UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 0-9756

Riggs National Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(202) 835-4309

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)2 of the Act).     Yes þ          No o

      The aggregate market value of the Company’s voting equity held by non-affiliates was $401,369,887 on June 30, 2004, based on the last sales price that day.

      The number of shares outstanding of the registrant’s common stock as of January 1, 2005 was 31,675,800.

FORM 10-K INDEX

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) that reflect the Riggs National Corporation’s (the Company or Riggs) current expectations and projections about future results, performance, prospects and opportunities, and include, without limitation, the references in this 10-K to earnings from venture capital, implementation of business strategies, hedging activities and the Company’s trust and investment advisory income. The Company has attempted to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “could” or similar expressions. These forward-looking statements are based on information currently available and are subject to a number of risks, uncertainties and other factors that could cause actual results, performance, prospects or opportunities in 2004 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements. These risks include, but are not limited to, certain risks and uncertainties that may affect the operations, performance, development, growth projections and results of the business. More specifically, these risks include the growth of (or decline in) the economy, changes in credit quality or interest rates, changes in value of venture capital investments in the technology and other sectors, timing of technology enhancements for products and operating systems, the impact of competitive products, services and pricing, customer business requirements, Congressional legislation, regulatory oversight, investigations, the unfavorable resolution of legal proceedings or government inquiries, the denial of insurance coverage for claims made by the Company, actions of the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System, regulatory, supervisory or enforcement actions of government agencies, the ability to successfully wind down and/or sell its international business operations, general economic conditions-both domestic and international-and similar matters, and the Company’s ability to satisfy the closing conditions under the merger agreement with The PNC Financial Services Group, Inc. In addition, the continuing impact of the September 11, 2001 terrorist attacks on the U.S. and global economy, the possibility of additional attacks, and international political conditions also may be an important factor or make the occurrence of one or more of the aforementioned risks or factors more likely.

The reader should not place undue reliance on any forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or for any other reason.

PART I

ITEM 1.     BUSINESS

Riggs National Corporation

Riggs is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (BHCA), and incorporated in the State of Delaware. Riggs was incorporated in 1980 and engages in a variety of banking-related activities through its bank and non-bank subsidiaries. The Company currently has banking operations or separate subsidiaries in the Washington, D.C. metropolitan area and New Haven, Connecticut. It provides investment advisory services domestically through subsidiaries registered under the Investment Advisers Act of 1940, as amended. At December 31, 2004, Riggs and its subsidiaries had 1,307 full-time equivalent employees. The Company had assets of $6.01 billion, liabilities of $5.62 billion and shareholders’ equity of $317.8 million at December 31, 2004.

The Company has five reportable business segments which are: Banking, International Banking, Treasury, Riggs Capital Partners (venture capital) and Other, which are described in Note 18 of Notes to Consolidated Financial Statements. In 2004, the Company’s Riggs & Co. segment was absorbed into the Banking segment.

In 2004, the Company announced it would completely exit its International Banking and foreign embassy banking relationships either through a sale or wind-down of activities. In the fourth quarter of 2004, Riggs entered into an agreement to sell its Channel Islands operations and portions of its London operations. This sale closed in the first quarter of 2005. In the third quarter of 2004 the Company terminated business operations at its Edge Act subsidiary in Miami, Florida and exited all of its foreign embassy relationships. The Company expects to substantially complete the wind-down of its remaining London operations in March 2005.

On July 16, 2004, The PNC Financial Services Group, Inc. (PNC) and Riggs National Corporation entered into an Agreement and Plan of Merger under which PNC agreed to acquire the Company. On February 10, 2005, Riggs and PNC amended and restated the Agreement and Plan of Merger. Under the restated terms of the merger agreement, Riggs

National Corporation will merge into PNC and PNC Bank, National Association will acquire the assets of Riggs Bank N.A. Riggs shareholders will be entitled to receive the merger consideration in shares of PNC’s common stock or in cash, subject to proration.

PNC has indicated to Riggs that it anticipates the merger will be completed as soon as possible and no later than May 31, 2005, subject to the satisfaction of various closing conditions.

Riggs Bank N.A.

The principal subsidiary of the Company is Riggs Bank N.A. (Riggs Bank or the Bank), a national banking association founded in 1836 and organized under the national banking laws of the United States in 1896. Riggs Bank had assets of $5.81 billion, deposits of $3.88 billion and stockholder’s equity of $435.5 million at December 31, 2004.

Riggs Bank operates twenty-eight branches and an investment advisory subsidiary in Washington, D.C.; fifteen branches in Virginia; eight branches in Maryland and a second investment advisory subsidiary in New Haven, Connecticut.

As a commercial bank, Riggs Bank provides a wide array of financial products and services primarily to customers in the Washington, D.C. metropolitan area and, to a much lesser extent, throughout the United States and internationally.

Riggs Bank’s Corporate & Institutional Banking Group provides services to customers ranging from mid-size to major multinational companies and non-profit organizations. These services include lines of credit, secured and unsecured term loans, letters of credit, credit support facilities, foreign currency transactions and cash management.

Riggs Bank’s Community Banking Group provides a variety of traditional services including checking, NOW, savings and money market accounts, personal loans and lines of credit, certificates of deposit, individual retirement accounts, investment sales and services. Additionally, the Community Banking Group provides 24-hour banking services through its telebanking operations and a network of 138 automated teller machines (ATMs) that is linked to national and regional ATM networks. Included in the Community Banking Group is the Bank’s wealth management division, which provides fiduciary and administrative services including financial management and tax planning for individuals, investment and accounting services for governmental, corporate and non-profit organizations, and estate planning and trust administration. The wealth management division provides domestic investment advisory services through Riggs Investment Advisors Inc. (RIA) and J. Bush & Co., Incorporated, both of which are wholly-owned subsidiaries of Riggs Bank incorporated in the State of Delaware and registered under the Investment Advisers Act of 1940, as amended.

As noted previously, the Company’s international operations are being sold or exited. However, as of December 31, 2004, international operations of Riggs Bank included:

The Company estimates that for 2004, 2003 and 2002, approximately 8%, 10% and 9%, respectively, of its consolidated revenues are attributable to foreign operations. For 2004, 2003 and 2002, 5%, 9% and 7%, respectively, of the consolidated assets at December 31 are attributable to its foreign operations. See Notes 16 and 18 of Notes to Consolidated Financial Statements.

Riggs Capital

Riggs Capital issued 150,000 shares of 8.625% guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures, Series A (trust preferred securities), with a liquidation preference of $1,000 per share, in December 1996. The securities currently qualify as tier I capital with certain limitations.

Riggs Capital II issued 200,000 shares of 8.875% guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures, Series C (trust preferred securities), with a liquidation preference of $1,000 per share, in March 1997. The securities also currently qualify as tier I capital with certain limitations.

As previously disclosed the Company suspended cash distributions on its trust preferred securities in November 2004.

In accordance with an accounting interpretation which was adopted by the Company on October 1, 2003 (FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities or FIN 46R), the Company no longer consolidates Riggs Capital II. The Company does consolidate Riggs Capital. At the time of adoption of this new accounting interpretation and at December 31, 2003, Riggs owned $60.3 million of the Series A trust preferred securities and $47.6 million of the Series C trust preferred securities. In financial statements applicable to periods prior to October 1, 2003, the amount of trust preferred securities owned by Riggs was netted against the outstanding securities of Riggs Capital and Riggs Capital II and reported as guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures in the Consolidated Statements of Condition. Prior to October 1, 2003, the interest earned by the Company on the trust preferred securities it owned was reflected in the Consolidated Statements of Operations as a reduction of minority interest in income of subsidiaries, net of taxes. Beginning in the fourth quarter of 2003, the trust preferred securities owned by Riggs are included in securities held to maturity in the Consolidated Statements of Condition and $360.8 million of debt that the Company has to Riggs Capital and Riggs Capital II is included in long-term debt as of December 31, 2003. Commencing in the fourth quarter of 2003, interest earned on the trust preferred securities that the Company owns is reflected as a component of interest income and the cost of the debt payable by the Company to Riggs Capital and Riggs Capital II is included in interest expense.

Riggs Capital II, the issuer of $200 million of 8.875% Series C debentures, remains an unconsolidated entity at December 31, 2004 and, accordingly, the $206.2 million of Riggs National Corporation (Parent Company) debt payable to Riggs Capital II is a liability of the Company at this date. Interest on this debt for the year ended December 31, 2004 is included in long-term interest expense in the Consolidated Statement of Operations. The trust preferred securities owned by the Company are classified as securities held to maturity on the Consolidated Statements of Condition.

Riggs Capital, the issuer of $150 million of 8.625% Series A debentures, was also deconsolidated upon the adoption of FIN 46R in 2003. In February 2004, however, the Company, which had also been acquiring these securities, acquired sufficient Series A debentures so that it owned more than 50% of all such debentures and, accordingly, reconsolidated this entity as the Company is the primary beneficiary of Riggs Capital. As a result, the debt payable by Riggs National Corporation (Parent Company) to Riggs Capital at December 31, 2004 and the related interest expense since reconsolidation have been eliminated in consolidation. Interest expense on this debt which was incurred prior to reconsolidation is included in interest expense on long-term debt in the Consolidated Statements of Operations for the year ended December 31, 2004. Prior to reconsolidation, the Series A debentures owned by the Company were classified as held to maturity securities in the Consolidated Statements of Condition.

Regulatory authorities may conclude at a future date that the trust preferred securities should no longer be included as a component of tier I regulatory capital. The Company has determined that it and the Bank would continue to be “well capitalized” under regulatory guidelines at December 31, 2004 without including the trust preferred securities as a component of regulatory capital. See Capital Resources and Notes 11 and 12 of Notes to Consolidated Financial Statements.

Riggs Capital Partners

Riggs Capital Partners LLC (RCP) and Riggs Capital Partners II LLC (RCP II), the Company’s venture capital operations, invest in equity investments, typically in privately-held, high-tech and growth companies. As of December 31, 2004, the fair value of combined venture capital investments of RCP and RCP II was $39.2 million.

Regulation-General

The Company is a registered bank holding company, subject to broad federal regulation and oversight by the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank is a national bank, the deposits of which are federally insured and backed by the full faith and credit of the U.S. Government up to applicable limits. The Bank is subject to broad federal regulation and oversight extending to all its operations by the Office of the Comptroller of the Currency (the OCC), its primary federal regulator, and also by the Federal Deposit Insurance Corporation (the FDIC) and the Federal Reserve. The Bank is also a member of the Federal Home Loan Bank of Atlanta (the FHLB), which serves as a source of funds for the Bank. To a lesser degree, other domestic and foreign regulatory agencies impact the Company and its subsidiaries, including the Bank.

Certain regulatory requirements and restrictions are discussed below or elsewhere in this document.

Federal Regulation of National Banks

The OCC has extensive regulatory, supervisory and enforcement authority over the operations of national banks. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC. All national banks are subject to a semi-annual assessment, based upon the bank’s total assets, to fund the operations of the OCC.

The OCC’s enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, to initiate injunctive actions and to appoint the FDIC as conservator or receiver. In general, these enforcement actions may be initiated by the OCC for violations of laws and regulations as well as unsafe or unsound practices, or with respect to receivership or conservatorship upon the determination that certain statutory criteria exist such as insolvency, substantial dissipation of assets, an unsafe or unsound condition in which to transact business, willful violation of cease and desist orders, concealment, losses or the likelihood of losses that will deplete substantially all capital, undercapitalization, similar factors, or upon notification by the U.S. Attorney General of guilt by a bank of a criminal offense arising under the money laundering laws of the United States. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required.

The OCC, as well as the other federal banking agencies, have adopted regulations and guidelines establishing safety and soundness standards including but not limited to such matters as loan underwriting and documentation, internal controls and audit systems, interest rate risk exposure, asset quality and earnings, and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. A failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the Bank Insurance Fund (the BIF), which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S. Government. As insurer, the FDIC assesses deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the BIF. The FDIC also has the authority to initiate enforcement actions against banks after giving the OCC an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Payment of Dividends

Riggs National Corporation is not only the name of the consolidated financial reporting entity but also refers to a distinct legal entity other than the consolidated financial reporting entity. The majority of Riggs’ cash revenue is from dividends paid to it by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends that it can pay. In addition, both Riggs and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums.

Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.

Neither the Bank nor Riggs may make any capital distribution (or, also, in the case of the Bank, pay any management fee to RNC) if the Bank or Riggs would thereafter be undercapitalized. Undercapitalized depository institutions and holding companies are subject to increased regulatory monitoring and asset growth limitations and are required to submit capital restoration plans. Both the Bank and the Company are considered “well capitalized” under federal banking regulations at December 31, 2004. As previously disclosed, the Company has suspended payment of the quarterly dividend on its common stock.

The Bank’s ability to pay dividends is also governed by the National Bank Act and OCC regulations. Under such statute and regulations, all dividends by a national bank must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. Various provisions of the National Bank Act further restrict the payment of dividends. Under

these restrictions, the Bank does not believe that it would have the capacity to pay any dividends until at the earliest 2007 and then only if it had cumulative retained earnings after 2004. In addition, the OCC has the authority to prohibit the payment of dividends by a national bank when it determines such payment to be an unsafe and unsound banking practice. The Bank would also be prohibited by federal statute and the OCC’s prompt corrective action regulations from making any capital distribution if, after giving effect to the distribution, the Bank would be classified as “undercapitalized” under OCC regulations. See Prompt Corrective Action. As discussed further, pursuant to the Consent Orders entered into with the OCC in May 2004 and January 2005, the Bank may not pay a dividend without the prior approval of the OCC. See Consent Order, Civil Money Penalty and Other Matters.

Capital Adequacy

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Federal Reserve, the FDIC and the OCC have issued similar risk-based and leverage capital guidelines applicable to the banking organizations that these regulatory entities supervise. Under the risk-based capital guidelines, the Company and the Bank are each required to maintain a minimum ratio of total capital to risk-based assets, which by definition includes certain off-balance sheet amounts, of 8%. At least half of the total capital must be comprised of common equity, retained earnings, qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles (tier I capital). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance (tier II capital which, together with tier I capital, comprises total capital). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total risk-weighted capital ratio of at least 10% and a tier I risk-weighted capital ratio of 6% or greater. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition by banking regulators or if it receives an unsatisfactory regulatory examination rating with respect to certain matters.

Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s tier I capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for bank holding companies and national banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other bank holding companies and national banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%. The Federal Reserve has not advised Riggs, and the OCC has not advised Riggs Bank, of any specific minimum leverage ratio applicable to it.

