<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER 0-9756
RIGGS NATIONAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1217953
------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1503 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20005
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 887-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 X . No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $2.50 PAR VALUE 30,653,547 SHARES
----------------------------- --------------------------------
(Title of Class) (Outstanding at November 2, 1998)
<PAGE>
RIGGS NATIONAL CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements-Unaudited
Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Condition
September 30, 1998 and 1997, and December 31, 1997 4
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to the Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18-19
PART II.OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Change in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
-2-
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS-UNAUDITED
RIGGS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1998 1997
==================================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 64,312 $ 52,420 $176,708 $153,772
Interest on Securities Available for Sale 16,960 22,103 55,771 62,265
Interest on Money Market Assets:
Time Deposits with Other Banks 10,305 2,038 24,921 6,150
Federal Funds Sold and Reverse Repurchase Agreements 2,195 7,156 10,372 21,719
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Money Market Assets 12,500 9,194 35,293 27,869
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 93,772 83,717 267,772 243,906
INTEREST EXPENSE
Interest on Deposits:
Savings and NOW Accounts 1,340 1,543 4,075 4,887
Money Market Deposit Accounts 10,297 13,070 32,387 38,215
Time Deposits in Domestic Offices 13,961 8,717 33,172 26,256
Time Deposits in Foreign Offices 9,312 6,951 25,294 19,084
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Deposits 34,910 30,281 94,928 88,442
- ----------------------------------------------------------------------------------------------------------------------------------
Interest on Short-Term Borrowings and Long-Term Debt:
Federal Funds Purchased and Repurchase Agreements 5,504 3,650 15,225 9,467
U.S. Treasury Demand Notes and Other Short-Term Borrowings 238 230 716 695
Long-Term Debt 4,368 4,368 13,104 13,104
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest on Short-Term Borrowings and Long-Term Debt 10,110 8,248 29,045 23,266
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 45,020 38,529 123,973 111,708
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 48,752 45,188 143,799 132,198
Less: Provision for Loan Losses - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 48,752 45,188 143,799 132,198
NONINTEREST INCOME
Trust and Investment Advisory Income 11,280 9,543 34,304 26,977
Service Charges and Fees 9,682 9,366 28,439 27,383
Other Noninterest Income 3,706 1,998 8,508 7,118
Securities Gains, Net 8,222 3,335 15,003 3,494
- ----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 32,890 24,242 86,254 64,972
NONINTEREST EXPENSE
Salaries and Employee Benefits 22,313 19,476 64,028 56,926
Occupancy, Net 4,889 4,812 13,767 14,230
Data Processing Services 4,118 4,862 13,275 14,200
Furniture and Equipment 2,494 2,476 7,518 6,965
Other Real Estate Owned Expense (Income), Net 338 (775) 300 (815)
Other Noninterest Expense 15,982 14,147 45,724 42,964
- ----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 50,134 44,998 144,612 134,470
- ----------------------------------------------------------------------------------------------------------------------------------
Income before Taxes and Minority Interest 31,508 24,432 85,441 62,700
Applicable Income Tax Expense 9,206 6,625 22,985 16,148
Minority Interest in Income of Subsidiaries, Net of Taxes 4,987 4,986 14,960 12,629
==================================================================================================================================
Net Income 17,315 12,821 47,496 33,923
Dividends on Preferred Stock (2,688) (2,688) (8,063) (8,063)
==================================================================================================================================
Net Income Available for Common Stock $ 14,627 $ 10,133 $ 39,433 $ 25,860
EARNINGS PER COMMON SHARE-Basic $ .48 $ .33 $ 1.29 $ .85
Diluted .46 .32 1.24 .82
DIVIDENDS DECLARED AND PAID PER COMMON SHARE $ .05 $ .05 $ .15 $ .15
</TABLE>
-3-
<PAGE>
RIGGS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(UNAUDITED) SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997 1997
==================================================================================================================================
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 143,124 $ 178,661 $ 186,091
Money Market Assets:
Time Deposits with Other Banks 754,680 175,380 241,813
Federal Funds Sold and Reverse Repurchase Agreements 165,000 646,474 549,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total Money Market Assets 919,680 821,854 790,813
Securities Available for Sale (at Market Value) 1,003,549 1,405,990 1,672,550
Loans 3,354,811 2,688,400 2,884,373
Reserve for Loan Losses (54,699) (63,678) (52,381)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,300,112 2,624,722 2,831,992
Premises and Equipment, Net 184,362 164,746 165,377
Accrued Interest Receivable 35,264 27,349 38,209
Other Real Estate Owned, Net 2,070 12,113 5,076
Other Assets 146,559 134,207 156,318
==================================================================================================================================
Total $5,734,720 $5,369,642 $5,846,426
LIABILITIES
Deposits:
Noninterest-Bearing Demand Deposits $ 609,275 $ 846,082 $ 982,865
Interest-Bearing Deposits:
Savings and NOW Accounts 359,746 393,753 436,337
Money Market Deposit Accounts 1,419,580 1,466,694 1,492,842
Time Deposits in Domestic Offices 1,106,577 770,156 867,772
Time Deposits in Foreign Offices 667,933 508,764 518,102
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 3,553,836 3,139,367 3,315,053
- ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 4,163,111 3,985,449 4,297,918
Short-Term Borrowings:
Federal Funds Purchased and Repurchase Agreements 434,463 313,818 327,579
U.S. Treasury Demand Notes and Other Short-Term Borrowings 21,877 26,216 24,929
- ----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 456,340 340,034 352,508
Other Liabilities 74,557 54,981 191,293
Long-Term Debt 191,525 191,525 191,525
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 4,885,533 4,571,989 5,033,244
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES 350,000 350,000 350,000
- ----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock-$1.00 Par Value
