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Riggs' problems could jeopardize PNC deal
by
Jack Milligan
Virginia Business
February
2005
It
is a Washington, D.C., institution — both literally
and figuratively — whose past seems inextricably
entwined with that of the city it has always called
home. Riggs & Co. — as Riggs National Corp.
was then known — helped finance the Mexican War
and, years later, the Alaska Purchase. Shortly before
the Civil War began, President Abraham Lincoln opened
a personal account at Riggs, just weeks after Confederate
President Jefferson Davis closed his, helping it earn
the sobriquet “bank of presidents.” And
in more recent years, Riggs has enjoyed the cachet of
providing banking services to many of the embassies
in Washington along with traditional banking services
at branches in D.C. and its neighboring suburbs.
“It
is the most important bank in the most important city
in the world,” says Brian W. Smith, a partner
in the Washington office of Latham & Watkins and
former general counsel of the Office of the Comptroller
of the Currency.
Not for much longer. Riggs has been bedeviled by a slew
of federal investigations into its dealings with various
foreign embassies in Washington, and last July agreed
to be acquired by PNC Financial Services Group Inc.
of Pittsburgh for $779 million in a cash and stock deal.
The bank’s legal problems have continued and some
securities analysts and consultants believe that PNC
might back out of the deal, or at the very least use
the threat of walking away to negotiate a lower takeover
price.
If PNC does abandon its bid, analysts doubt that Riggs
will be able to continue as an independent company.
“If they don’t sell out to PNC, they’ll
have to sell to someone else,” says Henry Coffee,
a banking analyst at the Washington-based securities
firm Ferris, Baker Watts Inc. Either way, the day is
coming when out-of-towners will control the lion’s
share of the Washington market — and the oldest
and largest independent bank in town will become a part
of history instead of making it.
Riggs is controlled by its majority stockholder, 79-year-old
Joe L. Allbritton, a Texan who acquired the bank in
1981 and still holds approximately 22 percent of its
stock. Allbritton, who was Riggs’ chairman and
chief executive officer for many years before turning
those duties over to his son — 35-year-old Robert
L. Allbritton — enjoyed the notoriety that came
from running the city’s largest bank. Insiders
hold more than 46 percent of Riggs’ stock, and
the Allbritton family controls much of that.
Riggs biggest problem is a bumper crop of investigations
and lawsuits that have sprung up like toadstools after
a three-day rain. In April, the OCC smacked Riggs with
a $25 million fine — the largest ever —
for violations of the Bank Secrecy Act after it failed
to report questionable transactions in bank accounts
by diplomats at the Saudi Arabian Embassy in Washington
and by the government of Equatorial Guinea. A U.S. Senate
investigation also has linked the bank to former Chilean
dictator Augusto Pinochet.
According to Riggs’ most recent 10-Q report filed
in November, the U.S. Department of Justice and U.S.
Attorney’s Office in the District of Columbia
are investigating the company, including Riggs accounts
used by the Equatorial Guinean and Saudi Arabian em-bassies,
its past relationship with Pinochet and its compliance
with anti-money laundering rules and the Bank Secrecy
Act generally. Two separate U.S. Senate investigations
— which have provided much of the public information
about Riggs’ embassy business — are ongoing,
while both the OCC and Federal Reserve continue with
their own inquiries. A company spokesman did not respond
to telephone messages requesting an interview with executives
for this story.
The legal costs from all these investigations have taken
a toll on the company’s profitability. Riggs reported
a $41.7 million net loss through the first nine months
of 2004, compared to net income of $7.9 million for
the same period in 2003. According to the company’s
third quarter earnings release, it incurred $28 million
in legal costs attributable to its ongoing regulatory
compliance efforts and the various investigations and
lawsuits that it has been forced to defend itself against.
And Riggs incurred an additional $10.8 million in expenses
through the first nine months of last year as it exited
or sold off most of its international businesses, some
of which allegedly had been involved in either anti-money
laundering or Bank Secrecy Act violations.
While Riggs has been best known for banking with many
of the foreign embassies in town, its largest business
is a network of 51 branches and 154 automated teller
machines that provide community banking services. Twenty-eight
of those branches are in the district, including two
that are listed on the National Register of Historic
Places. Riggs also has a modest wholesale banking operation,
and an international division that included its embassy
banking business and a London-based banking subsidiary.