The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the BIS). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In June 2004, the BIS published a new capital accord to replace its 1988 capital accord. The new capital accord would, among other things, set capital requirements for operational risk and refine the existing capital requirements for credit risk and market risk. Operational risk is defined to mean the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems in connection with external events. The 1988 capital accord does not include separate capital requirements for operational risk. The United States federal regulatory authorities are currently expected to release proposed rules to implement the BIS’s new capital accord in mid-year 2005. It is currently anticipated that these authorities would release final rules in mid-year 2006, and that the final rules would become effective in January 2008. The Company cannot predict the timing or final form of the United States rules implementing the new capital accord and their impact on the Company. The new capital requirements that may arise from the final rules could increase the minimum capital requirements applicable to Riggs and its subsidiaries.

Prompt Corrective Action

The Federal Deposit Insurance Act, as amended (FDIA), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the tier I capital ratio and the leverage ratio.

Under the regulations adopted by the federal regulatory authorities, a bank will be: (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a tier I risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a tier I risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (3.0% in certain circumstances) and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a tier I risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0% (3.0% in certain circumstances); (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a tier I risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. The Company believes that, as of December 31, 2004, its bank subsidiary, Riggs Bank, was “well capitalized,” based on the ratios and guidelines described above. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

Brokered Deposits

FDIC regulations adopted under the FDIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also to include any deposit that is obtained, directly or indirectly, from or through the mediation or assistance from a deposit broker) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest

rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized.

For information regarding the capital ratios and leverage ratio of Riggs and Riggs Bank see the discussion under the section captioned “Capital Resources” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 11 in Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data, elsewhere in this report.

Deposit Insurance Assessments

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the FDIC adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. This risk-based system assigns an institution to one of three capital categories: well-capitalized; adequately capitalized; or undercapitalized. These three categories are substantially similar to the prompt corrective action categories used by the regulators, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes.

Under the risk-based assessment system, there are nine assessment risk classifications (i.e., three supervisory subgroups within each capital category) to which different deposit insurance assessment rates are applied. Assessment rates for deposit insurance currently range from 0 to 27 basis points (“bp”) per $100 of deposits. The capital and supervisory subgroup to which an institution is assigned by the FDIC is confidential and may not be disclosed. The Bank’s rate of deposit insurance assessments depends upon the category and subcategory to which it is assigned by the FDIC. Any increase in insurance assessments would have an adverse effect on the earnings of the Bank and the Company. Under the Deposit Insurance Funds Act of 1996, deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Depositor Preference

The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Liability of Commonly Controlled Institutions

FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to an FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance.

Community Reinvestment Act

Under the Community Reinvestment Act (CRA), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with the examination of the institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the institution. An unsatisfactory rating may be used as the basis for the denial of an application by the OCC. The Bank’s CRA rating is “outstanding.”

Related Party Transactions

There are legal restrictions on the extent to which Riggs and its non-bank subsidiaries may borrow or otherwise obtain credit from the Bank. Subject to certain limited exceptions, the Bank may not extend credit to Riggs or to any non-bank affiliates in an amount which exceeds 10% of Riggs’ capital stock and surplus and may not extend credit in the aggregate to such affiliates in an amount which exceeds 20% of its capital stock and surplus. There are further legal requirements as to the type, amount and quality of collateral that must secure such extensions of credit by the Bank to Riggs or to its affiliates. Finally, extensions of credit and other transactions between the Bank and Riggs or its affiliates must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions with non-affiliated companies.

In addition, the Bank may not acquire the securities of most affiliates. Subsidiaries of the Bank are not deemed affiliates. However, the Federal Reserve has the discretion to treat subsidiaries of national banks as affiliates on a case-by-case basis.

Certain transactions with directors, officers or controlling persons (insiders) are also subject to conflict of interest rules enforced by the OCC. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, as a general matter, loans to insiders must be made on terms substantially the same as for loans to unaffiliated individuals. See Note 6 of Notes to Consolidated Financial Statements.

Financial Privacy

In accordance with the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the GLB Act), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Holding Company Regulation

The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the BHCA and the regulations of the Federal Reserve. As a bank holding company, the Company is required to file reports with the Federal Reserve and such additional information as the Federal Reserve may require, and is subject to regular examinations by it. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

Under Federal Reserve policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy, the Federal Reserve may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank.

Any loans made by RNC to the Bank are subordinate to deposits and to certain other indebtedness of the Bank. In the event of the Company’s bankruptcy, a commitment to maintain the capital adequacy of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

In addition, under the National Bank Act, if the capital stock of Riggs Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon Riggs. If the assessment is not paid within three months the OCC could order the sale of Riggs Bank stock held by Riggs to make good the deficiency.

Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. Under the Federal Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined

organization, the applicant’s performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act” included elsewhere in this item) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.

The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks.

Bank holding companies are required to give prior written notice to the Federal Reserve of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve. This notification requirement does not apply to any company that meets the well capitalized standard for banks, is well managed and is not subject to any unresolved supervisory issues.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank (FHLB) System, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans (i.e., advances) to members in accordance with policies and procedures, established by the board of directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board, an agency of the United States government. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are to be utilized to provide funding for residential home financing.

As a member, the Bank is required to purchase and maintain stock in the FHLB. At December 31, 2004, the Bank had $42.7 million in FHLB stock, which was in compliance with this requirement. In the past year, the Bank has received dividends on its FHLB stock. Recent legislative changes required the FHLB to change the characteristics and amounts of stock held by its members. These changes restrict somewhat the ability of bank members to redeem their shares right away.

Legislation

The Bank Secrecy Act of 1970 (the BSA) was designed to deter money laundering and the use of secret foreign bank accounts, establish regulatory reporting standards for currency transactions and improve detection and investigation of criminal, tax and other regulatory violations. The BSA and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money. Those requirements include the establishment of sound policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities.

In recent years, federal regulators have increased the attention paid to compliance with the provisions of the BSA and related laws, with particular attention paid to “Know Your Customer” practices, which are now known commonly as “Enhanced Due Diligence.” Banks have been encouraged, by both regulators and by various industry groups, to enhance their identification procedures prior to accepting new customers in order to deter criminal elements from using the banking system to move and hide illicit profits and activities.

In 2001, the President of the United States signed into law the USA PATRIOT Act of 2001 which requires banks to, among other things, enhance due diligence in monitoring accounts related to certain terrorist activities. The USA PATRIOT Act also applies BSA procedures to broker-dealers. The Bank also is responsible for compliance with restrictions from the U.S. Treasury’s Office of Foreign Assets Control (OFAC). Accordingly, Riggs Bank restricts transactions with certain countries except as permitted by OFAC or in accordance with a license from OFAC.

The USA PATRIOT Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the USA PATRIOT Act on financial

institutions of all kinds is significant and wide ranging. The USA PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. See Consent Order, Civil Money Penalty and Other Matters.

On July 30, 2002, the President of the United States signed into law the Sarbanes-Oxley Act of 2002 (the SOA). The SOA is the most far-reaching U.S. securities legislation enacted in many years, and includes many substantive and disclosure-based requirements. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities law. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the Exchange Act). Given the extensive and continuing SEC role in implementing rules relating to many of the SOA’s new requirements the Company’s costs have increased, at least in the short term, as a result of SOA implementation.

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Riggs or any of its subsidiaries could have a material effect on the business of the Company.

Consent Order, Civil Money Penalty and Other Matters

In July 2003, Riggs Bank entered into a Stipulation and Consent to the Issuance of a Consent Order and a Consent Order (the July 2003 Consent Order) with the OCC. The provisions of the July 2003 Consent Order are effective until such time as they are amended, suspended, waived or terminated by the OCC. The July 2003 Consent Order requires Riggs Bank to take various actions to ensure compliance and improve the monitoring of compliance with the Bank Secrecy Act and related rules and regulations (BSA).

In May 2004, Riggs Bank entered into an additional Stipulation and Consent to the Issuance of a Consent Order and a Consent Order (the May 2004 Consent Order) with the OCC which supplements, but does not replace, the July 2003 Consent Order. At the same time, Riggs Bank entered into a Consent Order of Civil Money Penalty with the OCC and a Consent to the Assessment of Civil Money Penalty with the Financial Crimes Enforcement Network and was assessed and paid a civil money penalty of $25 million. These consents were entered into as a result of the banking regulators’ allegations that Riggs Bank (1) violated the BSA and related rules and regulations, (2) failed to comply with the July 2003 Consent Order and (3) failed to implement adequate controls to ensure that Riggs Bank operates in a safe and sound manner with respect to BSA compliance. The May 2004 Consent Order requires Riggs Bank to take various actions as more fully described in the next paragraph with respect to BSA compliance.

Among the more significant OCC-required actions Riggs Bank is required to take under the May 2004 Consent Order are (1) a review and evaluation of the adequacy of Riggs Bank’s staffing skills and levels with regard to meeting its obligations under the consent order, (2) an evaluation of Riggs Bank’s books, records and information systems relative to the BSA and related rules and regulations and development of a plan to correct any noted deficiencies, (3) adoption, implementation and adherence to written policies for internal controls applicable to account relationships and related staffing, (4) the adoption of a dividend policy with respect to Riggs Bank which requires regulatory approval prior to the declaration of a dividend and (5) adoption, implementation and adherence to an internal audit program that, among other things, is adequate to detect irregularities in Riggs Bank’s operations, determine Riggs Bank’s compliance with all applicable laws, rules and regulations and evaluates adherence to established policies and procedures. The May 2004 Consent Order also requires that Riggs Bank review previously filed Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) to

ascertain that those reports were accurately filed and to review the activity from January 1, 2001 in all accounts identified as high risk to ensure that SARs and CTRs have been filed as appropriate.

In January 2005, Riggs Bank entered into a Stipulation and Consent to the Issuance of Modification of Existing Consent Order (the January 2005 Consent Order) with the OCC, which supplements, but does not replace, the May 2004 Consent Order. Among the more significant OCC-required actions Riggs Bank is required to take under the January 2005 Consent Order are (1) updating the management review conducted pursuant to the May 2004 Consent Order, (2) developing capital, strategic and contingency plans, (3) taking steps to ensure the maintenance and availability of all records, and (4) paying a dividend to Riggs only if Riggs Bank is in compliance with its capital plan and upon the prior approval of the OCC.

In May 2004, Riggs and Riggs International Banking Corporation (RIBC), Riggs Bank’s former Miami Edge Act subsidiary, entered into a Cease and Desist Order (the May 2004 Cease and Desist Order) with the Federal Reserve which generally required that (1) Riggs hire an independent consultant to review the functions and performance of the Board of Directors and senior management, (2) Riggs’ Board of Directors submit a plan to the Federal Reserve Bank of Richmond to strengthen board oversight of the management and operations of Riggs and its subsidiaries, (3) Riggs submit to the Federal Reserve Bank of Richmond a plan to improve the risk management practices of Riggs and its subsidiaries, and (4) Riggs submit to the Federal Reserve Bank of Richmond an internal audit program. The May 2004 Cease and Desist Order also generally required that (1) RIBC submit a plan to the Federal Reserve Bank of Atlanta to ensure compliance with all applicable provisions of the BSA and related rules and regulations, (2) RIBC submit to the Federal Reserve Bank of Atlanta a customer due diligence program (3) RIBC engage the services of a qualified independent firm to conduct a review of account and transaction activity to determine whether suspicious activities in accounts, if any, were properly identified and reported, and (4) RIBC submit a plan to the Federal Reserve Bank of Atlanta to ensure compliance with regulations of the U.S. Department of the Treasury’s Office of Foreign Assets Control. Once such plans are approved by the Federal Reserve Bank of Richmond and the Federal Reserve Bank of Atlanta, as the case may be, the May 2004 Cease and Desist Order required that Riggs and RIBC, as the case may be, adopt and comply with such plans. The May 2004 Cease and Desist Order did not impose a monetary penalty, but did require, however, that Riggs obtain prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve prior to declaring or paying dividends, paying interest on its trust preferred securities or acquiring its own stock. As noted in Riggs’ Form 10-Q for the quarterly period ended September 30, 2004, RIBC terminated business operations during the third quarter of 2004.

In January 2005, Riggs entered into a new Cease and Desist Order (the January 2005 Cease and Desist Order) with the Federal Reserve. The January 2005 Cease and Desist Order replaces the May 2004 Cease and Desist Order, which was terminated by the Federal Reserve. Under the January 2005 Cease and Desist Order, Riggs is required to, among other things, (1) continue to implement the plans required by the May 2004 Cease and Desist Order to strengthen management, board oversight and risk management, (2) develop capital, strategic and contingency plans, (3) continue to implement and enhance its internal audit program, and (4) ensure the maintenance and availability to supervisory authorities of all records of RIBC. In addition, as required by the May 2004 Cease and Desist Order, Riggs has agreed to continue to obtain the prior approval of the Federal Reserve in order to pay dividends on its common stock, pay distributions on its trust preferred securities and repurchase stock. As previously disclosed, due to the desire of Riggs to retain the strongest possible capital levels at both Riggs and Riggs Bank, Riggs has suspended the payment of its dividend on common stock and distributions on its trust preferred securities.

Primarily as a direct result of the above noted BSA criticisms, each of Riggs Bank and Riggs has been designated as being in a “troubled condition” by the OCC and the Federal Reserve, respectively. A bank or bank holding company that is classified as being in a troubled condition must have any new director or executive officer approved in advance by the OCC or Federal Reserve, as the case may be, and is subject to restrictions on making severance payments to its directors, officers and employees under the FDIC’s “golden parachute regulations.” In addition, entities that are in a “troubled condition” are subject to increased regulatory supervision. The increased regulatory supervision has resulted and is expected to continue to result in more frequent and intensive examinations. The results of these examinations, as well as changes in circumstances, or the failure of Riggs and Riggs Bank to comply with the Consent Orders and the Cease and Desist Order could result in amended or additional regulatory sanctions and civil money penalties.

In response to the regulatory concerns which led to Riggs Bank entering into the July 2003 Consent Order with the OCC, Riggs Bank undertook numerous actions including, among others, (i) the establishment of Riggs Bank’s Compliance & Security Department and the hiring of qualified individuals with compliance and investigative experience; (ii) the implementation of policies and procedures that govern account opening, monitoring and reporting processes; (iii) the creation of a board-level BSA Compliance Committee, which oversees Riggs Bank’s implementation of its BSA/ AML compliance program (iv) the reconstitution of Riggs Bank’s BSA Management Committee, which provides leadership and coordinated supervision of Riggs Bank’s BSA/ AML initiatives and attempts to ensure that regulatory issues are communicated promptly and addressed effectively; (v) the formation of Riggs Bank’s Suspicious Activity Reporting Committee, which reviews investigative reports and determines if SARs should be filed; (vi) the modification of Riggs Bank’s new EPS technology platform, to provide for a more sophisticated technological foundation for the advanced BSA systems and capabilities being implemented at Riggs Bank; (vii) the implementation of software upgrades to improve the detection, monitoring and reporting of suspicious activity; and (viii) the implementation of new and extensive in-house training on compliance with the BSA, the USA Patriot Act, Customer Identification Programs, suspicious activity identification, and related policies to attempt to ensure that Riggs Bank’s employees, officers and directors are adequately informed of, and properly trained to carry out, Riggs Bank’s compliance policies and procedures.

