The PNC Financial Services Group Inc. said Friday it is stepping up to buy troubled Riggs National Corp. for about US$779 million in stock and cash.

This week, the U.S. Senate permanent subcommittee on investigations of the committee on governmental affairs released a report lambasting its Riggs Bank subsidiary for failing to live up to its anti-money laundering obligations, among other things. It found that Riggs helped former Chilean dictator Augusto Pinochet evade legal proceedings related to his Riggs bank accounts and resisted oversight of these accounts. Riggs also managed more than 60 accounts and certificates of deposit for Equatorial Guinea, its officials, and their family members, with little or no attention to its anti-money laundering obligations; turned a blind eye to evidence suggesting the bank was handling the proceeds of foreign corruption, and; allowed numerous suspicious transactions to take place without notifying law enforcement.

More generally, it called the bank’s anti-money laundering program “dysfunctional,” claimed regulators were too tolerant of the bank’s weak anti-money laundering program and that they risked the appearance of conflicts of interest by taking jobs with Riggs after failing to bring enforcement action against it for its numerous compliance deficiencies.

Riggs is a 165-year old bank with US$6 billion in assets. It provides commercial and retail banking services through 50 branches in the Washington, D.C. area. Through the acquisition, PNC is seeking access to the DC market, with an eye on expansion to the surrounding region.

“This acquisition is an important step forward in our plan to grow PNC,” said James Rohr, chairman and chief executive officer of The PNC Financial Services Group. “Riggs’s strong banking franchise gives us an excellent platform on which to build in the extremely appealing metropolitan Washington marketplace. We believe Riggs’s customers will be well served by our comprehensive product offerings, and we believe we will win an increasing share of the region’s financial services business.

“This combination is highly attractive to us,” said Lawrence Hebert, chief executive officer of Riggs Bank N.A. “The integrated company will provide our customers with seamless service and access to a wider scope of products and services while maintaining the long and valued traditions of the Riggs franchise. We have found the best solution for shareholders, customers, employees and our communities.”

PNC president Joe Guyaux, who will oversee the integration process, said PNC is confident that it will successfully address Riggs’s regulatory problems. “We look forward to leveraging the Riggs platform to build a market- leading financial services franchise in Washington, Virginia and Maryland,” Guyaux said. “We are confident, following completion of our due diligence work, that we can successfully work through the regulatory issues that have been identified at Riggs.”

The transaction is expected to close during the first quarter of 2005. The merger is subject to customary closing conditions, including regulatory approvals and the approval of Riggs shareholders.
Sandler O’Neill & Partners, L.P. acted as the financial advisor to PNC and Wachtell, Lipton, Rosen & Katz acted as its legal advisor. Lehman Brothers, Inc. acted as the financial advisor to Riggs and Sullivan & Cromwell LLP acted as its legal advisor.

Standard & Poor’s Ratings Services placed its long-term counterparty credit rating on Riggs National Corp. on CreditWatch with positive implications on news of the deal. And, it affirmed its credit ratings on PNC.

“By many accounts, Riggs is a troubled institution, yet the financial impact on the $70 billion PNC should be minimal,” said S&P. “Strategically, the deal gives PNC an entry into the District of Columbia and provides a platform for branch expansion into neighboring counties in Virginia and Maryland. Unfortunately, PNC is late in the game, as competitors have already covered the more attractive markets surrounding the city.” S&P sees potential cost synergies in the deal, but says that any expense savings will largely be offset by deal financing costs and the costs of the planned branch expansion.

It notes that PNC is not acquiring Riggs’ international and embassy businesses, the source of the bank’s regulatory problems, as these will be disposed of by the time the acquisition closes. “Given that PNC successfully navigated through its own regulatory issues during the past two years, it is well equipped to deal with Riggs’ matters,” it suggests. “The addition of Riggs adds an element of execution risk, but PNC’s experience in small bank acquisitions and handling regulatory issues provides comfort that any downside to this acquisition should be well contained.”