The Federal Reserve told Riggs National Corp. it probably will not approve a $10 million payment due later this year on Riggs's trust-preferred securities, a type of security the company issued in the late 1990s.
Under the terms of its cease-and-desist order signed with the Federal Reserve in May, the holding company for Riggs Bank must seek approval before paying dividends on its stock or making semiannual payments to holders of its trust-preferred securities. Riggs has about $220 million in trust-preferred securities outstanding with payments due on June 30 and Dec. 31.
According to a Securities and Exchange Commission filing yesterday by Riggs, the company said the Fed was not "inclined" to approve the payments, meaning Riggs won't make its Dec. 31 payment.
Riggs spokesman Mark Hendrix declined to comment on why the Fed would not approve the payment but emphasized that the holding company and Riggs Bank remain well capitalized. Each has ample cash on hand to satisfy its obligations, he said. Riggs Bank has liquid assets -- cash or cash equivalents -- of more than $2 billion, and the holding company has liquid assets of about $95 million.
Federal Reserve spokesman Dave Skidmore declined to comment.
Sources familiar with the situation, who spoke on condition of anonymity because a supervisory action by the Fed is involved, said the agency acted out of an abundance of caution to preserve Riggs's cash. Despite its large capital cushion, Riggs lost $40.5 million in the first nine months of the year, largely because of expenses associated with ongoing investigations into the company and the costs associated with exiting its international and embassy banking businesses.
Riggs was cited in May for failure to properly monitor international and embassy accounts and report suspicious transactions, and it was fined $25 million. It was also designated a "troubled" institution by regulators, requiring it to seek approval from the Fed and the Office of the Comptroller of the Currency for a variety of actions. Despite this, Riggs has remained "well-capitalized," a regulatory designation for banks with the highest capital ratios.
Riggs and PNC Financial Services Group Inc. earlier this year agreed to a $766 million merger that is slated to take place in the first quarter of 2005.
Trust-preferred securities are a kind of hybrid equity-debt instrument that became popular with bank holding companies in the 1990s. Investors found them attractive because of their regular interest income, and banks could use the money raised by their sale as core capital for regulatory purposes. Riggs National Corp. issued $150 million of the securities in 1997 and another $200 million in 1998, though it has bought back nearly $130 million of the securities from investors since then.
Another reason for their popularity with banks is that bank holding companies are allowed to defer payments. Riggs can defer up to five years of payments on the trust-preferred securities, according to securities filings.