Riggs Bank has undertaken a revised plan of corrective action in response to the May 2004 Consent Order, the January 2005 Consent Order, the January 2005 Cease and Desist Order and the civil money penalty orders entered into in May 2004.

Pursuant to the revised plan of corrective action, on July 7, 2004, Riggs approved numerous policies and procedures for enhancing Riggs Bank’s BSA internal controls applicable to Riggs Bank’s account relationships and related staffing needs. In addition, in July 2004, Riggs approved policies and procedures related to Riggs’ internal audit and risk management procedures as well as BSA and anti-money laundering controls at RIBC. Riggs Bank has implemented several mechanisms to attempt to ensure effective implementation of Riggs Bank’s BSA internal control policies and procedures. The BSA Compliance Committee of the Board of Directors of Riggs Bank currently receives tracking reports at each of its meetings on management’s progress in implementing these policies and procedures. These tracking reports are also being reviewed by an outside consultant retained by Riggs Bank to assess Riggs Bank’s progress.

Riggs Bank has also developed detailed plans to implement the BSA internal control policies and procedures. The plans outline specific action steps that must be taken to implement the policies and procedures and include a process for validations. The plans also specify the Bank management responsible for completing each action step, as well as the date by which each step is expected to be completed.

In addition, Riggs Bank has made numerous changes to its internal audit function to improve the integrity and effectiveness of the bank’s BSA compliance policies and procedures. To improve its BSA internal audit process, in March 2004, the bank’s management revised its BSA internal audit plan.

Upon learning of the deficiencies cited by the OCC in the BSA internal audits, Riggs Bank actively sought to remedy the audit deficiencies and develop an internal audit program sufficient in scope to improve the testing of the bank’s BSA compliance policies and procedures. Riggs Bank replaced its outsourced internal audit provider in June 2004 and retained an outside consultant in August 2004 to provide outsourced internal audit management services and to provide quality assurance reviews of Riggs’ outsourced internal audits, including Riggs’ outsourced BSA internal audits.

In August 2004, Riggs Bank hired an internal audit liaison manager to oversee and coordinate the Bank’s outsourced internal audit function. In October 2004, the Bank’s internal audit department engaged a BSA audit compliance expert to further assist the Bank in overseeing the audits of its BSA compliance policies and procedures. In addition, in September 2004, Riggs Bank named an interim Chief Risk Officer.

Finally, to attempt to provide that immediate actions are undertaken to remedy deficiencies cited in internal audit reports, these reports, including BSA internal audit reports, are submitted to the Audit Committees of the Boards of Directors of Riggs Bank and Riggs and discussed at Audit Committee meetings. The Internal Audit Liaison Manager tracks reportable findings until their resolution and provides interim progress updates to the Audit Committee.

In addition to the actions taken by Riggs Bank described above to improve the Bank’s BSA-related internal controls and internal audit function, Riggs Bank has undertaken numerous steps to attempt to increase the effectiveness of Riggs Bank’s compliance with the BSA. These actions include, among others (i) the implementation of enhanced suspicious activity

monitoring and reporting processes; (ii) the implementation of policies and procedures to attempt to ensure that the Bank’s books and records, including electronic information systems, are maintained in a complete and accurate condition; (iii) the implementation of policies and procedures to verify that information required by the BSA is appropriately documented, filed and maintained, and also sets forth the necessary actions to correct and verify any inaccurate or incomplete books and records; (iv) revising the bank’s policies and procedures for SAR filings; and (v) the hiring of Lawrence Connell, a respected banker and former bank regulator, who has senior management responsibility for overall compliance with the OCC Consent Orders and the Federal Reserve Cease and Desist Order and is the Bank’s chief regulatory liaison.

Riggs’ BSA-related regulatory problems have significantly increased its costs of doing business and Riggs expects to continue to incur significant expenses in connection therewith. For 2004, Riggs had approximately $49 million of consulting costs, merger costs, legal costs and audit costs, a large part of which was attributable to BSA matters. Because it has been designated as being in a troubled condition, Riggs Bank’s FDIC quarterly insurance assessment increased by approximately $56 thousand from the second to the third quarter of 2004.

The July 2003 Consent Order is included in a Current Report filed by Riggs on Form 8-K dated July 17, 2003. The May 2004 Consent Order, the OCC Consent Order of Civil Money Penalty, the May 2004 Cease and Desist Order and the Assessment of Civil Money Penalty of the Financial Crimes Enforcement Network are each included in a Current Report filed by Riggs on Form 8-K dated May 17, 2004. The January 2005 Consent Order and January 2005 Cease and Desist Order are each included in a Current Report filed by Riggs on Form 8-K dated January 27, 2005.

Competition and Environment

The Company faces significant competitive pressures from local, regional, national and international banking institutions as well as thrifts, finance companies, credit unions, brokerage and insurance companies and other financial intermediaries. Many of the Company’s competitors are larger and have greater financial and other resources than Riggs. The Company may be impacted, however, by future changes in social, political or economic environments, domestic and foreign terrorism, or a deterioration of the public’s confidence in the banking system or the Company. Many of these factors are beyond the Company’s ability to control.

While Riggs is not dependent on any individual loan, deposit or wealth management customer, the withdrawal of funds by a combination of large depositors or the repayments of loans by a combination of large borrowers or the termination of several large wealth management relationships could negatively impact operating results, financial condition or liquidity. See Risk Factors on page 21.

Additional Information

The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at www.sec.gov.

Beginning in 2003, the Company also makes available free of charge on or through its Internet website (www.riggsbank.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC.

Riggs owns the properties located in Washington, D.C., which house its executive offices, fourteen of its branches and certain operational units of Riggs Bank. The Company also owns an office building in Maryland, where additional operational units of Riggs Bank are located. Further, it leases various properties in: Washington, D.C.; London (England); Jersey (Channel Islands); New Haven, Connecticut; Northern Virginia and Maryland. A residential property in London was sold in the third quarter of 2004 for a gain of $2.5 million, and an office building in London was sold at a gain of approximately $5.0 million in the first quarter of 2005. Additional information concerning the Company’s facilities can be

found in Notes 1, 3 and 7 of Notes to Consolidated Financial Statements. The facilities the Company owns and leases are adequate to meet the needs of its customers and its operating requirements.

On January 27, 2005, pursuant to an agreement with the United States Attorney for the District of Columbia and the Department of Justice, Riggs Bank pled guilty to a single felony count of failing to file timely and/or accurate Suspicious Activity Reports as required by the Bank Secrecy Act and its implementing regulations in connection with certain customer transactions in Riggs Bank’s now-discontinued embassy banking and international private banking businesses. Under the agreement, Riggs Bank will pay a $16 million fine to federal authorities, and has agreed to a five-year period of corporate probation upon sentencing and the entry of an order of conviction. The five-year period of corporate probation would terminate immediately upon the closing of the acquisition of Riggs by PNC or any other change of control transaction. The agreement confirms that the United States will not bring any additional criminal charges against Riggs Bank, Riggs, or any related entity in connection with any matters arising from the conduct related to the now-discontinued embassy banking and/or international private banking businesses of Riggs. The agreement also reflects that Riggs fully cooperated with the investigation that was conducted by the United States Attorney for the District of Columbia and the Department of Justice and that Riggs’ own internal investigation uncovered wrongdoing that was the subject of the guilty plea. The guilty plea and the expected sentencing could have adverse effects on the business of the Company and the Bank. A copy of the agreement with the United States Attorney for the District of Columbia and the Department of Justice and certain other documents related to the agreement are included on a Current Report filed by Riggs on Form 8-K dated January 27, 2005. On March 29, 2005, the United States District Court for the District of Columbia accepted the agreement and sentenced Riggs Bank in accordance with the terms of the agreement. The payment is covered by a $16 million reserve accrued as of December 31, 2004.

Riggs remains subject to numerous investigations by, and inquiries from, various other U.S., foreign and other governmental agencies and authorities. Some of the investigations and inquiries also involve current or former employees of Riggs. Riggs understands that these investigations and inquiries (to which there are generally no specified time periods) include, among other things, accounts associated with Equatorial Guinea, Saudi Arabia and Augusto Pinochet Ugarte (“Pinochet”), Riggs’ anti-money laundering (“AML”) and BSA compliance, the use of Riggs Bank’s airplane and other property and personnel, and the activities of the former Chief Risk Officer of Riggs both while at Riggs and at the OCC. Riggs is currently in the process of its own review of certain of these matters.

The U.S. Senate Permanent Subcommittee on Investigations (the PSI) is conducting an investigation of certain matters relating to Riggs, including those relating to Equatorial Guinea, Pinochet, BSA/ AML Compliance and the former Chief Risk Officer of Riggs. This investigation formally commenced in March of 2003. The PSI minority staff issued a report on July 15, 2004 in conjunction with a hearing the PSI held that same day. The PSI released a revised version of this staff report on September 24, 2004, then on October 15, 2004, PSI issued a Print of the July 15, 2004 hearing which included a revised version of the minority staff report. A follow-up staff report was issued on March 16, 2005. Riggs has been cooperating with this investigation, which has included providing documents and materials.

The U.S. Senate Committee on Governmental Affairs is conducting an investigation regarding Riggs. It has requested various documents and materials from Riggs principally concerning accounts related to Saudi Arabia and related persons as well as BSA/ AML compliance. This investigation was formally commenced in April of 2004. Riggs has been cooperating with this investigation, which has included providing documents and materials.

The OCC and the Federal Reserve have been reviewing various matters at Riggs, including the activities of certain current and former employees. These matters appear to include the accounts associated with Pinochet, accounts associated with Saudi Arabia, BSA/ AML compliance, compensation, and the use of Riggs Bank’s airplane and other property and personnel. Riggs has been cooperating with these reviews, which has included providing documents, audio recordings of Board meetings and other materials.

The OCC is also continuing to review the involvement of employees, officers and directors of Riggs Bank in connection with its compliance with anti-money laundering laws and regulations and its July 2003 Consent Order with the OCC and is considering whether to institute a civil money penalty proceeding against such individuals. In connection with that review, Riggs Bank’s directors and certain officers, as well as two former officers, have been afforded the opportunity by the OCC to submit information to the OCC and have done so.

Riggs has received a subpoena from the District Attorney of the County of New York requesting various documents and material relating to Equatorial Guinea and related interests and a similar request from the Fort Worth District Office of the Securities and Exchange Commission and is cooperating and complying with each of the foregoing. The U.K. Financial Services Authority has also made various inquiries regarding certain activities related to accounts associated with Pinochet and related persons in the Riggs’ London operations.

The Office of the Inspector General of the U.S. Treasury Department has served three subpoenas on Riggs, seeking, among other things, materials and documents related to Riggs’ former Chief Risk Officer. Riggs understands that the DOJ is reviewing the activities of Riggs’ former Chief Risk Officer both while at Riggs and the OCC.

On April 7, 2004 and April 28, 2004, Riggs shareholders filed substantially similar purported derivative actions in the Court of Chancery of the State of Delaware in and for New Castle County against certain current and former members of Riggs’ Board of Directors. On April 17, 2004, Riggs shareholders filed a purported derivative action in the Superior Court of the District of Columbia against certain current and former members of Riggs’ Board of Directors, substantially similar to the actions filed by Riggs shareholders in the Court of Chancery of the State of Delaware in and for New Castle County. The complaints each allege that the directors violated their fiduciary duties in relation to a variety of matters, including, among others, the compliance by Riggs with various anti-money laundering laws and various aspects of Riggs Bank’s international and embassy businesses. The lawsuits each seek, on behalf of Riggs, among other things, monetary damages and certain types of equitable relief. The two Delaware actions have been consolidated and on November 19, 2004 the plaintiffs filed a consolidated and amended complaint challenging the terms of the original merger agreement. The consolidated and amended complaint repeated and supplemented the allegations and claims in the original purported derivative actions and added a shareholder class action claim against the directors. The consolidated and amended complaint also sought to enjoin the PNC transaction on the grounds that the proxy statement (which was preliminary at the time) did not adequately disclose the alleged breaches by the directors and their real, allegedly self-interested, reasons for the transaction. On January 31, 2005, the defendants filed a motion to dismiss the Delaware action in its entirety. On February 22, 2005, the plaintiffs filed a second amended complaint that added a class claim against the Riggs directors asserting that the directors violated their fiduciary duties by failing to auction Riggs after PNC allegedly attempted to abandon the original merger.

On February 25, 2005, Riggs and PNC entered into an agreement in principle with plaintiff’s counsel to settle the Delaware action. In the settlement, PNC will contribute $2.7 million in cash into a settlement fund to be distributed to all public stockholders of Riggs (other than persons named as defendants in the Delaware action and their affiliates). In addition, PNC has agreed that the maximum amount of the termination fee payable under the parties’ amended merger agreement will be reduced from $30 million to $23 million, and plaintiffs’ counsel in the action was afforded the opportunity to review and comment on the proxy statement/prospectus relating to the merger before it was filed on February 25, 2005. The settlement will provide for a dismissal of the Delaware litigation with prejudice and the complete release of all claims that Riggs and Riggs’ stockholders may have during the period from July 15, 2004 through the completion of the merger against Riggs, the Riggs director defendants or PNC, which arise out of, or relate to, Riggs’ banking practices or the proposed merger. The settlement is subject to completion of the merger and customary conditions, including negotiation of a definitive settlement agreement and approval by the Delaware Court of Chancery. The payment is covered by a $2.7 million reserve accrued as of December 31, 2004.

On September 16, 2004, Judge Don Baltasar Garzon, Magistrate-Judge of the Central Investigative Court Number 5 of the Audiencia Nacional in Spain (the Spanish Court), allowed a complaint to be brought against seven current or former directors or employees of Riggs as defendants (collectively, the “individual defendants”) for the alleged concealment of assets and money laundering offenses. The Magistrate Judge allowed such complaint to be pursued within the already existing summary proceeding concerning a criminal complaint instituted in 1996 against Pinochet on behalf of the alleged victims of Pinochet’s alleged genocide, terrorism and torture. Riggs and Riggs Bank have been added as defendants with subsidiary civil liability in the amount of approximately $13 million in the event that the individual defendants do not satisfy any monetary judgment entered against them. In addition, the Spanish Court resolved to send letters rogatory (a judicial request) to the United States Attorney General in order that, among other things, a preventive attachment order be issued on the assets of Riggs Bank, Riggs and certain individual defendants to post the above mentioned sum as a bond. Riggs has also been provided with a draft of a complaint that may be filed in a related U.S. action. The draft complaint makes allegations similar to those made in the Spanish suit and seeks, among other things, compensatory and punitive damages.