According to its most recent 10-Q, Riggs will “exit
or sell substantially all of its international banking
business.”
Opinions are mixed as to whether PNC made a wise choice
when it bid to acquire Riggs. “They’re buying
significant branches and [Riggs] provides them with
great locations in and around the city,” says
Gary Townsend, a banking analyst at Arlington-based
securities firm Friedman, Billings, Ramsey Group Inc.
The $779 million price tag translates into a relatively
modest 12 percent premium for Riggs’ deposit base,
which is “low for a commercial bank,” Townsend
adds. Thomas D. McCandless, senior bank analyst with
Deutsche Bank Securities Inc. in New York, argues that
Riggs offers PNC a “logical platform for them
to expand from D.C. into the suburbs of Northern Virginia
and Maryland.” The region’s economy “has
proven to be somewhat recession proof,” he adds,
and “there’s not a dominant bank there even
though Bank of America is big, Wachovia is big, BB&T
is big; they all have comparable market share.”
Others voice less enthusiasm for the Riggs’ acquisition.
Coffee at Ferris, Baker says PNC is buying a “scattered
[branch] franchise and a host of [legal] problems. Our
concern all along has been that there really isn’t
any value there,” Coffee adds. Bert Ely, whose
Alexandria-based consulting firm, Ely & Co., tracks
developments in the banking industry, says that Riggs
is actually a poor entry vehicle into the greater Washington
market because the strength of its franchise is in the
district. “Much of its deposit share is in its
D.C. branches,” he says. “Riggs was slow
to move into the suburbs.”
Ely also worries that many of Riggs’ best employees
— including many of its lending officers —
may end up bolting to its competitors. The bank’s
ongoing legal problems, combined with recent questions
about whether PNC will complete the acquisition, have
created an air of uncertainty. “It’s a devastating
situation,” Ely says. “Everything’s
in limbo. I know there are a lot of folks there who
have their résumés out.”
“I just don’t think the value is there,”
Ely adds. “I didn’t think it was there to
begin with and it has eroded even more.”
PNC, which also declined to make its executives available
for this story, continues to say that it expects to
complete the merger by mid-April. The bank is believed
to have placed enough covenants and restrictions in
the merger agreement that it could back out if the various
investigations have not been substantially concluded
by the April date. A knowledgeable source close to Riggs
says that PNC’s biggest concern is the Justice
Department inquiry since that agency has the power to
close the bank down if it chose to.
Smith, now a banking attorney in Washington, figures
that PNC is especially sensitive to the “reputation
risk” posed by Riggs’ legal woes. Three
years ago, PNC landed in hot water with the feds over
accounting violations when it tried to transfer $762
million in bad loans and venture capital investments
from its balance sheet to an affiliate company. PNC
was forced to operate under a so-called consent decree
with the OCC — basically the regulatory equivalent
of the penalty box in hockey — and was fined $115
million. Having cleaned up its own legal mess, the Pittsburgh
bank may be reluctant to take on Riggs’ problems.
PNC has said it plans on dropping the Riggs name. And
should additional allegations surface once the deal
is finalized, “it will be the PNC Bank of Washington
that will be fingered,” says Smith.
Another conceivable scenario is that PNC will use its
leverage to negotiate a lower price. This would require
the acquiescence of the Allbritton family, which controls
a major chunk of Riggs stock. But it’s not clear
that the Allbrittons will be left with much of an option
should PNC press to renegotiate the deal. Ely and others
say that Joe Allbritton committed the unforgivable sin
of embarrassing the banking regulators whose job was
to supervise Riggs in the first place. Fed Chairman
Alan Greenspan and former Comptroller John D. Hawke
Jr. were dragged up to Capitol Hill last year to testify
about the Riggs’ debacle before Senate hearings.
“Every indication is that [the regulators] want
[Joe] Allbritton out of the bank,” says Ely.
And if the PNC deal falls through, the Allbrittons will
probably be forced to find another buyer. “I don’t
think that Riggs can remain independent,” says
Ely.
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