Shares Authorized - 25,000,000 at September 30, 1998 and 1997,
and December 31, 1997; Liquidation Preference - $25 per share
Shares
Issued - Noncumulative Perpetual Series B - 4,000,000
shares at September 30, 1998 and 1997, and December 31, 1997 4,000 4,000 4,000
Common Stock-$2.50 Par Value
Shares Authorized - 50,000,000 at September 30, 1998 and 1997,
and December 31, 1997
Shares Issued - 31,554,345 at September 30, 1998, 31,322,111 at
September 30, 1997 and 31,461,786 at December 31, 1997 78,886 78,305 78,654
Surplus - Preferred Stock 91,192 91,192 91,192
Surplus - Common Stock 160,352 157,424 159,160
Undivided Profits 187,577 139,985 152,732
Accumulated Other Comprehensive Income 903 470 1,167
Treasury Stock - 900,798 shares at September 30, 1998 and 1997,
and December 31, 1997 (23,723) (23,723) (23,723)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 499,187 447,653 463,182
==================================================================================================================================
Total $5,734,720 $5,369,642 $5,846,426
</TABLE>
-4-
<PAGE>
RIGGS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON ACCUMULATED
STOCK STOCK OTHER TOTAL
$1.00 $2.50 UNDIVIDED COMPREHENSIVE TREASURY STOCKHOLDERS'
PAR PAR SURPLUS PROFITS INCOME (LOSS) STOCK EQUITY
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 4,000 $ 78,183 $248,252 $118,682 $ 382 $(23,723) $425,776
Comprehensive Income:
Net Income 33,923 $ 33,923
Other Comprehensive Income
(Loss), Net of Tax: (1)
Unrealized Gain on Securities
Available for Sale, Net of
Reclassification Adjustments 2,299 2,299
Foreign Exchange
Translation Adjustments (2,211) (2,211)
---------------
Total Other Comprehensive
Income (Loss) 88
===============
Total Comprehensive Income $ 34,011
Issuance of Common Stock for
Stock Option Plans, 48,767 Shares 122 364 486
Cash Dividends -
Series B Preferred Stock,
$2.015625 per Share (8,063) (8,063)
Common Stock, $.15 per Share (4,557) (4,557)
===================================================================================================================================
Balance, September 30, 1997 $ 4,000 $ 78,305 $248,616 $139,985 $ 470 $(23,723) $447,653
Balance, December 31, 1997 $ 4,000 $ 78,654 $250,352 $152,732 $ 1,167 $(23,723) $463,182
Comprehensive Income:
Net Income 47,496 $ 47,496
Other Comprehensive Income
(Loss), Net of Tax: (1)
Unrealized Loss on Securities
Available for Sale, Net of
Reclassification Adjustments (710) (710)
Foreign Exchange
Translation Adjustments 446 446
---------------
Total Other Comprehensive
Income (Loss) (264)
===============
Total Comprehensive Income $47,232
Issuance of Common Stock for
Stock Option Plans, 92,559 Shares 232 1,192 1,424
Cash Dividends -
Series B Preferred Stock,
$2.015625 per Share (8,063) (8,063)
Common Stock, $.15 per Share (4,588) (4,588)
===================================================================================================================================
Balance, September 30, 1998 $ 4,000 $ 78,886 $251,544 $187,577 $ 903 $(23,723) $499,187
</TABLE>
[FN]
(1)- See Note 3, "New Financial Accounting Standards," for gross unrealized
gains or losses arising during each period and the tax effect on each
item of comprehensive income.
</FN>
-5-
<PAGE>
RIGGS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
Increase (decrease) in cash and cash equivalents 1998 1997
==============================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 47,496 $ 33,923
Adjustments to Reconcile Net Income to Cash
Provided By Operating Activities:
Provision for Loan Losses - -
Provision for Other Real Estate Owned Writedowns 850 1,237
Depreciation Expense and Amortization of Leasehold Improvements 8,522 8,683
Gains on Sale of Securities Available for Sale (15,003) (3,494)
Gains on Sale of Other Real Estate Owned (493) (1,974)
Decrease in Accrued Interest Receivable 2,945 2,693
Decrease in Other Assets 10,141 7,341
Decrease in Other Liabilities (116,736) (6,901)
- ------------------------------------------------------------------------------------------------------------------------------
Total Adjustments (109,774) 7,585
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Operating Activities (62,278) 41,508
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease In Time Deposits with Other Banks (512,867) 105,746
Principal Collections and Maturities of Securities Available for Sale 3,814,924 5,239,503
Proceeds from Sales of Securities Available for Sale 1,486,053 398,600
Purchases of Securities Available for Sale (4,618,065) (5,874,603)
Net Increase in Loans (468,454) (51,360)
Proceeds from Sale and Other Payments of Other Real Estate Owned 2,651 17,550
Net Increase in Premises and Equipment (27,507) (7,355)
Other, Net 332 (819)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (322,933) (172,738)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in:
Demand, NOW, Savings and Money Market Deposit Accounts (523,443) (147,420)
Time Deposits 388,636 82,186
Federal Funds Purchased and Repurchase Agreements 106,884 76,652
U.S. Treasury Demand Notes and Other Short-Term Borrowings (3,052) 8,148
Proceeds from the Issuance of Common Stock 1,424 486
Proceeds from Preferred Stock of Subsidiaries - 200,000
Dividend Payments - Preferred (8,063) (8,063)
- Common (4,588) (4,557)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided By Financing Activities (42,202) 207,432
- ------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes 446 (2,211)
- ------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (426,967) 73,991
Cash and Cash Equivalents at Beginning of Period 735,091 751,144
==============================================================================================================================
Cash and Cash Equivalents at End of Period $ 308,124 $ 825,135
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES:
NONCASH ACTIVITIES:
Loans Transferred to Other Real Estate Owned $ - $ 823
CASH PAID DURING THE YEAR FOR:
Interest Paid (Net of Amount Capitalized) $ 120,906 $ 112,345
Income Tax Payments 8,067 4,860
</TABLE>
-6-
<PAGE>
RIGGS NATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all normal recurring adjustments necessary for a fair presentation of
the interim period results, in conformity with generally accepted accounting
principles applied on a consistent basis and which require the use of
management estimates. These statements should be read in conjunction with the
financial statements and accompanying notes included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997. Certain
reclassifications have been made to prior-period amounts to conform with the
current year's presentation. The results of operations for the first nine
months of 1998 are not necessarily indicative of the results to be expected
for the full 1998 year.