On February 25, 2005, the Spanish Court issued an order in the previously disclosed Spanish litigation dismissing all criminal and civil claims against Riggs and seven of its former and current directors and officers. The Spanish Court’s order also dissolves related orders including the previously disclosed letters rogatory that the Spanish Court resolved to send to the United States Attorney General.

The Spanish Court’s order was issued in connection with a settlement entered into on January 27, 2005 between Riggs and the private plaintiffs who had initiated the Spanish proceedings against the Riggs defendants under which Riggs agreed to pay $8 million and to provide the plaintiffs, consistent with Riggs’ legal obligations, information concerning Pinochet’s accounts at Riggs. The payment is covered by the previously disclosed $8 million litigation reserve accrued as of December 31, 2004.

On September 10, 2004, Allison Vadhan et. al. and on September 13, 2004 Cantor Fitzgerald & Co. et. al., respectively, filed substantially similar suits in the United States District Court for the Southern District of New York against Riggs. The complaints each assert that because of Riggs’ allegedly deficient anti-money laundering program, Riggs was negligent in failing to alert the United States financial authorities to suspicious financial transactions that the plaintiffs claim were related to the September 11, 2001 terrorist attacks. The lawsuits seek, among other things, compensatory, punitive and/or exemplary damages. The Cantor Fitzgerald suit was dismissed without prejudice after the parties entered into a Tolling Agreement.

On November 18, 2004, Freeport Partners, LLC filed a class action suit against current and former members of Riggs and Riggs Bank’s boards of directors in the United States District Court for the District of Columbia. The complaint asserts that Riggs’ allegedly deficient anti-money laundering program resulted in violations by the defendants of the Racketeer Influenced and Corrupt Organization Act and breaches by the defendants of their fiduciary duties. The lawsuit seeks, among other things, recovery of economic damages and attorneys’ fees. On or about February 17, 2005 the defendants filed a motion to dismiss the complaint. On March 14, 2005 plaintiff filed an amended complaint which dropped as defendants all directors who had never been employees of Riggs and added allegations regarding the amended and restated merger agreement with PNC. The remaining defendants will be responding to the amended complaint.

On February 15, 2005 a creditor of a former Riggs Bank customer, whose account was attached by that creditor and closed in or about 1999, met with lawyers for Riggs Bank and indicated that it believed Riggs Bank may have engaged in “commercial bad faith” regarding the customer’s account at the time it was active. The creditor, which had entered into a tolling agreement with Riggs Bank months before based on a generally unspecified claim, indicated that it may file a complaint against Riggs Bank seeking in excess of $12 million in damages. Riggs Bank believes that it would have substantial defenses to any such claim and as such no accrual for a loss was recorded at December 31, 2004.

It is not possible for Riggs to predict the impact from many of these lawsuits, investigations, inquiries and matters nor the timing of any such impact, and they could result in the bringing of additional civil claims against Riggs and its subsidiaries or criminal and additional civil claims against its current and former employees and directors, additional regulatory sanctions and financial judgments and settlements which could have a material adverse impact on Riggs’ business, financial condition or results of operations and strategies which Riggs cannot quantify at this time.

No matters were submitted to security holders for vote during the fourth quarter of 2004.

PART II

The common stock of the Company is traded on The Nasdaq National Market under the symbol: “RIGS.”

A history of the Company’s stock prices and dividends is as follows:

As of February 28, 2005, there were 1,558 shareholders of record.

As discussed further in Part I, Item 1 of the Annual Report on Form 10-K, the January 2005 Cease and Desist Order requires the Company to obtain the prior approval of the Federal Reserve in order to pay dividends on its common stock, pay distributions on its trust preferred securities and repurchase stock. Riggs suspended the payment of its dividend on common stock and distributions on trust preferred securities. Under the terms of its trust preferred securities, Riggs cannot pay dividends on its common stock if there are accrued but unpaid distributions on its trust preferred securities. There are currently approximately $15.3 million in accrued but unpaid distributions on Riggs’ trust preferred securities, a portion of which is due to a subsidiary of Riggs that repurchased some of the outstanding trust preferred securities. In addition, pursuant to the May 2004 Consent Order and January 2005 Consent Order, Riggs Bank must obtain prior approval of the OCC to pay a dividend to the Company.

Information relating to compensation plans under which equity securities of the Company are authorized for issuance is set forth in Part III, Item 12 of the Annual Report on Form 10-K.

Sale of Unregistered Securities

On May 27, 2004, the Company sold to Anthony P. Terracciano 400 shares of its common stock, par value $2.50 per share. Mr. Terracciano paid $18.52 per share, which was the per share closing price reported on the NASDAQ National Market System on May 26, 2004. The aggregate consideration paid by Mr. Terracciano to the Company for the shares was $7,408. Mr. Terracciano acquired the shares in order to qualify as a member of the Company’s Board of Directors. The sale of the shares to Mr. Terracciano was exempt from registration under the Securities Act of 1933 pursuant to Regulation D.

Read the following information along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes included in this Annual Report on Form 10-K.

This overview is a summary-level presentation of those factors that are deemed most relevant to understanding the Company’s financial condition and results of operations. For a more complete understanding of the significant factors that influenced the Company’s financial performance during the past three years, read all of the following discussion and analysis and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that are subject to risks, uncertainties and other factors that could cause actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. See Forward-Looking Statements on page 3.

As previously described, Riggs National Corporation is a bank holding company headquartered in Washington, D.C. The Company engages in a variety of banking and financial services including community, commercial and international banking, trust and investment management services and venture capital investing. The Company conducts its activities through five reportable segments: Banking, International Banking, Treasury, Riggs Capital Partners (venture capital) and Other. With the exception of venture capital investing and issuance of trust preferred securities, the activities of the Company are primarily conducted through its principal operating subsidiary, Riggs Bank, and its subsidiaries and divisions. Venture capital investing is performed through two subsidiaries of Riggs, Riggs Capital Partners LLC and Riggs Capital Partners II LLC.

On July 16, 2004, Riggs entered into an Agreement and Plan of Merger with The PNC Financial Services Group, Inc. (PNC), a $77 billion financial services company based in Pittsburgh, Pennsylvania. On February 10, 2005, Riggs and PNC amended and restated the Agreement and Plan of Merger pursuant to which Riggs will merge with and into PNC, with PNC surviving the merger and continuing its corporate existence under Pennsylvania law. The Amended and Restated Agreement and Plan of Merger, which, except for the change in the value to be paid for Riggs shares, is substantially similar to the original agreement, values each share of Riggs common stock at approximately $20.00 based on PNC’s closing NYSE stock price of $54.58 on February 7, 2005. The aggregate consideration is composed of a fixed number of approximately 6.4 million shares of PNC common stock and $286 million in cash in exchange for all Riggs common shares outstanding, subject to adjustment. Riggs stock options will be cashed out prior to closing, if not exercised.

The transaction is expected to close as soon as possible and no later than May 31, 2005. The merger remains subject to customary closing conditions, including regulatory approvals and the approval of Riggs shareholders, and the receipt of exemptions from the Department of Labor and the SEC to mitigate the potential business impact of Riggs Bank’s plea agreement with the Department of Justice. The exemption sought from the Department of Labor would allow Riggs and PNC to retain “qualified professional asset manager” status and the exemption sought from the Securities and Exchange Commission would allow PNC to continue to advise registered mutual funds under Section 9 of the Investment Company Act of 1940, notwithstanding Riggs Bank’s plea agreement with the Department of Justice.

The Company has 51 branch locations and 138 ATMs in the metropolitan Washington, D.C. area. There are additional operations or subsidiaries in London (England), Jersey (Channel Islands) and Nassau (Bahamas). As previously discussed, Riggs began exiting its International businesses and operations in 2004 and expects to complete this exit in early 2005. Riggs serves an array of customers including individuals, partnerships, corporations, foundations, and not-for-profit organizations.

The Company’s principal sources of revenue are net interest income and noninterest income. Net interest income is the largest component of revenue and is the difference between what the Company earns on interest earning assets, such as loans, securities, and short-term investments, and what it pays on interest bearing liabilities, such as deposits and borrowings. Noninterest income, the next largest component of revenue, primarily represents service charges and fees earned on loans, deposits and assets under management, venture capital gains or losses and net securities gains or losses. Noninterest expense comprises the Company’s operating expenses and includes salaries and benefits, occupancy, data processing, consulting, legal, advertising, and other expenses.

The following summarizes the Company’s tax-equivalent net interest income, net interest margin, and interest rate spread for the three years ended December 31, 2004. Net interest margin is net interest income on a tax-equivalent basis as a percent of average earning assets. Interest rate spread is the difference between the rate it earns on interest-earning assets and the rate it pays on interest-bearing liabilities.

The three years ended December 31, 2004 were generally a period of historically low interest rates during which it became increasingly difficult to adjust the pricing of funding sources as rapidly as earning assets. While rates began to rise in mid-2004, these relatively low rates led to rate compression which caused net interest income, net interest margin and interest rate spread to decrease. As explained in Results of Operations beginning on page 28, declining interest rates also adversely impacted the Bank’s previously disclosed leverage program as did changes in authoritative accounting literature (see Riggs Capital on page 4 and Results of Operations on page 29) and the methodology by which Riggs is compensated as a financial agent bank by the U.S. Treasury (see Results of Operations on page 29). During 2004, Riggs began a program to acquire brokered deposits to replace funding previously provided from its International business and to enhance Bank liquidity during a period of significant change and scrutiny. Brokered deposits are generally obtained at a higher cost than deposits from traditional Bank customers which adversely impacted net interest income and the related margins.

Noninterest income for the prior three years has been:

The decline in noninterest income from 2003 to 2004 of $10.6 million is primarily the result of a reduction in securities gains of $13.1 million somewhat offset by an improvement in venture capital results of $7.8 million year over year. The comparison of 2004 to 2003 is also negatively impacted by $3.7 million in non-recurring gains in the prior period including an insurance gain of $2.2 million and the gain on sale of Riggs proprietary mutual funds of $1.2 million.

Noninterest expense for the prior three years has been:

The large expense increase in 2004 includes several significant items. Riggs incurred $51.7 million in fines and settlement costs during 2004. This was from a $25.0 million fine from the OCC and the Financial Crimes Enforcement Network in the second quarter of 2004, a $16 million fine from the United States Department of Justice recorded in the fourth quarter of 2004, an $8 million accrual for previously disclosed matters in the fourth quarter of 2004 related to litigation in Spain and $2.7 million for settlement of stockholder litigation. The Company also incurred $48.7 million in costs related to regulatory compliance including costs for attorneys, consultants and auditors inclusive of costs related to the planned merger with PNC. In addition, the Company recorded $24.8 million of net expenses in 2004 to exit International operations and expects to incur an additional $11.6 million in 2005.

The Company’s net income (loss) for the three years ended December 31, 2004 has been:

The Company’s asset quality at December 31, 2004 is strong with nonaccrual and renegotiated loans of $430 thousand, which represents 0.01% of all loans. At December 31, 2004, the Company’s reserve for loan losses is approximately four

times the total of nonaccrual, renegotiated and ninety-day past-due loans. The Company’s regulatory capital exceeds regulatory requirements and the Company and the Bank are “well-capitalized” under federal bank regulatory guidelines.

The Company opened 4 new branches in 2004 but found it necessary to curtail plans to open ten branches per year during the next three years. The branch expansion plan was delayed as a result of Riggs’ decision to preserve capital in light of regulatory challenges during 2004. A new branch facility typically requires an investment of between $500 thousand and $1.5 million depending upon the location and type of branch. The Company also curtailed plans to remodel all of its branches by the end of 2005 because of regulatory challenges it faced during the year and its desire to conserve capital.

RISK FACTORS

The Company is exposed to numerous risks that could adversely impact operating results, financial condition, and cash flows. In an effort to mitigate these risks, the Company has various policies, personnel and committees that establish limits for and monitor various aspects of its risk profile, which are monitored by the Chief Risk Officer. The Chief Risk Officer develops and implements entity-wide risk management policies, serves as internal consultant regarding risk management matters and works with other management members to identify and resolve potential risk management issues.

Geographic Concentration Risk

A significant majority of the Company’s assets, deposits and fee income is generated in the Washington, D.C. metropolitan area. As a result, deterioration of local economic conditions in this metropolitan area could expose the Company to losses associated with higher loan default rates and lower asset collateral values, deposit withdrawals and other factors that could adversely impact its financial condition and results of operations.

Exposure to International Events

The Company’s exposure to customer relationship risk has been significant because of its concentration of foreign customers, including foreign governments. These customers may be subject to deteriorating economic conditions, political and social upheaval, currency depreciation or devaluation, as well as nationalization and expropriation of assets or other factors over which the Company has no control, some or all of which may adversely impact the performance or financial condition of the Company. Moreover, terrorist activities and other hostile actions against U.S. interests could have an adverse impact upon the general economic condition of the Company’s foreign customers, as well as the U.S. economy, thereby impacting the activities and performance of the Company. However, the Company began exiting all of its International operations during 2004 and expects to complete the exit in early 2005. Once complete this exit will likely improve the overall risk of exposure to international events.

Fluctuations in Interest Rates (Market Risk)

Significant increases in market interest rates, or the perception that an increase may occur, could adversely impact the Company’s ability to generate new variable loans and cause the value of its fixed-rate assets to decline. An increase in market interest rates may also adversely impact the ability of adjustable rate borrowers to meet repayment obligations, thereby causing nonperforming loans and loan charge-offs to increase. Significant decreases in market interest rates could result in an acceleration of loan repayments thereby mitigating the positive impact of declining interest rates on fixed rate assets. Changes in market interest rates, including changes in the relationship between short-term and long-term market interest rates or between different rate indices, can impact interest rate spread. See Sensitivity to Market and Other Risk on page 38.

Competition Risk

The Company faces significant competitive pressure from local, regional, national and international banking institutions as well as thrifts, finance companies, credit unions, brokerage and insurance companies and other financial intermediaries. Many of the Company’s competitors are larger and have greater financial and other resources. Riggs competes on the basis of localized decision-making, interest rates, convenient locations and quality of customer service. See Competition and Environment on page 15.

Credit Risk

The Company is exposed to credit risk on the loans and similar products it has in its portfolio. While the portfolio is closely monitored and an on-going analysis and evaluation of this risk is performed, because of the nature of the Company’s

business, unexpected credit losses may subsequently be identified as a result of additional analysis performed by the Company or comments received from regulatory examiners. In addition, collateral values may deteriorate subsequent to the making of a loan so that a loss exposure develops. See Asset Quality on page 34.

