|
29,088 | (8,551 | ) | 69,132 | ||||||||||||
Net Cash Provided By Operating Activities
|
30,067 | 4,470 | 45,755 | |||||||||||||
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
||||||||||||||||
Net (Increase) Decrease In Time Deposits with
Other Banks
|
(83,810 | ) | 86,197 | 76,437 | ||||||||||||
Proceeds from Maturities of Securities Available
for Sale
|
8,353,744 | 12,155,976 | 5,962,451 | |||||||||||||
Proceeds from Sales of Securities Available for
Sale
|
682,368 | 531,157 | 245,895 | |||||||||||||
Purchases of Securities Available for Sale
|
(8,669,248 | ) | (13,359,434 | ) | (6,570,717 | ) | ||||||||||
Purchases of Securities Held to Maturity
|
(6,475 | ) | | | ||||||||||||
Purchases of Venture Capital Investments
|
(3,145 | ) | (9,327 | ) | (14,180 | ) | ||||||||||
Proceeds from Sale of OREO
|
812 | 3,926 | | |||||||||||||
Proceeds from Sale of Venture Capital Investments
|
5,002 | 1,405 | 10,491 | |||||||||||||
Net (Increase) Decrease in Loans
|
(221,043 | ) | (148,355 | ) | 63,167 | |||||||||||
Net Increase in Premises and Equipment
|
(54,798 | ) | (11,262 | ) | (16,241 | ) | ||||||||||
Other, Net
|
253 | 551 | 78 | |||||||||||||
Net Cash Provided By (Used in) Investing
Activities
|
3,660 | (749,166 | ) | (242,619 | ) | |||||||||||
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
||||||||||||||||
Net Increase in Non-Time Deposits
|
166,492 | 257,298 | 236,660 | |||||||||||||
Net Increase (Decrease) in Time Deposits
|
(1,119,257 | ) | 459,416 | 209,646 | ||||||||||||
Net Increase (Decrease) in Short-Term Borrowings
|
60,010 | (126,248 | ) | 13,788 | ||||||||||||
Proceeds from the Issuance of Common Stock
|
1,800 | 215 | 1,154 | |||||||||||||
Proceeds from Federal Home Loan Bank Borrowings
|
333,000 | 292,000 | | |||||||||||||
Dividend Payments
|
(5,713 | ) | (5,701 | ) | (5,694 | ) | ||||||||||
Repurchase of Common Stock
|
(254 | ) | | | ||||||||||||
Repurchase of Guaranteed Preferred Beneficial
Interests in Junior Subordinated Deferrable Interest Debentures
and Common Stock
|
| (87,849 | ) | | ||||||||||||
Net Cash (Used In) Provided By Financing
Activities
|
(563,922 | ) | 789,131 | 455,554 | ||||||||||||
Effect of Exchange Rate Changes
|
1,467 | 1,525 | (1,022 | ) | ||||||||||||
Net (Decrease) Increase in Cash and Cash
Equivalents
|
(528,728 | ) | 45,960 | 257,668 | ||||||||||||
Cash and Cash Equivalents at Beginning of Period
|
854,703 | 808,743 | 551,075 | |||||||||||||
Cash and Cash Equivalents at End of Period
|
$ | 325,975 | $ | 854,703 | $ | 808,743 | ||||||||||
SUPPLEMENTAL DISCLOSURES:
|
||||||||||||||||
Interest Paid
|
$ | 64,581 | $ | 68,247 | $ | 114,156 | ||||||||||
Income Tax Payments
|
11 | 3,670 | 146 | |||||||||||||
Trade Dated Securities Purchases
|
8,350 | | 100,188 | |||||||||||||
Trade Dated Securities Sales
|
120,426 | | | |||||||||||||
The Accompanying Notes Are An Integral Part Of These Statements
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Riggs National Corporation (the Company or Riggs), a Delaware Corporation, is a bank holding company that provides financial services to a wide variety of customers. These services include community banking, corporate and institutional banking, international banking and trust and investment management services.
These services are provided through the Companys wholly-owned subsidiary and principal operating unit, Riggs Bank N.A. (the Bank or Riggs Bank), and its operating subsidiaries and divisions: Riggs Bank Europe Ltd. (RBEL), Riggs & Co., Riggs & Co. International Ltd. (RCIL) and Riggs Real Estate Investment Corporation (RREIC).
In addition, the Company has invested in two partnerships that make venture capital investments. The Company has a 99% interest in each of these partnerships.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all subsidiaries except two wholly-owned trusts which have been deconsolidated effective October 1, 2003, at which date the Company adopted Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities or FIN 46R. These consolidated financial statements include all adjustments necessary to fairly present the Companys results of operations, financial condition and cash flows. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current years presentation. None of these reclassifications affect net income (loss) or earnings per share for the periods presented.
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates particularly susceptible to near term changes include the adequacy of the reserve for loan losses, the valuation of venture capital investments, the realizability of deferred tax assets and the assessment of asset impairment.
Cash and Cash Equivalents
Securities
At December 31, 2003 and 2002, 94% and 100%, respectively of the Companys securities are classified as available for sale and, as such, are carried at their fair values with any unrealized gains and losses, net of taxes, reported as a separate component of other comprehensive income (loss) within shareholders equity. Fair values are generally obtained from quoted market values or independent sources. Short-term securities, generally those with initial maturities of three months or less, are carried at cost as cost is deemed to approximate market value. At December 31, 2003, the Company has $107.9 million of securities classified as held to maturity which consists of the Companys repurchase of trust preferred securities issued by two previously consolidated entities. These securities are reflected in the Consolidated Statements of Condition at amortized cost.
The specific identification method is used to determine the gain or loss of any security sold.
Income on securities available for sale and held to maturity is recognized as earned and any purchase premiums or discounts from par value are amortized or accreted so as to approximate income recognition on a level yield basis. The Company suspends income recognition and eliminates from revenue any previously accrued income related to any security
48
Loans
The Company evaluates each past due commercial loan (commercial and financial loans and commercial real estate loans) and discontinues the accrual of interest based on the delinquency status, an evaluation of any collateral and the financial condition of the borrower. If there is doubt as to the collection of either principal or interest, or when interest or principal is 90 days past due and the loan is not well-secured and in the process of collection, it is placed into non-accrual status. A non-accrual loan may be restored to accrual status when interest and principal payments are brought current and the collection of future payments is not in doubt.
Income recognition on non-commercial loans is discontinued and the loans are generally charged off or foreclosure begun after a delinquency period of 120 days or as permitted by laws and other regulations. At that point, any uncollected interest is eliminated from income.
The Company originates with the intent to sell certain residential mortgage loans. These loans are carried at the lower of cost or fair value and are sold servicing released. The amount of these loans at December 31, 2003 and 2002 was $524 thousand and $1.2 million, respectively.
Reserve for Loan Losses
The analytical review of the loan portfolio performed to determine the adequacy of the reserve for loan losses includes a review of large balance loans for impairment, an analysis of historical loss experience by loan type and, for groups of loans with similar characteristics, an evaluation of current economic conditions and all other factors deemed pertinent to the analysis. Impaired loans are defined as specifically reviewed loans for which it is probable that Riggs will be unable to collect all amounts due in accordance with the loan agreement. Impaired loans are generally commercial and financial loans and commercial real estate loans and are usually on non-accrual status. Each impaired loan with an outstanding balance equal to or greater than $250 thousand has a specific, identified loan loss reserve associated with it or has been written down to its estimated net realizable value. Impaired loans do not include groups of smaller balance homogeneous loans with similar collateral characteristics, such as residential mortgage and home equity loans. Loss reserves for these types of loans are established on an aggregate basis using historical loss experience. Balances related to impaired loans are excluded when applying historical loss ratios to determine loan loss reserves.
The specific reserves for impaired loans are included in the reserve for loan losses. Impaired loans are valued based upon the fair value of the related collateral if the loans are collateral dependent. For all other impaired loans, the specific reserves are based on the present values of expected cash flows discounted at each loans initial effective interest rate.
Provisions to the reserve for loan losses are charged against, or credited to, earnings in amounts necessary to maintain an adequate reserve for loan losses. Commercial loans are charged-off when it is determined that the loan cannot be fully recovered and, as noted previously, non-commercial loans are generally charged-off at the time of loan foreclosure. Recoveries of loans previously charged-off are credited to the reserve for loan losses.
The Company maintains its reserve for loan losses in accordance with a policy approved by the Board of Directors. The Company has an established methodology for analyzing its reserve for loan losses that includes an internal loan classification policy. The Company periodically reviews its methodology to ascertain that it produces accurate assessments of probable loan losses. Domestic and foreign loans are subjected to substantially identical review procedures.
49
Premises and Equipment
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 certain fixed assets are capitalized at the Banks weighted-average cost of interest-bearing liabilities.
Impairment of Long-Lived Assets
Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment by comparing their fair values with their recorded amounts. At December 31, 2003, the Company had $5.9 million of goodwill and other intangibles and in the fourth quarter of 2003 recorded a $950 thousand goodwill impairment.
Venture Capital Investments
The valuation of venture capital investments was arrived at using a variety of factors including, but not limited to: market prices, where available, and discounted, if necessary, to reflect trading history, lock-up provisions, lack of market liquidity and other factors; cost, if there is no readily determinable market price and there has not been a material event, such as a follow-on round of financing or strategic sale; a value higher than cost if indicated by additional financing which fulfills certain requirements; and analysis and commentary from a funds Investment Manager/ General Partner.
The Company does not intend to sell or liquidate the venture capital portfolio and the valuation of venture capital investments is subject to uncertainties in that it does not represent a negotiated value between the Company, as seller, and an independent, willing buyer that has the necessary knowledge and financial ability to complete the purchase. Additionally, if the Company attempted to sell the venture capital portfolio, particularly if it deemed it necessary to liquidate the investments within a short period of time, the actual proceeds from the sale could differ significantly from the carrying value. The market for the type of venture capital investments held has since 2000 been impacted by a slowing economy, a depressed domestic equity market in which the values of publicly traded companies have declined, and, because of these market conditions, a decline in the number of initial public offerings and acquisitions of private companies by publicly traded firms. The gradual improvement in these sectors has begun to afford the Company better liquidation opportunities and it continues to actively manage the portfolio to maximize current valuations. Although these and other factors have been assessed in determining the values, because of the subjectivity in determining values, it is possible that the Company would experience a material loss if it chose to liquidate its venture capital portfolio, particularly if it attempted to do so quickly. The loss, if any, would be recorded in the Riggs Capital Partners segment.
Income Taxes and Deferred Tax Assets on Venture Capital Losses
Unrealized losses in the venture capital operations have resulted in the maintenance of $12.9 million of deferred tax assets as of December 31, 2003. Of this amount, $1.5 million was established in 2003. These assets can be utilized to reduce taxes payable on future capital gains but must be utilized within five years of the year in which the loss is realized for tax return
50
If sufficient net capital gains within the Companys venture capital operations are not realized in a timely manner, or if business conditions make it impossible, impractical or imprudent to implement the identified alternative strategies, an additional valuation allowance, resulting in a charge against income, for that portion of the deferred tax asset which will not be utilized, will be recorded in the Other segment.
In addition, uncertainty related to the utilization of deferred tax amounts generated by foreign subsidiaries resulted in the maintenance of a 100% valuation allowance of $7.6 million and $6.4 million as of December 31, 2003 and 2002, respectively.
Benefit Plans
The Company also provides health insurance benefits to retired employees and, to employees who retired prior to January 1, 1998, life insurance benefits. The estimated cost of retiree health insurance benefits is accrued during the employment period and a transition asset, recognized when the current accounting treatment for postretirement benefits was adopted, is being amortized over a 20 year period.
The Company sponsors a 401(k) Plan that is available to all domestic employees who meet certain age and length of service requirements. In 2002 Riggs began fully matching employee contributions up to a maximum of 6% of an employees eligible yearly earnings. Prior to 2002, the Company matched employee contributions for the first $100 the employee contributed and 50% thereafter up to a maximum of 6% of an employees eligible yearly earnings.
During 2002, the Company terminated a Supplemental Executive Retirement Plan (SERP) which it had maintained to provide supplemental income and postretirement death benefits to certain key employees. Upon termination of this plan, the actuarially determined liability for active participants with greater than one year of service prior to retirement was transferred into the Companys Executive Deferred Compensation Plan. Vested participants who are no longer employed by the Company were paid an amount equal to the current value of their benefit. Vested participants who were receiving benefits prior to plan termination will continue to receive these benefits. This supplemental plan has no assets (see Note 14 of Notes to Consolidated Financial Statements).
Stock-Based Employee Compensation Plans
51
In 2003 and 2002, the Company approved for award 210,407 and 161,909 shares, respectively, of its common stock to certain key executives under a Deferred Stock Award Agreement which are subject to performance and time vesting. Based on achieved 2003 and 2002 performance targets, 76,466 shares were awarded at December 31, 2003 and none at December 31, 2002. The 76,466 deferred shares earned at December 31, 2003 will vest in three equal annual installments, beginning in January of 2004. A total of $325 thousand in compensation expense was recorded in 2003 related to this award.
In 2003 and 2002, the Company granted 73,000 and 370,000, respectively, of its common stock to certain key executives under a Deferred Stock Award Agreement that are subject to time vesting. These shares vest in equal annual installments over a period of four to five years, beginning in January 2003 and January 2004. A total of $1.2 million and $646 thousand in expense was recognized for these awards in 2003 and 2002, respectively.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Year Ended December 31, | ||||||||||||||||
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATES) | 2003 | 2002 | 2001 | |||||||||||||
Net income, as reported
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | |||||||||
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
|
1,012 | 420 | | |||||||||||||
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
(6,754 | ) | (3,068 | ) | (3,040 | ) | ||||||||||
Pro forma net income
|
$ | (4,763 | ) | $ | 10,373 | $ | (26,417 | ) | ||||||||
Earnings per share:
|
||||||||||||||||
Basicas reported
|
$ | 0.03 | $ | 0.46 | $ | (0.82 | ) | |||||||||
Basicpro forma
|
$ | (0.17 | ) | $ | 0.36 | $ | (0.93 | ) | ||||||||
Dilutedas reported
|
$ | 0.03 | $ | 0.45 | $ | (0.82 | ) | |||||||||
Dilutedpro forma
|
$ | (0.16 | ) | $ | 0.36 | $ | (0.93 | ) | ||||||||
Weighted-Average Fair Value of Options
Granted
|
$ | 5.20 | $ | 6.03 | $ | 7.21 | ||||||||||
Weighted-Average Assumptions:
|
||||||||||||||||
Expected Lives (Years)
|
9.00 | 9.00 | 9.00 | |||||||||||||
Risk-Free Interest Rate
|
4.18 | % | 4.97 | % | 5.32 | % | ||||||||||
Expected Volatility
|
29.92 | % | 38.70 | % | 37.27 | % | ||||||||||
Expected Dividends (Annual Per Share)
|
$ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||||
The fair values of the stock options outstanding are used to determine the proforma impact of the options on compensation expense over their vesting period. Proforma net income and earnings per share were based on the Black-Scholes options pricing model for each grant made, using the key assumptions detailed above.
Earnings Per Common Share
2003 | 2002 | 2001 | ||||||||||||
Basic average common shares
|
28,609,296 | 28,505,405 | 28,470,953 | |||||||||||
Dilutive effect of stock options and unvested
deferred stock awards
|
967,789 | 398,794 | | |||||||||||
Dilutive average common shares
|
28,577,085 | 28,904,199 | 28,470,953 | |||||||||||
Stock options not included in the above per share calculations because inclusion would be anti-dilutive were 2,777,248 in 2003, 3,762,710 in 2002 and 437,532 in 2001.
52
Foreign Currency Translation
Foreign Exchange Income
Interest Rate and Foreign Currency Risk
The derivative instruments that Riggs uses include interest rate swaps, futures contracts and option contracts that relate to the pricing of specific assets and liabilities. Interest rate swaps involve the exchange of fixed and variable interest rate payments based upon a notional principal amount and maturity date. Interest rate futures generally involve exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the future at specified prices. Interest options represent contracts that give the owner the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified time period. Certain of these contracts grant the right to enter into interest rate swaps and cap and floor agreements with the writer of the option.
Riggs also enters into foreign exchange derivative contracts, including foreign currency forward contracts, to manage its exchange risk associated with the translation of foreign currency into U.S. dollars.
As a result of the use of derivative instruments the Company is exposed to credit and market risk. If the fair value of the derivative contract is positive, the counterparty owes Riggs and, hence, a repayment or credit risk exists. If the fair value of the derivative contract is negative, Riggs owes the counterparty and, therefore, there is no repayment risk. The Company attempts to minimize repayment risk by entering into transactions with financially stable counterparties that are specified in the Companys policy and reviewed periodically by the Companys credit committee. Derivative contracts are governed by an International Swap Dealers Association Master Agreement and, depending on the nature of the agreements, bilateral collateral arrangements also may be obtained. When Riggs has multiple derivative transactions with a counterparty, the net mark-to-market exposure represents the netting of positive and negative exposures with the same counterparty. The net mark-to-market exposure with a counterparty is a measure of credit risk when there is a legally enforceable master netting agreement between Riggs and the counterparty. Riggs uses master netting agreements with the majority of its counterparties.
Market risk is the adverse effect that a change in interest rates or comparative currency values has on the fair value of a financial instrument or expected cash flows. Riggs manages the market risk associated with interest rate and foreign exchange hedge contracts by establishing formal policy limits concerning the types and degree of risk that may be undertaken. The Companys Treasury segment monitors compliance with this policy.