NOTE 2. EARNINGS PER COMMON SHARE
In March 1997, Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" was issued and supersedes Accounting Principles Board
Opinion ("APB") No. 15. Basic earnings per share is calculated by dividing net
income, after deduction for preferred stock dividends, by the weighted-average
number of shares of common stock. Diluted earnings per share is calculated by
dividing net income, after deduction for preferred stock dividends, by the
weighted-average number of shares of common stock and common stock equivalents,
unless determined to be anti-dilutive.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------- -----------------------------------
BASIC DILUTED BASIC DILUTED
EPS EPS EPS EPS
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Income $47,496 $47,496 $33,923 $33,923
Dividends on Preferred Stock (8,063) (8,063) (8,063) (8,063)
----------------- ---------------- ----------------- -----------------
Income Available to Common Shareholders $39,433 $39,433 $25,860 $25,860
Weighted-Average Shares Outstanding 30,602,344 30,602,344 30,390,938 30,390,938
Weighted-Average Dilutive Effect
of Stock Option Plans n/a 1,093,063 n/a 1,133,782
----------------- ---------------- ----------------- -----------------
Adjusted Weighted-Average Shares Outstanding 30,602,344 31,695,407 30,390,938 31,524,720
BASIC EPS $ 1.29 $ .85
DILUTED EPS $ 1.24 $ .82
</TABLE>
NOTE 3. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, SFAS Nos. 130 and 131 were issued--"Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information," respectively. SFAS No. 130 requires that certain financial
activity typically disclosed in stockholders' equity be reported in the
financial statements as an adjustment to net income in determining
comprehensive income. Items applicable to the Corporation include activity in
foreign exchange translation adjustments and gain/(loss) on securities
available for sale. Items identified as comprehensive income are reported in
the statement of condition and the statement of changes in stockholders'
equity, under separate captions. The table on the following page specifies the
tax (provision)/benefit related to each component of comprehensive income along
with the unrealized gains/(losses)arising during the period. SFAS No. 130 was
effective for the Corporation on January 1, 1998, including the restatement of
prior periods reported consistent with this pronouncement. The Corporation did
not experience any material effect on its financial position or results of
operations from the implementation of SFAS No. 130.
-7-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NEW FINANCIAL ACCOUNTING STANDARDS, CONTINUED
OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Before -Tax Tax
Amount (Expense) / Net-of-Tax
Benefit Amount
================================================================================== ============= ============= ==============
NINE MONTHS ENDED SEPTEMBER 30, 1998:
<S> <C> <C> <C>
Foreign Currency Translation Adjustments $ 686 $ (240) $ 446
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains (Losses) Arising During Period 13,911 (4,869) 9,042
Reclassification Adjustment for (Gains) Losses Realized in Net Income (15,003) 5,251 (9,752)
- ---------------------------------------------------------------------------------- ------------- ------------- --------------
Net Unrealized Gains (Losses) (1,092) 382 (710)
================================================================================== ============= ============= ==============
Other Comprehensive Income (Loss) $ (406) $ 142 $ (264)
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Foreign Currency Translation Adjustments $(3,402) $ 1,191 $ (2,211)
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains (Losses) Arising During Period 7,031 (2,461) 4,570
Reclassification Adjustment for (Gains) Losses Realized in Net Income (3,494) 1,223 (2,271)
- ---------------------------------------------------------------------------------- ------------- ------------- --------------
Net Unrealized Gains (Losses) 3,537 (1,238) 2,299
- ---------------------------------------------------------------------------------- ------------- ------------- --------------
Other Comprehensive Income (Loss) $ 135 $ (47) $ 88
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
Currency Gain/(Loss) Other
Translation on Securities Comprehensive
Adjustments Income/ (Loss)
========================================================================= ================ ============== ==================
NINE MONTHS ENDED SEPTEMBER 30, 1998:
<S> <C> <C> <C>
Balance, December 31, 1997 $ (872) $ 2,039 $1,167
Current-Period Change 446 (710) (264)
========================================================================= ================ ============== ==================
Balance, September 30, 1998 $ (426) $ 1,329 $ 903
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Balance, December 31, 1996 $ 1,111 $ (729) $ 382
Current-Period Change (2,211) 2,299 88
========================================================================= ================ ============== ==================
Balance, September 30, 1997 $(1,100) $ 1,570 $ 470
</TABLE>
SFAS No. 131 requires the reporting of selected segmented information in
quarterly and annual reports. Information from operating segments is derived
from methods used by the Corporation's management to allocate resources and
measure performance. The Corporation is required to disclose profit/loss,
revenues and assets for each segment identified, including reconciliations of
these items to consolidated totals. The Corporation is also required to
disclose the basis for identifying the segments and the types of products and
services within each segment. SFAS No. 131 is effective for the Corporation for
the year ended December 31, 1998, and quarterly beginning in 1999, including
the restatement of prior periods reported consistent with this pronouncement,
if practical. The Corporation does not anticipate any material impact from the
implementation of SFAS No. 131.
-8-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NEW FINANCIAL ACCOUNTING STANDARDS, CONTINUED
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88,
and 106" was issued. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets in the Corporation's 1998 year-end financial
statements. SFAS No. 132 also eliminates certain disclosures which were
required by SFAS Nos. 87, "Employers' Accounting for Pensions," No.
88, "Employers' Accounting for Settlement and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions."
SFAS No. 132 was effective for the Corporation on January 1, 1998. The
Corporation did not experience any material impact from the implementation
of SFAS No. 132.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998. SFAS No. 133 will require the Corporation to record
derivative instruments, such as interest-rate swap agreements on the
Consolidated Statement of Condition as assets or liabilities, measured at fair
value. Currently the Corporation treats such instruments as off-balance-sheet
items. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the specific use of each
derivative instrument and whether it qualifies for hedge accounting treatment
as stated in the standard. SFAS No. 133 will be effective for the Corporation
on January 1, 2000. The impact to the Corporation's financial position of
implementing SFAS No. 133 has yet to be determined.
NOTE 4. SUBSEQUENT EVENT
On October 1, 1998, the Corporation called for redemption all 4 million shares
outstanding of its $100 million Noncumulative Perpetual Series B Preferred
Stock. The redemption will result in a one-time charge of $.43 to diluted
earnings per share in the fourth quarter of 1998. The redemption price was
$27.25 per share plus accrued but unpaid dividends. The Series B Preferred
Stock was issued on October 21, 1993 with a liquidation preference of $25.00
per share and an annual dividend rate of 10.75%.
-9-
<PAGE>
RIGGS NATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the third quarter of 1998 was $17.3 million compared with the
prior year's third quarter net income of $12.8 million, an increase of $4.5
million. Earnings per diluted share increased by $.14 to $.46 from $.32 for the
same period. Third quarter results in 1998 were favorably impacted by $8.2
million of nonrecurring securities gains.
For the first nine months of 1998, the Corporation had net income of $47.5
million, or $1.24 per diluted share, compared with net income of $33.9 million,
or $.82 per diluted share, for the first nine months of 1997. The increase was
due to $11.6 million of increased net interest income in the first nine months
of 1998 from increased loan volume, a $7.3 million increase in trust and
investment advisory income, and $15.0 million of nonrecurring securities gains
realized in 1998. These increases were partially offset by $10.1 million of
increased noninterest expense and a $6.8 million increase in income tax
expense.