Legislative and Regulatory Risk

The Company’s operations are subject to extensive regulation by federal banking authorities and are also subject to various laws and judicial and administrative decisions imposing requirements and restrictions on its operations. Policies adopted by these regulatory and administrative entities can impact the Company’s operations. In addition, these authorities periodically conduct examinations of the Company and may impose various requirements or sanctions. The regulatory environment may periodically change significantly as new laws and regulations are promulgated. As a result of new laws and regulations, the competitive environment may also change significantly. See Regulation-General on page 5.

Dividend Limitation Risk

The Company is a holding company and its operations are conducted primarily through its operating subsidiary, Riggs Bank. RNC’s ability to pay dividends to its shareholders and to service its debt is dependent primarily upon the ability of the Bank to make dividend and other payments to RNC. As of December 31, 2004, the Company had approximately $50 million of available liquid assets compared to $144 million at December 31, 2003. Certain laws and regulatory requirements restrict the ability of Riggs Bank to make such payments to the Company. During 2004 the Company discontinued payment of a dividend on its common stock. The Company also exercised its option to suspend payments on its Trust Preferred Securities in November, 2004. See Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Payment of Dividends and Capital Adequacy on pages 6, 7, and 19.

Liquidity Risk

The Company closely monitors its liquidity position including its sources of funding and commitments to fund assets or deposit withdrawals. The Company maintains several credit facilities and the Company’s securities available for sale portfolio is very marketable and is, therefore, a source of liquidity. In addition, substantially all of the securities available for sale portfolio can be pledged to secure borrowings. While marketable, liquidating the securities available for sale portfolio to fund liquidity requirements may result in the recognition of a loss. The Company believes it has sufficient liquidity to fund its commitments. However, changes in the stability of the economic, social or political environments culminating in withdrawals by several of the Bank’s largest depositors could have an adverse impact on the Company’s liquidity position. Also, deterioration in the public’s confidence in the banking system in general or the Company in particular could adversely impact liquidity. Despite the fact that in 2004 the Company experienced a significant level of negative attention related to its international operations, regulatory compliance, and other matters, the overall level of domestic customer deposits and domestic loans did not decline significantly in 2004. See also Commitments and Liquidity on page 34.

Operational Risk

The Company relies on various information systems for operating significant aspects of its business, including loan and deposit information, as well as internal management systems. These systems and the Company’s operations are vulnerable to, among other things, damage or interruption from natural disasters, power loss, network failure, improper operations, security breaches, computer viruses or intentional sabotage. Controls and procedures have been implemented where practical to mitigate these risks, but any disruption in the Company’s various information systems could adversely impact its operations which may affect its results of operations and financial condition. In addition, noncompliance with laws, regulations or contractual obligations, or failure to perform in accordance with industry standards could result in additional claims for damages, fines or monetary sanctions including, but not limited to, monetary sanctions which may be imposed under the provisions of the BSA and related regulations.

Consent Order, Civil Money Penalty and Other Matters

See Part I, Item 1 — Business and Note 10 of Notes to Consolidated Financial Statements for information related to the Consent Order, Civil Money Penalty and Other Matters.

Reputation Risk

Riggs strives to operate in a professional manner and has implemented various personnel policies and procedures, including an employee code of conduct applicable to all employees, to help ensure the maintenance of integrity and professionalism. Nevertheless, Riggs or its employees may fail to perform in accordance with these policies and procedures, or Riggs may find itself in a situation that is embarrassing from a public relations perspective and, upon this information becoming public knowledge, may suffer damage to its reputation. This damage could adversely impact customer confidence and have an adverse impact on the Company’s financial condition and results of operations. In 2004, Riggs experienced a significant level of negative attention related to its international operations, regulatory compliance, and other matters. This resulted in a significant increase in the level of reputation risk.

Risk Caused by Fluctuations in Currency Values

Riggs is exposed to changes in the relative values of the currencies in which it conducts business and the value of the United States dollar. Where deemed appropriate, the Company has attempted to mitigate this risk by entering into hedging transactions. See Note 20 of Notes to Consolidated Financial Statements. The Company also monitors on a quarterly basis its total risk exposure on a country-by-country basis and has established maximum risk exposures for each country. See Sensitivity to Market and Other Risk on page 38.

Reliance on Outside Vendors for Significant Overhead-Related Activities

The Company has made a significant investment in the utilization of third-party vendors to provide it with certain core services, such as, but not limited to, information technology services and telecommunications. Should these service providers fail to provide the Company with the products and services contracted for, fail to keep current with market standards in their respective industries or curtail or cease operations due to market or other conditions, the Company’s operations could be negatively impacted.

Disintermediation

In the banking and financial services businesses, disintermediation is the process in which customers and potential customers bypass banks and other traditional financial institutions thereby depleting anticipated revenue streams. While the Company continues its efforts to make its products and services an integral, valuable component of its customers’ financial transactions, the possibility of disintermediation is an inherent risk in the banking and traditional financial services business as customers may migrate to other financial intermediaries.

Concentration of Ownership

Members of a family beneficially own or control approximately 40% of the Company’s publicly traded stock. The effect of this concentration could impair or prevent the Company’s other shareholders from effecting certain actions deemed desirable by non-controlling shareholders.

Consummation of PNC Transaction

Although Riggs has pending an agreement to be acquired by PNC, the transaction remains subject to various closing conditions, including shareholder and regulatory approvals and clearances. See Note 2 of the Notes to Consolidated Financial Statements for information relating to the pending merger with PNC. In the event that the Company fails to complete the PNC transaction, it would expect to seek another transaction with another banking institution although no assurances can be given that it would be successful in doing so.

Litigation

See Part I, Item 3 — Legal Proceedings and Note 22 of the Notes to Consolidated Financial Statements for information relating to litigation involving the Company and the Bank.

Internal Controls

See Part II, Item 9A — Controls and Procedures for information relating to the Company’s internal controls.

Critical Accounting Policies and Estimates

Management of the Company has prepared the consolidated financial statements included in this Form 10-K in conformity with accounting principles generally accepted in the United States of America applied on a consistent basis and which

follow general practice within the banking industry. Accordingly, management of the Company is required to make certain estimates, judgments and assumptions that it believes to be reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Based on its consideration of accounting policies that involve the most complex and subjective estimates and assumptions as well as its analysis of whether and to what extent such estimates and assumptions will have a material impact on the Company’s financial condition or results of operations, management has identified the following critical accounting policies. Due to uncertainty inherent in these matters, actual results of future operations could differ from the estimates, judgments and assumptions used in applying these critical accounting policies.

Reserve for Loan Losses

The reserve for loan losses is maintained at a level deemed adequate to absorb probable losses in the loan portfolio. The determination of the adequacy of the reserve for loan losses is based upon an on-going, analytical review of the loan portfolio. This analysis requires application of judgment, subjective evaluation of economic uncertainties and assessment of business conditions that may change. Because of these and other factors, adjustments to the reserve for loan losses may be required in the future.

The analytical review of the loan portfolio performed to determine the adequacy of the reserve for loan losses includes a review of loans with balances over $250 thousand for impairment, an analysis of historical loss experience by loan type and, for groups of loans with similar characteristics, an evaluation of current economic conditions and all other factors considered pertinent to the analysis. Impaired loans are defined as those credits where the Company has determined it probable that all amounts due in accordance with the loan agreements will not be collected or recovered from the sale or disposition of collateral. Impaired loans are generally commercial and financial loans and commercial real estate loans and are usually on non-accrual status. Each impaired loan with an outstanding balance equal to or greater than $250 thousand has a specific, identified loan loss reserve associated with it. Impaired loans do not include groups of smaller balance homogeneous loans with similar collateral characteristics, such as residential mortgage and home equity loans. Loss reserves for these types of loans are established on an aggregate basis using historical loss experience, peer comparisons or other relevant measures. Balances related to impaired loans for which there are specific reserves are excluded when applying historical loss ratios to determine loan loss reserves.

The specific reserves for impaired loans are included in the reserve for loan losses. Impaired loans are usually valued based upon the fair value of the related collateral if the loans are collateral dependent. For all other impaired loans, the specific reserves are based on the present values of expected cash flows discounted at each loan’s initial effective interest rate.

Provisions to the reserve for loan losses are charged against, or credited to, earnings in amounts necessary to maintain an adequate reserve for loan losses. Commercial loans are charged-off when it is determined that they cannot be fully recovered and non-commercial loans are generally charged-off or loan foreclosure proceedings begun upon becoming 120 days delinquent or at such time as permitted by law or other regulations. Recoveries of loans previously charged-off are credited to the reserve for loan losses.

The Company maintains its reserve for loan losses in accordance with a policy approved by its Board of Directors. The Company has an established methodology for analyzing its reserve for loan losses that includes an internal loan classification policy. The Company periodically reviews its loan loss methodology to ascertain that it produces accurate assessments of probable loan losses. Domestic and international loans are subjected to similar review procedures.

The Company believes its credit monitoring procedures are adequate. However, credit losses are inherent to the business and it is possible there may be unidentified losses in the loan portfolio at December 31, 2004 that may become apparent at a later date pursuant to internal analysis or comments following regulatory examination. The establishment of additional loan loss reserves for problem credits that are currently unidentified or unanticipated would negatively impact future earnings. A charge, if any is needed, would be recorded in the segment in which the loan is recorded.

Venture Capital Investments

Venture capital investments are accounted for at fair value with gains and losses included in noninterest income in the Consolidated Statements of Operations.

At December 31, 2004, the Company valued its venture capital portfolio at $39.2 million. This valuation was arrived at using a variety of factors including market prices if available which may be discounted to reflect trading history, lock-up provisions, lack of market liquidity and other factors; cost, if there is no readily determinable market price and there has not been a material event, such as a follow-on round of financing or strategic sale; a value higher than cost if indicated by additional financing which fulfills certain requirements; and analysis and commentary from a fund’s Investment Manager/General Partner. At December 31, 2004 the largest investment in the venture capital portfolio on a fair value basis is valued at $3.7 million.

The valuation of venture capital investments is subject to uncertainty. The portfolio value does not represent a negotiated value between the Company and an independent, willing buyer. If the Company attempted to sell its venture capital portfolio, particularly if it deemed it necessary to liquidate the investments within a short period of time, the actual proceeds from the sale could differ significantly from the carrying value. In recent years the market for the type of venture capital investments Riggs holds has been negatively impacted by market conditions including a decline in the number of initial public offerings and acquisitions of private companies by publicly traded firms. The gradual improvement in these sectors has begun to afford the Company better liquidation opportunities and it continues to actively manage the portfolio to maximize current valuations. Although these and other factors have been assessed in determining current values, because of the subjectivity in determining values, it is possible that the Company would experience a loss if it chose to liquidate its venture capital portfolio, particularly if it attempted to do so quickly. The loss, if any, would be recorded in the Riggs Capital Partners segment.

Deferred Taxes

The Company records a provision for income taxes based upon the amount of current taxes payable (or refundable) and the change in net deferred tax assets or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement reporting purposes that will reverse in future periods. When substantial uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset is reduced by a valuation allowance. Establishing a valuation allowance causes an increase in income tax expense and requires significant judgement.

Uncertainty related to the utilization of deferred tax amounts generated by domestic subsidiaries, including foreign branches of domestic subsidiaries, resulted in the maintenance of a valuation allowance of $14.1 million and $9.0 million as of December 31, 2004 and 2003, respectively.

Uncertainty related to the utilization of deferred tax amounts generated by foreign subsidiaries resulted in the maintenance of a 100% valuation allowance of $9.4 million and $7.6 million as of December 31, 2004 and 2003, respectively.

Realized and unrealized losses in venture capital and other operations have resulted in the maintenance of $9.8 million of deferred tax assets as of December 31, 2004. This includes a reduction in deferred tax assets of $2.5 million in 2004. These assets can be utilized to reduce taxes payable on future capital gains but must be utilized within five years of the year in which the loss is realized for tax return purposes. As of December 31, 2004, a valuation allowance of $503 thousand was recorded against the deferred tax asset because it is not more likely than not that such assets will be recovered within the required time period. This includes a reduction of $6.4 million in 2004. The Company believes that the unreserved deferred tax asset balance of $9.3 million at December 31, 2004, which includes a deferred tax asset related to realized losses of $1.9 million, will be realized through generation of future net capital gains within its venture capital operations or the implementation of alternative business strategies that generate net capital gains. Management has identified several alternative business strategies that could produce sufficient capital gains to allow the deferred tax asset balance to be realized, including the sale of office buildings located in Washington, D.C.

If sufficient net capital gains within the Company’s venture capital operations are not realized in a timely manner, or if business conditions or other factors make it impossible, impractical or imprudent to implement alternative strategies, an additional valuation allowance, resulting in a charge against income for that portion of the deferred tax asset which will not be utilized, will be recorded in the Riggs Capital Partners segment.

Impairment of Long-Lived Assets

The Company tests for impairment in the carrying value of any asset or group of assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets, which were $5.0 million at December 31, 2004, are reviewed for impairment on at least an annual basis.

In 1999, the Company contracted to develop, implement and maintain a computer system to be utilized by the United States Department of the Treasury (the Treasury) in its cash management and reporting. Because of cost overruns and significant uncertainties relating to costs required to complete the system, the willingness of the Treasury to fund these additional costs and the recurring revenues to be realized upon implementation of the system, the Company recorded impairment charges of $8.4 million and $1.0 million in 2001 and 2002, respectively. There was no impairment charge in 2003 or 2004 related to this asset. This system became operational in September 2003 and, subsequent to December 31, 2003, Riggs and the government concluded negotiations that significantly reduced the uncertainties regarding recovery of costs incurred on the contract. Accordingly, beginning in the first quarter of 2004, the Company no longer reported this matter as a component of its “Critical Accounting Policies and Estimates.”

Gain and Loss Contingencies

The Company evaluates gain and loss contingencies in accordance with SFAS No. 5 (Accounting for Contingencies) and, when necessary, FASB Interpretation No. 14 (Reasonable Estimation of the Amount of a Loss, an interpretation of FASB Statement No. 5).

Gain contingencies are not recognized in the financial statements until the gain is realized, but the Company does evaluate the need to disclose such contingent gains in the notes to the financial statements. Loss contingencies are categorized as remote, reasonably possible or probable of occurring. Contingent losses for which chances of occurrence are remote are neither recognized nor disclosed in the financial statements. Reasonably possible contingencies are not recorded in the financial statements but, if material, are disclosed in the notes to the financial statements. Loss contingencies that are likely to occur are deemed probable of occurring. Probable loss contingencies that are material are recorded as liabilities in the financial statements at the estimated amount of the loss if such loss can be reasonably estimated. If no reasonable estimate of the loss can be made, but a range of possible losses can be reasonably ascertained, the minimum estimated loss will be accrued and the Company describes in its disclosure the remaining loss contingency.