Accounting for Derivatives
53
When entering into hedging transactions, the relationships between hedging instruments and hedged items is documented as is the risk management objective and strategy. This process links all derivatives that are designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the Consolidated Statements of Condition or to forecasted transactions. The Company evaluates, both at inception of the transaction and on an on-going basis, the effectiveness of all hedges in offsetting changes in fair values or cash flows of hedged items.
Riggs discontinues hedge accounting prospectively when the derivative is no longer effective in offsetting changes in fair values or cash flows of a hedged item, the derivative matures or is sold, terminated or exercised or the derivative is de-designated as a hedge instrument.
When hedge accounting is discontinued because the derivative no longer qualifies as an effective fair value hedge, it will continue to be carried on the Consolidated Statements of Condition at its fair value and the hedged asset or liability will no longer be adjusted to reflect changes in fair value. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, Riggs continues to carry the derivative in the Consolidated Statements of Condition at its fair value and any gains or losses accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued, the derivative will be carried at fair value with changes in fair value recognized in income. The Company also enters into derivative transactions which do not qualify for hedge accounting. Generally these transactions are intended to protect the Company from fluctuations in foreign currency exchange rates.
Treasury Stock
NOTE 2. RESTRUCTURING AND OTHER CHARGES
In December 2001 the Company announced plans to upgrade its technology and infrastructure and realign several of its business operations and, as a result of these decisions, recorded a $4.3 million restructuring charge. At December 31, 2002, the Company had remaining accrued employee severance payments of $334 thousand which were paid during 2003.
Also in 2001, the Company recorded various other charges including $25.7 million to write-down the carrying value of various assets because of significant uncertainties concerning their recoverability, $3.6 million to discharge its obligation under an employment contract and a $500 thousand penalty to exit a domestic technology-related contract. In 2001 the Company also established a $5.9 million valuation allowance against deferred tax assets.
54
NOTE 3: SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31 are as follows:
2003 | 2002 | |||||||||||||||||||||||||||||||
GROSS | GROSS | GROSS | GROSS | |||||||||||||||||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||||||||||||||
(IN THOUSANDS) | COST | GAINS | LOSSES | VALUE | COST | GAINS | LOSSES | VALUE | ||||||||||||||||||||||||
U.S. Treasury Securities
|
$ | 25,103 | $ | | $ | 29 | $ | 25,074 | $ | 4,998 | $ | | $ | | $ | 4,998 | ||||||||||||||||
State and Municipal Securities
|
24,917 | 145 | 44 | 25,018 | | | | | ||||||||||||||||||||||||
Government Agencies Securities
|
720,212 | 506 | 3,191 | 717,527 | 1,268,874 | 4,499 | 9 | 1,273,364 | ||||||||||||||||||||||||
Mortgage-Backed Securities
|
1,012,635 | 1,547 | 6,933 | 1,007,249 | 970,386 | 15,109 | 11 | 985,484 | ||||||||||||||||||||||||
Other Securities
|
51,831 | 119 | | 51,950 | 56,049 | 22 | | 56,071 | ||||||||||||||||||||||||
Total Securities Available for Sale
|
$ | 1,834,698 | $ | 2,317 | $ | 10,197 | $ | 1,826,818 | $ | 2,300,307 | $ | 19,630 | $ | 20 | $ | 2,319,917 | ||||||||||||||||
Realized gains from the sale of securities totaled $13.3 million during 2003 and realized losses totaled $12 thousand, compared with realized gains of $9.7 million and realized losses of $207 thousand in 2002 and realized gains of $14.3 million and realized losses of $2.3 million in 2001. At December 31, 2003, a $5.2 million unrealized loss, net of tax, was recorded in shareholders equity and included in accumulated other comprehensive income (loss), compared to a $12.7 million unrealized gain, net of tax, in 2002. Unrealized gains and losses are attributable to changes in market interest rates since the securities were purchased.
The following table details unrealized losses in the Companys securities available for sale portfolio.
LESS THAN 12 MONTHS | 12 MONTHS OR MORE | TOTAL | ||||||||||||||||||||||
FAIR | UNREALIZED | FAIR | UNREALIZED | FAIR | UNREALIZED | |||||||||||||||||||
(IN THOUSANDS) | VALUE | LOSSES | VALUE | LOSSES | VALUE | LOSSES | ||||||||||||||||||
U.S. Treasury Securities
|
$ | 25,074 | $ | 29 | $ | | $ | | $ | 25,074 | $ | 29 | ||||||||||||
State and Municipal Securities
|
6,468 | 44 | | | 6,468 | 44 | ||||||||||||||||||
Government Agencies Securities
|
448,231 | 3,191 | | | 448,231 | 3,191 | ||||||||||||||||||
Mortgage-Backed Securities
|
602,581 | 6,933 | | | 602,581 | 6,933 | ||||||||||||||||||
Total Securities Available for Sale with
Unrealized Losses
|
$ | 1,082,354 | $ | 10,197 | $ | | $ | | $ | 1,082,354 | $ | 10,197 | ||||||||||||
Securities available for sale that were pledged to secure deposits and other borrowings were $660.1 million at December 31, 2003 and $1.69 billion at December 31, 2002. The decline in pledged assets was due to a change in the way the U.S. Treasury compensates financial agent banks such as Riggs. Under the prior compensation methodology, Riggs was compensated by net interest earned on Treasury deposit balances which was reflected in net interest income. Under the new compensation methodology, Riggs uses zero cost Treasury deposits to purchase a non-marketable Treasury-issued depositary compensation security (DCS). The pledged asset balance has declined because under the old methodology Riggs was required to purchase securities to collateralize any Treasury deposit. The DCS balance is netted against the Treasury deposit balance in the Statements of Financial Condition in accordance with FIN 39 (Offsetting of Amounts Related to Certain Contracts) and the income from the DCS is recorded as a component of noninterest income.
The Other Securities category consists of Federal Home Loan Bank of Atlanta (FHLB) and Federal Reserve stock, money market mutual funds and other equity securities. The FHLB and Federal Reserve stock are valued at cost which approximates fair value. Equity securities are valued at fair value.
The contractual maturity distribution of securities available for sale at December 31 follows. Actual maturities may differ from contractual maturities because issuers may have the right to call obligations and mortgages underlying mortgage-backed securities may be repaid more quickly than scheduled.
55
2003 | 2002 | |||||||||||||||||||||||||||||||||
GROSS | GROSS | GROSS | GROSS | |||||||||||||||||||||||||||||||
(IN | AMORTIZED | UNREALIZED | UNREALIZED | FAIR | AMORTIZED | UNREALIZED | UNREALIZED | FAIR | ||||||||||||||||||||||||||
THOUSANDS) | COST | GAINS | LOSSES | VALUE | COST | GAINS | LOSSES | VALUE | ||||||||||||||||||||||||||
Within 1 year
|
$ | 179,179 | $ | 8 | $ | 29 | $ | 179,158 | $ | 493,328 | $ | 8 | $ | 3 | $ | 493,333 | ||||||||||||||||||
After 1 but within 5 years
|
582,698 | 498 | 3,191 | 580,005 | 706,150 | 4,120 | 6 | 710,264 | ||||||||||||||||||||||||||
After 5 but within 10 years
|
17,077 | 123 | 33 | 17,167 | 109,821 | 371 | 11 | 110,181 | ||||||||||||||||||||||||||
After 10 years
|
1,055,744 | 1,688 | 6,944 | 1,050,488 | 991,008 | 15,131 | | 1,006,139 | ||||||||||||||||||||||||||
Total Securities Available for Sale
|
$ | 1,834,698 | $ | 2,317 | $ | 10,197 | $ | 1,826,818 | $ | 2,300,307 | $ | 19,630 | $ | 20 | $ | 2,319,917 | ||||||||||||||||||
Interest earned on securities available for sale for the years ended December 31 is as follows:
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
U.S. Treasury Securities
|
$ | 244 | $ | 619 | $ | 8,635 | ||||||||
State and Municipal Securities
|
28 | | | |||||||||||
Government Agencies Securities
|
24,873 | 32,045 | 27,046 | |||||||||||
Mortgage-Backed Securities
|
40,570 | 36,506 | 30,343 | |||||||||||
Other Securities
|
1,703 | 1,875 | 2,606 | |||||||||||
Total Securities Available for Sale
|
$ | 67,418 | $ | 71,045 | $ | 68,630 | ||||||||
See Note 11 of Notes to Consolidated Financial Statements for discussion of securities held to maturity.
NOTE 4: LOANS AND RESERVE FOR LOAN LOSSES
The composition of the loan portfolio at December 31 is as follows.
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Commercial and Financial
|
$ | 581,223 | $ | 613,786 | ||||||
Commercial Real Estate
|
815,004 | 559,384 | ||||||||
Residential Mortgage
|
1,155,079 | 1,225,211 | ||||||||
Loans Held for Sale
|
524 | 1,247 | ||||||||
Home Equity
|
306,599 | 279,737 | ||||||||
Consumer
|
64,403 | 65,437 | ||||||||
Foreign
|
299,055 | 259,290 | ||||||||
Total Loans
|
3,221,887 | 3,004,092 | ||||||||
Net Deferred Loan Fees, Costs, Premiums and
Discounts
|
3,267 | 3,813 | ||||||||
Loans
|
$ | 3,225,154 | $ | 3,007,905 | ||||||
A summary of nonperforming and loans contractually past-due 90 days or more at December 31 follows.
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Nonaccrual Loans
|
$ | 2,308 | $ | 548 | ||||||
Past-Due Loans
|
12,178 | 11,045 | ||||||||
Nonaccrual loans at December 31, 2003 is comprised of two foreign loans both of which were placed on nonaccrual status during 2003. Nonaccrual loans at December 31, 2002 consists of another foreign loan which repaid during 2003. There were no renegotiated loans at December 31, 2003 or 2002. Nonaccrual and renegotiated loans may include certain impaired loans. The two foreign loans mentioned previously were the Companys only impaired loans at December 31, 2003. Charge-offs were taken on these loans and at year end they are reflected at net realizable value, and accordingly, there are no specific reserves at December 31, 2003. There were no impaired loans as of December 31, 2002. The 2003 average investment in impaired loans was $2.9 million, entirely in foreign loans. For 2002, the average investments in impaired loans was $309 thousand, also entirely in foreign loans.
56
An analysis of the changes in the reserve for loan losses follows:
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
Balance, January 1
|
$ | 25,958 | $ | 29,540 | $ | 36,197 | ||||||||
Provision for Loan Losses
|
5,146 | 421 | 2,526 | |||||||||||
Loans Charged-Off
|
5,880 | 6,972 | 11,464 | |||||||||||
Less: Recoveries of Charged-Off Loans
|
2,810 | 2,252 | 2,485 | |||||||||||
Net Charge-Offs
|
3,070 | 4,720 | 8,979 | |||||||||||
Foreign Exchange Translation Adjustments
|
251 | 717 | (204 | ) | ||||||||||
Balance, December 31
|
$ | 28,285 | $ | 25,958 | $ | 29,540 | ||||||||
The Companys reserve for loan losses at December 31, 2003 was $28.3 million, an increase from the December 31, 2002 balance of $26.0 million. A provision of $5.1 million was taken for the year, primarily to cover loan growth in the commercial real estate portfolio and for one of the foreign impaired loans that was placed on nonaccrual status during the year.
Cash payments received on impaired loans are generally applied to principal. The interest income that would have been earned in 2003, 2002 and 2001 if such loans had not been classified as impaired and therefore on nonaccrual status, was $215 thousand, $20 thousand, and $820 thousand, respectively. $4 thousand of interest was included in net interest income for impaired loans in 2003 while none was included in 2002.
Geographically, the Companys domestic loans are concentrated in the Washington, D.C. metropolitan area. Loans originated by the Companys United Kingdom operations represent 57% of foreign loans at December 31, 2003 and are predominantly to borrowers located in the United Kingdom.
At December 31, 2003, approximately $816.2 million or 25% of the Companys loan portfolio consisted of loans secured by real estate, excluding single-family residential loans, of which almost 100% was secured by properties located in the Washington, D.C. area. Approximately 45% of the Companys loan portfolio is secured by the primary residence of the borrower at December 31, 2003 compared to 50% at December 31, 2002.
NOTE 5: TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of banking business, loans are made to officers and directors of the Company and its affiliates as well as to their associates. These loans are underwritten at the Bank level consistent with standard banking practices and regulatory requirements and do not involve more than the normal risk of collectibility. At December 31, 2003 and 2002, loans to executive officers and directors of the Company and its affiliates, including loans to their associates, totaled $95.5 million and $140.9 million, respectively. During 2003 loan additions were $46.2 million and loan repayments were $91.7 million. In addition, there was an addition of $65 thousand due to changes in the composition of our Board of Directors and executive officers. In addition to the transactions set forth above, the Bank had $2.3 million in letters of credit outstanding at December 31, 2003 to related parties compared with $1.9 million at December 31, 2002. There were no related party loans that were impaired, on nonaccrual status, past due, restructured or deemed potential problem loans at December 31, 2003 and 2002.
At December 31, 2003, the Company had one $34.0 million repurchase agreement with a related party. The customer was considered a related party because a member of one of the Companys subsidiaries Board of Directors was in a senior management position at the customer. There were no repurchase agreements with related parties at December 31, 2002.
In 2003, the Company, through two venture capital investment partnerships each in which it has 99% interest, paid approximately $750 thousand in management fees to entities controlled by a director of the Company. In 2002 and 2001 the Company paid approximately $2.6 million and $4.0 million to these entities, respectively. These entities reimbursed the Bank approximately $660 thousand in 2003, $1.4 million in 2002 and $2.0 million in 2001 for rent, salaries and other services provided by the Bank to these entities while also incurring additional operating expense with non-related parties. These venture capital partnerships also have an obligation to repay all management fees to the Company prior to any profits being accrued by the partnerships.
57
In 2001, the Company used a corporate aircraft that is owned by two entities directly or indirectly controlled by an individual who is both a member of the Board of Directors and a significant shareholder of the Company, and paid $86 thousand to the owners for its use. The aircraft owned by these two entities was not substantially used by the Company in 2003 or 2002. The Company, through an agency, purchased advertising time on two television stations indirectly owned by this board member and shareholder in the amount of $185 thousand in 2001. There were no such transactions in 2003 or 2002. In addition, another entity indirectly controlled by this individual leases space in a Company-owned facility through 2007. Lease payments received were $469 thousand, $433 thousand and $397 thousand in 2003, 2002 and 2001, respectively. The Company was also reimbursed by the same entity in the amount of $81 thousand in each of these same years for use of a sports entertainment suite. In 2003 and 2002 the Company was reimbursed $146 thousand and $68 thousand for the use of a second sports entertainment suite.
The above transactions with related parties were reviewed by the Board of Directors.
NOTE 6. PREMISES AND EQUIPMENT
Investments in premises and equipment at year-end were as follows:
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Premises and Land
|
$ | 191,908 | $ | 194,542 | ||||||
Furniture and Equipment
|
130,985 | 116,895 | ||||||||
Leasehold Improvements
|
45,738 | 41,724 | ||||||||
Purchased and Capitalized Software
|
73,081 | 48,589 | ||||||||
Accumulated Depreciation and Amortization
|
(215,210 | ) | (198,497 | ) | ||||||
Total Premises and Equipment, Net
|
$ | 226,502 | $ | 203,253 | ||||||
Depreciation and amortization expense amounted to $19.0 million in 2003, $17.6 million in 2002 and $18.9 million in 2001.
During 2003 and 2002 Riggs continued to streamline and consolidate its London based operations. As a result, it is attempting to sell a facility there and, because of a continued depressed real estate market in the City of London, wrote down the carrying value of this building by $3.8 million in the second quarter of 2003. This was in addition to a write down of this building by $1.3 million in the fourth quarter of 2002. These write downs were based upon consultation with real estate experts and are included in other noninterest expense in the Consolidated Statements of Operations.
At December 31, 2003, Riggs is committed to the following future minimum lease payments under non-cancelable operating lease agreements overing equipment and premises. These commitments expire intermittently through 2024.
MINIMUM LEASE | ||||
(IN THOUSANDS) | PAYMENTS | |||
2004
|
$ | 8,472 | ||
2005
|
7,198 | |||
2006
|
6,362 | |||
2007
|
5,157 | |||
2008
|
4,322 | |||
2009 and thereafter
|
12,967 | |||
Total Minimum Lease Payments
|
$ | 44,478 | ||
Total minimum operating lease payments included in the preceding table have not been reduced by future minimum payments from sublease rental agreements that expire through 2005. Minimum sublease rental income for 2004 is expected
58
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
Rental Expense
|
$ | 9,563 | $ | 9,114 | $ | 9,439 | ||||||||
Sublease Rental Income
|
(300 | ) | (481 | ) | (1,007 | ) | ||||||||
Net Rental Expense
|
$ | 9,263 | $ | 8,633 | $ | 8,432 | ||||||||
In the normal course of business, Riggs also leases space to others in buildings it owns. This rental income amounted to $2.4 million in 2003, and $2.3 million in 2002 and 2001 and it is accounted for as a credit to occupancy expense. For 2004, the Company anticipates that minimum rental income from the leasing of space in owned buildings will be approximately $2.1 million.
NOTE 7: TIME DEPOSITS $100 THOUSAND OR MORE
The aggregate amount of time deposits in domestic offices, each with a minimum balance of $100 thousand, was $315.0 million and $1.42 billion at December 31, 2003 and 2002, respectively. This decrease of $1.12 billion was due primarily to the previously described change in the method by which the U.S. Treasury compensates financial agent banks such as Riggs.
