U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 13, 1998
-----------------------------
Citigroup Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9924 52-1568099
--------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
399 Park Avenue, New York, New York 10043
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(Address of principal executive offices) (Zip Code)
(212) 559-1000
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(Registrant's telephone number, including area code)
<PAGE>
CITIGROUP INC.
CURRENT REPORT ON FORM 8-K
ITEM 5. OTHER EVENTS.
In connection with the merger (the "Merger") of Citicorp with and into a
wholly owned subsidiary of Travelers Group Inc., Citigroup Inc. (formerly
Travelers Group Inc., herein "Citigroup") is filing herewith certain
supplemental financial information, including the unaudited supplemental
condensed consolidated financial statements of Citigroup and its subsidiaries
for the three and nine months ended September 30, 1998 and 1997, together with
the related Management's Discussion and Analysis of Financial Condition and
Results of Operations of Citigroup, which are being filed as Exhibit 99.01 to
this Form 8-K and are incorporated herein by reference.
The supplemental financial statements give retroactive effect to the
Merger, which has been accounted for as a pooling of interests as described in
Note 1 to the supplemental condensed consolidated financial statements.
Generally accepted accounting principles do not permit giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include a period subsequent to the
date of consummation. The supplemental condensed consolidated financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Citigroup after
financial statements covering the date of consummation of the Merger are issued.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) EXHIBITS.
Exhibit No. Description
- ----------- -----------
12.01 Supplemental Calculation of Ratio of Income to Fixed Charges and
Supplemental Calculation of Ratio of Income to Combined Fixed
Charges Including Preferred Stock Dividends for each of the fiscal
years in the five-year period ended December 31, 1997 and for the
nine months ended September 30, 1998 and 1997
27.01 Financial Data Schedule relating to the nine months ended September
30, 1998
99.01 Unaudited supplemental condensed consolidated financial statements
of Citigroup and its subsidiaries for the three and nine months
ended September 30, 1998 and 1997, including the related
Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: November 13, 1998
CITIGROUP INC.
By: /s/ Irwin Ettinger
-----------------------
Irwin Ettinger
Chief Accounting Officer
By: /s/ Roger W. Trupin
-----------------------
Roger W. Trupin
Controller
CITIGROUP INC.
CALCULATION OF RATIO OF INCOME TO FIXED CHARGES
<TABLE>
<CAPTION>
(In Millions)
YEAR ENDED DECEMBER 31, NINE MONTHS
SEPTEMBER 30,
EXCLUDING INTEREST ON DEPOSITS: 1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
INTEREST EXPENSE (OTHER THAN
INTEREST ON DEPOSITS) 14,911 12,362 13,488 13,532 13,145 12,425 10,811
INTEREST FACTOR IN RENT EXPENSE 301 282 275 302 252 222 207
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES 15,212 12,644 13,763 13,834 13,397 12,647 11,018
--------- --------- --------- --------- --------- --------- ---------
INCOME:
INCOME BEFORE TAXES & MINORITY INTEREST 10,750 11,087 8,914 5,656 5,911 8,207 8,540
OTHER -- 1 -- -- (126) -- --
FIXED CHARGES 15,212 12,644 13,763 13,834 13,397 12,647 11,018
--------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME 25,962 23,732 22,677 19,490 19,182 20,854 19,558
========= ========= ========= ========= ========= ========= =========
RATIO OF INCOME TO FIXED CHARGES
EXCLUDING INTEREST ON DEPOSITS 1.71 1.88 1.65 1.41 1.43 1.65 1.78
========= ========= ========= ========= ========= ========= =========
INCLUDING INTEREST ON DEPOSITS:
FIXED CHARGES:
INTEREST EXPENSE 24,524 21,336 22,390 22,528 22,942 20,810 17,900
INTEREST FACTOR IN RENT EXPENSE 301 282 275 302 252 222 207
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES 24,825 21,618 22,665 22,830 23,194 21,032 18,107
--------- --------- --------- --------- --------- --------- ---------
INCOME:
INCOME BEFORE TAXES & MINORITY INTEREST 10,750 11,087 8,914 5,656 5,911 8,207 8,540
OTHER -- 1 -- -- (126) -- --
FIXED CHARGES 24,825 21,618 22,665 22,830 23,194 21,032 18,107
--------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME 35,575 32,706 31,579 28,486 28,979 29,239 26,647
========= ========= ========= ========= ========= ========= =========
RATIO OF INCOME TO FIXED CHARGES
INCLUDING INTEREST ON DEPOSITS 1.43 1.51 1.39 1.25 1.25 1.39 1.47
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
CITIGROUP INC.
CALCULATION OF RATIO OF INCOME TO FIXED CHARGES
INCLUDING PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(In Millions) YEAR ENDED DECEMBER 31, NINE MONTHS
SEPTEMBER 30,
EXCLUDING INTEREST ON DEPOSITS: 1997 1996 1995 1994 1993 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
INTEREST EXPENSE (OTHER THAN
INTEREST ON DEPOSITS) 14,911 12,362 13,488 13,532 13,145 12,425 10,811
INTEREST FACTOR IN RENT EXPENSE 301 282 275 302 252 222 207
DIVIDENDS--PREFERRED STOCK 433 505 800 704 589 265 333
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES 15,645 13,149 14,563 14,538 13,986 12,912 11,351
--------- --------- --------- --------- --------- --------- ---------
INCOME:
INCOME BEFORE TAXES & MINORITY INTEREST 10,750 11,087 8,914 5,656 5,911 8,207 8,540
OTHER -- 1 -- -- (126) -- --
FIXED CHARGES (EXCLUDING PREFERRED
STOCK DIVIDENDS) 15,212 12,644 13,763 13,834 13,397 12,647 11,018
--------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME 25,962 23,732 22,677 19,490 19,182 20,854 19,558
========= ========= ========= ========= ========= ========= =========
RATIO OF INCOME TO FIXED CHARGES
EXCLUDING INTEREST ON DEPOSITS 1.66 1.80 1.56 1.34 1.37 1.62 1.72
========= ========= ========= ========= ========= ========= =========
INCLUDING INTEREST ON DEPOSITS:
FIXED CHARGES:
INTEREST EXPENSE 24,524 21,336 22,390 22,528 22,942 20,810 17,900
INTEREST FACTOR IN RENT EXPENSE 301 282 275 302 252 222 207
DIVIDENDS--PREFERRED STOCK 433 505 800 704 589 265 333
--------- --------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES 25,258 22,123 23,465 23,534 23,783 21,297 18,440
--------- --------- --------- --------- --------- --------- ---------
INCOME:
INCOME BEFORE TAXES & MINORITY INTEREST 10,750 11,087 8,914 5,656 5,911 8,207 8,540
OTHER -- 1 -- -- (126) -- --
FIXED CHARGES (EXCLUDING PREFERRED
STOCK DIVIDENDS) 24,825 21,618 22,665 22,830 23,194 21,032 18,107
--------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME 35,575 32,706 31,579 28,486 28,979 29,239 26,647
========= ========= ========= ========= ========= ========= =========
RATIO OF INCOME TO FIXED CHARGES
INCLUDING INTEREST ON DEPOSITS 1.41 1.48 1.35 1.21 1.22 1.37 1.45
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CITIGROUP INC. FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING DISCLOSURES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,844
<INT-BEARING-DEPOSITS> 14,085
<FED-FUNDS-SOLD> 108,363<F1>
<TRADING-ASSETS> 146,713
<INVESTMENTS-HELD-FOR-SALE> 103,009
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 215,595
<ALLOWANCE> 6,604
<TOTAL-ASSETS> 701,314
<DEPOSITS> 222,435
<SHORT-TERM> 19,492<F2>
<LIABILITIES-OTHER> 47,226
<LONG-TERM> 49,419
3,820
2,313
<COMMON> 25
<OTHER-SE> 40,752
<TOTAL-LIABILITIES-AND-EQUITY> 701,314
<INTEREST-LOAN> 16,853
<INTEREST-INVEST> 0<F3>