The determination that a contingency is remote, reasonably probable or probable of occurring is made by the Company based upon known and pertinent knowledge which is deemed reliable. Additional information, or interpretations of knowledge previously deemed reliable, could become known at a future date which may cause the Company to reassess its evaluation of the contingency occurring.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the Company’s largest revenue source representing 60%, 61% and 67% of all revenues in 2004, 2003 and 2002, respectively. Revenues of the Company include net interest income and noninterest income.

Net interest income is affected by changes in the level of interest rates and the composition of interest-earning assets and interest-bearing liabilities. While the Company can exert some effect on its net interest income through its product pricing and promotional decisions, many factors, such as the overall condition of the economy, monetary policy, tax laws, credit demand and competition impact net interest income and are beyond the control of the Company (see Tables A and B of this Form 10-K).

Net interest income decreased $19.7 million, or 12%, in 2004 compared to 2003 and in 2003 decreased $21.7 million, or 11%, from 2002. Interest income decreased $1.7 million, from $231.9 million in 2003 to $230.2 million in 2004. Interest income for the prior year decreased $24.2 million from $256.1 million in 2002 to $231.9 million in 2003. Net interest margin was 2.88% in 2004 compared to 3.16% and 3.65% in 2003 and 2002, respectively.

In 2004, the Company began the process of exiting its International operations. As a result the overall level of international deposits declined from $1.37 billion at December 31, 2003 to $170.2 million at December 31, 2004. The decline in these deposits was partially offset by the Bank’s issuance of brokered certificate of deposits during 2004. At December 31, 2004 brokered CDs totaled $902.0 million. The Bank had no brokered CDs at December 31, 2003. Brokered CDs were generally

obtained at a higher cost than the international deposits, thus reducing net interest income. The decline in net interest income in 2003 from the prior year is also due to the rapid repayment of existing loans, particularly mortgage loans, stimulated by low interest rates. The Company estimates that approximately 46% of its mortgage loan balances at December 31, 2002 were paid-off during 2003 and an additional 20% of these balances were refinanced into lower rates. While Riggs participated aggressively in the competitive refinancing market, the loans it recorded were at lower rates than those previously on its books. In addition, many of the older loans had net deferred acquisition costs and purchase premiums which were charged against income at payoff.

Net interest income was also adversely impacted by a July 2003 change in the methodology by which the Treasury compensates financial agent banks. Prior to July 2003, Riggs was compensated by net interest earned on Treasury deposits, which was reflected in net interest income. Since July 2003, Riggs has been utilizing non-interest earning Treasury deposits to purchase a non-marketable, Treasury-issued depositary compensation security (DCS) for the same amount as the Treasury deposits. The DCS and deposit balances are netted in the Statements of Financial Condition in accordance with FIN 39 (Offsetting of Amounts Related to Certain Contracts) and income earned on the DCS is reflected in the Statements of Operations as non-interest income, rather than a component of net interest income. The average deposit balance that the Treasury maintained at Riggs Bank to compensate it as a financial agent bank was $472.0 million and $895.1 million in 2003 and 2002, respectively.

Beginning October 1, 2003, because of the adoption of FIN 46R, the Company will consolidate its business trusts if the Company has repurchased at least 50.0% of the trust preferred securities originally issued by a trust. As of December 31, 2004, the Company had repurchased $77.3 million, or 51.6% of a trust (Riggs Capital) that originally issued $150.0 million of trust preferred securities. As of December 31, 2004, the Company had repurchased $49.8 million, or 24.9%, of a trust (Riggs Capital II) that originally issued $200.0 million of trust preferred securities. Therefore, Riggs currently consolidates Riggs Capital and does not consolidate Riggs Capital II. As a result, Riggs Capital II payments are categorized as interest expense.

Interest income on a tax equivalent basis in 2004 was $235.1 million, a decline of $1.6 million, or 1%, from $236.7 million in 2003. On a tax equivalent basis, interest income decreased $23.3 million from 2002 to 2003. As indicated in Table A of this Form 10-K, average earning assets were $5.51 billion in 2003 and $5.36 billion in 2004. The rates earned on these assets decreased from 4.87% in 2002 to 4.30% in 2003 and then increased slightly to 4.39% in 2004 as rates began to rise in the second quarter of 2004.

Average loan balances increased by $158.1 million from 2003 to 2004 and by $117.2 million from 2002 to 2003. The increase is the result of increased volumes of commercial real estate and home equity loans. In 2002, Riggs realigned its RBEL operations to focus on expatriate and embassy banking rather than on corporate lending and, consequently, sold $138.3 million in loans and loan commitments. The next largest average earning asset category, securities available for sale, decreased $85.7 million or 4% from 2003 to 2004 and increased $143.7 million in 2003 compared to 2002. Rates earned on available for sale securities were steady at 3.35% in 2004 and 2003. Because of attractive tax equivalent rates, Riggs acquired state and municipal securities in 2003. Riggs had an average balance of $26.4 million and $947 thousand of these securities in 2004 and 2003. These securities are classified as securities available for sale and yield 5.38% and 4.52% on a tax equivalent basis for 2004 and 2003, respectively.

The composition of average earning assets for the past three years is as follows:

Interest expense increased by $18.0 million from 2003 to 2004. In June of 2004, rates began to increase for the first time in many years leading to an increase across most components of interest expense. As previously discussed, Riggs began a

program to acquire brokered deposits in 2004 to replace funding previously provided from its International business and to enhance Riggs Bank’s liquidity during a period of significant change and scrutiny. Brokered deposits are generally obtained at a higher cost than deposits from traditional bank customers, which also caused an increase in interest expense.

The composition of average interest-bearing liabilities for the past three years is as follow:

Provision for Loan Losses

The provision for loan losses in 2004 was $49 thousand compared to $5.1 million in 2003 and $421 thousand in 2002. Nonaccrual and renegotiated loans were $430 thousand, $2.3 million and $548 thousand at December 31, 2004, 2003 and 2002, respectively. This represents 0.01%, 0.07% and 0.02% of all loans at December 31, 2004, 2003 and 2002, respectively. In 2004, the quality of Riggs’ loan portfolios improved over already strong levels from the prior two years. This was the primary reason the Company did not provide additional loan loss provisions during the year. See Table J.

Noninterest Income

Noninterest income represented 40% of the Company’s 2004 revenue and was 39% and 33% of the Company’s total revenue in 2003 and 2002, respectively. The increased percentage in 2004 is the result of declines in net interest income.

Noninterest income decreased by $10.6 million, or 10% from the prior year. The decline of $10.6 million in noninterest income from 2003 to 2004 is primarily the result of a reduction in securities gains of $13.1 million. The decline is partially offset by an improvement in venture capital results of $7.8 million year over year. The comparison of 2004 to 2003 is also negatively impacted by $3.7 million in non-recurring gains in the prior period including an insurance gain of $2.2 million and the gain on sale of Riggs proprietary mutual funds for $1.2 million. Excluding these significant items, the decline in noninterest income was $1.6 million and less than 2% in 2004 compared to 2003.

Noninterest income increased $16.6 million from 2002 to 2003. Venture capital losses decreased to $4.2 million in 2003 from $14.8 million in 2002 while securities gains increased to $13.3 million in 2003 from $9.4 million in 2002. Also contributing to the increase in noninterest income in 2003 was the previously mentioned $3.7 million in non-recurring gains. Partially offsetting these improvements was a decrease in trust and investment advisory income caused by the second quarter 2002 renegotiation of an agreement with the real estate advisor to the Multi-Employer Property Trust (MEPT), an open commingled real estate fund. The new agreement resulted in a reduction in revenue of approximately $3.5 million in 2003 compared to 2002. Excluding these significant items the increase in noninterest income was $1.9 million and approximately 2% in 2003 compared to 2002.

Trust and investment advisory income impacts the Riggs & Co. segment while venture capital losses impact the Riggs Capital Partners segment. Securities gains impact the Treasury segment. Service charges and fee income primarily impacts the Banking segment.

Noninterest Expense

Noninterest expense increased by $107.7 million, or 42%, to $365.3 million in 2004 compared to $257.6 million in 2003. The large expense increases in 2004 include several significant items. Riggs incurred $51.7 million in fines and settlement costs during 2004. This was from a $25.0 million fine from the OCC and the Financial Crimes Enforcement Network in the second quarter of 2004, a $16 million fine from the Department of Justice in the fourth quarter of 2004, an $8 million accrual for previously disclosed litigation reserves in the fourth quarter of 2004 related to litigation in Spain and $2.7 million for settlement of stockholder litigation. The Company also incurred $48.7 million in costs related to regulatory compliance including costs for attorneys, consultants, and auditors inclusive of costs related to the planned merger with PNC. In addition, the Company’s expenses recorded in 2004 to exit International operations was $24.8 million, net of gains.

These significant items accumulated to $125.2 million for the year but were partially offset by a $12.8 million decline in data processing services subsequent to a September 2003 systems conversion.

From 2003 to 2002, noninterest expenses increased by $19.7 million. During 2003, costs were adversely impacted by: $11.4 million of consulting and other costs incurred in conjunction with a systems conversion project; $3.9 million of consulting costs incurred to improve the Bank’s compliance with BSA; a $3.8 million write-down of an office building in London which was sold during the first quarter of 2005; and a $950 thousand write-down of goodwill.

In 2003 and 2002, respectively, the Company approved for award 210,407 and 161,909 shares to certain key executives under a deferred stock award agreement subject to performance and time vesting. Based on achieved 2003 and 2002 performance targets, 76,466 shares were awarded at December 31, 2003 and none at December 31, 2002. The 76,466 deferred shares earned at December 31, 2003 vest in three equal annual installments, beginning in January of 2004. A total of $321 thousand and $325 thousand in stock compensation expense was recorded in 2004 and 2003, respectively, and is included in pension and other employee benefits in the Consolidated Statements of Operations. Future expense amounts could vary because the individual to whom the award was granted must be employed by the Company on the distribution date each year and new participants could be added.

In 2002, Riggs increased its matching of employee 401(k) Plan contributions from $0.50 for every dollar contributed (up to 6% of eligible wages) to a dollar-for-dollar match (up to 6% of eligible wages). This change in matching resulted in an increase in pension and other employee benefits expense of $2.1 million in 2002 and subsequent years. Pension and other employee benefits costs affect all segments with the exception of Riggs Capital Partners.

In 2003 and 2002, respectively, the Company awarded 73,000 and 370,000 shares of its common stock to certain key executives under the terms of a plan approved by shareholders in April 2002. This award is set up to vest annually in equal amounts over a period of four to five years, beginning in January 2003 and January 2004. For the years ended 2004, 2003 and 2002, respectively, Riggs recorded $941 thousand, $1.2 million and $646 thousand of expense related to this award, which is recorded in pension and other employee benefits in the Consolidated Statements of Operations. New participants may be added and, in addition, to obtain this award, the individual to whom it was granted must be employed by the Company on the date of distribution each year. Projected expense amounts, therefore, could vary.

The Company recorded impairment charges amounting to approximately $850 thousand in 2004, $4.8 million in 2003 and $4.5 million in 2002. The 2004 impairment charge was from impairment in goodwill. The 2003 impairment charge includes a $950 thousand write-down of goodwill and also includes a $3.8 million write-down of an office building in London that is under contract to be sold by the Company. This facility was also written down by $1.3 million in 2002. The amount of these facility write-downs was determined based upon consultation with real estate experts. In 2002, as part of a systems conversion project, Riggs also wrote off $1.1 million in costs related to prior development of an information system to support bank tellers when it was determined that this development would not be compatible with the Company’s new technology. In London, the Company incurred a charge of $1.1 million to exit long-term maintenance contracts in 2002 and domestically, it wrote down a long-term, fixed price, non-cancelable technology contract by $1.0 million due to cost overruns that will not be passed on to subcontractors or other parties to the contract.

In 2004, the Company also reduced its workforce by 10%, from 1,450 full-time equivalent positions at December 31, 2003 to 1,307 at December 31, 2004. This was the result of a reduction in force in the first quarter of the 2004 combined with the ongoing exit of International operations.

FINANCIAL POSITION AND LIQUIDITY

Summary

Total assets declined from $6.32 billion at December 31, 2003 to $6.01 billion at December 31, 2004, a decrease of $311.9 million. The decrease was attributable to decreases in cash of $178.4 million, time deposits with other banks of $221.7 million, securities available for sale of $131.0 million, securities held to maturity of $58.0 million, and loans of $223.8 million, offset in part by an increase in federal funds sold and reverse repurchase agreements of $450.0 million. The decline in assets is primarily the result of actions relating to exiting International operations.

Earning Assets

Loans, securities available for sale, securities held to maturity and other short-term investments are the Company’s primary earning assets. At December 31, 2004, 2003 and 2002, these assets represented approximately 88%, 86% and 90%, respectively, of the Company’s total assets and 87%, 87% and 89% of the Company’s average assets for each of those years.

Loans represent the largest earning asset category. At December 31, 2004, 2003 and 2002 loans were 57%, 59% and 49% of earning assets and 58%, 53% and 53% of average earning assets for those years, respectively.

Securities available for sale, the next largest component of earning assets, were 32%, 34% and 38% of earning assets at December 31, 2004, 2003 and 2002, respectively, and represented 35%, 36% and 34% of average earning assets for those years.

The third component of the Company’s earning asset mix, short-term investments, was 10%, 5% and 13% of earning assets at December 31, 2004, 2003 and 2002, respectively, and represented 6%, 10% and 13% of average earning assets for the those years.

Loans

Loans are primarily generated in the Banking segment through both retail and commercial banking activities. Certain loan balances remained in the International Banking segment during 2004 as the Company continues to exit those operations (see Tables C and D of this Form 10-K).

Total loans at December 31, 2004 were $3.00 billion, a $224 million or 7% decrease from December 31, 2003. The largest decreases were in domestic commercial and financial loans of $179.7 million or 31% and foreign loans of $98.7 million or 33%. The decline in commercial and financial loans was the result of targeted loan sales and non-renewals totaling $90 million and a reduction in lending activity in the second half of 2004 subsequent to Riggs highly publicized regulatory fine and related matters. The decrease in foreign loans is the direct result of the Company’s actions to exit its International operations, resulting in $163.4 million of loans held for sale at December 31, 2004. Somewhat offsetting these declines were increases in commercial real estate loans, which increased $88.8 million or 11%, and home equity loans, which increased $110.3 million or 36%. The increase in commercial real estate is driven by a continued strong real estate market in the metro Washington D.C. area. The home equity loan volume significantly increased in 2004 as the Company applied significant marketing resources into this product.

Total loans at December 31, 2003 were $3.23 billion, a $217.2 million or 7% increase from December 31, 2002. The largest increases were in: commercial real estate loans, which increased $255.6 million or 46%, home equity loans, which increased $26.9 million or 10%, loans to foreign governments and official institutions, which increased $14.9 million or 14%, and loans to foreign commercial and industrial customers, which decreased by $13.8 million or 18%. Offsetting these increases were decreases in: commercial and financial loans of $32.6 million or 5%; and residential mortgage loans of $70.1 million or 6%. Other foreign loans increased $38.6 million or 50% in 2003.