Approximately 96% of time deposits in foreign offices were in denominations of $100 thousand or more at December 31, 2003 compared to about 89% at December 31, 2002.
Total time deposits at December 31, 2003 had the following scheduled maturities:
(IN THOUSANDS) | ||||||
2004
|
$ | 799,884 | ||||
2005
|
95,943 | |||||
2006
|
25,599 | |||||
2007
|
13,940 | |||||
2008
|
3,925 | |||||
2009 and thereafter
|
6 | |||||
Total
|
$ | 939,297 | ||||
NOTE 8: BORROWINGS
Short-Term Borrowings
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Federal Funds Purchased
|
$ | 64,500 | $ | 10,150 | ||||||
Repurchase Agreements
|
454,211 | 448,948 | ||||||||
Other Short-Term Borrowings
|
11,671 | 11,274 | ||||||||
Total Short-Term Borrowings
|
$ | 530,382 | $ | 470,372 | ||||||
Additional information regarding short-term borrowings is as follows:
(IN THOUSANDS, EXCEPT RATES) | 2003 | 2002 | 2001 | |||||||||||
Average Outstanding1
|
$ | 442,180 | $ | 451,068 | $ | 493,282 | ||||||||
Maximum Outstanding at any Month-End
|
530,382 | 578,463 | 596,620 | |||||||||||
Weighted-Average Rate Paid1
|
1.10 | % | 1.54 | % | 3.53 | % | ||||||||
Year-End Rate
|
0.60 | % | 0.63 | % | 1.14 | % | ||||||||
1 Average amounts are based on daily balances. Average rates are computed by dividing actual interest expense by average amounts outstanding. |
59
The Company has a credit facility with the Federal Home Loan Bank of Atlanta (FHLB) in the amount of $815.0 million that is secured by a blanket lien agreement. The Company has $396.0 million of available credit under this facility at December 31, 2003. The Company also has a credit facility with the Federal Reserve for $127.0 million which is secured by an assignment of commercial loans and has not been drawn on at December 31, 2003. The Company also has two short-term, unsecured bank credit lines totaling $109.5 million of which $64.5 million is utilized at December 31, 2003. The blanket lien agreement with the FHLB and the collateral assignment to the Federal Reserve are applicable to both short and long term borrowings.
Long-Term Borrowings
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Subordinated Debentures
|
$ | 66,525 | $ | 66,525 | ||||||
FHLB Advances
|
419,000 | 292,000 | ||||||||
Repurchase Agreements
|
206,000 | | ||||||||
Payable to Issuers of Trust Preferred Securities
|
360,808 | | ||||||||
$ | 1,052,333 | $ | 358,525 | |||||||
The $66.5 million of subordinated debentures have a 9.65% fixed rate, mature in 2009 and cannot be called. Issuance costs related to this debt are being amortized as a component of interest expense making the effective cost of this debt 9.73%. These debentures qualify as tier II regulatory capital.
In 2003 and 2002, Riggs borrowed $127.0 million and $292.0 million, respectively from the FHLB. These advances have maturity dates through 2007 and carry a blended interest rate of 2.58%. Of the $419.0 million total of FHLB advances, $50.0 million is callable in 2004 and $25.0 million is callable in 2005. This debt matures as follows:
TOTAL ADVANCE | WEIGHTED- | |||||||||
(IN THOUSANDS, EXCEPT RATES) | AMOUNTS | AVERAGE RATE | ||||||||
2004
|
$ | 140,000 | 2.37 | % | ||||||
2005
|
67,000 | 3.15 | ||||||||
2006
|
162,000 | 2.45 | ||||||||
2007
|
50,000 | 2.80 | ||||||||
$ | 419,000 | 2.58 | % | |||||||
In 2003 the Company borrowed $206.0 million under long-term repurchase agreements. These repurchase agreements have maturity dates through 2007 and carry a blended interest rate of 1.64%. Of the $206.0 million, $100.0 million is callable in 2004. This debt matures as follows:
TOTAL REPURCHASE | WEIGHTED- | |||||||||
(IN THOUSANDS, EXCEPT RATES) | AMOUNTS | AVERAGE RATE | ||||||||
2005
|
$ | 11,000 | 1.63 | % | ||||||
2006
|
150,000 | 1.25 | ||||||||
2007
|
45,000 | 2.97 | ||||||||
$ | 206,000 | 1.64 | % | |||||||
NOTE 9: COMMITMENTS AND CONTINGENCIES
Riggs issues primarily two types of letters of credit: commercial and stand-by. Commercial letters of credit are normally short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. Commercial letters of credit are contingent upon the satisfaction of specified conditions and, therefore, they represent a loss exposure if the customer defaults on the underlying transaction.
Stand-by letters of credit can be either financial or performance-based. Financial stand-by letters of credit obligate the Company to disburse funds to a third party if the Riggs customer fails to repay an outstanding loan or debt instrument.
60
Commitments to extend credit and letters of credit outstanding at December 31 are as follows:
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Commitments to extend credit
|
$ | 1,327,070 | $ | 1,039,724 | ||||||
Commercial letters of credit
|
46,273 | 70,479 | ||||||||
Stand-by letters of credit
|
60,115 | 53,540 |
The above commitment amounts are not reflected in the Consolidated Statements of Condition and many of the commitments will expire without being drawn upon. Such commitments are issued upon careful evaluation of the financial condition of the customer.
The Company is also committed to fund future venture capital investments. At December 31, 2003 and 2002, these commitments totaled $9.5 million and $15.9 million, respectively.
The Company has change of control agreements with 17 executive officers. The maximum amount payable under these contracts is approximately $9.5 million at December 31, 2003. The Company also has one employment contract that will expire on March 31, 2006. At December 31, 2003, the commitment for payment under this contract is approximately $743 thousand.
The Company has fully and unconditionally guaranteed the trust preferred securities issued by two subsidiary business trusts, as discussed in Note 11 of Notes to Consolidated Financial Statements.
In the normal course of business the Company is involved in various types of litigation and disputes which may lead to litigation. The Company, based upon an assessment of the facts and circumstances of actual, threatened and unasserted legal actions, and, when deemed necessary, after consultation with outside counsel, has determined that pending legal actions will not have a material impact on its financial condition or future operations. Losses involving actual, threatened and unasserted legal actions are reflected in the financial statements when it is determined a loss is probable and the amount of such loss can be reasonably estimated.
Consent Order and Notification of Possible Assessment of Civil Money Penalties
In July 2003, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order and a Consent Order (collectively the Consent Order) with the OCC. The provisions of the Consent Order are effective until such time as they are amended, suspended, waived or terminated by the OCC. The Consent Order requires the Bank to take various actions to ensure compliance and improve the monitoring of compliance with BSA and related rules and regulations. The Consent Order allows the OCC to take whatever future actions it deems necessary to fulfill its regulatory responsibilities. These actions could include the imposition of a monetary penalty, including a civil money penalty.
On March 2, 2004, the OCC advised the Bank that it was considering whether to institute a civil money penalty action against the Bank and that such action would be based upon the OCCs allegations that the Bank violated the BSA and related rules and regulations, failed to comply with the Consent Order discussed above and failed to implement adequate controls to ensure that the Bank operates in a safe and sound manner with respect to BSA matters. The amount of the civil money penalty being considered was not specified by the OCC. The OCC also informed the Bank that it may seek unspecified modifications to the Consent Order and/or an additional consent order. Many of the regulatory violations alleged by the OCC predate the Consent Order. Under OCC procedures, the Bank is afforded the opportunity to submit information bearing on the appropriate amount of any penalty to be assessed before the imposition of such a penalty.
The OCC also informed the Bank that it is considering whether to take measures that would generally subject the Bank to increased regulatory supervision and operational restrictions. In particular, the OCC advised the Bank that primarily as a direct result of its BSA criticisms, that it expects to designate the Bank as being in a troubled condition. A bank that is classified as being in a troubled condition must have any new director or executive officer approved in advance by the OCC and is subject, along with its holding company, to a prohibition on making severance payments to the Banks
61
Also on March 2, 2004, the Bank was advised by the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury that it was evaluating whether it is appropriate for FinCEN to assess a civil monetary penalty and/or take additional enforcement action against the Bank for alleged apparent willful violations of BSA and related rules and regulations. FinCEN generally categorizes its concerns as (1) failure to establish and implement an adequate anti-money laundering program, (2) failure to properly prepare and file suspicious activity reports, and (3) failure to file accurate currency transaction reports. The amount of the civil money penalty being considered was not specified by FinCEN. Under FinCENs procedures, before it makes a determination as to the existence and willfulness of the Banks violations, the Bank is allowed to submit further information that is relevant to FinCENs evaluation of whether a civil money penalty and/or additional enforcement action is warranted for the alleged violations. The Company understands that the OCC and FinCEN are reviewing the involvement of employees, officers, and directors of the Bank with respect to the foregoing.
The Company cannot currently estimate the amount of any civil monetary penalty, if any, that either the OCC or FinCEN may assess.
The Bank expects these actions will increase the Banks costs of doing business.
NOTE 10: REGULATORY REQUIREMENTS
The Company and its subsidiaries, including the Bank, are subject to various regulatory restrictions including:
| The Bank must maintain non-interest earning reserves with the Federal Reserve against its deposits and Eurocurrency liabilities. At December 31, 2003 and 2002, the Companys reserves with the Federal Reserve were $167.3 million and $95.3 million, respectively. The average of such reserves was $70.1 million in 2003 and $53.3 million in 2002. |
| There are limitations on the amount of loans or advances that the Bank can make to the Company and any non-bank subsidiaries or affiliates. In addition, such loans and advances must be secured by collateral. At December 31, 2003, the Bank had total equity capital of $427.2 million, of which $121.6 million is retained earnings. |
| Regulations impose limitations on dividends that the Bank can pay to the Company. Generally, such dividends are limited to the earnings of the Bank for the current and prior two years less any dividend payments during the same period. However, dividends payable by the Bank and its subsidiaries are further limited by requirements for the maintenance of adequate capital. This limitation on dividends that the Bank can pay to the Company could adversely impact the Companys cash flow and its ability to pay future debt payments and dividends. Since regulatory authorities maintain that a holding company should be a source of financial strength for its subsidiary bank, dividends paid by the Bank to the Company may be restricted if the regulators conclude that the Companys operating expenses and debt servicing requirements place the Banks capital position at risk. At December 31, 2003, the retained earnings of the Bank were not available for payment of dividends to the Company. |
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and regulatory classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank maintain minimum ratios for total and tier I capital to risk-weighted assets and of tier I capital to average assets. As of December 31, 2003, the Company and the Bank exceed all applicable capital adequacy requirements.
As of December 31, 2003, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain total risk-based, tier I risk-based, and tier I leverages ratios as set forth in the table below.
62
TO BE WELL | ||||||||||||||||||||||||||
CAPITALIZED | ||||||||||||||||||||||||||
MINIMUM | UNDER | |||||||||||||||||||||||||
REQUIREMENTS | PROMPT | |||||||||||||||||||||||||
FOR CAPITAL | CORRECTIVE | |||||||||||||||||||||||||
ADEQUACY | ACTION | |||||||||||||||||||||||||
(Dollar Amounts In Millions) | ACTUAL | PURPOSES | PROVISIONS | |||||||||||||||||||||||
AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||||
AS OF DECEMBER 31, 2003
|
||||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||||
Consolidated
|
$ | 708 | 17.81 | % | $ | 318 | 8.00 | % | $ | 397 | 10.00 | % | ||||||||||||||
Riggs Bank
|
456 | 11.82 | 309 | 8.00 | 386 | 10.00 | ||||||||||||||||||||
Tier I Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||||
Consolidated
|
497 | 12.52 | 159 | 4.00 | 238 | 6.00 | ||||||||||||||||||||
Riggs Bank
|
428 | 11.08 | 154 | 4.00 | 232 | 6.00 | ||||||||||||||||||||
Tier I Leverage (to Average Assets):
|
||||||||||||||||||||||||||
Consolidated
|
497 | 8.41 | 237 | 4.00 | 296 | 5.00 | ||||||||||||||||||||
Riggs Bank
|
428 | 7.52 | 228 | 4.00 | 285 | 5.00 | ||||||||||||||||||||
AS OF DECEMBER 31, 2002
|
||||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||||
Consolidated
|
$ | 710 | 20.25 | % | $ | 280 | 8.00 | % | $ | 350 | 10.00 | % | ||||||||||||||
Riggs Bank
|
462 | 13.52 | 273 | 8.00 | 342 | 10.00 | ||||||||||||||||||||
Tier I Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||||
Consolidated
|
495 | 14.13 | 140 | 4.00 | 210 | 6.00 | ||||||||||||||||||||
Riggs Bank
|
436 | 12.76 | 137 | 4.00 | 205 | 6.00 | ||||||||||||||||||||
Tier I Leverage (to Average Assets):
|
||||||||||||||||||||||||||
Consolidated
|
495 | 7.85 | 252 | 4.00 | 315 | 5.00 | ||||||||||||||||||||
Riggs Bank
|
436 | 7.17 | 243 | 4.00 | 304 | 5.00 |
NOTE 11: | GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES |
The Company owns two business trusts, Riggs Capital and Riggs Capital II, each of which is a qualifying special purpose entity created for the purpose of issuing trust preferred securities. The trusts have used the proceeds from the issuance of the trust preferred securities to purchase the Companys subordinated debentures with comparable interest and repayment terms as the trust preferred securities. The following summarizes the terms of the trust preferred securities:
Series A | Series C | Total | ||||||
Amount Originally Issued
|
$150.0 million | $200.0 million | $350.0 million | |||||
Rate
|
8.625% | 8.875% | 8.768% | |||||
Liquidation Preference
|
$1,000/share | $1,000/share | ||||||
Earliest Redemption
|
12/31/06 | 3/15/07 | ||||||
Maturity
|
12/31/26 | 3/15/27 | ||||||
Dividends
|
semi-annual | semi-annual |
In the third quarter of 2003 the Company repurchased for cash $6.5 million of these trust preferred securities which had a blended coupon rate of 8.80%. $4.0 million of these repurchases were at par and $2.5 million of the repurchases were at a premium, which resulted in a direct after-tax decrease to shareholders equity of $97 thousand. During 2002 the Company repurchased for cash $101.4 million of these trust preferred securities which had a blended coupon rate of 8.73%. These repurchases were at a discount and resulted in a direct after-tax increase to shareholders equity of $7.4 million. There were no trust preferred security repurchases in the fourth quarter of 2003.
63
As a result of the above repurchases, the amounts of trust preferred securities outstanding at September 30, 2003 were as follows:
Series A | Series C | Total | ||||||
Amount Outstanding
|
$89.7 million | $152.4 million | $242.1 million | |||||
Rate
|
8.625% | 8.875% | 8.782% |
Through September 30, 2003, dividends on trust preferred securities were reflected in the Consolidated Statements of Operations as minority interest in income of subsidiaries, net of taxes. The trust preferred securities, with certain limitations, qualify as tier I capital.
Effective October 1, 2003, and in accordance with FIN 46R, the Company no longer consolidates Riggs Capital and Riggs Capital II. At the time of the adoption of FIN 46R and at December 31, 2003, Riggs owned $60.3 million of the Series A trust preferred securities and $47.6 million of the Series C trust preferred securities. In financial statements issued prior to October 1, 2003, the amount of trust preferred securities owned by Riggs was netted against the outstanding debt of Riggs Capital and Riggs Capital II and reported as minority interest in the Consolidated Statements of Condition. And, prior to October 1, 2003, the interest earned by the Company on the trust preferred securities it owned was reflected in the Consolidated Statements of Operations as a reduction of minority interest in income of subsidiaries, net of taxes. Beginning in the fourth quarter of 2003, the trust preferred securities owned by Riggs are classified as securities held to maturity in the Consolidated Statements of Condition and $360.8 million of debt that the Company has that is payable to Riggs Capital and Riggs Capital II is included in long-term debt. Commencing in the fourth quarter of 2003, interest earned on the trust preferred securities that the Company owns is reflected as a component of interest income and the cost of the debt payable to Riggs Capital and Riggs Capital II is included in interest expense.
During the first quarter of 2004, the Company acquired more than 50% of the debentures of one of the series and the Company intends to reconsolidate the subsidiary that issued the guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures. At December 31, 2003, the fair market value of repurchased securities classified as held to maturity is $115.3 million.