NET INTEREST INCOME
Net interest income on a tax-equivalent basis (net interest income plus an
amount equal to the tax savings on tax-exempt interest) totaled $49.5 million
in the third quarter of 1998, increasing $3.3 million from the third quarter of
1997. Net interest income on a tax-equivalent basis was $146.1 million for the
first nine months of 1998, compared with $135.1 million for the same period in
1997. The increases from the prior year's quarter and the year-to-date period
were primarily the result of favorable increases in average earning assets over
increases in average interest-bearing funds between the periods. The increase
in average loans outstanding for the third quarter of 1998 versus the same
period in 1997 was the primary factor for the increase in average earning
assets in the third quarter of 1998 over the prior year's third quarter. The
increase in average earning assets over increases in average interest-bearing
funds between the nine months ended September 30, 1998 and 1997 was also
enhanced by an increase in average loans and by $200 million in proceeds
received from Trust Preferred Securities issued and sold in March 1997.
NET INTEREST INCOME CHANGES (1)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, 1998 VS 1997 SEPTEMBER 30, 1998 VS 1997
-------------------------------- --------------------------------
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
(IN THOUSANDS) RATE VOLUME CHANGE RATE VOLUME CHANGE
=====================================================================================================================
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Loans, Including Fees $ 985 $ 10,903 $ 11,888 $ 275 $ 22,626 $ 22,901
Securities Available for Sale (485) (4,910) (5,395) 197 (7,250) (7,053)
Time Deposits with Other Banks 164 8,102 8,266 627 18,144 18,771
Federal Funds Sold and Reverse
Repurchase Agreements 1 (4,961) (4,960) 289 (11,636) (11,347)
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Income 665 9,134 9,799 1,388 21,884 23,272
Interest Expense:
Interest-Bearing Deposits 2,162 2,466 4,628 3,615 2,870 6,485
Federal Funds Purchased and
Repurchase Agreements (64) 1,919 1,855 (116) 5,875 5,759
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 1 7 8 10 11 21
Long-Term Debt - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Expense 2,099 4,392 6,491 3,509 8,756 12,265
=====================================================================================================================
Net Interest Income $(1,434) $ 4,742 $ 3,308 $(2,121) $ 13,128 $ 11,007
</TABLE>
(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.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------- ----------------------------------
(TAX-EQUIVALENT BASIS) (1) AVERAGE INCOME/ AVERAGE INCOME/
(IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
==============================================================================================================================
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans, Including Fees (2) $3,217,128 $64,579 7.96 % $2,672,404 $52,691 7.82 %
Securities Available for Sale (3) 1,165,177 17,442 5.94 1,491,501 22,837 6.07
Time Deposits with Other Banks 736,915 10,304 5.55 156,846 2,038 5.16
Federal Funds Sold and Reverse Repurchase Agreements 155,553 2,196 5.60 507,258 7,156 5.60
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets and Average Rate Earned 5,274,773 94,521 7.11 4,828,009 84,722 6.96
Reserve for Loan Losses (54,692) (63,461)
Cash and Due from Banks 137,172 159,415
Other Assets 366,780 355,743
==================================================================================================================================
Total Assets $5,724,033 $5,279,706
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Interest-Bearing Deposits $3,383,321 $34,909 4.09 % $3,137,141 $30,281 3.83 %
Federal Funds Purchased and Repurchase Agreements 436,666 5,505 5.00 284,360 3,650 5.09
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 18,381 238 5.14 17,845 230 5.11
Long-Term Debt 191,525 4,368 9.05 191,525 4,368 9.05
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds and Average Rate Paid 4,029,893 45,020 4.43 3,630,871 38,529 4.21
Demand Deposits 800,060 809,680
Other Liabilities 55,516 49,941
Minority Interest in Preferred Stock of Subsidiaries 350,000 350,000
Stockholders' Equity 488,564 439,214
==============================================================================================================================
Total Liabilities, Minority Interest and
Stockholders' Equity $5,724,033 $5,279,706
==============================================================================================================================
NET INTEREST INCOME AND SPREAD $49,501 2.68 % $46,193 2.75 %
==============================================================================================================================
NET INTEREST MARGIN ON EARNING ASSETS 3.72 % 3.80 %
</TABLE>
(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.
(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.
NONINTEREST INCOME
Noninterest income for the third quarter of 1998 totaled $32.9 million, a 36%
increase of $8.7 million from $24.2 million for the same period a year earlier.
Excluding securities gains, noninterest income during the third quarter of 1998
was $24.7 million, up $3.8 million, or 18%, from $20.9 million a year ago.
Noninterest income for the first nine months of 1998 totaled $86.3 million, a
33% increase of $21.3 million from $65.0 million for the same period a year
earlier. Excluding securities gains, noninterest income during the first nine
months of 1998 was $71.3 million, up $9.8 million, or 16%, from $61.5 million a
year ago.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------- ----------------------------------
(TAX-EQUIVALENT BASIS) (1) AVERAGE INCOME/ AVERAGE INCOME/
(IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
=================================================================================================================================
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans, Including Fees (2) $3,010,016 $177,494 7.88 % $2,626,338 $154,593 7.87 %
Securities Available for Sale (3) 1,255,696 57,279 6.10 1,414,376 64,332 6.08
Time Deposits with Other Banks 607,038 24,921 5.49 163,880 6,150 5.02
Federal Funds Sold and Reverse Repurchase Agreements 247,887 10,372 5.59 526,517 21,719 5.52
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets and Average Rate Earned 5,120,637 270,066 7.05 4,731,111 246,794 6.97
Reserve for Loan Losses (53,152) (63,605)
Cash and Due from Banks 146,882 160,626
Other Assets 359,012 359,686
==================================================================================================================================
Total Assets $5,573,379 $5,187,818
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Interest-Bearing Deposits $3,237,560 $ 94,927 3.92 % $3,138,330 $ 88,442 3.77 %
Federal Funds Purchased and Repurchase Agreements 406,467 15,226 5.01 249,837 9,467 5.07
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 18,464 716 5.18 18,185 695 5.11
Long-Term Debt 191,525 13,104 9.15 191,525 13,104 9.15
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds and Average Rate Paid 3,854,016 123,973 4.30 3,597,877 111,708 4.15
Demand Deposits 828,698 809,465
Other Liabilities 63,369 51,814
Minority Interest in Preferred Stock of Subsidiaries 350,000 298,718
Stockholders' Equity 477,296 429,944
==================================================================================================================================
Total Liabilities, Minority Interest and
Stockholders' Equity $5,573,379 $5,187,818
==================================================================================================================================
NET INTEREST INCOME AND SPREAD $146,093 2.75 % $135,086 2.82 %
==================================================================================================================================
NET INTEREST MARGIN ON EARNING ASSETS 3.81 % 3.82 %
</TABLE>
(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.