At December 31, 2004, approximately 24% of the loan portfolio matures in less than one year. This compares to 25% at the end of the prior year. At December 31, 2004, approximately 35% of the loan portfolio has fixed interest rates that do not adjust during the term of the loan and 65% has floating or adjustable interest rates that adjust prior to the loan’s maturity.

Prior to deciding to exit its International Banking businesses in 2004, Riggs extended credit to borrowers domiciled outside of the United States primarily through its International Banking segment. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, investments and other monetary assets. In addition, cross-border outstandings include guarantees issued on behalf of non-local third parties and local currency outstandings to the extent they are not funded by local currency borrowings. While the Company routinely reviews these assets and assesses the impact of any changes on foreign domiciled borrowers, the economic value and recoverability of these assets may be affected by changing economic and political conditions in the respective countries. In addition, some of the Company’s loans are to sovereign entities, some of which might be subject to deteriorating economic conditions, political and social upheaval, currency depreciation or devaluation, or other factors over which Riggs has no control. If, for any reason, a loan to such a borrower became past due or a problem credit, collection efforts would be made more difficult because of the sovereign status of the borrower. Several sovereign entities also maintained significant depository relationships with the Company during portions of the year. The largest of these accounts were in the embassy banking business which was fully exited in 2004.

At December 31, 2004 and December 31, 2003, the United Kingdom was the only foreign country with cross-border outstandings in excess of 1% of total assets that had loans in either a nonperforming or past-due loan status. There were no foreign countries with cross-border outstandings in excess of 1% that had loans in a nonperforming or past-due loan status at December 31, 2002 (see Tables E and F of this Form 10-K and Note 16 of Notes to Consolidated Financial Statements).

Short-Term Investments

Short-term investments are managed in the Treasury segment and include time deposits with other banks, federal funds sold and reverse repurchase agreements. These investments are liquid assets with original maturities generally of less than 90 days. Short-term investments are generally lower-yielding assets that are highly interest-rate sensitive. The amount of funds available for short-term investments is a function of daily movements in the securities, loan and deposit portfolios combined with the Company’s interest-rate risk management and liquidity strategy.

At December 31, 2004, short-term investments totaled $515.4 million, an increase of $228.3 million from December 31, 2003. At December 31, 2003, short-term investments totaled $287.1 million, a decrease of $526.2 million when compared to year-end 2002. The significant increase in short-term investments at December 31, 2004 compared to the prior year-end resulted from the Company’s efforts to increase liquidity subsequent to Riggs highly publicized regulatory fine and related matters. The average yield on short-term investments was 1.89% in 2004, 1.59% in 2003 and 1.61% in 2002. The increase in 2004 is caused by a general increase in interest rates which began in June 2004.

Securities Available for Sale and Securities Held to Maturity

At December 31, 2004, the Company had $1.70 billion of securities classified as available for sale (97% of all securities) and $49.9 million of securities classified as held to maturity (3% of all securities). At December 31, 2003, the Company had $1.83 billion of securities classified as available for sale and $107.9 million of securities held to maturity.

The securities available for sale portfolio is managed by the Treasury segment as part of the Company’s liquidity and interest-rate risk management process. Securities available for sale are reflected in the Consolidated Statements of Condition at fair value. Differences between amortized cost and fair value are reported net of applicable taxes as a component of other comprehensive income or loss within shareholders’ equity. On a tax equivalent basis the securities available for sale portfolio yielded 3.35%, 3.35% and 3.81% in 2004, 2003 and 2002, respectively.

Gross unrealized gains and losses at December 31, 2004 were $1.4 million and $15.0 million, respectively.

Approximately 98% of the available for sale securities have been issued by the U.S. Treasury, an agency of the U.S. Government or a government sponsored entity (such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation) and therefore the repayment of substantially all securities is either guaranteed by the government or a AAA rated entity. As a result, timely payment of principal and interest is reasonably assured and any unrealized gain or loss is primarily attributable to changes in market interest rates. All of the Company’s state and municipal securities were insured by an independent, non-government third party as to repayment of principal and interest.

At December 31, 2004, 2003 and 2002, 5%, 10% and 21% of the securities available for sale portfolio matures within one year and the portfolio duration for each is 2.4, 2.3, and 1.0 years, respectively. The duration of the investment portfolio extended slightly due to the rise in general interest rates, especially in the short and intermediate terms. Mortgage asset prepayments slowed down as the refinancing boom came to an end and callable assets were not called, extending their effective maturities. The Bank extended the duration of its liabilities late in 2004 by extending the maturity of long-term FHLB advances and repurchase agreements and by issuing brokered certificates of deposits for terms in excess of one year to offset the extension on the asset side. Although most of the securities have contractual maturity dates that are greater than one year, many have call features which allow the issuer to call the securities away from the Bank. Anticipated calls of securities and estimated mortgage prepayments on mortgage-backed securities have been factored into the overall portfolio duration calculation (see Note 4 of Notes to Consolidated Financial Statements).

See “Minority Interest in Trust Preferred Securities” for a discussion of securities held to maturity on page 37.

Venture Capital Investments

Venture capital investments amounted to $39.2 million at December 31, 2004 and $43.4 million at the close of the prior year. The Company recorded a net gain of $3.6 million on its venture capital investments in 2004 that is primarily

attributable to unrealized gains in the fair value of its venture capital investments. In 2003, the Company recorded a $4.2 million loss, substantially unrealized, on these investments (see Note 1 of Notes to Consolidated Financial Statements). The overall balance in the portfolio declined as the Company is in the process of limiting its total exposure to venture capital.

The portfolio’s performance improved in 2004 and the Company recorded a net gain for the first time since 2000. This is related to an overall positive trend in the venture capital market as more companies were able to complete initial public offerings or acquisitions by larger companies. The losses in 2003 were attributable to several factors including a domestic economic slowing, a general decline in the domestic stock market and the decline in initial public offerings and acquisitions by public companies of private companies. Because venture capital investors typically look to the IPO process and acquisitions as a means of liquidating investments, the lack of such markets was detrimental to the value of investments held in prior years.

At December 31, 2004, the Company maintained a valuation allowance against total deferred tax assets relating to venture capital losses. The Company has concluded that it is more likely than not that the remaining deferred tax assets which are attributable to losses from venture capital operations will be realized through capital gains generated by its venture capital operations or through such gains generated elsewhere within the Company. The Company has significant unrealized gains in properties that could be used to generate the necessary gains.

Commitments and Liquidity

At December 31, 2004, the Company believes it has the necessary liquidity to meet its obligations. As noted previously, the Company had $515.4 million of short-term investments and has approximately $57 million of unused credit lines at December 31, 2004. The securities available for sale portfolio has a relatively short duration of 2.4 years which can, with the exception of the state and municipal securities, be pledged to secure borrowings. Average interest-bearing deposits declined from $3.87 billion in 2003 to $3.20 billion in 2004. In addition, despite the fact that average interest-bearing deposits declined by $280.0 million from 2002 to 2003, substantially all of this decline is due to a $424.5 million decline in average time deposits in domestic offices from 2002 to 2003. The decrease in average time deposits is domestic offices from 2002 to 2003 is almost entirely attributable to the previously described change in the methodology by which the Treasury compensates financial agent banks. As a result of this change, average Treasury time deposits utilized to compensate Riggs as a financial agent bank were $423.0 million less in 2003 than 2002. Average non-interest bearing deposits were $755.8 million in 2004, $559.9 million in 2003 and $501.5 million in 2002. Because of these factors, the Company believes that its deposit base comprises a stable source of funding.

During 2004, Riggs contributed $69.5 million in capital to Riggs Bank which enhanced the Bank’s capital ratios. The principal cash obligations of Riggs are payments of interest and distributions on subordinated debt and trust preferred securities. As of December 31, 2004, Riggs had approximately $50 million of available liquid assets compared to $144 million at December 31, 2003.

ASSET QUALITY

Credit Risk Administration

Because the loan portfolio is the Company’s largest component of earning assets, one of the Company’s primary objectives is to maintain a high quality loan portfolio. This is achieved through adherence to loan underwriting standards and regular evaluation of credit risk within the portfolio. The potential for loss is, however, inherent to the lending process. Riggs attempts to minimize this risk by stressing the integrity, financial strength and liquidity of borrowers and, if integral to the granting of credit, the stability of supporting collateral values. The credit administration function establishes credit policies including those related to credit underwriting, limits on the ability of an individual loan officer or group of loan officers to extend credit, policies addressing concentrations of credit risk and internal credit scoring. The credit administration function reports to a chief credit officer who works with the various business units to ensure the integrity of established procedures and policies. In addition, the Company maintains a loan review group that monitors compliance with these policies and thereby further ensures the integrity of the credit process (see Notes 1 and 5 of Notes to Consolidated Financial Statements).

Provision and Reserve for Loan Losses

The adequacy of the reserve for loan losses is determined based on an analysis of the composition of the loan portfolio, the level and trend of loan delinquencies, the financial condition of specific delinquent or problem borrowers and related guarantors, historical charge-off rates, general economic and industry-specific conditions and all other factors deemed relevant, including supervisory comment received during the examination process. Based upon this analysis, which is performed quarterly and reviewed by a standing management committee, a provision for loan losses is recorded to maintain the reserve for loan losses at a level adequate to absorb probable losses in the portfolio.

For loan pools with homogeneous characteristics, such as residential mortgage, home equity and consumer loans, provisions are determined using historical loss rates and other relevant factors. For non-homogeneous loans, the Company allocates specific reserves for loan losses to individual loans in the highest risk categories and provides for the remainder using historical and other factors. In addition, the Company maintains a qualitative component in its reserve for loan losses. This portion of the reserve is adjusted when the Company concludes that recent charge-off experience may not be indicative of future experience, either adverse general economic or industry-specific conditions are not manifested as specific problem credits or in delinquency ratios, or the Company knows of specific potentially adverse events or conditions of a borrower. The Company maintains its reserve for loan losses in accordance with a policy approved by the Company’s Board of Directors.

Based upon application of this policy, the Company recorded a loan loss provision of $49 thousand in 2004. At December 31, 2004, the reserve for loan losses was $24.7 million, or approximately 0.82% of loans and approximately four times the Company’s nonaccrual, renegotiated, and 90 days past due credits. Foreign nonperforming assets represent approximately 4% of consolidated nonperforming assets (including 90 days past due credits). In 2004, the quality of Riggs’ loan portfolios improved over already strong levels from the prior two years. This, as well as the impact of transferring $164 million to assets held for sale was the primary reason the Company did not provide additional loan loss provisions during the year.

The Company recorded a loan loss provision of $5.1 million in 2003. At December 31, 2003, the reserve for loan losses was $28.3 million, or approximately .88% of loans and 195% of the Company’s nonaccrual, renegotiated and 90 days past due credits. The foreign loan loss provision in 2003 was approximately $181 thousand and the domestic provision was $5.0 million. Riggs recorded a loan loss provision of $421 thousand in 2002.

During the three years ended December 31, 2004, the reserve for loan losses as a percentage of loans has remained in the range of .82% to .88%. During this same period, nonaccrual, renegotiated and 90 days past due credits decreased from $11.6 million to $6.3 million. In addition, 50% of the Company’s portfolio is secured by residential real estate at December 31, 2004. Traditionally, net losses on such loans have been minimal (see Table H of this Form 10-K).

Foreign exchange translation adjustments in the reserve for loan losses were $98 thousand and $251 thousand in 2004 and 2003, respectively. These adjustments relate to reserves recorded in British sterling, and are made to account for changes in our reserve for loan losses resulting from fluctuating foreign exchange rates.

The estimated allocation of the reserve for loan losses by loan category is detailed in Table I of this Form 10-K and represents the Company’s assessment of existing conditions and risk factors within these categories. Changes in the risk characteristic and loan amounts within the loan portfolio affect the overall level of required reserves.

Nonperforming Assets and Past Due Loans

Nonperforming assets include nonaccrual loans, renegotiated loans, other real estate owned and other repossessed assets. Nonaccrual loans are loans for which recognition of interest income has been discontinued. Impaired loans are nonaccrual loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement (see Tables J and K of this Form 10-K).

Riggs evaluates each past due commercial loan (commercial and financial loans and commercial real estate loans) and discontinues the accrual of interest based on the delinquency status, an evaluation of any collateral and the financial condition of the borrower. If there is doubt as to the collection of either principal or interest, or when interest or principal is 90 days past due and the commercial loan is not well-secured and in the process of collection, it is placed into nonaccrual status. A nonaccrual loan may be restored to accrual status when interest and principal payments are brought current and

the collection of future payments is not in doubt. Nonaccrual loans totaled $430 thousand at December 31, 2004, a decrease of $1.9 million from an already low level at December 31, 2003.

Income recognition on non-commercial loans is discontinued and the loans are generally charged off or loan foreclosure proceedings begun upon becoming 120 days delinquent or at such time as permitted by law or other regulations. At this point, any uncollected interest is eliminated from income.

Renegotiated loans are those loans where there has been an extension of the original repayment period or a reduction of the obligation to pay principal or interest because of deterioration in the borrower’s financial position. There were no renegotiated loans at December 31, 2004 or 2003.

Loans are transferred into other real estate owned and other repossessed assets owned when collateral securing the loans is acquired through foreclosure. Other repossessed assets owned totaled $12 thousand on December 31, 2004 compared to $40 thousand on December 31, 2003.

The 90 days past due loan category amounted to $5.9 million and $12.2 million at December 31, 2004 and 2003, respectively. The balances are primarily attributable to secured residential real estate loans that are in the process of collection and are accruing interest.

At December 31, 2004, the Company identified $834 thousand of potential problem loans compared to $814 thousand of such loans at December 31, 2003. The current balance consists of a small number of consumer and residential real estate credits. Potential problem loans are defined as loans that are currently performing but which have certain attributes that more likely lead to nonaccrual or past due status in the foreseeable future.

Foreign loans and other credits may be adversely affected by social, economic and political instabilities, including military confrontations. The Company cannot estimate the losses, if any, associated with any such instabilities (see Note 16 of Notes to Consolidated Financial Statements).

DEPOSITS AND FUNDING SOURCES

Deposits, short-term borrowings, FHLB advances and long-term debt are the Company’s principal funding sources. For 2004, these funding sources averaged $5.53 billion, an increase of $29.7 million from the $5.50 billion for 2003. In 2002, these funding sources averaged $5.18 billion. Beginning on October 1, 2003, trust preferred securities issued by a deconsolidated business trust are no longer a funding source for the Company but, rather, because of the Company’s previously discussed adoption of FIN 46R, the debt the Company has to the trust that issued the trust preferred securities is considered a funding source. During 2004, Riggs began a program to acquire brokered deposits to replace funding previously provided from its International Banking business and to enhance Riggs Bank’s liquidity during a period of significant change and scrutiny. Brokered deposits are generally obtained at a higher cost than deposits from traditional bank customers which adversely impacted net interest income and the related margins in 2004.