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 instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments
Securities
Venture Capital Investments
Loans
64
Deposit Liabilities
Short-Term Borrowings
Long-Term Debt
Guaranteed Preferred Beneficial Interests in Junior Subordinated Deferrable Interest Debentures
Derivative Instruments
Commitments to Extend Credit and Other Off-Balance Sheet Financial Instruments
Accrued Interest Receivable and Accrued Interest Payable
Estimated Fair Values of Financial Instruments
65
The estimated fair values of the Companys financial instruments are as follows:
DECEMBER 31, 2003 | DECEMBER 31, 2002 | |||||||||||||||||
CARRYING | FAIR | CARRYING | FAIR | |||||||||||||||
(IN THOUSANDS) | AMOUNT | VALUE | AMOUNT | VALUE | ||||||||||||||
Financial Assets:
|
||||||||||||||||||
Cash and Due from Banks
|
$ | 325,975 | $ | 325,975 | $ | 244,703 | $ | 244,703 | ||||||||||
Federal Funds Sold and Reverse Repurchase
Agreements
|
| | 610,000 | 610,000 | ||||||||||||||
Time Deposits with Other Banks
|
287,077 | 287,077 | 203,267 | 203,267 | ||||||||||||||
Securities Available for Sale
|
1,826,818 | 1,826,818 | 2,319,917 | 2,319,917 | ||||||||||||||
Securities Held to Maturity
|
107,891 | 115,319 | | | ||||||||||||||
Venture Capital Investments
|
43,356 | 43,356 | 49,419 | 49,419 | ||||||||||||||
Total Net Loans
|
3,196,869 | 3,326,883 | 2,981,947 | 3,092,333 | ||||||||||||||
Accrued Interest Receivable
|
22,907 | 22,907 | 23,026 | 23,026 | ||||||||||||||
Financial Liabilities:
|
||||||||||||||||||
Deposits
|
4,286,232 | 4,290,538 | 5,238,997 | 5,244,858 | ||||||||||||||
Short-Term Borrowings
|
530,382 | 530,382 | 470,372 | 470,372 | ||||||||||||||
Long-Term Debt
|
1,052,333 | 1,088,349 | 358,525 | 363,078 | ||||||||||||||
Guaranteed Preferred Beneficial Interests in
Junior Subordinated Deferrable Interest Debentures
|
| | 248,584 | 248,584 | ||||||||||||||
Accrued Interest Payable
|
1,378 | 1,378 | 3,281 | 3,281 | ||||||||||||||
Derivative Instruments
|
$ | (3,862 | ) | $ | (3,862 | ) | $ | (2,867 | ) | $ | (2,867 | ) | ||||||
Off-Balance Sheet Commitments:
|
||||||||||||||||||
Commitments to Extend Credit
|
| | | | ||||||||||||||
Letters of Credit-Commercial
|
| | | | ||||||||||||||
Letters of Credit-Stand-By
|
167 | 167 | | | ||||||||||||||
Venture Capital Commitments
|
| | | | ||||||||||||||
NOTE 13: 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 for tax losses and tax credit carryforwards to the extent that realization of such assets is more likely than not.
Income before taxes and minority interest relating to the operations of domestic offices and foreign offices are as follows:
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
Domestic Offices
|
$ | 17,307 | $ | 43,335 | $ | 15,026 | ||||||||
Foreign Offices
|
(1,363 | ) | 2,068 | (7,468 | ) | |||||||||
Total
|
$ | 15,944 | $ | 45,403 | $ | 7,558 | ||||||||
66
Components of income tax provision (benefit) are as follows:
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
Current Provision (Benefit):
|
||||||||||||||
Federal
|
$ | 10,364 | $ | 16,144 | $ | (2,093 | ) | |||||||
State
|
11 | 114 | 297 | |||||||||||
Foreign
|
9 | 70 | | |||||||||||
Total Current Provision (Benefit):
|
10,384 | 16,328 | (1,796 | ) | ||||||||||
Deferred Provision (Benefit):
|
||||||||||||||
Federal
|
(5,998 | ) | (857 | ) | 13,784 | |||||||||
State
|
| | (913 | ) | ||||||||||
Total Deferred Provision
|
(5,998 | ) | (857 | ) | 12,871 | |||||||||
Provision for Income Tax Expense
|
$ | 4,386 | $ | 15,471 | $ | 11,075 | ||||||||
The income tax benefit recorded in shareholders equity reflecting the benefit of the return deduction relating to employee stock option exercises was $200 thousand, $15 thousand and $151 thousand for 2003, 2002 and 2001, respectively.
At December 31, 2003 and 2002, the Company maintained a valuation allowance against deferred tax assets of approximately $7.6 million and $6.4 million respectively, as a result of uncertainty related to the utilization of deferred tax amounts generated by foreign subsidiaries. In addition, the Company maintained a valuation allowance of approximately $6.9 million and $5.4 at December 31, 2003 and 2002, respectively, attributable to capital losses on venture capital investments. The Company has concluded that it is more likely than not that the remaining deferred tax assets which are attributable to losses from venture capital operations will be realized through capital gains generated by its venture capital operations or through capital gains generated elsewhere within the Company. Riggs also established a valuation allowance of approximately $1.3 million and $230 thousand during 2003 and 2002 attributable to write-downs on other capital assets. The Company has concluded that it is more likely than not that the remaining deferred tax asset attributable to this asset write-down will be realized through capital gains generated elsewhere within the Company or through other tax planning strategies.
Income tax expense related to minority interest was $5.7 million, $9.1 million and $10.7 million in 2003, 2002 and 2001, respectively.
Reconciliation of Statutory Tax Rates to Effective Tax Rates:
(IN THOUSANDS, EXCEPT PERCENTAGES) | 2003 | 2002 | 2001 | |||||||||||
Income Tax Computed at Federal Statutory Rate of
35%
|
$ | 5,580 | $ | 15,891 | $ | 2,645 | ||||||||
Add (Deduct):
|
||||||||||||||
State Tax, Net of Federal Tax Benefit
|
7 | 74 | (400 | ) | ||||||||||
Tax-Exempt Interest
|
(2,878 | ) | (2,477 | ) | (1,760 | ) | ||||||||
Increase in Tax Credits
|
(1,893 | ) | (242 | ) | (394 | ) | ||||||||
Increase of Valuation Allowance
|
4,528 | 726 | 9,334 | |||||||||||
Nontaxable Life Insurance
|
(1,143 | ) | (432 | ) | (319 | ) | ||||||||
Other, Net
|
185 | 1,931 | 1,969 | |||||||||||
Provision for Income Tax Expense
|
4,386 | 15,471 | 11,075 | |||||||||||
Effective Tax Rate
|
27.5 | % | 34.1 | % | 146.5 | % | ||||||||
At December 31, 2003 and 2002, the Company maintained a domestic net operating loss carryforward of approximately $49.3 million and $45.7 million, respectively. The domestic net operating loss carryforward will begin expiring in the year 2020. A portion of the domestic net operating loss carryforward is subject to separate return limitation year restrictions. However, we believe it is more likely than not the full domestic net operating loss carryforward will be fully utilized. At December 31, 2003 and 2002, the Company maintained a foreign net operating loss carryforward of approximately $20.8 million and $15.0 million, respectively.
67
The net deferred tax liability is included in other liabilities in the Consolidated Statements of Condition. The Company believes that it is more likely than not that deferred tax assets will be realized, except in cases where valuation allowances have been established against these assets. 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, 2003 and 2002 are detailed below:
Sources of Temporary Differences Resulting in Deferred Tax Liabilities (Assets):
(IN THOUSANDS) | 2003 | 2002 | ||||||||
Excess Tax Over Book Depreciation-Domestic
|
$ | 741 | $ | 2,010 | ||||||
Pension Plan and Post-Retirement
|
15,370 | 16,648 | ||||||||
Capitalized Costs
|
2,962 | 1,553 | ||||||||
Subsidiary Dividend Deferral
|
9,184 | 14,135 | ||||||||
Unrealized Hedging Gains and Losses-Foreign
|
23 | (7 | ) | |||||||
Other, Net-Domestic
|
326 | 504 | ||||||||
Other, Net-Foreign
|
89 | 181 | ||||||||
Total Deferred Tax Liabilities
|
28,695 | 35,024 | ||||||||
Unrealized Venture Capital Losses
|
(8,720 | ) | (11,833 | ) | ||||||
Unrealized Securities Gains and Losses
|
(2,677 | ) | 6,864 | |||||||
Excess Tax Over Book Depreciation-Foreign
|
(1,021 | ) | (1,138 | ) | ||||||
Allowance for Loan Losses-Domestic
|
(9,346 | ) | (8,038 | ) | ||||||
Allowance for Loan Losses-Foreign
|
(490 | ) | (911 | ) | ||||||
Accrual to Cash Basis Conversion
|
(1,601 | ) | (2,043 | ) | ||||||
Charitable Contribution Carryforward
|
(222 | ) | | |||||||
Capital Loss Carryforward
|
(2,716 | ) | | |||||||
Tax Credit Carryforward
|
(3,599 | ) | (1,706 | ) | ||||||
Net Operating Loss Carryforward-Domestic
|
(17,260 | ) | (15,982 | ) | ||||||
Net Operating Loss Carryforward-Foreign
|
(6,073 | ) | (4,308 | ) | ||||||
Unrealized Hedging Gains and Losses-Domestic
|
(831 | ) | (1,673 | ) | ||||||
Other, Net-Domestic
|
(2,019 | ) | (1,214 | ) | ||||||
Other, Net-Foreign
|
(103 | ) | (257 | ) | ||||||
Total Deferred Tax Assets
|
(56,678 | ) | (42,239 | ) | ||||||
Valuation Allowances (Foreign and Domestic)
|
16,593 | 12,065 | ||||||||
Net Deferred Tax (Asset) Liability
|
$ | (11,390 | ) | $ | 4,850 | |||||
NOTE 14: BENEFIT PLANS
Pension Plans
Riggs Bank Europe Ltd.
Riggs National Corporation
68
The Companys funding policy is to contribute an amount equal to the greater of the minimum annual required contribution according to ERISA and the IRS and the amount necessary to ensure the market value of assets are at least as great as the Unfunded Accumulated Benefit Obligation according to SFAS 87-Employers Accounting for Pensions.
The assets of the pension plan consist primarily of equity and fixed income mutual funds, which are held in trust. Some of these mutual funds are part of an Immediate Participation Guarantee contract with a life insurance company. Over the past two pension plan years, approximately 14% of plan assets were invested in the Riggs Funds, mutual funds which were an affiliate of the Company.
The allocation of pension plan assets at December 31 were:
2003 | 2002 | |||||||||
Cash and cash equivalents
|
2 | % | 2 | % | ||||||
Domestic equity mutual funds
|
49 | 44 | ||||||||
International equity mutual funds
|
10 | 9 | ||||||||
High grade fixed income mutual funds
|
35 | 41 | ||||||||
High yield fixed income mutual funds
|
4 | 4 | ||||||||
100 | % | 100 | % | |||||||
Health and Insurance Benefits
Similar benefits for active employees are provided through an insurance company and several health maintenance organizations. The Company recognizes the cost of providing benefits by expensing the annual insurance premiums, which, net of employee contributions, were $6.6 million in 2003, $5.2 million in 2002, and $4.8 million in 2001.
Riggs accounts for postretirement benefits under SFAS 106, Employers Accounting for Postretirement Benefits Other than Pensions. SFAS 106 requires accrual of the expected cost of benefits during the years that the employee renders the necessary service. Adoption of SFAS 106 in 1993 resulted in an accumulated transition obligation of $13.0 million which is being recognized over a 20-year period. Riggs incurred $2.2 million in 2003 for postretirement health and life insurance expenses, which included $357 thousand relating to the amortization of the transition obligation. This compares to $4.2 million in health and life insurance expenses for 2002 and $2.0 million for 2001, with transition obligation amortization of $357 thousand in each of those years.
The yearly benefits expected to be paid to participants in the domestic pension plan and the retiree health and life insurance plans are as follows:
Domestic | Postretirement | |||||||||
(IN MILLIONS) | Pension Plan | Plans | ||||||||
2004
|
$ | 6.8 | $ | 1.4 | ||||||
2005
|
6.8 | 1.4 | ||||||||
2006
|
6.7 | 1.4 | ||||||||
2007
|
6.8 | 1.4 | ||||||||
2008 and thereafter
|
236.4 | 82.0 | ||||||||
The expected benefits to be paid are based on the same assumptions used to measure the Companys benefit obligations at December 31, 2003 and include estimated future employee service.
The measurement date for the pension and postretirement plans is December 31, 2003.
69
At December 31, 2003, the Company attempted to maintain approximately 60% of the pension plan assets in equity securities and 40% in fixed income securities. This target allocation is adjusted periodically based upon the Companys assessment of such factors as equity market conditions and trends, current and anticipated interest rates, the shape of the yield curve, the interest rate futures market and general domestic and international economic conditions and trends. Consideration is given to the demographics of the retiree population and active employees approaching retirement.
The pension plan has an investment policy that includes investment guidelines for equity, fixed income, cash, and cash equivalents and other investments. These guidelines include the minimum and maximum percentage of the plan assets that may be invested in various types of investments. The policy also specifies the maximum amount that can be invested in a single issuer and industry and identifies prohibited types of investments and transactions. The goal of the investment policy is to preserve the capital of the plans assets and maximize investment earnings in excess of inflation, while maintaining acceptable levels of volatility.
The long-term expected rate of return on plan assets was 8.0% in 2003 and 2002 but will be reduced to 7.5% in 2004. The discount rate for valuing plan liabilities was 6.0% and 6.5% at December 31, 2003 and 2002, respectively, and is projected to be 6.0% at December 31, 2004. The Company believes that the assumed return on plan assets of 7.5% is reasonable over the long-term given the investment flexibility in the plan investment policy and long-term historical returns achieved on the types of assets in which the plan invests. The Company further believes that the targeted long-term return on investments is appropriate given the current funding status relative to its benefit obligation and the fact that participation in the plan and benefits accruing under the plan have been frozen.
CHANGE IN PENSION BENEFIT OBLIGATION
RIGGS NATIONAL | ||||||||||||||||||
(IN THOUSANDS) | CORPORATION | RBEL | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
Benefit Obligation at Beginning of Year
|
$ | 100,241 | $ | 96,929 | $ | 6,013 | $ | 4,793 | ||||||||||
Service Cost
|
240 | 388 | | | ||||||||||||||
Interest Cost
|
6,320 | 6,398 | 336 | 272 | ||||||||||||||
Actuarial Loss
|
13,288 | 9,991 | 2,182 | 916 | ||||||||||||||
Benefits and Expenses Paid
|
(10,701 | ) | (7,078 | ) | (430 | ) | (465 | ) | ||||||||||
Curtailment
|
| (6,387 | ) | | | |||||||||||||
Other1
|
| | 665 | 497 | ||||||||||||||
Benefit Obligation at End of Year
|
$ | 109,388 | $ | 100,241 | $ | 8,766 | $ | 6,013 | ||||||||||
1 | Represents Foreign Exchange Translation Adjustments |
CHANGE IN PLAN ASSETS
RIGGS NATIONAL | ||||||||||||||||||
(IN THOUSANDS) | CORPORATION | RBEL | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
Fair Value of Plan Assets at Beginning of Year
|
$ | 101,692 | $ | 94,695 | $ | 4,327 | $ | 5,441 | ||||||||||
Actual Return on Plan Assets
|
18,643 | (6,925 | ) | 793 | (1,051 | ) | ||||||||||||
Employer Contributions
|
1,500 | 21,000 | | | ||||||||||||||
Plan Participants Contribution
|
| | | (66 | ) | |||||||||||||
Benefits and Expenses Paid
|
(10,701 | ) | (7,078 | ) | (430 | ) | (465 | ) | ||||||||||
Other1
|
| | 517 | 468 | ||||||||||||||
Fair Value of Plan Assets at End of Year
|
$ | 111,134 | $ | 101,692 | $ | 5,207 | $ | 4,327 | ||||||||||
Funded Status
|
$ | 1,746 | $ | 1,451 | $ | (3,559 | ) | $ | (1,686 | ) | ||||||||
Unrecognized Net Actuarial Loss
|
54,285 | 57,083 | 4,033 | 2,449 | ||||||||||||||
Unrecognized Prior Service Cost
|
(124 | ) | (244 | ) | | | ||||||||||||
Prepaid Pension Cost
|
$ | 55,907 | $ | 58,290 | $ | 474 | $ | 763 | ||||||||||
1 | Represents Foreign Exchange Translation Adjustments |
70
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
RIGGS NATIONAL | ||||||||||||||||||||||||||
CORPORATION | RBEL | |||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Discount Rate
|
6.00 | % | 6.50 | % | 7.25 | % | 5.50 | % | 5.50 | % | 5.75 | % | ||||||||||||||
Expected Return on Plan Assets
|
8.00 | % | 8.00 | % | 8.00 | % | 5.50 | % | 5.50 | % | 5.75 | % | ||||||||||||||
Rate of Compensation Increase
|
N/A | N/A | 5.25 | % | N/A | N/A | N/A |
COMPONENTS OF NET PERIODIC PENSION COST
(IN THOUSANDS) | ||||||||||||||||||||||||
Service Cost
|
$ | 240 | $ | 388 | $ | 1,433 | $ | 424 | $ | 507 | $ | 549 | ||||||||||||
Interest Cost
|
6,320 | 6,398 | 5,886 | 337 | 272 | 298 | ||||||||||||||||||
Expected Return on Plan Assets
|
(7,875 | ) | (7,595 | ) | (6,300 | ) | (243 | ) | (308 | ) | (364 | ) | ||||||||||||
Amortization of Prior Service Cost
|
(120 | ) | (137 | ) | (112 | ) | | | 101 | |||||||||||||||
Recognized Net Actuarial Loss (Gain)
|
5,319 | 3,622 | 1,405 | 250 | 9 | (85 | ) | |||||||||||||||||
Other1
|
| | | 2 | 102 | 5 | ||||||||||||||||||
Net Periodic Cost
|
$ | 3,884 | $ | 2,676 | $ | 2,312 | $ | 770 | $ | 582 | $ | 504 | ||||||||||||
1 | Represents Foreign Exchange Translation Adjustments |
The funded status of the postretirement projected benefit obligation is as follows:
RIGGS NATIONAL | ||||||||||
(IN THOUSANDS) | CORPORATION | |||||||||
2003 | 2002 | |||||||||
Benefit Obligation at Beginning of Year
|
$ | 28,105 | $ | 20,282 | ||||||
Service Cost
|
518 | 861 | ||||||||
Interest Cost
|
1,664 | 1,725 | ||||||||
Actuarial Loss
|
9,144 | 6,297 | ||||||||
Benefits Paid
|
(1,222 | ) | (1,060 | ) | ||||||
Plan Amendments
|
(9,207 | ) | | |||||||
Benefit Obligation at End of Year
|
$ | 29,002 | $ | 28,105 | ||||||
Unrecognized Net Actuarial Loss
|
(20,492 | ) | (14,036 | ) | ||||||
Unrecognized Prior Service Cost
|
6,138 | | ||||||||
Unrecognized Transition Obligation
|
(3,211 | ) | (3,567 | ) | ||||||
Accrued Postretirement Benefit Cost
|
$ | 11,437 | $ | 10,502 | ||||||
The net periodic costs for postretirement health and life insurance benefits are as follows:
(IN THOUSANDS) | RIGGS NATIONAL CORPORATION | |||||||||||||
2003 | 2002 | 2001 | ||||||||||||
Service Cost
|
$ | 518 | $ | 861 | $ | 437 | ||||||||
Interest Cost
|
1,664 | 1,725 | 1,141 | |||||||||||
Amortization of Transition Amount
|
357 | 357 | 357 | |||||||||||
Amortization of Prior Service Costs
|
(3,069 | ) | | (348 | ) | |||||||||
Recognized Net Actuarial Loss
|
2,688 | 1,173 | 427 | |||||||||||
Net Periodic Cost
|
$ | 2,158 | $ | 4,116 | $ | 2,014 | ||||||||
The assumed health care cost trend rate averaged 11.0% for 2003, gradually decreasing to 5.0% by the year 2009 and remaining constant thereafter. An average rate of 12.0% was used in 2002. A discount rate of 6.0% was used at December 31, 2003 and a rate of 6.50% was used at December 31, 2002 to determine the projected postretirement benefit
71
Stock Option Plans
The Board of Directors and shareholders of the Company approved stock option plans in 1993, 1994, and 1996 under which options to purchase shares of common stock were granted to key employees. The exercise price could not be less than the fair market value of the common stock at the date of grant. For options under these plans, the vesting periods have ranged from zero to three years. All stock options have a life of 10 years. The total number of shares of common stock reserved for issuance upon exercise of options granted were 1,250,000, 1,250,000, and 9,000,000 for the 1993, 1994, and 1996 Plans, respectively. In 2002, the Board of Directors terminated these plans. The Board and shareholders of the Company in 2002 approved a 2002 Long-Term Incentive Plan. As options under the 1993, 1994 and 1996 plans are terminated, a corresponding amount is added to the total number of shares of common stock reserved for issuance upon exercise of options granted under the new 2002 Plan.