(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.
NONINTEREST EXPENSE
Noninterest expense for the third quarter of 1998 was $50.1 million, up 11%
from the $45.0 million reported in the third quarter of 1997. The increase was
due primarily to an increase in performance-based compensation expense.
Noninterest expense for the nine months ended June 30, 1998 was $144.6 million
compared to $134.5 million reported in the first nine months of 1997, a $10.1
million increase due primarily to additional salary and performance-based
compensation expense and costs associated with improvements in the
Corporation's information technologies.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
FINANCIAL CONDITION
SECURITIES
Securities available for sale totaled $1.00 billion at September 30, 1998,
compared to $1.67 billion at year-end 1997, and $1.41 billion at September 30,
1997. The activity for the first nine months included purchases of securities
available for sale totaling $2.99 billion, which were more than offset by
maturities and sales of securities available for sale totaling $2.57 billion
and $937.1 million, respectively. The weighted-average maturities and yields
for the portfolio, adjusted for anticipated prepayments, were approximately 1.6
years and 5.81%, respectively, at September 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------------------- ------------------------------ -------------------------------
AMORTIZED MARKET/ AMORTIZED MARKET/ AMORTIZED MARKET/
AVAILABLE FOR SALE COST BOOK VALUE COST BOOK VALUE COST BOOK VALUE
================================================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ - $ - $ 504,851 $ 505,477 $ 504,990 $ 506,721
Government Agencies Securities 808,845 809,428 863,190 863,162 966,277 966,456
Mortgage-Backed Securities 124,383 125,229 2,305 2,360 156,997 157,026
Other Securities 68,277 68,892 33,257 34,991 41,150 42,347
================================================================================================================================
Total $1,001,505 $1,003,549 $1,403,603 $1,405,990 $1,669,414 $1,672,550
</TABLE>
LOANS
At September 30, 1998, total loans outstanding amounted to $3.35 billion,
increasing $470.4 million from the December 31, 1997 total of $2.88 billion.
The increase in loans from December 31, 1997, was primarily attributed to
increases in commercial and financial loans of $166.2 million, residential
mortgage loans of $177.5 million, and foreign loans of $118.4 million,
partially offset by a decrease of $9.1 million in consumer loans. The increase
in residential mortgage loans was due primarily to the purchase of $261.7
million of mortgage loans, partially offset by principal repayments.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997 1997
================================================================================================================
<S> <C> <C> <C>
Commercial and Financial $ 696,045 $ 428,188 $ 529,894
Real Estate - Commercial/Construction 418,928 366,853 410,011
Residential Mortgage 1,333,954 1,174,846 1,156,493
Home Equity 329,275 317,149 317,669
Consumer 69,860 77,881 78,932
Foreign 508,033 320,600 389,632
- ----------------------------------------------------------------------------------------------------------------
Loans 3,356,095 2,685,517 2,882,631
(Unearned Discount/Net Deferred Fees)
Unamortized Premium (1,284) 2,883 1,742
=================================================================================================================
Total Loans $3,354,811 $2,688,400 $2,884,373
</TABLE>
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
ASSET QUALITY
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccrual loans, renegotiated loans and
other real estate owned (net of reserves), totaled $3.7 million at September
30, 1998, a $5.3 million (59%) decrease from the year-end 1997 total of $9.0
million and a $14.0 million (79%) decrease from the September 30, 1997 total.
The decrease from year-end 1997 was primarily due to paydowns and sales of
$14.9 million and charge-offs of $1.4 million, partially offset by additions of
$11.0 million. The decrease in nonaccrual loans from year-end was due to
paydowns and sales of $12.8 million and charge-offs of $538 thousand, partially
offset by additions of $11.0 million. The decrease in other real estate owned,
net of reserves, during the first nine months of 1998 was the result of
paydowns and sales of $2.2 million and charge-offs of $850 thousand.
PAST-DUE AND POTENTIAL PROBLEM LOANS
Past-due loans consist of residential real estate loans, commercial and
industrial loans, and consumer loans that are in the process of collection and
are accruing interest. Past-due loans increased $3.2 million during the first
nine months of 1998 to $10.5 million, and increased $4.9 million from September
30, 1997. These increases were predominately residential, single-family
past-due loans.
At September 30, 1998, the Corporation had identified $25.0 million in
potential problem loans that are currently performing but that management
believes have certain attributes that may lead to nonaccrual or past due status
in the foreseeable future. One commercial domestic loan comprised this balance.
NONPERFORMING ASSETS AND PAST-DUE LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997 1997
================================================================== ================= ================ =================
NONPERFORMING ASSETS:
<S> <C> <C> <C>
Nonaccrual Loans (1) $ 1,519 $ 5,466 $ 3,793
Renegotiated Loans (2) 84 107 101
Other Real Estate Owned, Net 2,070 12,113 5,076
================================================================== ================= ================ =================
Total Nonperforming Assets $ 3,673 $17,686 $ 8,970
PAST-DUE LOANS (3) $10,527 $ 5,639 $ 7,279
</TABLE>
(1) - Loans (other than consumer) that are in default in either principal or
interest for 90 days or more that are not well-secured and in the process
of collection, or that are, in management's opinion, doubtful as to the
collectibility of either interest or principal.
(2) - Loans for which terms have been renegotiated to provide a reduction of
interest or principal as a result of a deterioration in the financial
position of the borrower. Renegotiated loans do not include $6.6 million
in loans renegotiated at market terms that have performed in accordance
with their respective renegotiated terms.
(3) - Loans contractually past due 90 days or more in principal or interest
that are well-secured and in the process of collection.
DEPOSITS
Deposits are the primary and most stable source of funds for the Corporation.