<INTEREST-OTHER> 17,723
<INTEREST-TOTAL> 34,576
<INTEREST-DEPOSIT> 0<F3>
<INTEREST-EXPENSE> 20,810
<INTEREST-INCOME-NET> 13,766
<LOAN-LOSSES> 2,077
<SECURITIES-GAINS> 694
<EXPENSE-OTHER> 7,964
<INCOME-PRETAX> 8,204
<INCOME-PRE-EXTRAORDINARY> 5,130
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,130
<EPS-PRIMARY> 2.21<F4>
<EPS-DILUTED> 2.14<F4>
<YIELD-ACTUAL> 0<F3>
<LOANS-NON> 3,337<F5>
<LOANS-PAST> 1,037<F6>
<LOANS-TROUBLED> 48
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,237
<CHARGE-OFFS> 2,458
<RECOVERIES> 490
<ALLOWANCE-CLOSE> 6,704<F7>
<ALLOWANCE-DOMESTIC> 0<F8>
<ALLOWANCE-FOREIGN> 0<F9>
<ALLOWANCE-UNALLOCATED> 0<F10>
<FN>
<F1> Includes Securities Purchased Under Resale Agreements.
<F2> Purchased Funds and Other Borrowings.
<F3> Not Disclosed.
<F4> Primary EPS represents Basic EPS under Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS No. 128).
<F5> Includes $1,280MM of cash-basis commercial loans and $2,057MM of consumer
loans on which accrual of interest has been suspended.
<F6> Accruing loans 90 or more days delinquent.
<F7> Aggregate allowance activity for the nine months of 1998 includes $358MM
in other changes, of which, $320MM reflects the addition of credit less reserves
related to the acquisition of UCS. The remaining balance is principally
foreign currency translation effects. Aggregate allowance includes
$50 million attributable to standby letters of credit and guarantees
included in Other Liabilities, and $50 million attributable to derivative
and foreign exchange contracts reported as a deduction from Trading Account
Assets at September 30, 1998.
<F8> No portion of Citigroup's credit loss allowance is specifically allocated
to any individual loan or group of loans, however, $1,827MM of the
allowance at December 31, 1997 was attributed to operations outside the
U.S. (see Note 4 to the 1997 10-K).
<F9> See Footnote F8 above.
<F10> See Footnote F8 above.
</FN>
</TABLE>
Exhibit 99.01
Citigroup Inc.
Index to Supplemental Condensed Consolidated Financial Statements (Unaudited)
for the Three and Nine Months Ended September 30, 1998
- --------------------------------------------------------------------------------
Supplemental Financial Statements: Page No.
Supplemental Condensed Consolidated Statement of Income
(Unaudited) - Three and Nine Months Ended
September 30, 1998 and 1997 1
Supplemental Condensed Consolidated Statement of Financial
Position - September 30, 1998 (Unaudited) and December 31, 1997 2
Supplemental Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) - Nine Months Ended
September 30, 1998 3
Supplemental Condensed Consolidated Statement of Cash Flows
(Unaudited) - Nine Months Ended September 30, 1998 and 1997 4
Notes to Supplemental Condensed Consolidated Financial
Statements - (Unaudited) 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Other Financial Information 63
- --------------------------------------------------------------------------------
<PAGE>
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------
In Millions, Except per Share Amounts 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Loan interest, including fees $ 5,884 $ 5,284 $ 16,853 $ 15,379
Other interest and dividends 5,926 5,557 17,723 15,632
Insurance premiums 2,423 2,226 7,158 6,670
Commissions and fees 2,907 2,867 8,767 8,038
Principal transactions (1,016) 1,359 1,227 3,733
Asset management and administration fees 563 448 1,614 1,236
Realized (losses) gains from sales of investments (16) 293 694 527
Other income 923 787 2,956 2,328
----------------------------------------------------------------
Total revenues 17,594 18,821 56,992 53,543
Interest expense 7,173 6,399 20,810 17,900
----------------------------------------------------------------
Total revenues, net of interest expense 10,421 12,422 36,182 35,643
- -------------------------------------------------------------------------------------------------------------------------------
Provisions for benefits, claims and credit losses
Policyholder benefits and claims 2,099 1,898 6,140 5,709
Provision for credit losses 826 559 2,077 1,640
----------------------------------------------------------------
Total provision for benefits, claims and credit losses 2,925 2,457 8,217 7,349
- -------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Non-insurance compensation and benefits 2,819 3,371 9,739 9,692
Insurance underwriting, acquisition and operating 756 820 2,379 2,424
Restructuring charges (credit) -- 880 (324) 880
Other operating 2,764 2,389 7,964 6,758
----------------------------------------------------------------
Total operating expenses 6,339 7,460 19,758 19,754
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,157 2,505 8,207 8,540
Provision for income taxes 375 906 2,914 3,120
Minority interest, net of income taxes 53 55 163 153
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 729 $ 1,544 $ 5,130 $ 5,267
- -------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net income $ 0.30 $ 0.66 $ 2.21 $ 2.25
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,248.3 2,245.7 2,245.9 2,250.4
- -------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net income $ 0.30 $ 0.63 $ 2.14 $ 2.15
- -------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding 2,320.7 2,357.1 2,324.5 2,362.3
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1
<PAGE>
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
In Millions of Dollars September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents (including segregated cash and other deposits) $ 14,844 $ 12,618
Deposits at interest with banks 14,085 13,049
Investments 103,009 91,633
Federal funds sold and securities borrowed or purchased under agreements to resell 108,363 119,967
Brokerage receivables 23,515 15,627
Trading account assets 146,713 180,088
Loans, net
Consumer 124,756 119,097
Commercial 90,839 79,509
-------------------------------------
Loans, net of unearned income 215,595 198,606
Allowance for credit losses (6,604) (6,137)
-------------------------------------
Total loans, net 208,991 192,469
Reinsurance recoverables 9,537 9,579
Separate and variable accounts 13,149 11,319
Other assets 59,108 51,035
-------------------------------------
Total assets $ 701,314 $ 697,384
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits $ 222,435 $ 199,121
Investment banking and brokerage borrowings 16,128 11,464
Short-term borrowings 19,492 14,028
Long-term debt 49,419 47,387
Federal funds purchased and securities loaned or sold under agreements to repurchase 99,234 132,103
Brokerage payables 24,264 12,763
Trading account liabilities 102,607 127,152
Contractholder funds and separate and variable accounts 29,393 26,157
Insurance policy and claims reserves 43,926 43,782
Other liabilities 47,226 38,301
-------------------------------------
Total liabilities 654,124 652,258
- -------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock - Series I 280 280
- -------------------------------------------------------------------------------------------------------------------------------
Citigroup or subsidiary obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt securities of -- Parent 1,200 1,000
- -------------------------------------------------------------------------------------------------------------------------------
-- Subsidiary 2,620 1,995
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 2,313 3,353
Common stock ($.01 par value; authorized shares: 6.0 billion;
issued shares: 1998 - 2,517,021,775 and 1997 - 2,499,949,682) 25 25
Additional paid-in capital 13,260 12,471