A summary of the stock option activity under the 1993, 1994, 1996 and 2002 Plans follows:
WEIGHTED- | ||||||||
AVERAGE | ||||||||
STOCK | EXERCISE | |||||||
OPTIONS | PRICE | |||||||
Outstanding at December 31, 2000
|
6,254,954 | $ | 18.97 | |||||
Granted
|
1,315,625 | 15.36 | ||||||
Exercised
|
84,218 | 10.38 | ||||||
Terminated
|
1,464,188 | 29.00 | ||||||
Outstanding at December 31, 2001
|
6,022,173 | $ | 15.86 | |||||
Granted
|
1,582,202 | 13.19 | ||||||
Exercised
|
16,319 | 12.20 | ||||||
Terminated
|
202,896 | 17.52 | ||||||
Outstanding at December 31, 2002
|
7,385,160 | $ | 15.25 | |||||
Granted
|
1,506,369 | 13.86 | ||||||
Exercised
|
158,561 | 12.09 | ||||||
Terminated
|
437,520 | 15.30 | ||||||
Outstanding at December 31, 2003
|
8,295,448 | $ | 15.05 | |||||
Prior to 2002, members of the Board of Directors of the Company were eligible to participate in the 1997 Non-employee Directors Stock Option Plan (the 1997 Plan). Under the 1997 Plan, options to purchase up to 600,000 shares of common stock could be granted to non-employee directors of the Company or a subsidiary. The exercise price could not be less than the fair market value of the common stock at the date of grant, with vesting occurring at the date of grant. This 1997 Plan also was terminated by the Board of Directors in 2002. Non-employee directors are eligible to participate in the 2002 Long-Term Incentive Plan.
72
A summary of the stock option activity under the 1997 Plan follows:
WEIGHTED- | ||||||||
AVERAGE | ||||||||
STOCK | EXERCISE | |||||||
OPTIONS | PRICE | |||||||
Outstanding at December 31, 2000
|
375,000 | $ | 19.02 | |||||
Granted
|
40,000 | 17.00 | ||||||
Exercised
|
7,500 | 13.13 | ||||||
Terminated
|
| | ||||||
Outstanding at December 31, 2001
|
407,500 | $ | 18.98 | |||||
Granted
|
| | ||||||
Exercised
|
| | ||||||
Terminated
|
32,500 | 19.63 | ||||||
Outstanding at December 31, 2002
|
375,000 | $ | 18.87 | |||||
Granted
|
| | ||||||
Exercised
|
| | ||||||
Terminated
|
| | ||||||
Outstanding at December 31, 2003
|
375,000 | $ | 18.87 | |||||
At December 31, 2003, weighted-average details for all stock options outstanding follow:
OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||||
WEIGHTED- | ||||||||||||||||||||||
NUMBER | AVERAGE | WEIGHTED- | NUMBER | WEIGHTED- | ||||||||||||||||||
RANGE OF | OUTSTANDING | REMAINING | AVERAGE | EXERCISABLE AT | AVERAGE | |||||||||||||||||
EXERCISE | AT DECEMBER 31, | CONTRACTUAL | EXERCISE | DECEMBER 31, | EXERCISE | |||||||||||||||||
PRICE | 2003 | LIFE (YEARS) | PRICE | 2003 | PRICE | |||||||||||||||||
$ | 9.38 TO $12.38 | 2,090,500 | 2.9 | $ | 11.50 | 2,090,500 | $ | 11.50 | ||||||||||||||
$ | 13.13 TO $17.56 | 4,249,782 | 9.2 | 14.07 | 2,328,135 | 14.20 | ||||||||||||||||
$ | 19.50 TO $20.50 | 2,120,666 | 5.7 | 19.86 | 2,120,666 | 19.86 | ||||||||||||||||
$ | 25.88 TO $30.25 | 209,500 | 5.5 | 28.60 | 209,500 | 28.60 | ||||||||||||||||
$ | 9.38 TO $30.25 | 8,670,448 | 6.7 | $ | 15.22 | 6,748,801 | $ | 15.59 | ||||||||||||||
Other Benefit Plans
During 2002, the Company terminated the Supplemental Executive Retirement Plan that provided supplemental retirement income and preretirement death benefits to certain key employees. The amount of benefits was based on the participants corporate title, functional responsibility and service as a key employee. Upon the later of a participants termination of employment or attainment of age 62, the participant would have received the vested portion of the supplemental retirement benefit, payable for the life of the participant, but for no more than 15 years. Upon Plan termination, the current liability for active participants with greater than one year of service prior to their retirement was transferred into our Executive Deferred Compensation Plan. Vested participants who are no longer employed by the Company have been paid an amount equal to the current value of their benefit. Vested participants who were receiving benefits will continue to receive them. At December 31, 2003 the Company had a $642 thousand pension benefit obligation for this supplemental plan, compared with $1.1 million at year-end 2002. Accrued pension costs were $690 thousand at year-end 2003 and $1.1 million at year-end 2002. This supplemental plan has no assets and incurred $41 thousand in net periodic costs in 2003, compared with $306 thousand and $298 thousand for 2002 and 2001, respectively. Payments from this plan will be approximately $97 thousand per year through 2007 and $523 thousand thereafter.
Riggs sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code that is available to all domestic employees who meet certain age and length of service requirements (the 401(k) Plan). In 2002 Riggs began match funding employee contributions 100% up to a maximum of 6% of an employees eligible yearly earnings. Prior to 2002, Riggs match funded employee contributions 100% on the first $100 the employee contributed and 50% thereafter up
73
The Company grants awards to certain key executives under Deferred Time Vested Stock and Performance Time Vested Stock Agreements which are discussed in Stock-Based Compensation Plans in Note 1.
The Company has an Executive Deferred Compensation Plan to allow certain employees to defer wages and non-employee directors to defer directors fees. Under the plan, non-employee directors may elect to defer fees and have the deferred amounts treated as having been invested in cash, shares of the Companys common stock, or a combination of cash and stock.
NOTE 15: FOREIGN ACTIVITIES
Foreign activities are those conducted with customers domiciled outside of the United States, regardless of the location of the banking office utilized by these customers. Because foreign activity is integrated within the Company, it is not possible to definitively classify the customers activities as entirely domestic or foreign.
The following table reflects changes in the reserve for loan losses on loans to foreign-domiciled customers. Allocations of the provision for loan losses are based upon actual charge-off experience and the risk inherent in the foreign loan portfolio.
FOREIGN RESERVE FOR LOAN LOSSES
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||
Balance, January 1
|
$ | 4,930 | $ | 11,651 | $ | 9,449 | ||||||
Provision for Loan losses
|
181 | (4,182 | ) | 5,943 | ||||||||
Loans Charged-Off
|
2,932 | 4,094 | 4,913 | |||||||||
Less: Recoveries on Charged-Off Loans
|
1,862 | 838 | 1,376 | |||||||||
Net Charge-Offs
|
1,070 | 3,256 | 3,537 | |||||||||
Foreign Exchange Translation Adjustments
|
251 | 717 | (204 | ) | ||||||||
Balance, December 31
|
$ | 4,292 | $ | 4,930 | $ | 11,651 | ||||||
The 2002 reversal in the foreign portfolio was taken as those reserves were no longer necessary since foreign nonperforming assets decreased by $2.0 million, or 77%, from the prior year end, aggregate loan balances decreased due to significant pay-downs and maturities and the Company sold $138.3 million in commercial loans and commitments at its London operations.
The following table reflects foreign assets by geographical location for the last three years and selected categories of the Consolidated Statements of Operations. Loans made to, or deposits placed with, a branch of a foreign bank located outside the foreign banks home country are considered as loans to, or deposits with, the foreign bank. To measure profitability of foreign activity, Riggs has established a funds pricing system for business units that are net users or providers of funds. When identifiable, noninterest income and expense are reflected in specific regions and the remainder is allocated based on earning assets identified in each geographical area.
74
GEOGRAPHICAL PERFORMANCE
INCOME BEFORE | ||||||||||||||||||||||||
TAXES AND | ||||||||||||||||||||||||
TOTAL ASSETS | TOTAL | TOTAL | MINORITY | NET INCOME | ||||||||||||||||||||
(IN THOUSANDS) | DECEMBER 31, | REVENUE | EXPENSES | INTEREST | (LOSS) | |||||||||||||||||||
Middle East and Africa
|
2003 | $ | 109,983 | $ | 6,265 | $ | 2,656 | $ | 3,609 | $ | 2,938 | |||||||||||||
2002 | 136,206 | 5,463 | 3,633 | 1,830 | 1,094 | |||||||||||||||||||
2001 | 129,563 | 9,576 | 7,172 | 2,404 | 1,563 | |||||||||||||||||||
Europe
|
2003 | $ | 360,686 | $ | 16,410 | $ | 34,826 | $ | (18,416 | ) | $ | (14,990 | ) | |||||||||||
2002 | 245,950 | 20,487 | 35,911 | (15,424 | ) | (9,219 | ) | |||||||||||||||||
2001 | 405,726 | 40,220 | 71,157 | (30,937 | ) | (32,705 | ) | |||||||||||||||||
Asia/Pacific
|
2003 | $ | 8,501 | $ | 458 | $ | 194 | $ | 264 | $ | 215 | |||||||||||||
2002 | 7,885 | 322 | 214 | 108 | 65 | |||||||||||||||||||
2001 | 10,284 | 754 | 566 | 188 | 123 | |||||||||||||||||||
South and Central America
|
2003 | $ | 51,182 | $ | 1,936 | $ | 2,163 | $ | (227 | ) | $ | (185 | ) | |||||||||||
2002 | 24,476 | 919 | 1,161 | (242 | ) | (145 | ) | |||||||||||||||||
2001 | 15,416 | 1,228 | 976 | 252 | 164 | |||||||||||||||||||
Caribbean
|
2003 | $ | 28,411 | $ | 1,652 | $ | 975 | $ | 677 | $ | 551 | |||||||||||||
2002 | 18,871 | 1,945 | 1,822 | 123 | 73 | |||||||||||||||||||
2001 | 115,828 | 13,607 | 10,816 | 2,791 | 1,814 | |||||||||||||||||||
Other
|
2003 | $ | 25,158 | $ | 1,331 | $ | 564 | $ | 767 | $ | 624 | |||||||||||||
2002 | 22,662 | 937 | 623 | 314 | 188 | |||||||||||||||||||
2001 | 961 | 142 | 106 | 36 | 23 | |||||||||||||||||||
Total Foreign
|
2003 | $ | 583,921 | $ | 28,052 | $ | 41,378 | $ | (13,326 | ) | $ | (10,847 | ) | |||||||||||
2002 | 456,050 | 30,073 | 43,364 | (13,291 | ) | (7,944 | ) | |||||||||||||||||
2001 | 677,778 | 65,527 | 90,793 | (25,266 | ) | (29,018 | ) | |||||||||||||||||
Percentage of Foreign to Consolidated
|
2003 | 9 | % | 10 | % | 16 | % | N/A | N/A | |||||||||||||||
2002 | 7 | 9 | 13 | N/A | N/A | |||||||||||||||||||
2001 | 11 | 17 | 24 | N/A | 124 | % | ||||||||||||||||||
Notes to Table
1) | Foreign assets at December 31, 2003, 2002 and 2001 exclude net pool funds contributed by foreign activities to fund domestic activities. |
2) | N/A-Due to losses posted by foreign business segments, percentage of income before taxes, minority interest and percentage of net income are not applicable. |
3) | Total expenses for Europe in 2001 includes $12.4 million of restructuring and other charges. See Note 2 of Notes to Consolidated Financial Statements. |
4) | Total assets for Middle East and Africa include $3.0 million and $19.9 million of overdrawn account balances for 2003 and 2002, respectively, approved under a guidance line of credit, to a single country. |
75
NOTE 16: PARENT COMPANY FINANCIAL STATEMENTS(1)
STATEMENTS OF OPERATIONS
(IN THOUSANDS) | 2003 | 2002 | 2001 | |||||||||||
Revenues
|
||||||||||||||
Dividends from Subsidiaries
|
$ | (15,174 | ) | $ | 54,019 | $ | | |||||||
Equity in Undistributed Earnings of Subsidiaries
|
35,621 | (23,329 | ) | (17,211 | ) | |||||||||
Interest on Time Deposit Placements
|
679 | 1,117 | 5,098 | |||||||||||
Interest on Reverse Repurchase Agreements
|
22 | 44 | 118 | |||||||||||
Interest and Dividends on Securities Available
for Sale
|
888 | 1,514 | 3,824 | |||||||||||
Interest and Dividends on Securities Held to
Maturity
|
2,356 | | | |||||||||||
Other Operating Income
|
2,462 | 2,572 | 14,804 | |||||||||||
Total Revenues
|
26,854 | 35,937 | 6,633 | |||||||||||
Operating Expenses
|
||||||||||||||
Interest Expense
|
38,094 | 33,610 | 38,107 | |||||||||||
Other Operating Expenses
|
4,872 | 3,575 | 5,159 | |||||||||||
Total Operating Expenses
|
42,966 | 37,185 | 43,266 | |||||||||||
Loss before Taxes
|
(16,112 | ) | (1,248 | ) | (36,633 | ) | ||||||||
Applicable Income Tax Benefit(2)
|
(17,091 | ) | (14,269 | ) | (13,256 | ) | ||||||||
Net Income (Loss)
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | |||||||
STATEMENTS OF CONDITION DECEMBER 31,
(IN THOUSANDS) | 2003 | 2002 | |||||||||
Assets
|
|||||||||||
Cash
|
$ | 1,762 | $ | 853 | |||||||
Time Deposits with Other Banks
|
54,000 | 45,000 | |||||||||
Intercompany Reverse Repurchase Agreements
|
6,000 | 6,200 | |||||||||
Securities Available for Sale
|
81,994 | 81,952 | |||||||||
Securities Held to Maturity
|
107,891 | | |||||||||
Loans
|
| 12,500 | |||||||||
Investment in Subsidiaries
|
470,061 | 518,196 | |||||||||
Other Assets
|
82,623 | 54,893 | |||||||||
Total Assets
|
$ | 804,331 | $ | 719,594 | |||||||
Liabilities
|
|||||||||||
Other Liabilities
|
$ | 3,478 | $ | 4,436 | |||||||
Long-Term Borrowings:
|
|||||||||||
Subordinated Debentures due 2009
|
66,525 | 66,525 | |||||||||
Junior Subordinated Deferrable Interest
Debentures, Series A, due 2026
|
154,640 | 96,174 | |||||||||
Junior Subordinated Deferrable Interest
Debentures, Series C, due 2027
|
206,168 | 163,218 | |||||||||
Total Long-Term Borrowings
|
427,333 | 325,917 | |||||||||
Total Liabilities
|
430,811 | 330,353 | |||||||||
Shareholders Equity
|
373,520 | 389,241 | |||||||||
Total Liabilities and Shareholders
Equity
|
$ | 804,331 | $ | 719,594 | |||||||
(1) | Parent Company financial statements reflect the adoption of FIN 46R as of October 1, 2003. FIN 46R does not allow restatement of prior year financial statements. |