Deposits totaled $4.16 billion at September 30, 1998, decreasing $134.8 million
from the December 31, 1997 deposit total. The decrease from the year-end
balance was due to decreases in demand deposit accounts of $373.6 million,
savings and NOW accounts of $76.6 million, and money market deposit accounts of
$73.3 million, partially offset by increases in domestic and foreign time
deposits of $388.6 million in the aggregate. The decrease in demand deposit
accounts was partially due to the implementation of a program in July of 1998
to sweep certain demand deposit account balances to money market accounts.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings increased by $103.8 million, or 29%, from the year-end
1997 balance. Short-term borrowings are an additional source of funds that the
Corporation has utilized to meet certain asset/liability and daily cash
management objectives. The increase in short-term borrowings from year-end was
primarily due to increases in repurchase agreements, which are a funding
vehicle for the Corporation. Short-term borrowings are used to help the
Corporation generate cash and maintain adequate levels of liquidity.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997 1997
=========================================================== ================== ================== ===================
<S> <C> <C> <C>
Federal Funds Purchased and Repurchase Agreements $434,463 $313,818 $327,579
U.S. Treasury Demand Notes and Other Borrowed Funds 21,877 26,216 24,929
- ----------------------------------------------------------- ------------------ ------------------ -------------------
Total Short-Term Borrowings 456,340 340,034 352,508
Subordinated Debentures due 2009 66,525 66,525 66,525
Subordinated Notes due 2006 125,000 125,000 125,000
- ----------------------------------------------------------- ------------------ ------------------ -------------------
Total Long-Term Debt 191,525 191,525 191,525
=========================================================== ================== ================== ===================
Total Short-Term Borrowings and Long-Term Debt $647,865 $531,559 $544,033
</TABLE>
LIQUIDITY
The Corporation seeks to maintain sufficient liquidity to meet the needs of
depositors, borrowers and creditors at a reasonable cost and without undue
stress on the operations of the Corporation and its banking subsidiaries. The
Corporation's Asset/Liability Committee actively analyzes and manages liquidity
in coordination with other areas of the organization (see "Sensitivity to
Market Risk"). At September 30, 1998, the Corporation's liquid assets, on a
consolidated basis, which include cash and due from banks, Government
obligations and other securities, federal funds sold, reverse repurchase
agreements and time deposits at other banks, totaled $2.07 billion (36% of
total assets). This compares with $2.65 billion (45%) at December 31, 1997, and
$2.41 billion (45%) at September 30, 1997. This consistent liquidity position
is maintained by a stable source of funds from the Corporation's core deposit
relationships. Additionally, the Corporation has other sources of funds, such
as short-term borrowings and advances available through its membership in the
Federal Home Loan Bank of Atlanta.
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
Total stockholders' equity at September 30, 1998 was $499.2 million, an
increase of $36.0 million from the year-end 1997 total and up $51.5 million
from September 30, 1997. The increase from year-end 1997 was the result of net
earnings of $47.5 million, partially offset by dividends on preferred and
common stock of $12.7 million in the aggregate. Book value per common share wa
$13.18 as of September 30, 1998 compared to $12.04 at year-end 1997 and $11.59
at September 30, 1997. Below are the capital ratios of the Corporation and its
banking subsidiary, Riggs Bank National Association (Riggs Bank N.A.) at
September 30, 1998 and 1997, and December 31, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, REQUIRED
1998 1997 1997 MINIMUMS
=================================================================================================================
RIGGS NATIONAL CORPORATION:
<S> <C> <C> <C> <C>
Tier I 17.15% 19.55% 18.45% 4.00%
Combined Tier I and Tier II 28.23 33.83 31.52 8.00
Leverage 11.46 11.18 11.15 4.00
RIGGS BANK N.A.:
Tier I 12.23 15.09 14.35 4.00
Combined Tier I and Tier II 13.48 16.35 15.60 8.00
Leverage 8.78 8.58 8.64 4.00
</TABLE>
-15-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 UPDATE
GENERAL
Advances and changes in technology can have a significant impact on the
Corporation's business. Financial institutions are dependent on information
systems and also have many external interdependencies with other companies.
Many computer programs were designed to recognize calendar years by their last
two digits. Calculations performed using these digits may not work properly
with dates beginning in the year 2000 and beyond. The "Year 2000" issue creates
risk for the Corporation from unforeseen problems in its computer systems and
from Year 2000 issues with the Corporation's vendors and customers.
APPROACH AND RISKS
The Corporation began to identify the risks associated with the Year 2000 in
1995. Management established a corporate oversight structure to ensure timely
risk assessments, remediation plans, systems testing, conversions, and
centralized management of the project. The structure of the effort entails a
number of groups, each addressing a different aspect of the project, reporting
to the Year 2000 Program Manager. Oversight of the entire project is performed
by the Year 2000 Advisory Group. This is a management committee appointed by
the Board of Directors that reports to the Board on a quarterly basis.
Management determined that an enterprise wide business risk assessment approach
is most appropriate for addressing and remediating Year 2000 problems. This
included an assessment of the information technology resources of each of the
functional areas in the Corporation, as well as separate assessments of
information technology vendors and suppliers, mainframe applications, third
party suppliers, alternative platforms, and non-information technology and
facilities risks.
In addition to systems related risks, the Corporation undertook a review of
risks created by potential business interruptions suffered by the Corporation's
major business counterparties, both domestic and foreign. The Corporation
divided its business counterparties into three broad categories: Funds Takers
(primarily borrowers), Funds Providers (depositors and other funding sources)
and Capital Markets partners (trading counterparties). For those business
partners that would have a significant impact on the Corporation's liquidity,
income, or capital markets activities, should they encounter significant
business interruption due to the Year 2000, management has worked through the
functional areas involved to assess their readiness and to form contingency
plans to recover from an abrupt interruption in the business relationship.
After the assessment phase, Year 2000 efforts have focused on remediation and
verification. The Corporation has developed detailed action plans to address
mainframe systems, third party servicers, embedded technology, and facilities
and non-information technology issues. For in-house systems, purchased systems
and software, and third party servicers, the Year 2000 efforts have involved
contacting the vendors or suppliers and determining the Year 2000 status of the
various systems, and of the plans to bring the systems into compliance. It also
includes testing each system to verify the remediation efforts. The Program
Manager records and tracks information to keep management aware of the status
of the Corporation's information technology systems. The Program Manager is
working with the functional areas of the Corporation to develop contingency
plans for a variety of situations, such as the failure of a vendor to remediate
Year 2000 issues by a particular date, or in the event that a system is
abruptly not available for processing.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain business operations, in a reasonably
likely worst case scenario. There can be no assurance that the Year 2000 issue
will not materially adversely impact the Corporation's financial position,
results of operations, or relationships with customers, vendors, or others.