Retained earnings 35,746 32,002
Treasury stock, at cost (1998 - 241,566,813 shares and 1997 - 220,026,597 shares) (8,254) (6,595)
Accumulated other changes in equity from nonowner sources 593 1,057
Unearned compensation (593) (462)
-------------------------------------
Total stockholders' equity 43,090 41,851
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 701,314 $ 697,384
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
2
<PAGE>
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-------------------------------------------
In Millions of Dollars Amount Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock, at aggregate liquidation value (in thousands)
<S> <C> <C>
Balance, beginning of year $ 3,353 14,831
Redemption or retirement of preferred stock (1,040) (6,356)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 2,313 8,475
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock and additional paid-in capital
Balance, beginning of year 12,496 2,499,950
Conversion of preferred stock to common stock 153 6,942
Exercise of common stock warrants 131 10,130
Issuance of shares pursuant to employee benefit plans 512
Other (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 13,285 2,517,022
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 32,002
Net income 5,130
Common dividends (1,215)
Preferred dividends (171)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period 35,746
- ---------------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (6,595) (220,027)
Issuance of shares pursuant to employee benefit plans, net of shares
tendered for payment of option exercise price and withholding taxes 347 16,785
Treasury stock acquired (2,006) (38,325)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period (8,254) (241,567)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year 1,057
Net change in unrealized gains and losses on investment securities, net of tax (462)
Net translation adjustments, net of tax (2)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period 593
- ---------------------------------------------------------------------------------------------------------------
Unearned compensation
Balance, beginning of year (462)
Issuance of restricted stock, net of amortization (131)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period (593)
- ---------------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 40,777 2,275,455
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 43,090
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3
<PAGE>
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
In Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,130 $ 5,267
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Amortization of deferred policy acquisition costs and value of insurance in force 1,129 1,073
Additions to deferred policy acquisition costs (1,330) (1,272)
Other non-cash changes 2,580 2,199
Change in trading account assets 33,375 (29,819)
Change in trading account liabilities (24,545) (794)
Change in Federal funds sold and securities purchased under agreements to resell 11,604 (23,744)
Change in Federal funds purchased and securities sold under agreements to
repurchase (32,869) 45,680
Change in brokerage receivables net of brokerage payables 3,613 1,434
Net gain on sale of securities (694) (527)
Venture capital activity (686) (224)
Restructuring charge (credit) (324) 880
Other, net 2,451 1,563
- -------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (566) 1,716
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Change in deposits at interest with banks (1,036) 305
Change in loans (136,335) (87,773)
Proceeds from sales of loans 124,927 77,487
Purchases of investments (65,014) (59,308)
Proceeds from sales of investments 33,839 36,718
Proceeds from maturities of investments 26,197 16,787
Other investments, primarily short-term, net (2,743) (553)
Capital expenditures on premises and equipment (1,239) (1,073)
Proceeds from sales of premises and equipment, subsidiaries and affiliates,
and other real estate owned 448 1,231
Business acquisitions (3,890) (1,618)
Other, net (319) (164)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,165) (17,961)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (1,394) (1,275)
Issuance of common stock 243 354
Issuance of preferred stock -- 783
Issuance of redeemable preferred stock of subsidiaries 825 450
Redemption of preferred stock (1,040) (850)
Treasury stock acquired (2,006) (2,335)
Stock tendered for payment of withholding taxes (511) (280)
Issuance of long-term debt 12,350 13,056
Payments and redemptions of long-term debt (10,503) (7,655)
Change in deposits 23,314 9,143
Change in short-term borrowings including investment banking and
brokerage borrowings 5,302 5,458
Contractholder fund deposits 3,852 2,450
Contractholder fund withdrawals (2,450) (1,991)
Other, net 79 (120)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,061 17,188
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (104) (435)
- -------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 2,226 508
Cash and cash equivalents at beginning of period 12,618 10,165
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,844 $ 10,673
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,160 $ 2,860
Cash paid during the period for interest $ 19,725 $ 16,765
Non-cash investing activities:
Transfers from loans to OREO and assets pending disposition $ 192 $ 282
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
4
<PAGE>
Citigroup Inc. and Subsidiaries
Notes to Supplemental Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
On October 8, 1998, Citicorp merged (the Merger) with and into a newly
formed, wholly owned subsidiary of Travelers Group Inc. (TRV) in a
transaction accounted for under the pooling of interests method and
subsequently TRV changed its name to Citigroup Inc. (Citigroup). The
accompanying supplemental condensed consolidated financial statements as
of September 30, 1998 and for the three and nine month periods ended
September 30, 1998 and 1997 are unaudited and include the accounts of
Citigroup Inc. and its subsidiaries, including Citicorp (collectively, the
Company). In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation have been
reflected. The supplemental consolidated financial statements give
retroactive effect to the Merger in a transaction accounted for as a
pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if TRV and Citicorp
had always been combined. Generally accepted accounting principles (GAAP)
do not permit giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements
that do not include a period subsequent to the date of consummation. The
supplemental consolidated financial statements do not extend through the
date of consummation. However, they will become the historical
consolidated financial statements of the Company after financial
statements covering the date of consummation of the Merger (October 8,
1998) are issued. The supplemental consolidated statement of changes in
stockholders' equity reflects the accounts of the Company as if the
additional preferred and common stock had been issued during all the
periods presented. The supplemental condensed consolidated financial
statements, including the notes thereto, should be read in conjunction
with the audited supplemental consolidated financial statements and
related notes of Citigroup Inc. and subsidiaries for the years ended
December 31, 1997, 1996 and 1995, as filed by Citigroup in a Form 8-K
dated October 26, 1998 (the 1997 Supplemental Financial Statements).