(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. |
76
PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS) | 2003 | 2002 | 2001 | ||||||||||||||
Cash Flows from Operating
Activities:
|
|||||||||||||||||
Net Income (Loss)
|
$ | 979 | $ | 13,021 | $ | (23,377 | ) | ||||||||||
Adjustments to Reconcile Net Income to Net Cash
|
|||||||||||||||||
Provided by Operating Activities:
|
|||||||||||||||||
Depreciation Expense and Amortization
|
(861 | ) | (1,485 | ) | (2,297 | ) | |||||||||||
Increase in Other Assets, excluding Premises
& Equipment
|
(10,517 | ) | (13,728 | ) | (32 | ) | |||||||||||
Dividends in Excess of Earnings
|
15,174 | 23,328 | 17,211 | ||||||||||||||
Increase (Decrease) in Other Liabilities
|
(471 | ) | (1,563 | ) | 3,519 | ||||||||||||
Gain on Securities Sales
|
| | (11,308 | ) | |||||||||||||
Total Adjustments
|
3,325 | 6,552 | 7,093 | ||||||||||||||
Net Cash Provided by (Used in) Operating
Activities
|
4,304 | 19,573 | (16,284 | ) | |||||||||||||
Cash Flows from Investing
Activities:
|
|||||||||||||||||
Purchase of Securities Available for Sale
|
(1,515,155 | ) | (1,318,461 | ) | (1,808,280 | ) | |||||||||||
Proceeds from Sales of Securities Available for
Sale
|
| | 21,900 | ||||||||||||||
Proceeds from Maturities of Securities for Sale
|
1,516,000 | 1,338,000 | 1,800,000 | ||||||||||||||
Purchase of Securities Held to Maturity
|
(6,500 | ) | | | |||||||||||||
Net Decrease in Loans
|
12,500 | | | ||||||||||||||
Net Decrease in Premises & Equipment
|
1 | 2 | 24 | ||||||||||||||
Net Decrease (Increase) in Investments in
Subsidiaries
|
18,350 | 508 | (16,408 | ) | |||||||||||||
Net Increase in Investments in Unconsolidated
Subsidiaries
|
(17,351 | ) | | | |||||||||||||
Net Cash (Used in) Provided by Investing
Activities
|
7,845 | 20,049 | (2,764 | ) | |||||||||||||
Cash Flows from Financing
Activities:
|
|||||||||||||||||
Net Decrease in Long-Term Debt
|
| (87,837 | ) | | |||||||||||||
Net Proceeds from Issuance of Common Stock
|
3,526 | 215 | 1,154 | ||||||||||||||
Dividend Payments
|
(5,713 | ) | (5,701 | ) | (5,694 | ) | |||||||||||
Repurchase of Common Stock
|
(254 | ) | (12 | ) | | ||||||||||||
Net Cash Used in Financing
Activities
|
(2,441 | ) | (93,335 | ) | (4,540 | ) | |||||||||||
Effect of Exchange Rate Change
|
1 | | | ||||||||||||||
Net Increase (Decrease) in Cash and Cash
Equivalents
|
9,709 | (53,713 | ) | (23,588 | ) | ||||||||||||
Cash and Cash Equivalents at Beginning of Year
|
52,053 | 105,766 | 129,354 | ||||||||||||||
Cash and Cash Equivalents at End of Year
|
$ | 61,762 | $ | 52,053 | $ | 105,766 | |||||||||||
Supplemental Disclosures:
|
|||||||||||||||||
Interest Paid
|
$ | 38,042 | $ | 33,558 | $ | 38,055 | |||||||||||
Income Tax Payments
|
| | 146 | ||||||||||||||
77
NOTE 17: SEGMENT INFORMATION
DECEMBER 31, 2003
RIGGS | RIGGS | |||||||||||||||||||||||||||||||||
INTERNATIONAL | RIGGS & | CAPITAL | NATIONAL | |||||||||||||||||||||||||||||||
(IN THOUSANDS) | BANKING | BANKING | CO. | TREASURY | PARTNERS | OTHER | RECONCILIATION | CORPORATION | ||||||||||||||||||||||||||
NET INTEREST INCOME
|
||||||||||||||||||||||||||||||||||
Interest Income
|
$ | 145,298 | $ | 22,077 | $ | 5,488 | $ | 76,146 | $ | 13 | $ | 27,702 | $ | (40,082 | ) | $ | 236,642 | |||||||||||||||||
Interest Expense
|
22,047 | 19,213 | 2,452 | 23,289 | | 38,115 | (40,082 | ) | 65,034 | |||||||||||||||||||||||||
Funds Transfer Income (Expense)
|
10,686 | 39,048 | 10,434 | (75,007 | ) | (3,167 | ) | 18,006 | | | ||||||||||||||||||||||||
Net Interest Income (Loss), Tax-Equivalent
|
133,937 | 41,912 | 13,470 | (22,150 | ) | (3,154 | ) | 7,593 | | 171,608 | ||||||||||||||||||||||||
Provision for Loan Losses
|
(5,452 | ) | 390 | (81 | ) | | | (3 | ) | | (5,146 | ) | ||||||||||||||||||||||
Net Interest Income (Loss)
|
128,485 | 42,302 | 13,389 | (22,150 | ) | (3,154 | ) | 7,590 | | 166,462 | ||||||||||||||||||||||||
NONINTEREST INCOME
|
||||||||||||||||||||||||||||||||||
Noninterest Income- External Customers
|
46,256 | 5,997 | 42,501 | 16,499 | (4,060 | ) | 3,097 | | 110,290 | |||||||||||||||||||||||||
Intersegment Noninterest Income
|
2,763 | 6,024 | 2,991 | | | 2,030 | (13,808 | ) | | |||||||||||||||||||||||||
Total Noninterest Income
|
49,019 | 12,021 | 45,492 | 16,499 | (4,060 | ) | 5,127 | (13,808 | ) | 110,290 | ||||||||||||||||||||||||
NONINTEREST EXPENSE
|
||||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
3,913 | 1,083 | 1,236 | 23 | | 9,852 | | 16,107 | ||||||||||||||||||||||||||
Direct Expense
|
70,445 | 38,723 | 31,830 | 3,930 | 793 | 112,788 | | 258,509 | ||||||||||||||||||||||||||
Overhead and Support
|
66,193 | 16,676 | 16,251 | 2,624 | 320 | (102,064 | ) | (13,808 | ) | (13,808 | ) | |||||||||||||||||||||||
Total Noninterest Expense
|
140,551 | 56,482 | 49,317 | 6,577 | 1,113 | 20,576 | (13,808 | ) | 260,808 | |||||||||||||||||||||||||
Income (Loss) Before Taxes and Minority Interest
|
36,953 | (2,159 | ) | 9,564 | (12,228 | ) | (8,327 | ) | (7,859 | ) | | 15,944 | ||||||||||||||||||||||
Taxes
|
10,280 | 869 | 3,336 | (3,738 | ) | | (6,361 | ) | 4,386 | |||||||||||||||||||||||||
Minority Interest
|
| | | | (33 | ) | 10,612 | 10,579 | ||||||||||||||||||||||||||
Net Income
|
$ | 26,673 | $ | (3,028 | ) | $ | 6,228 | $ | (8,490 | ) | $ | (8,294 | ) | $ | (12,110 | ) | $ | | $ | 979 | ||||||||||||||
Total Average Assets
|
$ | 3,333,966 | $ | 674,742 | $ | 246,394 | $ | 2,853,710 | $ | 58,639 | $ | 757,206 | $ | (1,573,512 | ) | $ | 6,351,145 | |||||||||||||||||
The Companys reportable segments are strategic business units that provide diverse products and services within the financial services industry. Riggs has six reportable segments: Banking, International Banking, Riggs & Co. (wealth management), Treasury, Riggs Capital Partners (venture capital) and Other. These segments are described in further detail on the following pages.
Except for utilization of funds transfer pricing methodologies, the accounting policies for the segments are generally the same as those described in Note 1 of Notes to Consolidated Financial Statements. Riggs accounts for intercompany transactions as if the transactions were to third parties under market conditions. Overhead and support expenses are allocated to each operating segment based on number of employees, service usage and other factors relevant to the expense incurred. Geographic financial information is provided in Note 15 of Notes to Consolidated Financial Statements. The 2001 restructuring and other charges described in Note 2 of Notes to Consolidated Financial Statements are recorded in the Other segment as this presentation reflects how the Company manages and evaluates its segments.
Revenue and expense allocation formulas and funds transfer pricing methodologies may change. If necessary, prior periods are restated to reflect material changes in the components of the segments. Prior periods have not been restated to reflect changes in the Companys revenue and cost allocations and funds transfer pricing methodologies. In addition, revenues and expenses which are unusual or noncontrollable may be reflected in the Other segment, which is consistent with internal financial reporting, if management believes such presentation most accurately represents the remaining operating segments performance.
78
Reconciliations are provided from the segment totals to the consolidated financial statements. The reconciliations of noninterest income and noninterest expense offset as these items result from intercompany transactions and the reconciliation of total average assets represents the elimination of intercompany balances.
DECEMBER 31, 2002
RIGGS | RIGGS | |||||||||||||||||||||||||||||||||
INTERNATIONAL | RIGGS & | CAPITAL | NATIONAL | |||||||||||||||||||||||||||||||
(IN THOUSANDS) | BANKING | BANKING | CO. | TREASURY | PARTNERS | OTHER | RECONCILIATION | CORPORATION | ||||||||||||||||||||||||||
NET INTEREST INCOME
|
||||||||||||||||||||||||||||||||||
Interest Income
|
$ | 160,316 | $ | 27,860 | $ | 5,938 | $ | 92,195 | $ | 216 | $ | 34,324 | $ | (61,312 | ) | $ | 259,537 | |||||||||||||||||
Interest Expense
|
41,254 | 26,733 | 4,049 | 17,615 | | 38,390 | (61,312 | ) | 66,729 | |||||||||||||||||||||||||
Funds Transfer Income (Expense)
|
14,660 | 39,945 | 11,559 | (77,220 | ) | (3,600 | ) | 14,656 | | | ||||||||||||||||||||||||
Net Interest Income (Loss), Tax-Equivalent
|
133,722 | 41,072 | 13,448 | (2,640 | ) | (3,384 | ) | 10,590 | | 192,808 | ||||||||||||||||||||||||
Provision for Loan Losses
|
(3,644 | ) | 4,663 | | | | (1,440 | ) | | (421 | ) | |||||||||||||||||||||||
Net Interest Income (Loss)
|
130,078 | 45,735 | 13,448 | (2,640 | ) | (3,384 | ) | 9,150 | | 192,387 | ||||||||||||||||||||||||
NONINTEREST INCOME
|
||||||||||||||||||||||||||||||||||
Noninterest Income- External Customers
|
43,991 | 4,576 | 45,890 | 13,147 | (14,505 | ) | 301 | | 93,400 | |||||||||||||||||||||||||
Intersegment Noninterest Income
|
2,677 | 32,656 | 3,769 | | | 1,980 | (41,082 | ) | | |||||||||||||||||||||||||
Total Noninterest Income
|
46,668 | 37,232 | 49,659 | 13,147 | (14,505 | ) | 2,281 | (41,082 | ) | 93,400 | ||||||||||||||||||||||||
NONINTEREST EXPENSE
|
||||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
5,216 | 2,183 | 578 | 13 | 27 | 9,671 | | 17,688 | ||||||||||||||||||||||||||
Direct Expense
|
69,444 | 65,369 | 35,412 | 3,538 | 2,659 | 87,356 | (41,082 | ) | 222,696 | |||||||||||||||||||||||||
Overhead and Support
|
53,383 | 12,781 | 12,595 | 2,331 | 454 | (81,544 | ) | | | |||||||||||||||||||||||||
Total Noninterest Expense
|
128,043 | 80,333 | 48,585 | 5,882 | 3,140 | 15,483 | (41,082 | ) | 240,384 | |||||||||||||||||||||||||
Income (Loss) Before Taxes and Minority Interest
|
48,703 | 2,634 | 14,522 | 4,625 | (21,029 | ) | (4,052 | ) | | 45,403 | ||||||||||||||||||||||||
Taxes
|
14,501 | 1,402 | 5,074 | 1,615 | (7,361 | ) | 240 | 15,471 | ||||||||||||||||||||||||||
Minority Interest
|
| | | | (112 | ) | 17,023 | 16,911 | ||||||||||||||||||||||||||
Net Income
|
$ | 34,202 | $ | 1,232 | $ | 9,448 | $ | 3,010 | $ | (13,556 | ) | $ | (21,315 | ) | $ | | $ | 13,021 | ||||||||||||||||
Total Average Assets
|
$ | 3,142,762 | $ | 650,846 | $ | 231,091 | $ | 3,148,078 | $ | 72,510 | $ | 785,376 | $ | (1,968,086 | ) | $ | 6,062,577 | |||||||||||||||||
Following are brief descriptions of our segments:
Banking
International Banking
79
DECEMBER 31, 2001
RIGGS | RIGGS | |||||||||||||||||||||||||||||||
INTERNATIONAL | RIGGS | CAPITAL | NATIONAL | |||||||||||||||||||||||||||||
(IN THOUSANDS) | BANKING | BANKING | & CO. | TREASURY | PARTNERS | OTHER | RECONCILIATION | CORPORATION | ||||||||||||||||||||||||
NET INTEREST INCOME
|
||||||||||||||||||||||||||||||||
Interest Income
|
$ | 176,378 | $ | 45,782 | $ | 4,608 | $ | 120,463 | $ | 434 | $ | 40,699 | $ | (86,402 | ) | $ | 301,962 | |||||||||||||||
Interest Expense
|
51,431 | 57,368 | 6,907 | 35,944 | | 45,598 | (86,402 | ) | 110,846 | |||||||||||||||||||||||
Funds Transfer Income (Expense)
|
(139 | ) | 49,934 | 13,798 | (84,329 | ) | (4,762 | ) | 25,498 | | | |||||||||||||||||||||
Net Interest Income (Loss), Tax-Equivalent
|
124,808 | 38,348 | 11,499 | 190 | (4,328 | ) | 20,599 | | 191,116 | |||||||||||||||||||||||
Provision for Loan Losses
|
3,444 | (5,970 | ) | | | | | | (2,526 | ) | ||||||||||||||||||||||
Net Interest Income (Loss)
|
128,252 | 32,378 | 11,499 | 190 | (4,328 | ) | 20,599 | | 188,590 | |||||||||||||||||||||||
NONINTEREST INCOME
|
||||||||||||||||||||||||||||||||
Noninterest Income-External Customers
|
42,713 | 4,650 | 53,025 | 3,331 | (31,103 | ) | 12,693 | | 85,309 | |||||||||||||||||||||||
Intersegment Noninterest Income
|
3,266 | 7,858 | 2,312 | 1 | | 2,565 | (16,002 | ) | | |||||||||||||||||||||||
Total Noninterest Income
|
45,979 | 12,508 | 55,337 | 3,332 | (31,103 | ) | 15,258 | (16,002 | ) | 85,309 | ||||||||||||||||||||||
NONINTEREST EXPENSE
|
||||||||||||||||||||||||||||||||
Depreciation and Amortization
|
8,026 | 1,658 | 932 | 16 | 29 | 8,259 | | 18,920 | ||||||||||||||||||||||||
Direct Expense
|
67,580 | 53,076 | 37,472 | 3,901 | 4,210 | 97,184 | (16,002 | ) | 247,421 | |||||||||||||||||||||||
Overhead and Support
|
53,052 | 603 | 10,875 | 2,318 | 367 | (67,215 | ) | | | |||||||||||||||||||||||
Total Noninterest Expense
|
128,658 | 55,337 | 49,279 | 6,235 | 4,606 | 38,228 | (16,002 | ) | 266,341 | |||||||||||||||||||||||
Income (Loss) Before Taxes and Minority Interest
|
45,573 | (10,451 | ) | 17,557 | (2,713 | ) | (40,037 | ) | (2,371 | ) | | 7,558 | ||||||||||||||||||||
Taxes
|
14,460 | (2,992 | ) | 6,057 | (966 | ) | (14,012 | ) | 8,528 | | 11,075 | |||||||||||||||||||||
Minority Interest
|
| | | | (87 | ) | 19,947 | | 19,860 | |||||||||||||||||||||||
Net Income
|
$ | 31,113 | $ | (7,459 | ) | $ | 11,500 | $ | (1,747 | ) | $ | (25,938 | ) | $ | (30,846 | ) | $ | | $ | (23,377 | ) | |||||||||||
Total Average Assets
|
$ | 2,778,192 | $ | 849,250 | $ | 93,767 | $ | 2,676,990 | $ | 87,795 | $ | 862,976 | $ | (1,811,563 | ) | $ | 5,537,407 | |||||||||||||||
Riggs & Co.