STATE OF READINESS
While there is general uncertainty inherent in the Year 2000 problem resulting
in part from the uncertainty of the readiness of third party vendors and
customers, the Corporation's progress towards completing the enterprise-wide
risk assessment and remediating Year 2000 problems is on target. Management
expects to substantially complete remediation and verification of all mission
critical internal systems by December 31, 1998, and mission critical third
party servicers by March 31, 1999. This is in accordance with guidelines
established by Bank regulatory authorities. Verification of non-mission
critical system changes, including non-information technology issues, will be
performed throughout 1999. The Corporation presently believes that the Year
2000 issue will not cause significant operational problems.
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
COSTS
The total cost to become Year 2000 compliant is not expected to be material to
the Corporation's financial position or results of operations. The Corporation
estimates the total cost of the Year 2000 project will be approximately $7.3
million, with funds provided from operating cash flows. As of September 30,
1998 the total amount expended is $2.7 million, with $1.9 million of this
expense incurred in the first nine months of 1998. The future cost of
completing the Year 2000 project is estimated to be approximately $4.6 million.
The most significant components of the total cost will consist of an estimated
64% for personnel costs, including consultants, and 27% for data processing
services.
The Year 2000 expense represents approximately 8% of the Corporation's total
actual information technology expenditures for the first nine months of 1998.
Other significant or critical non-Year 2000 information technology efforts have
not been materially delayed or impacted by Year 2000 initiatives.
CONTINGENCY PLANS
To prepare for the possibility that certain information systems or third party
vendors and servicers will not be Year 2000 compliant, the Corporation is
developing detailed contingency plans. The Corporation has two types of
contingency plans, remediation plans and business resumption plans.
The remediation plans address those information systems the Corporation knows
are not currently Year 2000 compliant. These plans describe and schedule
alternative provisions, including, if necessary, the replacement of vendors or
third party servicers to ensure compliance. These remediation plans are
complete.
The business resumption plans address how the Corporation will continue
operations in the event a Year 2000 related interruption occurs. The
Corporation expects to complete the business resumption plans for its mission
critical systems and third party servicers by year-end 1998. While
implementation of the business resumption plans is not expected to be
necessary, it will ensure the Corporation has the ability to process
transactions and serve its customers under circumstances where a Year 2000
problem actually occurs.
The discussion of the Corporation's efforts and expectations related to Year
2000 compliance are forward-looking statements which should be read in
conjunction with the Corporation's disclosures under the "Safe Harbor"
provisions as discussed in this Form 10-Q following Item 3. The Corporation's
ability to achieve Year 2000 compliance and the associated costs could be
adversely impacted by, among other things, the availability of programming and
verification resources, vendors' ability to modify proprietary software, and
problems identified in the ongoing project plan.
-17-
<PAGE>
RIGGS NATIONAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SENSITIVITY TO MARKET RISK
The Corporation is exposed to various market risks. It has determined that
interest-rate risk has a material impact on the Corporation's financial
performance, and as such has established the Asset/Liability Committee ("ALCO")
to manage interest-rate risk. The role of this committee is to prudently manage
the asset/liability mix of the Corporation to provide a stable net interest
margin while maintaining liquidity and capital. This entails the management of
the overall risk of the Corporation in conjunction with the acquisition and
deployment of funds based upon the Committee's view of both current and
prospective market and economic conditions.
The Corporation manages its interest-rate risk through the use of an income
simulation model, which forecasts the impact on net interest income of a
variety of different interest rate scenarios. A "most likely" interest rate
scenario is forecasted based upon an analysis of current market conditions and
expectations. The model then evaluates the impact on net interest income of
rates moving significantly higher or lower than the "most likely" scenario. The
results are compared to risk tolerance limits set by corporate policy. The
model's results as of September 30, 1998 are shown in the table below. Current
policy establishes limits for possible changes in net interest income for 12
and 36 month horizons. The interest rate scenarios monitored by ALCO are based
upon a 100 basis point (1%) gradual increase or decrease in rates over a
12-month time period and a 300 basis point (3%) gradual increase or decrease
in rates over a 36-month time period.
At September 30, 1998, the forecasted impact of rates rising or falling 100
basis points versus the "most likely" scenario over a 12-month time period was
a change in net interest income not exceeding 1%. For a 300 basis point
movement in rates versus the "most likely" scenario over a 36-month period, the
impact on net interest income did not exceed 5%. The results of the simulation
for September 30, 1998 indicated that the Corporation maintained an asset
sensitive position, and was within guidelines for interest rates moving
significantly in either direction.
In managing the Corporation's interest-rate risk, ALCO uses financial
derivative instruments, such as interest-rate swaps. Financial derivatives are
employed to assist in the management and/or reduction of the interest-rate risk
of the Corporation, and can effectively alter the sensitivity of segments of
the statement of condition for specified periods of time. All of these
derivative instruments are considered off-balance-sheet, as they do not
materially affect the level of assets or liabilities of the Corporation. Along
with financial derivative instruments, the income simulation model includes
short-term financial instruments, investment securities, loans, deposits, and
other borrowings. Interest-rate risk management strategies are discussed and
approved by ALCO prior to implementation.
INTEREST-RATE SENSITIVITY ANALYSIS (1)
<TABLE>
<CAPTION>
MOVEMENTS IN INTEREST RATES FROM SEPTEMBER 30, 1998
===================================================== ================================== ===================================
SIMULATED IMPACT OVER NEXT SIMULATED IMPACT OVER NEXT
TWELVE MONTHS THIRTY-SIX MONTHS
- ----------------------------------------------------- ---------------------------------- -----------------------------------
(IN THOUSANDS) +100BP -100BP +300BP -300BP
- ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Simulated Impact Compared With a
"Most Likely" Scenario:
<S> <C> <C> <C> <C>
Net Interest Income Increase/(Decrease) .1 % (0.1)% 1.8 % (4.6)%
Net Interest Income Increase/(Decrease) $ 137 $ (103) $ 10,476 $(26,853)
</TABLE>
(1)-Key Assumptions:
Assumptions with respect to the model's projections of the effect of
changes in interest rates on Net Interest Income include:
1. Target balances for various asset and liability classes, which are
solicited from the management of the various units of the Corporation.
2. Interest rate scenarios which are generated by ALCO for the "most likely"
scenario and are dictated by policy for the alternative scenarios.
3. Spread relationships between various interest rate indices, which are
generated by the analysis of historical relationships and ALCO consensus.
4. Assumptions about the effect of embedded options and prepayment speeds:
instruments that are callable are assumed to be called at the first
opportunity if an interest rate scenario makes it advantageous for
the owner of the call to do so. Prepayment assumptions for mortgage
products are derived from accepted industry sources.