Certain financial information that is normally included in annual
financial statements prepared in accordance with GAAP, but is not required
for interim reporting purposes, has been condensed or omitted.
Certain reclassifications have been recorded to conform the accounting
policies and presentations of Citicorp and TRV.
At TRV's Annual Meeting of Stockholders on April 22, 1998, shareholders
approved an amendment to the Restated Certificate of Incorporation to
increase the common stock authorized for issuance from 1.5 billion shares
to 3 billion shares. At a Special Meeting of Stockholders of TRV held on
July 22, 1998, shareholders approved another amendment to the Restated
Certificate of Incorporation to increase the common stock authorized for
issuance to 6 billion shares.
2. Recent Transactions
Citicorp Merger
As previously discussed, on October 8, 1998, Citicorp merged with and into
a newly formed, wholly owned subsidiary of TRV and, subsequently, TRV
changed its name to Citigroup. Under the terms of the Merger, 1.13 billion
shares of Citigroup common stock were issued in exchange for all the
outstanding shares of Citicorp common stock based on an exchange ratio of
2.5 shares of Citigroup common stock for each share of Citicorp common
stock. Each share of TRV common stock automatically represents one share
of Citigroup common stock. Following the exchange, former shareholders of
Citicorp and TRV each own approximately 50% of the outstanding common
stock of Citigroup. Each outstanding share of Citicorp preferred stock was
converted into one share of a corresponding series of preferred stock of
Citigroup having substantially identical terms.
- --------------------------------------------------------------------------------
5
<PAGE>
Upon consummation of the Merger, the Company became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the
BHCA). The BHCA precludes a bank holding company and its affiliates from
engaging in certain activities, generally including insurance
underwriting. Under the BHCA in its current form, the Company has two
years from October 8, 1998 to comply with all applicable provisions (the
BHCA Compliance Period). The BHCA Compliance Period may be extended, at
the discretion of the Federal Reserve Board, for three additional one-year
periods so long as the extension is not deemed to be detrimental to the
public interest. At this time, the Company believes that its compliance
with applicable laws following the Merger will not have a material adverse
effect on the Company's financial condition or results of operations. The
Company will evaluate its alternatives in order to comply with whatever
laws are applicable at the expiration of the BHCA Compliance Period and
any extensions thereof.
The following supplemental information reflects certain historical
financial data for each of TRV and Citicorp and the combined amounts for
Citigroup, including the effects of adjustments to conform the accounting
policies:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30
-------------------------------------------------------------------
In Millions of Dollars 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
TRV $ 8,222 $ 9,961 $28,686 $27,845
Citicorp 9,372 8,860 28,306 25,698
- ----------------------------------------------------------------------------------------------------------------------------
Citigroup $17,594 $18,821 $56,992 $53,543
- ----------------------------------------------------------------------------------------------------------------------------
Net income:
TRV $ 199 $ 1,029 $ 2,433 $ 2,727
Citicorp 530 511 2,692 2,530
Adjustments to conform accounting policies (1) -- 4 5 10
-------------------------------------------------------------------
Citigroup $ 729 $ 1,544 $ 5,130 $ 5,267
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted to reflect the adoption by Citicorp of the immediate recognition
of the transition obligation under SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" effective January 1,
1993, to conform to the method used by TRV, and other adjustments to
conform the accounting policies of the companies and to record the related
tax effects of these adjustments.
- --------------------------------------------------------------------------------
The Nikko Securities Co., Ltd.
In August 1998, The Nikko Securities Co., Ltd. (Nikko), Salomon Smith
Barney Holdings Inc. (Salomon Smith Barney) and TRV signed an agreement to
form a global strategic alliance. The agreement calls for the formation of
a joint venture, called Nikko Salomon Smith Barney Limited, which will
provide investment banking, sales, trading and research services for
corporate and institutional clients in Japan and other foreign
jurisdictions. Nikko Salomon Smith Barney will combine the Japanese
institutional and corporate business of Salomon Smith Barney with Nikko's
domestic and international institutional and corporate business. Nikko's
retail business and other activities, including asset management, will
continue under the management of Nikko. Nikko Salomon Smith Barney will be
owned 51% by Nikko and 49% by Salomon Smith Barney. It is anticipated that
the joint venture will be operational in the first quarter of 1999,
subject to applicable regulatory approvals.
In addition, in August 1998 TRV purchased 9.5% of Nikko's outstanding
common stock plus bonds convertible into an additional 15.5% common equity
interest in Nikko on a fully diluted basis for a purchase price of $1.5
billion.
3. Changes in Accounting Principles and Recently Issued Accounting
Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130), which addresses the manner in which total changes in equity from
nonowner sources are presented in the financial statements, including
unrealized gains and losses on securities available for sale and foreign
currency translation. The following table sets forth the Company's total
changes in equity from nonowner sources under SFAS No. 130 for the three
and nine-month periods ended September 30, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------
In Millions of Dollars 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 729 $ 1,544 $ 5,130 $ 5,267
Other changes in equity from nonowner sources, net of
tax (300) 468 (464) 643
---------------------------------------------------------------------
Total changes in equity from nonowner sources $ 429 $ 2,012 $ 4,666 $ 5,910
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998 and December 31, 1997, accumulated other changes in
equity from nonowner sources on the supplemental condensed consolidated
statement of financial position include the after-tax amounts for net
unrealized gains on investments available for sale of $1,230 million and
$1,692 million, respectively, and foreign currency translation of $(637)
million and $(635) million, respectively.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 127 (SFAS No. 127), "Deferral of the Effective
Date of Certain Provisions of SFAS 125," which was effective for transfers
and pledges of certain financial assets and collateral made after December
31, 1997. The adoption of SFAS No. 127 created additional assets and
liabilities on the Company's supplemental condensed consolidated statement
of financial position related to the recognition of securities provided
and received as collateral. At September 30, 1998, the impact of SFAS No.
127 on the Company's supplemental condensed consolidated statement of
financial position was a decrease to total assets and liabilities of
approximately $3.6 billion. In addition, as a result of SFAS No. 127,
certain inventory positions, primarily foreign government securities, have
been reclassified to receivables or payables.
In the 1998 third quarter, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for
determining when specific costs should be capitalized and when they should
be expensed. The impact of adopting SOP 98-1 was not material.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk" (SOP 98-7). SOP
98-7 provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk and applies to all entities
and all such contracts, except for long-duration life and health insurance
contracts. The method used to account for such contracts is referred to as
deposit accounting. SOP 98-7 does not address when deposit accounting
should be applied. SOP 98-7 identifies several methods of deposit
accounting for insurance and reinsurance contracts that do not transfer
insurance risk and provides guidance on the application of each method.