Treasury
Riggs Capital Partners
80
Other
NOTE 18: COMPREHENSIVE INCOME OTHER COMPREHENSIVE INCOME (LOSS)
BEFORE | TAX | NET OF | |||||||||||
TAX | (EXPENSE) | TAX | |||||||||||
(IN THOUSANDS) | AMOUNT | BENEFIT | AMOUNT | ||||||||||
Twelve Months Beginning January 1,
2001:
|
|||||||||||||
Foreign Currency Translation Adjustments
|
$ | (1,572 | ) | $ | 550 | $ | (1,022 | ) | |||||
Unrealized Gain (Loss) on Securities:
|
|||||||||||||
Unrealized Holding Gain Arising During Period
|
14,956 | (5,235 | ) | 9,721 | |||||||||
Reclassification Adjustment for Gains Included in
Net Income
|
(729 | ) | 255 | (474 | ) | ||||||||
Net Unrealized Gain on Securities
|
14,227 | (4,980 | ) | 9,247 | |||||||||
Unrealized Holding Gain (Loss) Arising During
Period
|
(2,217 | ) | 776 | (1,441 | ) | ||||||||
Reclassification Adjustment for Gains Included in
Net Income
|
(1,215 | ) | 425 | (790 | ) | ||||||||
Net Unrealized Loss on Derivatives
|
(3,432 | ) | 1,201 | (2,231 | ) | ||||||||
Other Comprehensive Income
|
$ | 9,223 | $ | (3,229 | ) | $ | 5,994 | ||||||
Twelve Months Beginning January 1,
2002:
|
|||||||||||||
Foreign Currency Translation Adjustments
|
$ | 2,346 | $ | (821 | ) | $ | 1,525 | ||||||
Unrealized Gain (Loss) on Securities:
|
|||||||||||||
Unrealized Holding Gain Arising During Period
|
28,879 | (10,108 | ) | 18,771 | |||||||||
Reclassification Adjustment for Gains Included in
Net Income
|
(9,163 | ) | 3,207 | (5,956 | ) | ||||||||
Net Unrealized Gain on Securities
|
19,716 | (6,901 | ) | 12,815 | |||||||||
Unrealized Gain (Loss) on Derivatives:
|
|||||||||||||
Unrealized Holding Loss Arising During Period
|
(4,013 | ) | 1,405 | (2,608 | ) | ||||||||
Reclassification Adjustment for Gains Included in
Net Income
|
2,639 | (924 | ) | 1,715 | |||||||||
Net Unrealized Loss on Derivatives
|
(1,374 | ) | 481 | (893 | ) | ||||||||
Other Comprehensive Income
|
$ | 20,688 | $ | (7,241 | ) | $ | 13,447 | ||||||
Twelve Months Beginning January 1,
2003:
|
|||||||||||||
Foreign Currency Translation Adjustments
|
$ | 2,257 | $ | (790 | ) | $ | 1,467 | ||||||
Unrealized Gain (Loss) on Securities:
|
|||||||||||||
Unrealized Holding Loss Arising During Period
|
(14,159 | ) | 4,875 | (9,284 | ) | ||||||||
Reclassification Adjustment for Gains Included in
Net Income
|
(13,331 | ) | 4,666 | (8,665 | ) | ||||||||
Net Unrealized Loss on Securities
|
(27,490 | ) | 9,541 | (17,949 | ) | ||||||||
Unrealized Gain (Loss) on Derivatives:
|
|||||||||||||
Unrealized Holding Gain Arising During Period
|
2,514 | (880 | ) | 1,634 | |||||||||
Net Unrealized Gain on Derivatives
|
2,514 | (880 | ) | 1,634 | |||||||||
Other Comprehensive Income
|
$ | (22,719 | ) | $ | 7,871 | $ | (14,848 | ) | |||||
81
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
FOREIGN | UNREALIZED | ACCUMULATED | ||||||||||||||||
CURRENCY | GAIN (LOSS) | UNREALIZED | OTHER | |||||||||||||||
TRANSLATION | ON | GAIN (LOSS) ON | COMPREHENSIVE | |||||||||||||||
(IN THOUSANDS) | ADJUSTMENT | SECURITIES | DERIVATIVES | INCOME (LOSS) | ||||||||||||||
Twelve Months Ended December 31,
2001
|
||||||||||||||||||
Balance, January 1, 2001
|
$ | (4,657 | ) | $ | (9,316 | ) | $ | | $ | (13,973 | ) | |||||||
Current Period Change
|
(1,022 | ) | 9,247 | (2,231 | ) | 5,994 | ||||||||||||
Balance, December 31, 2001
|
(5,679 | ) | (69 | ) | (2,231 | ) | (7,979 | ) | ||||||||||
Twelve Months Ended December 31,
2002
|
||||||||||||||||||
Balance, January 1, 2002
|
$ | (5,679 | ) | $ | (69 | ) | $ | (2,231 | ) | $ | (7,979 | ) | ||||||
Current Period Change
|
1,525 | 12,815 | (893 | ) | 13,447 | |||||||||||||
Balance, December 31, 2002
|
(4,154 | ) | 12,746 | (3,124 | ) | 5,468 | ||||||||||||
Twelve Months Ended December 31,
2003
|
||||||||||||||||||
Balance, January 1, 2003
|
$ | (4,154 | ) | $ | 12,746 | $ | (3,124 | ) | $ | 5,468 | ||||||||
Current Period Change
|
1,467 | (17,949 | ) | 1,634 | (14,848 | ) | ||||||||||||
Balance, December 31, 2003
|
(2,687 | ) | (5,203 | ) | (1,490 | ) | (9,380 | ) | ||||||||||
NOTE 19: INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT
The Company has the following hedging instruments at December 31, 2003 and 2002:
Fair-Value HedgesIn prior years, Riggs entered into pay fixed, receive floating interest rate swaps to hedge changes in fair value of certain fixed rate loans attributable to changes in benchmark interest rates. At the beginning of 2002, Riggs had seven interest rate swaps classified as fair value with a total notional value of $29.7 million. During 2002, all of the hedged loans were reclassified as Held for Sale based upon a signed sales agreement which called for the loans to be sold at a small discount to face value. Upon reclassification of these loans, the Company ceased hedge accounting. There were no fair value hedges for the remainder of 2002 or during 2003. During 2002 and 2001, the Company recognized a net gain of $22 thousand and $20 thousand, respectively. These amounts represented the ineffective portion of all fair value hedges and are included in other noninterest income in the 2002 and 2001 Consolidated Statements of Operations.
Cash Flow HedgesRiggs uses interest rate swaps to hedge its exposure to variability in expected future cash outflows on floating rate liabilities attributable to changes in interest rates. At December 31, 2003 the Company had seven such interest rate swaps with a total notional value of $47.0 million compared to six interest rate swaps with a total notional value of $42.7 million at December 31, 2002. The Company also uses foreign currency forward contracts to hedge the foreign exchange risk associated with principal and interest payments on loans denominated in a foreign currency. At December 31, 2003 Riggs had one contract with a total notional value of $517 thousand compared to two contracts with a total notional value of $8.1 million at December 31, 2002. For the twelve months ended December 31, 2003 and 2002, there was no impact to other noninterest income in the Consolidated Statements of Operations for the ineffective portion of all cash flow hedges.
Gains or losses on derivatives that are reclassified from accumulated other comprehensive income to income are included in the line in the Consolidated Statement of Operations in which the income or expense related to the hedged item is recorded. At December 31, 2003, $56 thousand of net deferred losses on derivative instruments recorded in accumulated other comprehensive income is expected to be reclassified as expense during the next twelve months compared to the $497 thousand of net losses at December 31, 2002. The maximum term over which the Company was hedging its exposure to the variability of cash flows was 18 months as of December 31, 2003 and 30 months as of December 31, 2002.
The Company uses forward exchange contracts to hedge substantially all of its net investment in a foreign subsidiary. The purpose of this hedge is to protect against adverse movements in currency exchange rates, in this case pounds sterling. At December 31, 2003, $695 thousand of net deferred losses related to the existing net investment forward exchange contract are included in accumulated other comprehensive income compared to the $251 thousand of net deferred losses at December 31, 2002. The corresponding notional values at year-end 2003 and 2002 were $76.1 million and $75.4 million, respectively.
82
OtherAs of December 31, 2003 and 2002, the Company had certain derivative instruments used to manage interest rate and foreign exchange risk that were not designated to specific hedge relationships. The carrying value of these items is a net liability of $219 thousand and $592 thousand at December 31, 2003 and 2002, respectively. The impact to the Consolidated Statements of Operations from these derivatives was a gain of $400 thousand in 2003 and a gain of $606 thousand in 2002. At December 31, 2003 the Company had ten interest rate contracts and four forward contracts with a total notional value of $56.0 million compared to twenty-six interest rate contracts and seven forward contracts with a total notional value of $140.4 million at December 31, 2002. These instruments are marked to market through current period earnings. In addition, at December 31, 2003, the Company had a notional amount of $33.7 million in commitments to purchase foreign currency and a related amount of $32.8 million in commitments to sell foreign currency which have an insignificant net impact on the Statement of Operations and Statement of Condition.
NOTE 20: GOODWILL
SFAS 142, Goodwill and Other Intangible Assets, was issued in June 2001. It discontinues amortization of intangible assets unless these assets have finite useful lives, and, instead, requires that they be tested at least annually for impairment by comparing their fair values with their recorded amounts. SFAS 142 also requires disclosure of the changes in the carrying amounts of goodwill from period to period, the carrying amounts of intangible assets by major intangible asset class for those subject to and not subject to amortization, and the estimated intangible asset amortization expense for the next five years. Since SFAS 142 was required to be implemented starting with fiscal years beginning after December 15, 2001, Riggs discontinued the amortization of goodwill beginning on January 1, 2002.
In 2003, the Companys annual impairment test resulted in a $950 thousand write-down of goodwill.
Data concerning various intangible assets is as follows (in thousands):
DECEMBER 31, 2003 | DECEMBER 31, 2002 | |||||||||||||||||
GROSS | GROSS | |||||||||||||||||
CARRYING | ACCUMULATED | CARRYING | ACCUMULATED | |||||||||||||||
VALUE | AMORTIZATION | VALUE | AMORTIZATION | |||||||||||||||
Amortizable Core Deposit Intangibles
|
$ | 10,881 | $ | (10,829 | ) | $ | 10,881 | $ | (10,765 | ) | ||||||||
Amortizable Fair Value of Leasehold Improvements
|
3,955 | (3,838 | ) | 3,955 | (3,764 | ) | ||||||||||||
Unamortizable Goodwill
|
11,652 | (5,908 | ) | 12,602 | (5,908 | ) |
LEASEHOLD | ||||||||||||||
FAIR | CORE | |||||||||||||
Amortization Expense: | VALUE | DEPOSIT | ||||||||||||
ADJUSTMENT | INTANGIBLES | GOODWILL | ||||||||||||
Actual:
|
||||||||||||||
Year Ended December 31, 2003
|
$ | 74 | $ | 64 | $ | | ||||||||
Year Ended December 31, 2002
|
74 | 92 | | |||||||||||
Year Ended December 31, 2001
|
302 | 127 | 645 | |||||||||||
Expected:
|
||||||||||||||
Year Ended December 31, 2004
|
$ | 74 | $ | 36 | $ | | ||||||||
Year Ended December 31, 2005
|
22 | 16 | | |||||||||||
Year Ended December 31, 2006
|
21 | | |
NOTE 21: SUBSEQUENT EVENT
On February 18, 2004, the Company announced that it is eliminating 87 positions from its domestic work force, 45 of which are currently filled, and, in addition, closing its Berlin (Germany) Embassy Banking office by mid-2004 and, as a result, eliminating an additional 10 positions. Because of these actions, the Company will accrue approximately $650 thousand of severance benefits in the first quarter of 2004. Deposits at the Berlin Embassy Banking office are approximately $20.0 million.
See also Consent Order and Notification of Possible Assessment of Civil Money Penalties in Note 9.
83
INDEPENDENT AUDITORS REPORT
THE BOARD OF DIRECTORS
We have audited the accompanying consolidated statements of condition of Riggs National Corporation and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2001 consolidated financial statements were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 23, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Riggs National Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
McLean, Virginia
84
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 (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Note: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Riggs National Corporations filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
85
SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
2003 | ||||||||||||||||||||
Unaudited for the Years Ended December 31, 2003, 2002 and 2001 | FIRST | SECOND | THIRD | FOURTH | ||||||||||||||||
(In Thousands, Except Per Share Amounts) | QUARTER | QUARTER | QUARTER | QUARTER | ||||||||||||||||
Interest Income
|
$ | 64,253 | $ | 61,320 | $ | 52,863 | $ | 58,206 | ||||||||||||
Interest Expense
|
16,053 | 15,604 | 12,902 | 20,475 | ||||||||||||||||
Net Interest Income
|
48,200 | 45,716 | 39,961 | 37,731 | ||||||||||||||||
Less: Provision for Loan Losses
|
926 | 815 | 580 | 2,825 | ||||||||||||||||
Net Interest Income after Provision for Loan
Losses
|
47,274 | 44,901 | 39,381 | 34,906 | ||||||||||||||||
Noninterest Income
|
26,129 | 30,085 | 28,655 | 25,421 | ||||||||||||||||
Noninterest Expense
|
58,946 | 65,484 | 66,188 | 70,190 | ||||||||||||||||
Income before Taxes and Minority Interest
|
14,457 | 9,502 | 1,848 | (9,863 | ) | |||||||||||||||
Applicable Income Tax Expense (Benefit)
|
4,997 | 4,189 | (1,833 | ) | (2,967 | ) | ||||||||||||||
Minority Interest in Income of Subsidiaries, Net
of Taxes
|
3,531 | 3,544 | 3,542 | (38 | ) | |||||||||||||||
Net Income (Loss)
|
5,929 | 1,769 | 139 | (6,858 | ) | |||||||||||||||
Earnings (Loss) Per Share
|
||||||||||||||||||||
Basic
|
$ | 0.21 | $ | 0.06 | $ | | $ | (0.24 | ) | |||||||||||
Diluted
|
0.20 | 0.06 | | (0.24 | ) | |||||||||||||||
2002 | ||||||||||||||||||||
FIRST | SECOND | THIRD | FOURTH | |||||||||||||||||
QUARTER | QUARTER | QUARTER | QUARTER | |||||||||||||||||
Interest Income
|
$ | 64,421 | $ | 64,917 | $ | 64,922 | $ | 65,277 | ||||||||||||
Interest Expense
|
17,179 | 16,204 | 17,517 | 15,829 | ||||||||||||||||
Net Interest Income
|
47,242 | 48,713 | 47,405 | 49,448 | ||||||||||||||||
Less: Provision for Loan Losses
|
(1,668 | ) | | 1,400 | 689 | |||||||||||||||
Net Interest Income after Provision for Loan
Losses
|
48,910 | 48,713 | 46,005 | 48,759 | ||||||||||||||||
Noninterest Income
|
18,528 | 23,049 | 27,130 | 24,693 | ||||||||||||||||
Noninterest Expense
|
56,782 | 59,865 | 59,305 | 64,432 | ||||||||||||||||
Income before Taxes and Minority Interest
|
10,656 | 11,897 | 13,830 | 9,020 | ||||||||||||||||
Applicable Income Tax Expense
|
4,315 | 3,821 | 4,424 | 2,911 | ||||||||||||||||
Minority Interest in Income of Subsidiaries, Net
of Taxes
|
4,916 | 4,074 | 4,015 | 3,906 | ||||||||||||||||
Net Income
|
1,425 | 4,002 | 5,391 | 2,203 | ||||||||||||||||
Earnings Per Share
|
||||||||||||||||||||
Basic
|
$ | 0.05 | $ | 0.14 | $ | 0.19 | $ | 0.08 | ||||||||||||
Diluted
|
0.05 | 0.14 | 0.19 | 0.08 | ||||||||||||||||
Note to Quarterly Tables: The sum of quarterly earnings per share may not equal year-to-date earnings per share due to continuous changes in average shares outstanding.
