Riggs 2003 Annual Report

Dear Fellow Shareholders:

            We took many steps to strengthen Riggs during 2003, including plans for a major market expansion beyond Washington, D.C., a reorganization of the company and the completion of a state-of-the-art technology overhaul.  These efforts, which will have benefits for years to come, adversely affected earnings during the year.  For the year 2003, Riggs had net income of $1.0 million, or $0.03 per diluted share, compared with net income of $13.0 million, or $0.45 per diluted share in 2002.  Results were also hurt by the extremely competitive mortgage market that compressed net interest margins, the rapid repayment of mortgages as a result of the low interest rate environment as well as a non-recurring expense related to Bank Secrecy Act compliance. 

            Although we are not satisfied with our financial results, an analysis of our performance is incomplete without assessing our conservative capital ratios.  The Corporation’s total regulatory capital ratio was xx.x% as of December 31, 2003, compared to a regulatory minimum of x.x% and well in excess of our peers in the banking industry.  We employ a very conservative asset management strategy, with the bulk of our idle deposits invested in short-term Treasury securities.  In addition, our loan portfolio is heavily dominated by residential mortgages, which are well-collateralized assets.  Non-performing assets remain low, with the reserve for loan loss to total loans below 1%. 

            From a financial point of view, 2003 was a disappointing year.  We know that we must improve core earnings, expand customer relationships, deliver excellent products and service and create a culture that rewards top-notch performance and a workforce that is customer focused.  During the past year, we took a number of steps in that direction.

            We simplified our organizational structure, reducing the number of divisions from four to two which we think will improve management accountability, cutting administrative overhead and help us refocus our marketing efforts on serving the customer, rather than narrowly focusing on products.  A good example of that strategy is in our wealth management area, where we continued to emphasize the relationship manager model in which our private bankers bring in Riggs experts to meet all of the client’s financial needs.  Our Investment Policy Committee, a group of financial experts dedicated to selecting approved investment products regardless of the source, solidified our new “open architecture” model.  That led us to exit the mutual fund business, selling our proprietary Riggs Funds to Federated Investors, thus improving our ability to serve our customers with a broad array of quality investment products. In addition, we are outsourcing our broker/dealer operations to LPL Financial Services, a leading independent brokerage firm which operates under an open architecture advisory-based model that is consistent with our new direction.  The goal of an open architecture is to provide the wealth management client as well as institutional clients with access to the best products for their needs. 

            We completed a two-year technology overhaul that we believe will lay the foundation of a broad turnaround strategy for our organization.  We literally rebuilt the entire technical and operating infrastructure of the company over a two year period, which we believe will capture lost revenue, improve inefficient processes, improve customer service, transform the way we engage with prospects and boost shareholder returns.  Each customer’s unique characteristics are now available online, including demographics, preferences, complementary relationships, priority rankings, high probability cross-sell opportunities and risk profiles.  The system will help Riggs deliver a consistent, positive customer experience across all delivery channels. Launched in December 2001, the effort culminated over Labor Day weekend 2003, when Riggs employees reported for work around the clock to test and re-test the system.  Riggs’ new Customer Relationship Management System is deployed in every area of the bank.

            To be sure, implementing such a massive technology overhaul drew substantial resources in terms of personnel and expense, and that was compounded by a regulatory action taken by The Office of the Comptroller of the Currency (OCC).  Although no fines or penalties were assessed, the OCC found deficiencies in our Bank Secrecy Act compliance procedures, and that we had not kept pace with the rapid changes that the BSA/USA Patriot Act had imposed upon the financial industry, namely testing, monitoring, account activity and training.  Although no instances of money laundering were found, we took the OCC findings very seriously as we do all regulatory matters.  We gave our full cooperation to the OCC during its examination.  Then we developed a detailed work plan that we provided to the OCC for its review and comment, and we have already made significant progress on that plan. We moved quickly to establish a BSA compliance infrastructure that will be among the best in the industry. Our program includes extensive employee training as well as enhanced internal controls, reporting and monitoring abilities.  We outsourced our internal audit function to Ernst & Young, an acknowledged leader in this area. In addition, we hired a new Director of Compliance & Security, Mr. David Caruso, who is leading our Bank Secrecy Act efforts.  Riggs Board and senior management are fully committed to insuring that we do our part in combating money laundering and terrorism.