SOP 98-7 is effective for financial statements for fiscal years beginning
after June 15, 1999, with earlier adoption encouraged. Restatement of
previously issued financial statements is not permitted. The effect of
initially adopting SOP 98-7 should be reported as a cumulative catch-up
adjustment. The Company does not expect the adoption of SOP 98-7 to have a
material impact on results of operations, financial condition or
liquidity.
For a discussion of other accounting pronouncements and their future
applicability see Note 1 of the 1997 Supplemental Financial Statements.
- --------------------------------------------------------------------------------
7
<PAGE>
4. Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-----------------------------------------------------------------------
In Millions, Except per Share Amounts 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 729 $ 1,544 $ 5,130 $ 5,267
Preferred dividends (50) (67) (172) (211)
-----------------------------------------------------------------------
Income available to common stockholders for
basic EPS $ 679 $ 1,477 $ 4,958 $ 5,056
Effect of dilutive securities 6 10 19 30
-----------------------------------------------------------------------
Income available to common stockholders
for diluted EPS $ 685 $ 1,487 $ 4,977 $ 5,086
-----------------------------------------------------------------------
Weighted average common shares
outstanding applicable to basic EPS 2,248.3 2,245.7 2,245.9 2,250.4
Effect of dilutive securities:
Convertible securities 13.2 26.5 13.2 26.4
Options 38.9 52.3 44.1 53.9
Warrants 0.7 7.4 3.1 7.0
Restricted stock 19.6 25.2 18.2 24.6
-----------------------------------------------------------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 2,320.7 2,357.1 2,324.5 2,362.3
-----------------------------------------------------------------------
Basic earnings per share $ 0.30 $ 0.66 $ 2.21 $ 2.25
-----------------------------------------------------------------------
Diluted earnings per share $ 0.30 $ 0.63 $ 2.14 $ 2.15
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. Investments
Investments, which are owned principally by the banking and insurance
subsidiaries and are broadly diversified along industry, product, and
geographic lines, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
In Millions of Dollars 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities, primarily available for sale at fair value $ 86,327 $77,920
Equity securities, at fair value 3,913 3,928
Venture capital, at fair value (1) 3,285 2,599
Short-term and other 9,484 7,186
-----------------------------------------
$103,009 $91,633
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the nine months ended September 30, 1998, net gains on investments
held by venture capital subsidiaries totaled $404 million, of which $584
million and $285 million represented gross unrealized gains and losses,
respectively. For the nine months ended September 30, 1997, net gains on
investments held by venture capital subsidiaries totaled $501 million, of
which $359 million and $66 million represented gross unrealized gains and
losses, respectively.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8
<PAGE>
The amortized cost and fair value of investments in fixed maturity and
equity securities at September 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 (1)
------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Amortized Fair
In Millions of Dollars Cost Gains Losses Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities held to maturity,
principally mortgage-backed securities $ 33 $ 8 $ -- $ 41 $ 41 $ 50
Fixed maturity securities available for sale
Mortgage-backed securities, principally
obligations of U.S. Federal
agencies $12,001 $ 499 $ 7 $12,493 $ 9,795 $10,099
U.S. Treasury and Federal agency 6,528 643 -- 7,171 6,816 7,128
State and municipal 13,531 911 260 14,182 10,351 10,817
Foreign government 21,999 327 684 21,642 19,381 19,996
U.S. corporate 23,146 1,520 232 24,434 23,306 24,137
Other debt securities 6,214 260 102 6,372 5,625 5,702
------------------------------------------------------------------------------------
$83,419 $ 4,160 $ 1,285 $86,294 $75,274 $77,879
------------------------------------------------------------------------------------
Equity securities (2) $ 3,966 $ 159 $ 212 $ 3,913 $ 3,661 $ 3,928
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale include:
Government of Brazil Brady Bonds $ 661 $ 10 $ -- $ 671 $ 1,436 $ 2,048
Government of Venezuela Brady Bonds 507 -- 212 295 535 480
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1997, gross unrealized gains and losses on fixed maturity
securities and equity securities totaled $3,586 million and $705 million,
respectively.
(2) Includes non-marketable equity securities carried at cost which are
reported in both the amortized cost and fair values columns.
- --------------------------------------------------------------------------------
6. Trading Account Assets and Liabilities
<TABLE>
<CAPTION>
September 30, December 31,
In Millions of Dollars 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trading Account Assets
U.S. Treasury and Federal agency securities $ 35,968 $ 56,007
State and municipal securities 3,674 3,255
Foreign government securities 28,890 50,924
Corporate and other debt securities 15,203 16,637
Derivative and other contractual commitments (1)(2) 42,237 34,585
Equity securities 7,682 9,236
Mortgage loans and collateralized mortgage securities 6,698 3,160
Commodities 445 1,274
Other 5,916 5,010
-------------------------------
$146,713 $180,088
-------------------------------
Trading Account Liabilities
Securities sold, not yet purchased $ 60,023 $ 90,247
Derivative and other contractual commitments (1)(2) 42,584 36,905
-------------------------------
$102,607 $127,152
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of master netting agreements. In addition, the asset balances at
September 30, 1998 and December 31, 1997 are reduced by $50 million of
credit loss reserves. See page 20 for additional explanation.
(2) Deferred revenue on derivative and foreign exchange contracts, which is
reported in Other liabilities and attributable to ongoing costs such as
servicing and credit considerations, totaled $451 million and $391 million
at September 30, 1998 and December 31, 1997, respectively.
- --------------------------------------------------------------------------------
7. Derivatives and Foreign Exchange Contracts
The following table presents the aggregate notional principal amounts of
Citigroup's outstanding derivative, foreign exchange and commodities
products and related risks at September 30, 1998 and December 31, 1997,
along with the related balance sheet credit exposure. Additional
information concerning Citigroup's derivative, foreign exchange, and
commodities products and related risks and activities, including a
description of accounting policies, and credit and market risk management
process is provided in Notes 1 and 21 of Notes to the 1997 Supplemental
Financial Statements.
- --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
Notional Principal Balance Sheet
Amounts Credit Exposure (1)
-------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30, Dec, 31,
In Billions of Dollars 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate products $5,979.8 $4,314.8 $27.3 $16.9
Foreign exchange products 2,554.7 1,920.2 39.1 37.4
Equity products 143.8 127.0 7.2 4.0
Commodity products 24.4 32.5 .9 1.2
Credit derivative products 16.7 6.9 0.3 --
--------------------------------
74.8 59.5
Effects of master netting agreements at Citicorp (2) (30.6) (24.1)
Effects of securitization (3) (2.0) (0.8)
--------------------------------
$42.2 $34.6
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts do not reflect credit loss reserves attributable to derivative and
foreign exchange contracts.
(2) Master netting agreements mitigate credit risk by permitting the offset of
amounts due from and to individual counterparties in the event of
counterparty default. The effect of master netting agreements at Salomon
Smith Barney is reflected in the individual line items for each of the
products in the table above.