Deposits

Deposit balances are the primary funding source of the Company. The average deposit balance for 2004 was $3.95 billion which compares to average deposit balances of $4.43 billion in 2003 and $4.65 billion in 2002. Average interest bearing deposits were $3.20 billion, $3.87 billion and $4.15 billion in 2004, 2003 and 2002, respectively. In 2004, the Company began the process of exiting its International operations. As a result the overall level of international deposits, which include embassy banking relationships, declined from $1.37 billion at December 31, 2003 to $170.2 million at December 31, 2004. The decline in these deposits was partially offset by the Bank’s issuance of brokered certificates of deposit during 2004. At December 31, 2004, brokered CDs totaled $902.0 million. The Bank had no brokered CDs at December 31, 2003. In 2003, average deposit balances and average interest bearing deposit balances were significantly impacted by the amount of deposits maintained at Riggs by the Treasury to compensate the Company as a financial agent bank. The Treasury changed the methodology by which Riggs as a financial agent bank is compensated and average deposit balances to compensate Riggs as a financial agent bank declined to $472.0 million in 2003 from $895.1 million in 2002 while there were no such balances in 2004.

Average demand deposits were $755.8 million, $559.9 million and $501.5 million in 2004, 2003 and 2002. As a means of reducing deposit reserve requirements, the Company periodically sweeps excess demand funds into money market accounts.

The average balances transferred, which are not included in demand deposits in Table A of this Form 10-K, were $461.4 million in 2004 compared to $480.8 million and $468.4 million in 2003 and 2002, respectively.

The average cost of interest-bearing deposits was .91%, .82% and 1.24% in 2004, 2003 and 2002, respectively. The change in the cost of these funds is primarily attributable to the previously described brokered CD program and actions of the Federal Reserve. From December 31, 2000 to year-end 2003, the Federal Reserve lowered its target federal funds rate by 550 bps, from 6.50% to 1.00%. Starting in the second quarter of 2004 the Federal Reserve raised its target federal funds rate from 1.00% to 2.25% at December 31, 2004.

Short-Term Borrowings

Short-term borrowings consist primarily of federal funds purchased and repurchase agreements and, to a lesser extent, short-term FHLB borrowings. These obligations are an additional source of funds used to meet liquidity and interest-rate risk management objectives. On average, short-term borrowings were $766.2 million, $584.9 million and $450.2 million for 2004, 2003 and 2002, respectively. The increase in 2004 is consistent with the Company’s strategy to increase liquidity. The cost of these funds was 1.74%, 1.40% and 1.54% for 2004, 2003 and 2002, respectively (see Note 9 of Notes to Consolidated Financial Statements). Riggs has secured and unsecured lines of credit with various parties in the amount of $915.4 million that can be drawn upon to meet potential funding requirements. $226.4 million of these facilities are unused as of December 31, 2004. The FHLB can cancel any unused portion of the credit facilities at any time. Any borrowings under these facilities are subject to the negotiated terms.

FHLB Borrowings and Other Long-Term Debt

The $1.14 billion balance of long-term debt at December 31, 2004 consists of $66.5 million subordinated debentures due in 2009, $206.2 million payable to one of the two entities that issued the Company’s trust preferred securities, $596.0 million in FHLB advances and $270.0 million in repurchase agreements.

The $66.5 million subordinated debentures have a fixed interest rate of 9.65% and are not callable in advance of maturity. The FHLB advances have maturity dates through 2007 and carry a blended interest rate of 2.74%. The FHLB may exercise its option to call $222.0 million of these advances prior to scheduled maturity. Unless called, in 2005 none of these advances are repayable. The $270.0 million of repurchase agreements mature between 2006 and 2007 and have an average rate of 2.47%. Average long-term debt was $813.4 million in 2004 compared to $487.1 million in 2003 and $73.4 million in 2002.

Minority Interest in Trust Preferred Securities

The Company owns two trusts that were formed for the purpose of issuing trust preferred securities. Riggs Capital issued $150 million and Riggs Capital II issued $200 million, and these securities were accounted for as minority interest.

In accordance with an accounting interpretation which was adopted by the Company on October 1, 2003 (FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities or FIN 46R), the Company no longer consolidates Riggs Capital II. The Company does consolidate Riggs Capital. At the time of adoption of FIN 46R and at December 31, 2003, Riggs owned $60.3 million of the Series A trust preferred securities and $47.6 million of the Series C trust preferred securities. In financial statements applicable to periods prior to October 1, 2003, the amount of trust preferred securities owned by Riggs was netted against the outstanding securities of Riggs Capital and Riggs Capital II and reported as guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures in the Consolidated Statements of Condition. Prior to October 1, 2003, the interest earned by the Company on the trust preferred securities it owned was reflected in the Consolidated Statements of Operations as a reduction of minority interest in income of subsidiaries, net of taxes. Beginning in the fourth quarter of 2003, the trust preferred securities owned by Riggs are included in securities held to maturity in the Consolidated Statements of Condition and $360.8 million of debt that the Company has to Riggs Capital and Riggs Capital II is included in long-term debt. Commencing in the fourth quarter of 2003, interest earned on the trust preferred securities that the Company owns is reflected as a component of interest income and the cost of the debt payable by the Company to Riggs Capital and Riggs Capital II is included in interest expense.

Amount of trust preferred securities originally issued in 1996 and 1997 by business trusts owned by the Company:

Trust preferred securities repurchased from third party investors during the year ended December 31 are as follows.

Trust preferred securities outstanding to third party investors of consolidated business trusts and recorded as Guaranteed Preferred Beneficial Interests in Junior Subordinated Deferrable Interest Debentures by Riggs Capital at December 31, 2004 total $72.6 million. Trust preferred securities outstanding to all investors, including the Company and recorded as Long-Term Borrowings by Riggs Capital II at December 31, 2004 total $200.0 million. As previously disclosed, the Company has suspended cash distributions on its trust preferred securities. The Company, however, continues to accrue the expense related to trust preferred securities as the amounts are deferred and payable at a future date.

Sensitivity to Market and Other Risk

As previously noted, the Company is exposed to various business risks. Two types of “market risk” that could materially impact the operating results of the Company are interest rate risk and foreign currency exchange exposure. Though the Company’s Asset/ Liability Committee (the ALCO) closely monitors its exposure to these risks, the modeling of interest rate risk requires a variety of assumptions including the level of interest rates, the shape of the yield curve, the asset and liability mix and the path of foreign exchange rates. If the actual results vary significantly from the forecast, or if errors occur in the Company’s modeling techniques, the Company may be limited in controlling or mitigating such risks.

Riggs manages its interest-rate risk through the use of an income simulation model which forecasts the impact on net interest income of a variety of different interest rate scenarios. A “most likely” interest rate scenario is forecasted based upon an analysis of current market conditions and expectations. The model then evaluates the impact on net interest income of rates moving significantly higher or lower than the “most likely” scenario. “Most likely” is defined as the outlook of the Treasury segment on the path of future interest rates. As of December 31, 2004, the most likely interest rate scenario calls for the federal funds target rate to increase to 3.25% by year-end 2005. The federal funds target rate then rises gradually to 4.25% by year-end 2006, holding at that level for the remainder of the 36-month forecast horizon. The results are compared to risk tolerance limits set by Company policy. The model’s results as of December 31, 2004 are shown in Table M of this Form 10-K. Current policy establishes limits for possible changes in net interest income for 12 and 36 month horizons. The interest rate scenarios monitored by ALCO are based upon a 100 bp (1%) gradual increase or decrease in rates over a 12-month time period versus the most likely scenario and a 300 bp (3%) gradual increase or decrease in rates over a 36-month time period versus the most likely scenario.

As of December 31, 2004, the forecasted impact of rates rising or falling 100 bp versus the “most likely” scenario over a 12-month time period was a change in net interest income not exceeding 4%. For a 300 bp movement in rates versus the “most likely” scenario over a 36-month period, the impact on net interest income did not exceed 2%. The results of the simulation for December 31, 2004 indicated that Riggs Bank was liability sensitive over the long term because a large portion of its assets are comprised of fixed-rate instruments. Earnings benefit from the down 100 bp versus most likely from increasing spreads on fixed rate assets but are offset somewhat by floors on deposits and faster prepayment rates on mortgage loans and mortgage backed securities.

In managing interest-rate risk, ALCO makes limited use of financial derivative instruments, such as interest-rate swaps. Financial derivatives are employed to assist in the management and/or reduction of interest-rate risk and can effectively alter the interest-rate sensitivity of the Company. In addition, ALCO manages its interest rate risk profile by changing the duration mix of both assets and liabilities. Investments and borrowings are shortened or lengthened to maintain a balanced risk profile. Along with financial derivative instruments, the income simulation model includes assumptions about short-term financial instruments, investment securities, loans, deposits, and other borrowings.

At December 31, 2004 and 2003, the Company’s cumulative one year repricing gap was $(0.44) billion and $(1.28) billion, respectively. A negative gap position indicates that the Company would be adversely impacted by rising interest rates because interest bearing deposits would re-price more quickly than interest earning assets. The Company does not monitor its interest rate risk exposure through gap measurement techniques but rather utilizes the income simulation techniques discussed above.

At December 31, 2004, Riggs had $20.8 million in commitments to purchase foreign currency and a $78.3 million commitment to sell foreign currency comprising a foreign exchange contract for a notional amount of $78.3 million to hedge the investment in London-based legal entities. In addition, interest rate swaps were used to hedge interest rate risk. At December 31, 2004, there were 5 interest rate swaps totaling $33.4 million in notional principal balances of which $20.9 million was used to hedge cash flows from variable rate liabilities (see Note 20 of Notes to Consolidated Financial Statements).

CAPITAL RESOURCES

One of the Company’s fundamental objectives is to maintain a level of capital that promotes depositor and investor confidence. In addition to maintaining conservative loan underwriting standards, the Company places an emphasis on capital strength and its ability to withstand unfavorable economic conditions and business losses.

The Company’s policy is to ensure that the Bank is capitalized in accordance with regulatory guidelines. As previously discussed, the Bank is subject to minimum capital ratios as prescribed by the OCC, which are essentially the same as those prescribed by the Federal Reserve for bank holding companies. However, as previously noted, the Company has changed the method by which it accounts for trust preferred securities. Banking regulators currently allow trust preferred securities to be included in regulatory capital to a limited extent.

Total shareholders’ equity at December 31, 2004 was $317.8 million, a $55.7 million decrease from year-end 2003. The decrease was primarily the result of net losses of $98.3 million, unrealized securities losses, net of taxes of $3.7 million and $2.9 million in dividend payments for the year. Offsetting these decreases to equity were increases of $48.4 million related to issuance of the Company’s common stock, and a $1.4 million unrealized gain after tax on the Company’s hedging activities. The $48.4 million increase from the issuance in Company stock was substantially the result of stock options which were exercised after the announcement of Riggs’ merger with PNC. Total shareholders’ equity at December 31, 2003 was $373.5 million, a $15.7 million decrease from year-end 2002. The decrease was primarily the result of unrealized after tax securities losses of $17.9 million and $5.7 million in dividend payments. These decreases were partially offset by $4.2 million related to issuance of the Company’s stock.

Banking regulators have issued risk-based capital guidelines for banks and bank holding companies. These requirements provide minimum total, tier I, and leverage capital ratios that measure capital adequacy. The total capital ratio measures combined tier I and tier II capital to risk-weighted assets. The tier I capital ratio measures tier I capital to risk-weighted assets. The leverage capital ratio measures tier I capital to average assets. At December 31, 2004 and 2003, the Company’s and Bank’s capital ratios exceeded the “well-capitalized” levels under each of the regulatory ratios (see Table N of this Form 10-K and Note 11 of Notes to Consolidated Financial Statements).

FOURTH QUARTER 2004 VS. FOURTH QUARTER 2003

For the quarter ended December 31, 2004, the Company reported a net loss of $57.8 million compared to a net loss of $6.9 million in the fourth quarter of 2003.

Net interest income was $33.5 million in the fourth quarter of 2004 compared to $35.6 million in the comparable quarter of the prior year, essentially unchanged. The net interest margin was 2.67% and 2.88% for the fourth quarter of 2004 and 2003, respectively. The decline in margin is the result of using higher priced brokered CD’s in the fourth quarter of 2004 as a funding source and the extension of liability maturities to protect against rising rates. In addition, the proceeds from brokered CDs and wholesale borrowings were invested in short term instruments as a way to build liquidity during a difficult regulatory period.

A negative provision in 2004 is the result of Riggs’ ongoing exit of international operations and the related reduction in loan balances. The 2004 results also reflect an even higher quality loan portfolio when compared to the fourth quarter of the prior year.

Noninterest income totaled $23.7 million in the fourth quarter of 2004, a decrease of $2.2 million from the $25.9 million in the comparable quarter of the prior year. This was primarily due to decreases in service charge income as the Company increased the use of no fee type products to compete for customers in the Washington, D.C. metro market. Net securities losses in the fourth quarter of 2004 were $137 thousand compared to a net gain of $774 thousand in the prior year’s fourth quarter.

Noninterest expense for the 2004 fourth quarter was $120.5 million, compared to $71.8 million in the year-ago quarter, an increase of $48.7 million. The large expense increases in the fourth quarter of 2004 includes several significant items. This included the establishment of litigation reserves of $26.7 million, including a $16 million fine from the Department of Justice, an $8 million accrual for previously disclosed matters related to litigation in Spain and a $2.7 million accrual for the settlement of stockholder litigation. The Company also incurred $20.5 million in costs related to regulatory compliance including costs for attorneys, consultants, and auditors. In addition, the Company recorded $16.5 million of expenses in the quarter to exit International operations.

TABLE A:

THREE-YEAR AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES¹

TABLE B:

NET INTEREST INCOME CHANGES¹

TABLE C:

YEAR-END LOANS

DECEMBER 31,

TABLE D:

YEAR-END MATURITIES AND RATE SENSITIVITY

DECEMBER 31, 2004

TABLE E:

CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS¹

TABLE F:

CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS
WITH NONPERFORMING OR PAST-DUE LOANS

TABLE G:

MATURITIES OF SECURITIES AVAILABLE FOR SALE

DECEMBER 31, 2004

This table reflects the carrying values and amortized cost, by contractual maturity, of securities available for sale. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

TABLE H:

RESERVE FOR LOAN LOSSES AND SUMMARY OF CHARGE-OFFS (RECOVERIES)
DECEMBER 31,

TABLE I:

RESERVE FOR LOAN LOSSES ALLOCATION AND LOAN DISTRIBUTION

DECEMBER 31,

(IN THOUSANDS)