5. Reinvestment rates for funds replacing assets or liabilities that are
assumed (through early withdrawal, prepayment, calls, etc.) to run off
the balance sheet, which are generated by the spread relationships.
6. Maturity strategies with respect to assets and liabilities, which are
solicited from the management of the various units of the Corporation.
-18-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK,
CONTINUED
SENSITIVITY TO MARKET RISK, CONTINUED
Management finds that the methodologies discussed on the previous page provide
a meaningful representation of the Corporation's interest-rate and market risk
sensitivity, though factors other than changes in the interest rate
environment, such as levels of non-earning assets, and changes in the
composition of earning assets, may affect net interest income. Management
believes its current interest-rate sensitivity level is appropriate,
considering the Corporation's economic outlook and conservative approach taken
in the review and monitoring of the Corporation's sensitivity position. No
material changes have taken place since December 31, 1997.
COMMITMENTS AND CONTINGENT LIABILITIES
Outstanding commitments and contingent liabilities that do not appear in the
consolidated financial statements at September 30, 1998 and 1997, and December
31, 1997 are detailed in the table below. At December 31, 1997, the
Corporation's financial derivative instruments included a $200 million
(notional principal balance) interest-rate swap agreement, entered into in July
1993, to hedge money market assets against the possibility of declining
interest rates that entailed the receipt of a fixed rate and payment of a
floating rate. This swap agreement, which was due to mature in July 1998, was
terminated by the Corporation in March 1998 with an aggregate net interest
expense of $368 thousand recognized in 1998.
<TABLE>
<CAPTION>
CONTRACTUAL OR NOTIONAL VALUE
-----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997
===========================================================================================================
<S> <C> <C> <C>
Commitments to Extend Credit $1,188,909 $871,096 $873,794
Letters of Credit 135,933 131,494 132,770
Derivative Instruments:
Foreign Exchange Contracts:
Commitments to Purchase $ 140,135 $ 85,409 $111,215
Commitments to Sell 222,770 182,911 190,324
Interest-Rate Swap Agreements 113,910 381,479 351,489
Interest-Rate Option Contracts 663 630 642
</TABLE>
The Corporation's interest-rate swap and options contract activity for the nine
months ended September 30, 1998, is as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, SEPTEMBER 30,
1997 ADDITIONS MATURITIES TERMINATIONS 1998
========================================== ================ ============== ============= ================= =================
Interest-Rate Swaps:
<S> <C> <C> <C> <C> <C>
Receive fixed/pay variable $250,000 $ -- $ -- $250,000 $ --
Receive variable/pay fixed 50,000 -- 25,000 -- 25,000
For Customers 52,131 37,442 -- -- 89,573
========================================== ================= ============= ============= ================= =================
Total $352,131 $ 37,442 $ 25,000 $250,000 $114,573
</TABLE>
------------------------------------------------
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND THE QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, CONTAINS FORWARD-LOOKING
STATEMENTS, AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
THAT INVOLVE RISK AND UNCERTAINTY. IN ORDER TO COMPLY WITH THE TERMS OF THE
SAFE HARBOR, THE CORPORATION NOTES THAT A VARIETY OF FACTORS COULD CAUSE THE
CORPORATION'S ACTUAL RESULTS AND EXPERIENCES TO DIFFER MATERIALLY FROM THE
ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE CORPORATION'S
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
CERTAIN RISKS AND UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE,
DEVELOPMENT, GROWTH PROJECTIONS AND RESULTS OF THE CORPORATION'S BUSINESS SUCH
AS, THE GROWTH OF THE ECONOMY, INTEREST RATE MOVEMENTS, TIMELY DEVELOPMENT BY
THE CORPORATION OF TECHNOLOGY ENHANCEMENTS FOR ITS PRODUCTS AND OPERATING
SYSTEMS, THE IMPACT OF COMPETITIVE PRODUCTS, SERVICES AND PRICING, CUSTOMER
BUSINESS REQUIREMENTS, CONGRESSIONAL LEGISLATION AND SIMILAR MATTERS. READERS
OF THIS REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS WHICH ARE SUBJECT TO INFLUENCE BY THE NAMED RISK FACTORS AND
UNANTICIPATED FUTURE EVENTS. ACTUAL RESULTS, ACCORDINGLY, MAY DIFFER MATERIALLY
FROM MANAGEMENT EXPECTATIONS.
-19-
<PAGE>
RIGGS NATIONAL CORPORATION
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
--------
The following exhibit is furnished to this Form 10-Q:
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements 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
Date: November 6, 1998 /s/ TIMOTHY C. COUGHLIN
--------------------------- --------------------------------
Timothy C. Coughlin
President
Date: November 6, 1998 /s/ JOHN L. DAVIS
--------------------------- --------------------------------
John L. Davis
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-20-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
===============================================================================
(27) Financial Data Schedule
Exhibits omitted are not required or not applicable.
-21-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000350847
<NAME> RIGGS NATIONAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 143,124
<INT-BEARING-DEPOSITS> 754,680
<FED-FUNDS-SOLD> 165,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,003,549
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,354,811
<ALLOWANCE> 54,699
<TOTAL-ASSETS> 5,734,720
<DEPOSITS> 4,163,111
<SHORT-TERM> 456,340
<LIABILITIES-OTHER> 74,557
<LONG-TERM> 191,525
<COMMON> 78,886
0
4,000
<OTHER-SE> 416,301
<TOTAL-LIABILITIES-AND-EQUITY> 5,734,720
<INTEREST-LOAN> 176,708
<INTEREST-INVEST> 55,771
<INTEREST-OTHER> 35,293
<INTEREST-TOTAL> 267,772
<INTEREST-DEPOSIT> 94,928
<INTEREST-EXPENSE> 123,973
<INTEREST-INCOME-NET> 143,799
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 15,003
<EXPENSE-OTHER> 144,612
<INCOME-PRETAX> 85,441
<INCOME-PRE-EXTRAORDINARY> 85,441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,496
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 3.81
<LOANS-NON> 1,519
<LOANS-PAST> 10,527
<LOANS-TROUBLED> 84
<LOANS-PROBLEM> 25,000
<ALLOWANCE-OPEN> 52,381
<CHARGE-OFFS> 2,548
<RECOVERIES> 4,532
<ALLOWANCE-CLOSE> 54,699
<ALLOWANCE-DOMESTIC> 43,588
<ALLOWANCE-FOREIGN> 11,111
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