(3) Citibank has securitized and sold net receivables, and the associated
credit risk related to certain derivative and foreign exchange contracts
via Citibank Capital Markets Assets Trust.
- --------------------------------------------------------------------------------
8. Debt
Investment banking and brokerage borrowings consisted of the following:
<TABLE>
<CAPTION>
In Millions of Dollars September 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $11,825 $ 7,110
Other short-term borrowings 4,303 4,354
-----------------------------------------
$16,128 $ 11,464
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Short-term borrowings consisted of commercial paper and other short-term
borrowings outstanding as follows:
<TABLE>
<CAPTION>
In Millions of Dollars September 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper
Citigroup Inc. $ 682 $ --
Commercial Credit Company 5,130 3,871
Citicorp 3,581 1,941
Travelers Property Casualty Corp. - 108
-----------------------------------------
9,393 5,920
Other short-term borrowings 10,099 8,108
-----------------------------------------
$ 19,492 $ 14,028
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Long-term debt, including its current portion, consisted of the following:
<TABLE>
<CAPTION>
In Millions of Dollars September 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Citigroup Inc. $ 1,974 $ 1,695
Citicorp 19,007 19,035
Salomon Smith Barney Holdings Inc. 20,905 19,064
Commercial Credit Company 6,250 6,300
Travelers Property Casualty Corp. 1,250 1,249
The Travelers Insurance Group Inc. 33 44
-----------------------------------------
$ 49,419 $ 47,387
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
9. Restructuring Charges
As discussed in Notes 2 and 15 of Notes to the 1997 Supplemental
Consolidated Financial Statements, in the fourth quarter of 1997, as a
result of the merger with Salomon Inc, Salomon Smith Barney recorded a
restructuring charge of $838 million ($496 million after-tax). At
September 30, 1998, the reserve balance was $353 million, primarily
reflecting a $324 million ($191 million after-tax) adjustment, in the
second quarter, relating to the Seven World Trade Center lease. This
reduction in the reserve resulted from negotiations on a sub-lease which
indicated that excess space would be disposed of on terms more favorable
than had been originally estimated. A current reassessment of space needs,
including the merger with Citicorp, could indicate a need for increased
occupancy by the Company of space previously considered excess, and could
result in a further adjustment to reduce the restructuring reserve.
As discussed in Note 15 of Notes to the 1997 Supplemental Consolidated
Financial Statements, during the 1997 third quarter, Citicorp recorded an
$880 million charge related to cost-management programs and customer
service initiatives to improve operational efficiency and productivity. Of
the $880 million restructuring charge, approximately $330 million remained
in the reserve as of September 30, 1998, with the difference reflecting
the $245 million of equipment and premises write-downs recorded in 1997,
as well as $300 million of primarily severance and related costs (of which
$229 million has been paid in cash and $71 million is legally obligated),
together with translation effects. Through September 30, 1998, 3,116 staff
positions have been reduced under this program, 1,335 in the third
quarter.
10. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
In January 1998, Travelers Capital IV, a wholly owned subsidiary trust of
TRV, issued 8 million 6.850% Trust Preferred Securities (the TRV IV
Preferred Securities) with a liquidation preference of $25 per TRV IV
Preferred Security to the public and 247,440 common securities to TRV, the
proceeds of which were invested by Travelers Capital IV in $206 million of
6.850% Junior Subordinated Deferrable Interest Debentures issued by
Citigroup (the Citigroup Debentures). The $206 million of Citigroup
Debentures is the sole asset of Travelers Capital IV. The Citigroup
Debentures mature on January 22, 2038 and are redeemable by Citigroup in
whole or in part at any time after January 22, 2003. Travelers Capital IV
will use the proceeds from any such redemption to redeem a like amount of
TRV IV Preferred Securities and common securities. Distributions on the
TRV IV Preferred Securities and common securities are cumulative and
payable quarterly in arrears. Citigroup's obligations under the agreements
that relate to the TRV IV Preferred Securities, the Trust and the
Citigroup Debentures constitute a full and unconditional guarantee by
Citigroup of the Trust's obligations under the TRV IV Preferred
Securities. Upon consummation of the Citicorp merger, the name of
Travelers Capital IV was changed to Citigroup Capital IV.
In January 1998, SSBH Capital I, a wholly owned subsidiary trust of
Salomon Smith Barney, issued 16 million 7.2% Trust Preferred Securities
(SSBH Capital Preferred Securities) with a liquidation preference of $25
per SSBH Capital Preferred Security to the public and 494,880 common
securities to Salomon Smith Barney, the proceeds of which were invested by
SSBH Capital I in $412 million of 7.2% Subordinated Deferrable Interest
Debentures issued by Salomon Smith Barney (the Salomon Smith Barney
Debentures). The $412 million of Salomon Smith Barney Debentures is the
sole asset of SSBH Capital I. The Salomon Smith Barney Debentures mature
on January 28, 2038 and are redeemable by Salomon Smith Barney in whole or
in part at any time after January 28, 2003. SSBH Capital I will use the
proceeds from any such redemption to redeem a like amount of SSBH Capital
Preferred Securities and common securities. Distributions on the SSBH
Capital Preferred Securities and common securities are cumulative and
payable quarterly in arrears. Salomon Smith Barney's obligations under the
agreements that relate to the SSBH Capital Preferred Securities, the Trust
and the Salomon Smith Barney Debentures constitute a full and
unconditional guarantee by Salomon Smith Barney of the Trust's obligations
under the SSBH Capital Preferred Securities.
In June 1998, Citicorp Capital III, a wholly owned subsidiary trust of
Citicorp, issued 9 million 7.1% Trust Preferred Securities (the Capital
Securities) with a liquidation preference of $25 per Capital Security, the
proceeds of which were invested by Citicorp Capital III in $231.75 million
of 7.1% Junior Subordinated Deferrable Interest Debentures issued by
Citicorp (the Subordinated Debt Securities). The Subordinated Debt
Securities are the sole asset of Citicorp Capital III. The Subordinated
Debt Securities mature on August 15, 2028 and are redeemable by Citicorp
in whole or
- --------------------------------------------------------------------------------
11
<PAGE>
in part at any time on or after August 15, 2003. Citicorp used
substantially all of the net proceeds of the sale of the Subordinated Debt
Securities to redeem, substantially concurrently with the issuance of the
Capital Securities, all of the $216,550,000 outstanding principal amount
of Subordinated Bank Adjustable Note Capital Securities issued by Citicorp
on December 9, 1986. Distributions on the Capital Securities are
cumulative and payable quarterly in arrears. Under these arrangements,
taken as a whole, payments due are fully and unconditionally guaranteed on
a subordinated basis.