86
2001 | ||||||||||||||||||||
FIRST | SECOND | THIRD | FOURTH | |||||||||||||||||
(In Thousands, Except Per Share Amounts) | QUARTER | QUARTER | QUARTER | QUARTER | ||||||||||||||||
Interest Income
|
$ | 81,389 | $ | 76,903 | $ | 75,199 | $ | 68,471 | ||||||||||||
Interest Expense
|
34,963 | 28,452 | 26,901 | 20,530 | ||||||||||||||||
Net Interest Income
|
46,426 | 48,451 | 48,298 | 47,941 | ||||||||||||||||
Less: Provision for Loan Losses
|
115 | | 838 | 1,573 | ||||||||||||||||
Net Interest Income after Provision for Loan
Losses
|
46,311 | 48,451 | 47,460 | 46,368 | ||||||||||||||||
Noninterest Income
|
27,721 | 22,267 | 17,799 | 17,522 | ||||||||||||||||
Noninterest Expense
|
56,519 | 57,162 | 57,524 | 95,136 | ||||||||||||||||
Income before Taxes and Minority Interest
|
17,513 | 13,556 | 7,735 | (31,246 | ) | |||||||||||||||
Applicable Income Tax Expense (Benefit)
|
6,984 | 4,408 | 3,198 | (3,515 | ) | |||||||||||||||
Minority Interest in Income of Subsidiaries, Net
of Taxes
|
4,923 | 4,960 | 4,932 | 5,045 | ||||||||||||||||
Net Income (Loss)
|
5,606 | 4,188 | (395 | ) | (32,776 | ) | ||||||||||||||
Earnings (Loss) Per Share
|
||||||||||||||||||||
Basic
|
$ | 0.20 | $ | 0.15 | $ | (0.01 | ) | $ | (1.15 | ) | ||||||||||
Diluted
|
0.19 | 0.14 | (0.01 | ) | (1.15 | ) | ||||||||||||||
CONSOLIDATED FINANCIAL RATIOS AND OTHER INFORMATION
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
Net Income to Average:
|
||||||||||||||||||||||
Earning Assets
|
0.02 | % | 0.24 | % | (0.47 | )% | 0.43 | % | 0.62 | % | ||||||||||||
Total Assets
|
0.02 | 0.21 | (0.42 | ) | 0.39 | 0.57 | ||||||||||||||||
Shareholders Equity
|
0.26 | 3.48 | (5.92 | ) | 6.06 | 9.14 | ||||||||||||||||
Average:
|
||||||||||||||||||||||
Loans to Deposits
|
65.89 | % | 60.26 | % | 70.02 | % | 74.66 | % | 77.50 | % | ||||||||||||
Shareholders Equity to Loans
|
12.68 | 13.10 | 13.64 | 11.55 | 10.79 | |||||||||||||||||
Shareholders Equity to Deposits
|
8.36 | 7.90 | 9.55 | 8.62 | 8.36 | |||||||||||||||||
Shareholders Equity to Assets
|
6.02 | 6.18 | 7.13 | 6.36 | 6.19 | |||||||||||||||||
At December 31:
|
||||||||||||||||||||||
Reserve for Loan Losses to Total Loans
|
0.88 | % | 0.86 | % | 1.03 | % | 1.23 | % | 1.29 | % | ||||||||||||
Common Shareholders
|
1,753 | 1,868 | 2,016 | 2,162 | 2,315 | |||||||||||||||||
Employees
|
1,450 | 1,522 | 1,613 | 1,558 | 1,589 | |||||||||||||||||
Banking Offices
|
56 | 57 | 59 | 60 | 60 | |||||||||||||||||
Per Share Data:
|
||||||||||||||||||||||
Dividend Payout Ratio
|
583.55 | % | 43.78 | % | N/A | 26.32 | % | 18.35 | % | |||||||||||||
Average Common Shares Outstanding
|
28,609,296 | 28,505,405 | 28,470,953 | 28,348,699 | 28,463,825 | |||||||||||||||||
Book Value per Common Share
|
$ | 13.02 | $ | 13.65 | $ | 12.66 | $ | 13.48 | $ | 11.93 | ||||||||||||
87
THREE-YEAR FOREIGN AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES
2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||||
AVERAGE | INCOME/ | YIELDS/ | AVERAGE | INCOME/ | YIELDS/ | AVERAGE | INCOME/ | YIELDS/ | |||||||||||||||||||||||||||||
(IN THOUSANDS) | BALANCE | EXPENSE | RATE | BALANCE | EXPENSE | RATE | BALANCE | EXPENSE | RATE | ||||||||||||||||||||||||||||
ASSETS
|
|||||||||||||||||||||||||||||||||||||
Loans, Net of Unearned Discounts
|
$ | 204,743 | $ | 10,585 | 5.17 | % | $ | 329,320 | $ | 18,997 | 5.77 | % | $ | 416,112 | $ | 28,804 | 6.92 | % | |||||||||||||||||||
Time Deposits with Other Banks
|
240,427 | 5,397 | 2.24 | 180,532 | 4,601 | 2.55 | 246,979 | 10,705 | 4.33 | ||||||||||||||||||||||||||||
Pool Funds Provided, Net1
|
884,991 | 16,815 | 1.90 | 461,888 | 8,222 | 1.78 | 510,929 | 19,109 | 3.74 | ||||||||||||||||||||||||||||
Total Earning Assets and Average Rate
Earned(5)
|
1,330,161 | 32,797 | 2.47 | 971,740 | 31,820 | 3.27 | 1,174,020 | 58,618 | 4.99 | ||||||||||||||||||||||||||||
Less: Reserve for Loan Losses
|
3,096 | 6,459 | 9,144 | ||||||||||||||||||||||||||||||||||
Cash and Due from Banks
|
35,342 | 31,369 | 29,359 | ||||||||||||||||||||||||||||||||||
Premises and Equipment, Net
|
12,594 | 14,825 | 16,488 | ||||||||||||||||||||||||||||||||||
Other Assets
|
9,097 | 13,127 | 25,418 | ||||||||||||||||||||||||||||||||||
Total Assets
|
$ | 1,384,098 | $ | 1,024,602 | $ | 1,236,141 | |||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|||||||||||||||||||||||||||||||||||||
Interest-Bearing Deposits Savings and NOW Accounts
|
$ | 544,449 | $ | 3,637 | 0.67 | % | $ | 240,126 | $ | 2,452 | 1.02 | % | $ | 216,929 | $ | 4,093 | 1.89 | % | |||||||||||||||||||
Other Time
|
460,746 | 9,094 | 1.97 | 374,578 | 9,164 | 2.45 | 629,109 | 28,369 | 4.51 | ||||||||||||||||||||||||||||
Total Interest-Bearing Deposits
|
1,005,195 | 12,731 | 1.27 | 614,704 | 11,616 | 1.89 | 846,038 | 32,462 | 3.84 | ||||||||||||||||||||||||||||
Short-Term Borrowings:
|
95,401 | 1,290 | 1.35 | 144,578 | 2,059 | 1.42 | 127,741 | 3,799 | 2.97 | ||||||||||||||||||||||||||||
Total Interest-Bearing Funds &
Average Rate Incurred
|
1,100,596 | 14,021 | 1.27 | 759,282 | 13,675 | 1.80 | 973,779 | 36,261 | 3.72 | ||||||||||||||||||||||||||||
Demand Deposits
|
169,957 | 154,117 | 146,892 | ||||||||||||||||||||||||||||||||||
Other Liabilities & Shareholders Equity
|
113,545 | 111,203 | 115,470 | ||||||||||||||||||||||||||||||||||
Total Liabilities and Shareholders
Equity
|
$ | 1,384,098 | $ | 1,024,602 | $ | 1,236,141 | |||||||||||||||||||||||||||||||
NET INTEREST INCOME AND SPREAD | $ | 18,776 | 1.20 | % | $ | 18,145 | 1.47 | % | $ | 22,357 | 1.27 | % | |||||||||||||||||||||||||
NET INTEREST MARGIN ON EARNING ASSETS | 1.41 | % | 1.87 | % | 1.90 | % | |||||||||||||||||||||||||||||||
1 | Pool Funds Provided, Net, are amounts contributed by foreign activities to fund domestic activities. |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
Information required under this Item with respect to the change in the Companys independent accountants is contained in the Companys Proxy Statement for the 2004 Annual Meeting of Shareholders (the 2004 Proxy Statement), under the caption Ratification of Independent Public Accountants and is incorporated herein by reference.
ITEM 9A. CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The Company will evaluate its internal controls and procedures in light of comments recently received from banking regulators regarding compliance with the BSA and related rules and regulations as discussed on pages 10 and 61.
88
Disclosure Controls and Procedures
Internal Control Over Financial Reporting
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item with respect to directors of the Company is contained in the 2004 Proxy Statement, under the captions Election of Directors-Nominees for Director, Audit Committee, Nominating/Corporate Governance Committee and Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated herein by reference. Information required under this Item with respect to executive officers of the Company is included in Item 1 of Part I of this Annual Report.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is available through the Companys website at www.riggsbank.com. The Company intends to satisfy the disclosure requirements under the Securities Exchange Act of 1934, as amended, regarding an amendment to, or a waiver from, the Companys Code of Ethics regarding its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on its website at www.riggsbank.com.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is contained in the 2004 Proxy Statement under the captions The Board, Its Committees and Its Compensation-Director Compensation, Compensation of Executive Officers, Compensation Committee Report on Executive Compensation, Compensation Committee Interlocks and Insider Participation, and Stock Performance Graph and is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required under this Item is contained in the 2004 Proxy Statement under the caption Stock Ownership of Certain Beneficial Owners and Management and is incorporated herein by reference.
Number of securities | ||||||||||||
remaining available for | ||||||||||||
Number of securities | future issuance under | |||||||||||
to be issued upon | Weighted-average | equity compensation | ||||||||||
exercise of | exercise price of | plans (excluding | ||||||||||
outstanding options, | outstanding options, | securities reflected in | ||||||||||
Plan category | warrants and rights | warrants and rights | column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security
holders
|
9,083,914 | $ | 15.25 | 6,217,190 | ||||||||
Equity compensation plans not approved by
security holders
|
| | | |||||||||
Total
|
9,083,914 | $ | 15.25 | 6,217,190 | ||||||||
89
See Note 14 of Notes to Consolidated Financial Statements for additional information on these Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in the 2004 Proxy Statement under the caption Transactions with Management and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required under this Item is contained in the 2004 Proxy Statement under the caption Audit Committee and in Appendix B Audit Firm Fee Summary and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) List of Financial Statements
Riggs National Corporation
Page | ||||
Independent Auditors Report
|
84 | |||
Report of Independent Public Accountants
|
85 | |||
Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001
|
44 | |||
Consolidated Statements of Condition as of
December 31, 2003 and 2002
|
45 | |||
Consolidated Statements of Changes in
Shareholders Equity for the years ended December 31,
2003, 2002 and 2001
|
46 | |||
Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001
|
47 | |||
Notes to Consolidated Financial Statements
|
48-83 |
(b) List of Exhibits
(c) Reports on Form 8-K
90
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 | |
/s/ ROBERT L. ALLBRITTON | |
_______________________________________ Robert L. Allbritton |
|
Chairman of the Board and Chief Executive Officer | |
March 11, 2004 |
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.
/s/ TIMOTHY C. COUGHLIN Timothy C. Coughlin |
President and Director | |||
/s/ STEVEN T. TAMBURO Steven T. Tamburo |
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |||
JOE L. ALLBRITTON* Joe L. Allbritton |
Vice Chairman of the Board | |||
J. CARTER BEESE, JR.* J. Carter Beese, Jr. |
Director | |||
CHARLES A. CAMALIER, III* Charles A. Camalier, III |
Director | |||
LAWRENCE I. HEBERT* Lawrence I. Hebert |
Director | |||
STEVEN B. PFEIFFER* Steven B. Pfeiffer |
Director | |||
ROBERT L. SLOAN* Robert L. Sloan |
Vice Chairman of the Board | |||
JACK VALENTI* Jack Valenti |
Director | |||
WILLIAM L. WALTON* William L. Walton |
Director | |||
EDDIE N. WILLIAMS* Eddie N. Williams |
Director | |||
*By: /s/ JOSEPH M. CAHILL Joseph M. Cahill, Attorney-in-Fact March 11, 2004 |
91
INDEX TO EXHIBITS
Exhibit No. | Description | Pages | ||||||||
(3.1 | ) | Restated Certificate of Incorporation of Riggs National Corporation, dated April 19, 1999 (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 1999, SEC File No. 0-9756) | ||||||||
(3.2 | ) | By-laws of the Registrant with amendments through January 23, 2002 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(4.1 | ) | Indenture dated June 1, 1989 with respect to $100 million 9.65% Subordinated Debentures due 2009 (Incorporated by reference to the Registrants Form 8-K dated June 20, 1989, SEC File No. 0-9756) | ||||||||
(4.2 | ) | Indenture dated December 13, 1996 with respect to $150 million, 8.625% Trust Preferred Securities, Series A due 2026 (Incorporated by reference to the Registrants S-3 dated February 6, 1997, SEC File No. 333-21297) | ||||||||
(4.3 | ) | Indenture dated March 12, 1997, with respect to $200 million, 8.875% Trust Preferred Securities, Series C due 2027 (Incorporated by reference to the Registrants S-3 dated May 2, 1997, SEC File No. 333-26447) | ||||||||
(10.1 | ) | Indemnification Agreement of Chief Executive Officer dated January 22, 2003 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2002, SEC File No. 0-9756) | ||||||||
(10.2 | ) | Indemnification Agreement of Chief Financial Officer dated November 19, 2002 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2002, SEC File No. 0-9756) | ||||||||
(10.3 | ) | Indemnification Agreement of Director dated April 16, 2003 | 95-105 | |||||||
(10.4 | ) | Indemnification Agreement of Director dated April 16, 2003 | 106-116 | |||||||
(10.5 | ) | Indemnification Agreement of Director dated April 16, 2003 | 117-127 | |||||||
(10.6 | ) | Indemnification Agreement of Director dated April 16, 2003 | 128-138 | |||||||
(10.7 | ) | Indemnification Agreement of Director dated April 16, 2003 | 139-149 | |||||||
(10.8 | ) | Indemnification Agreement of Director dated April 16, 2003 | 150-160 | |||||||
(10.9 | ) | Time Sharing Agreement for lease of Gulfstream V by Perpetual Corporation/ Lazy Lane Farms, Inc. and Allbritton Communications companies (Incorporated by reference to the Registrants Form 10-Q dated March 31, 2001, SEC File No. 0-9756) | ||||||||
(10.10 | ) | Time Sharing Agreement for the lease of the Gulfstream V between Perpetual Corporation/ Lazy Lane Farms, Inc, Allbritton Communications Company and Riggs Bank N.A. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.11 | ) | Time Sharing Agreement for lease of Beechcraft King Air 300 between Allbritton Communications Company and Riggs Bank N.A. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2001, SEC File No. 0-9756) | ||||||||
(10.12 | ) | Time Sharing Agreement for lease of the Beechcraft King Air 300 between Allbritton Communications and Riggs Bank N.A. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.13 | ) | Time Sharing Agreement for the lease of the Gulfstream III between Perpetual Corporation/ Lazy Lane Farms, Inc. and Riggs Bank N.A. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.14 | ) | Joe L. Allbritton Settlement Agreement, dated December 31, 2001 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.15 | ) | Riggs National Corporations Senior Executive Change of Control and Retention Agreement (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) |
92
Exhibit No. | Description | Pages | ||||||||
(10.16 | ) | Trust Under the Riggs National Corporations Senior Executive Change of Control and Retention Agreement, dated November 8, 2001 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.17 | ) | Riggs National Corporations Executive Deferred Compensation Plan (Incorporated by reference to the Registrants Form S-8 dated December 6, 2001, SEC File No. 333-74644) | ||||||||
(10.18 | ) | Trust under the Riggs National Corporations Executive Deferred Compensation Plan (Incorporated by reference to the Registrants Form S-8 dated December 6, 2001, SEC File No. 333-74644) | ||||||||
(10.19 | ) | Second Amendment to Operating Agreement of Riggs Capital Partners LLC (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.20 | ) | Third Amendment and Joinder to the Operating Agreement of Riggs Capital Partners, LLC (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.21 | ) | Operating Agreement of Riggs Capital Partners II, LLC (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.22 | ) | First Amendment and Joinder to the Operating Agreement of Riggs Capital Partners II, LLC (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.23 | ) | Riggs Capital Partners II, LLC Investment and Management Agreement (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.24 | ) | First Amendment and Joinder to the Investment and Management Agreement of Riggs Capital Partners II, LLC (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.25 | ) | Riggs Capital Partners Operating and Services Agreement with RCP Investments L.P. (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.26 | ) | First Amendment to Riggs Capital Partners Operating and Services Agreement (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2001, SEC File No. 0-9756) | ||||||||
(10.27 | ) | Second Amendment and Joinder to the Operating and Services Agreement between Riggs Bank N.A. and Riggs Capital Partners Investments, L.P. and Riggs Capital Partners Investments II, L.P. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.28 | ) | First Amendment and Joinder to the Investment and Management Agreement of Riggs Capital Partners, LLC (Incorporated by reference to the Registrants Form 10-Q for the quarter ended September 30, 2002, SEC File No. 0-9756) | ||||||||
(10.29 | ) | Lease Agreement, dated February 1, 2002, between Allbritton Communications Company and Riggs National Corporation (Incorporated by reference to the Registrants Form 10-Q for the quarter ended March 31, 2002, SEC File No. 0-9756) | ||||||||
(10.30 | ) | Riggs Bank N.A. 2002 Executive Managerial Bonus Program (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2002, SEC File No. 0-9756) | ||||||||
(10.31 | ) | Real Estate Investment Advisory Agreement, dated May 24, 2002, between Riggs Bank N.A. and Kennedy Associates Real Estate Counsel, Inc. (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2002, SEC File No. 0-9756) | ||||||||
(10.32 | ) | Fourth Amendment to the Operating Agreement of Riggs Capital Partners, LLC, dated January 1, 2003 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2002, SEC File No. 0-9756) |
93
Exhibit No. | Description | Pages | ||||||||
(10.33 | ) | Second Amendment to the Operating Agreement of Riggs Capital Partners II, LLC, dated January 1, 2003 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2002, SEC File No. 0-9756) | ||||||||
(10.34 | ) | Master Professional Services Agreement between Crowe Chizek and Company LLP and Riggs Bank N.A. dated December 27, 2002 (Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2002, SEC File No. 0-9756) | ||||||||
(10.35 | ) | Amendment to Riggs National Corporations Deferred Compensation Plan, dated April 1, 2003 (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2003, SEC File No. 0-9756) | ||||||||
(10.36 | ) | Banking Information Technology Services Agreement between Fidelity Information Services Inc. and Riggs Bank N.A. dated June 13, 2003 (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2003, SEC File No. 0-9756) | ||||||||
(10.37 | ) | 2003 Riggs Executive Officer Short-Term Bonus Plan (Incorporated by reference to the Registrants Form 10-Q for the quarter ended June 30, 2003, SEC File No. 0-9756) | ||||||||
(11 | ) | Computation of Per Share Earnings | 161 | |||||||
(21 | ) | Subsidiaries of the Registrant | 162 | |||||||
(23.1 | ) | Consent of KPMG LLP | 163 | |||||||
(23.2 | ) | Explanation Concerning Absence of Current Written Consent of Arthur Andersen LLP | 164 | |||||||
(24 | ) | Powers of Attorney | 165 | |||||||
(31.1 | ) | Chief Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a) | 166 | |||||||
(31.2 | ) | Chief Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a) | 167 | |||||||
(32.1 | ) | Chief Executive Officer Certification pursuant to Section 1350 | 168 | |||||||
(32.2 | ) | Chief Financial Officer Certification pursuant to Section 1350 | 169 | |||||||
(99.1 | ) | Consent Order with the Office of the Comptroller of the Currency, dated July 16, 2003 (Incorporated by reference to the Registrants Form 8-K dated July 17, 2003) |
| Management contract of compensatory plan or arrangement |
Exhibits omitted are not required or not applicable
94