            On a happier note, the OCC also evaluated Riggs’ total performance in helping to meet our community’s credit needs in lending, investment and service.  The OCC awarded us an “Outstanding” rating in each of these three areas for our compliance with the Community Reinvestment Act (CRA) in our efforts to provide financings to low- and moderate-income families.  The CRA was passed by Congress in 1977 to ensure that depository institutions help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. 

Plans For 2004
The first objective is to improve core earnings by identifying and prioritizing core businesses based on key performance measures, including profitability, efficiency and revenue growth.  The second objective is to expand the number and scope of customers.  We will accomplish this by equipping our workforce with the knowledge, technology and tools necessary to enhance the customer experience, with the goal of aligning the company, its people, products, processes and information around customers.  And finally, our third objective is to create and support a performance culture by cultivating and sustaining a professional workforce that is customer-focused and accountable for its performance.  This three-year strategic plan is aggressive but attainable, particularly with our new technology capability in place.

            Our focus is to increase our presence in the fast-growing suburban markets with such innovations as our Financial Center at Tavern Square in Alexandria, Virginia, which has now been operating for just over a year and has created a completely different banking experience.  In 2004, we will add 11 branches in the affluent Virginia and Maryland suburbs and remodel 20 more branch offices.  With LPL as a partner, we will focus on enhancing our distribution channels.  In addition, we will substantially increasing the commercial portfolio in middle market credit and various classes of specialized credit unique to the Washington area such as government contract lending and commercial real estate.  Our risk standards imposed pertinent to those classes of assets will be more stringent than many banks, but nonetheless, we think that there is significant quality credit out there that will enable the bank, by increasing its loan to deposit ratio, accelerate in these classes of assets that we think are part of the future.  Fortunately, the economic outlook for 2004 has brightened in recent months.  For the first time in three years, the business environment is working in our favor.

            In closing, I would like to thank our dedicated employees, many of whom were instrumental in getting our massive technology overhaul to work smoothly.  Many of you gave up your Labor Day weekend and worked literally around the clock to make sure the system was ready to go when the doors opened on Tuesday, September 5.  I would also like to express my sincere appreciation to my fellow shareholders, who have seen their patience tested over the past year as we make changes to improve results. (1,339 words)

Community Banking (700 words)

1.         Branches.  Riggs continues to dominate the Washington D.C. market in terms of deposits.  But the promise of the market is in Virginia and Maryland where we are initiating a presence to capture share of these affluent areas by adding 11 new branches (map).  These new “banking centers” will feature extended weekday hours, Sunday banking, free checking, money-back guarantees on products and unexpected value.  We want to provide access to our clients through every customer touch point such as our expanding ATM network.

Beyond adding branches, we are focused on upgrading our people and making sure that we have the skill sets required in today’s sophisticated financial markets, so that we can converse intelligently about their needs and provide solutions.  In 2003, we had a number of training initiatives across the bank to deliver unexpected value.  Our prototype for this new type of banking is Tavern Square Financial Center, which we opened about a year ago to flattering reviews from consumers and the banking trade press.  (Graphic: Deposit Growth, Loan Growth)

2.         Private Banking.  Riggs is committed to serving the long-term investment needs of affluent individuals and families using a disciplined and objective investment management strategy.  While we have been moving towards an open architecture program over the past few years, we made a strong commitment in that direction by selling our proprietary mutual funds in 2003.  The sale of the Riggs Funds makes a further move toward open architecture, an approach that allows Riggs wealth advisors to offer superior investment solutions from the widest possible range of available alternatives.  Open architecture means trying to select the best investment vehicles regardless of who provides them.  The process has a very high degree of integrity.  We will choose funds based on performance regardless of who provides them. 

            Although we had an in-house broker/dealer operation for a number of years, it was very costly in terms of product development and compliance.  We decided to outsource this back office function to LPL, a large independent broker/dealer with excellent resources including excellent training for our brokers.  Now, we are able to focus our money-management expertise on large institutional clients such as foundations, corporate pension and retirement plans, educational and cultural organizations as well as high-net-worth individuals.  We use an investment process called Core Satellite which is a combination of active investments such as mutual funds and passive investment vehicles such as indexes and exchange traded funds. 

            Within private banking, we’ve moved to the relationship management model where we position our private bankers to be more client-centric rather than product-centric.  That required a much more experienced banker than we had in place, and we made some key hires in 2003 to continue to along that path.