11. Regulatory Capital
Citigroup and Citicorp are subject to risk-based capital and leverage
guidelines issued by the Board of Governors of the Federal Reserve Board
(FRB), and its U.S. insured depository institution subsidiaries, including
Citibank, N.A., are subject to similar guidelines issued by their
respective primary regulators. These guidelines are supplemented by a
leverage ratio requirement. At September 30, 1998, regulatory capital as
set forth in guidelines issued by U.S. federal bank regulators is as
follows:
<TABLE>
<CAPTION>
Minimum
Requirement Citigroup Citicorp Citibank, N.A.
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital ratio (1) 4.00% 8.69% 7.97% 7.80%
Total capital ratio (1) (2) 8.00% 11.28% 11.65% 11.70%
Leverage ratio (1) (3) 3.00% 5.73% 6.56% 6.12%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects adjustments to conform accounting policy as discussed in Note 2.
(2) Total capital includes Tier 1 and Tier 2.
(3) Tier 1 capital divided by adjusted average assets.
- --------------------------------------------------------------------------------
12. Contingencies
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
The reserves carried for environmental and asbestos claims at September
30, 1998 are the Company's best estimate of ultimate claims and claim
adjustment expenses based upon known facts and current law. However, the
conditions surrounding the final resolution of these claims continue to
change. Currently, it is not possible to predict changes in the legal and
legislative environment and their impact on the future development of
asbestos and environmental claims. Such development will be affected by
future court decisions and interpretations and changes in Superfund and
other legislation. Because of these future unknowns, additional
liabilities may arise for amounts in excess of the current reserves. These
additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves
by an amount that would be material to the Company's operating results in
a future period. However, the Company believes that it is not likely that
these claims will have a material adverse effect on the Company's
financial condition or liquidity.
In the ordinary course of business Citigroup and/or its subsidiaries are
also defendants or co-defendants in various litigation matters, other than
those described above. Although there can be no assurances, the Company
believes, based on information currently available, that the ultimate
resolution of these legal proceedings would not be likely to have a
material adverse effect on the Company's results of operations, financial
condition or liquidity.
- --------------------------------------------------------------------------------
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-----------------------------------------------------------------------
In Millions, Except per Share Amounts 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 17,594 $ 18,821 $ 56,992 $ 53,543
Total revenues, net of interest expense $ 10,421 $ 12,422 $ 36,182 $ 35,643
Net income $ 729 $ 1,544 $ 5,130 $ 5,267
Earnings per share:
Basic $ 0.30 $ 0.66 $ 2.21 $ 2.25
Diluted $ 0.30 $ 0.63 $ 2.14 $ 2.15
Weighted average common shares
outstanding (Basic) 2,248.3 2,245.7 2,245.9 2,250.4
Adjusted weighted average common shares
outstanding (Diluted) 2,320.7 2,357.1 2,324.5 2,362.3
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Merger with Citicorp
As discussed in Notes 1 and 2 of Notes to Supplemental Condensed Consolidated
Financial Statements, on October 8, 1998, Citicorp merged with and into a newly
formed, wholly owned subsidiary of Travelers Group Inc. (TRV) (the Merger).
Following the Merger, TRV changed its name to Citigroup Inc. (Citigroup). Under
the terms of the Merger, 1.13 billion shares of Citigroup common stock were
issued in exchange for all of the outstanding shares of Citicorp common stock
based on an exchange ratio of 2.5 shares of Citigroup common stock for each
share of Citicorp common stock. Each share of TRV common stock automatically
represents one share of Citigroup common stock. Following the exchange, former
shareholders of Citicorp and TRV each own approximately 50% of the outstanding
common stock of Citigroup. Each outstanding share of Citicorp preferred stock
was converted into one share of a corresponding series of preferred stock of
Citigroup with identical terms. The Merger has been accounted for as a pooling
of interests and, accordingly, the supplemental condensed consolidated financial
statements presented herein reflect the combined results of TRV and Citicorp as
if the Merger had been in effect for all periods.
Results of Operations
Consolidated net income for the quarter ended September 30, 1998 was $729
million, compared with net income of $1.544 billion in the 1997 period.
Consolidated net income for the nine months ended September 30, 1998 was $5.130
billion, compared to $5.267 billion in the 1997 period. The 1998 nine-month
period includes a credit of $191 million in the second quarter of 1998
representing a reduction in the restructuring reserve recorded in the fourth
quarter of 1997 in connection with the Salomon Merger (see Note 9 of Notes to
Supplemental Condensed Consolidated Financial Statements). The 1997 third
quarter and nine-month period includes a $550 million restructuring charge ($880
million pretax). Excluding restructuring impacts, net income for the quarter
decreased $1.4 billion, or 65%, and for the nine months decreased $884 million,
or 15%, from the comparable 1997 periods.
- --------------------------------------------------------------------------------
13
<PAGE>
SEGMENT RESULTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
THE BUSINESSES OF CITIGROUP
Citigroup is a diversified, integrated financial services company engaged in
banking, investment services, life and property and casualty insurance services,
and consumer finance. The following table presents net income for these industry
segments for the three and nine months ended September 30, 1998 and 1997.
Net Income
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------
In Millions of Dollars 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banking Services $533 $ 521 $2,701 $2,546
Investment Services (325) 508 779 1,373
Life Insurance Services 228 237 747 617
Property & Casualty Insurance Services 262 272 812 723
Consumer Finance Services 81 60 209 161
Corporate and Other (50) (54) (118) (153)
---------------------------------------------------------------------
$729 $1,544 $5,130 $5,267
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following discussions present in more detail each segment's performance.
BANKING SERVICES
SUMMARY OF FINANCIAL RESULTS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------
In Millions of Dollars 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue $3,098 $2,876 $ 8,932 $ 8,543
Commissions, fees and other income 2,396 2,665 8,369 7,505
---------------------------------------------------------------------
Total revenue, net of interest expense 5,494 5,541 17,301 16,048
---------------------------------------------------------------------
Provision for credit losses 736 486 1,807 1,421
Restructuring charge - 880 - 880
Operating expense 3,902 3,343 11,169 9,675
---------------------------------------------------------------------
Total operating expense 4,638 4,709 12,976 11,976
---------------------------------------------------------------------
Income before taxes 856 832 4,325 4,072
Income taxes 323 311 1,624 1,526
---------------------------------------------------------------------
Net income $ 533 $ 521 $ 2,701 $ 2,546
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Citicorp reported net income for the 1998 third quarter of $533 million, down
$538 million from $1.1 billion (excluding the $550 million after-tax
restructuring charge) in the 1997 third quarter. Generally strong Global
Consumer results were reduced by a sharp decline in Global Corporate Banking
resulting from after-tax losses of $240 million related to Russia ($384 million
pretax) and $97 million from marking to market fixed income inventories, and by
lower earnings in the new Investment Activities segment (see page 34). Net
income of $521 million in the 1997 third quarter included a $550 million
restructuring charge ($880 million pretax).