3.         Mortgages.  During 2003, Riggs enjoyed record loan growth in home equity originations and mortgages.  Our 2.49% home equity product has been particularly successful.  (Graphic: New Applications Growth)

4.         Business Banking.  This is a very affluent market and lucrative opportunity that will pay a significant annuity to the bank, so we are anxious to grow this market segment over time.  In addition to profitable lending opportunities, business owners provide excellent cross-selling opportunities in terms of other personal deposit and credit products, brokerage services and private banking.  The other opportunity is that many family-owned businesses are now looking at opportunities to pass the business on or sell which creates opportunities for our trust department.  Indeed our branches can now provide retail services, private banking, personal trust, residential mortgage, consumer lending and business banking, all of which is built around the individual customer.  Our success will be measured by how well we execute this strategy as well as our ability to deliver unexpected value.  Our goal is to double the professional staff serving this market within the next few years.

            Our senior management team and lenders have grown up in this market and are well known and have ties.  That brings stability to us and our lenders that the other large banks don’t have because they’re continuing shuffling lenders through this marketplace.  For a bank our size, we have a product line, certainly a lending expertise equal to our greater than our competitors, the ability to complete a transaction quickly and we can compete on price. 

5.         Merchant Card Services (Graphic: Growth in merchant clients)
6.         Trust/Brokerage (graphic or photo)
7.         Consumer Lending (graphic or photo)

Wholesale Banking (664 words)

1.         Embassy.  More than 95% of Washington’s foreign embassies are Riggs clients.  We are also the dominant bank serving the world’s embassies in Latin America, the Middle East, Western Europe, Central Europe, the former Soviet Union and Africa.  Each is staffed with people who are first or second generation from that part of the world, speak the language and are focused on providing retail and wholesale corporate banking services.  Countries send some of their best and brightest diplomats to Wash. DC.  These are influential people in their countries and they know the most influential businessmen/women in their countries.  If we can do a good job with them while they’re here, maybe even after they leave their children stay and go to college, provide them with a unique banking experience while they’re here, they’re likely to be very receptive to our international private bankers who travel to those countries, looking to develop opportunities with the high net worth individuals, the industrial leaders in those countries.  (graphic?)

            Another market includes multilateral institutions in Washington DC such as the IMF, the World Bank, the Organization For American States and the Pan American Health Organization.

2.         International Private Banking.  With locations in Miami, London and the Channel Islands, Riggs provides banking, trust and investment management services to affluent international clients.  Its mission is no different than a domestic private bank except their target market is international non-resident clientele, high net worth, wealthy individuals from around the world.

            During 2003, we completed the first-ever framework agreement with the Overseas Private Investment Corp. to support the financing of International Schools abroad.  These are American-type schools, often sponsored by the U.S. State Department, that are in countries where the U.S. State Department has a heavy presence, oftentimes in underserved countries where the U.S. multinational companies may be operating.  A way to attract an individual to go to work in that country is to provide the proper schooling for their children when their family relocates there. 

            In 2002, we launched an ex-patriot mortgage banking business two years ago for senior level U.S. executives and lawyers who have relocated to London.  There are very unique and technical tax planning opportunities, and we have developed a mortgage for them that is very efficient for them in terms of trying to balance the dual taxation between the U.K. and the U.S.  We have seen tremendous growth in this business.

            We completed a large U.S. Export/Import Bank transaction that will be used to support the fight against HIV/AIDS in Africa.

3.         Government Contracts

            Government contract lending is one of the new lines of business that we introduced in our 2001 five-year strategy plan.  In Washington, D.C., given homeland security and the events of 9/11, that’s a significant marketplace.  We have identified that sector, which is essentially software development, security and warfare related technology, as one of our most important strategic lines of business.  We have grown our portfolio by some 20+ government contract lenders over the course of the last two and a half years.  We have some of the most experienced lenders in this market.  They know their customer’s business and that’s very unique because the average commercial lender struggles trying to understand government contracting. 

4.         Commercial Real Estate

            The commercial real estate area has generally comprised 50% of our loan portfolio and is evenly distributed among the various types of financing products such as office buildings, condominiums/apartments, shopping centers and income producing real estate.  Our competitive advantage in commercial real estate is that our lenders on average have 15 years or more experience and are able to negotiate transactions and structure those credit facilities generally more quickly than our competitors. 

5.         Institutional Banking

            This market includes not-for-profit organizations such as religious institutions, churches, colleges/universities, K-12 private schools, charities, performing arts and trade associations.  During 2003, we established a new relationship with the University of Maryland Alumni Association.  Our goal for 2004 is to pursue the thousands of not-for-profits in the Virginia and Maryland suburbs.