Net income for the 1998 nine months was $2.7 billion or $5.65 per diluted common
share, down $394 million from $3.1 billion (excluding the $550 million after-tax
restructuring charge) in the 1997 nine months. Net income of $2.5 billion in the
1997 nine months included the restructuring charge. Return on common equity was
10.1% in the quarter and 17.8% in the nine months, compared with 9.9% and 17.2%
for the 1997 periods (21.0% and 21.1% for the 1997 periods excluding the
charge), and return on average assets was 0.63% and 1.11% for the 1998 periods,
compared with 0.68% and 1.16% for 1997 (1.42% and 1.41% excluding the charge).
Global Consumer income before taxes in the 1998 third quarter was $723 million,
up $81 million or 13% from 1997, excluding the $580 million restructuring
charge, reflecting strong results in U.S. bankcards and in Japan, partially
offset by lower earnings in Asia Pacific and Latin America. For the nine months,
income before taxes was $1.9 billion, down $76 million or 4% from 1997,
excluding the charge. Global Corporate Banking loss before taxes was $183
million, down
- --------------------------------------------------------------------------------
14
<PAGE>
from income of $521 million (excluding a restructuring charge of $281 million)
in the 1997 third quarter. The 1998 third quarter included a loss of $384
million attributable to the financial market turmoil in Russia, which affected
both revenue and credit costs, as well as a $138 million write-down of fixed
income inventories. For the nine months, income before taxes was $913 million,
down $727 million or 44% from 1997, excluding the charge. Pretax income in Asia
Pacific of $204 million for the quarter was down $103 million or 34% from last
year -- Global Consumer businesses were down $36 million or 24% while Global
Corporate Banking results were down $67 million or 42%.
Net Interest Revenue (Taxable Equivalent Basis) (1)
<TABLE>
<CAPTION>
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
In Millions of Dollars 1998 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest revenue $ 3,117 $ 3,009 $ 2,856 $ 2,871 $ 2,888
Effect of credit card securitization activity 951 908 640 596 565
---------------------------------------------------------------------------------
Total adjusted (2) $ 4,068 $ 3,917 $ 3,496 $ 3,467 $ 3,453
- ------------------------------------------------------------------------------------------------------------------------------------
In Billions of Dollars
Total average interest-earning assets $ 278.7 $ 276.0 $ 265.2 $ 257.0 $ 255.7
Effect of credit card securitization activity 39.9 36.8 27.4 26.3 24.8
---------------------------------------------------------------------------------
Total adjusted (2) $ 318.6 $ 312.8 $ 292.6 $ 283.3 $ 280.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin (%)
Total 4.44% 4.37% 4.37% 4.43% 4.48%
Effect of credit card securitization activity .62% .65% .48% .42% .40%
---------------------------------------------------------------------------------
Total adjusted (2) 5.06% 5.02% 4.85% 4.85% 4.88%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The taxable equivalent adjustment is based on the U.S. federal statutory
tax rate of 35%.
(2) See page 21 for discussion of the effect of credit card securitization
activity.
- --------------------------------------------------------------------------------
Net interest revenue of $3.1 billion in the 1998 third quarter increased 4% and
8% from the 1998 second quarter and 1997 third quarter, respectively. The net
interest margin of 4.44% was up from the second quarter, but down slightly from
a year ago. Average interest-earning assets of $278.7 billion were up slightly
from the prior quarter and up 9% from the 1997 quarter. Net interest revenue and
net interest margin for all periods presented were reduced by the effect of
credit card securitization activity.
Adjusted for the effect of credit card securitization activity, net interest
revenue of $4.1 billion increased 4% from the 1998 second quarter and 18% from
the 1997 third quarter. The adjusted net interest margin of 5.06% increased from
both the 1998 second quarter and the 1997 third quarter. Adjusted average
interest-earning assets of $318.6 billion were up 2% from the second quarter and
14% from the prior year.
The improvement in adjusted net interest revenue from the 1998 second quarter
reflected an increase in the level of average interest-earning assets in Global
Consumer, including the acquisition of certain assets of Confia, the effect of
risk-based pricing strategies in U.S. bankcards, as well as the impact of one
more day in the current quarter, partially offset by decreases in Global
Relationship Banking. The Global Consumer volume-driven increase in net interest
revenue was evenly split between the developed markets, in Europe and in U.S.
bankcards, and the emerging markets, in Latin America, including Confia, and
Asia Pacific Citibanking.
The improvement in adjusted net interest revenue from the 1997 third quarter
reflected the addition of Universal Card Services (UCS) in April 1998, an
increase due to risk-based pricing strategies in other U.S. bankcards
portfolios, and higher levels of average interest-earning assets in Global
Consumer and in Emerging Markets. The volume-driven increase in Global Consumer
was primarily from increases in emerging markets, including Confia, especially
in Citibanking, and from North America and Japan in Citibanking and the Private
Bank. Growth in Emerging Markets was concentrated in Asia Pacific and Latin
America, including Confia.
- --------------------------------------------------------------------------------
15
<PAGE>
Commissions, Fees and Other Income
Commissions and Fees Revenue
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer:
Citibanking $ 321 $ 321 -- $ 935 $ 910 3
Cards 595 486 22 1,679 1,450 16
Private Bank 122 130 (6) 372 360 3
----------------------- ----------------------
Total Global Consumer (1) 1,038 937 11 2,986 2,720 10
Global Corporate Banking and Other 533 518 3 1,560 1,474 6
----------------------- ----------------------
Total adjusted 1,571 1,455 8 4,546 4,194 8
Effect of credit card securitization
activity (1) 4 23 (83) 23 77 (70)
----------------------- ----------------------
Total $1,575 $1,478 7 $4,569 $4,271 7
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Information:
Global Consumer Businesses in:
Emerging markets $ 275 $ 316 (13) $ 823 $ 905 (9)
Developed markets 763 621 23 2,163 1,815 19
----------------------- ----------------------
Total $1,038 $ 937 11 $2,986 $2,720 10
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See page 21 for discussion of the effect of credit card securitization
activity.
- --------------------------------------------------------------------------------
Total commissions and fees revenue of $1.6 billion in the 1998 third quarter and
$4.6 billion for the 1998 nine months increased $97 million and $298 million,
both up 7% from the comparable 1997 periods. Commissions and fees revenue was
increased in all periods by the effect of credit card securitization activity.
Adjusted commissions and fees revenue in the third quarter of $1.6 billion and
in the nine months of $4.5 billion was up $116 million and $352 million, both up
8% from the comparable 1997 periods.
Global Consumer commissions and fees revenue was up $101 million or 11% in the
third quarter and $266 million or 10% in the nine months, principally reflecting
the April 1998 acquisition of UCS. Excluding UCS, growth in the quarter was led
by a 7% increase in the developed markets, primarily reflecting continued
improvements in U.S. bankcards, and was partially offset by a 13% decline in the
emerging markets, principally in Asia Pacific in Cards and the Private Bank,
reflecting economic conditions in the region including the effect of foreign
currency translation. U.S. bankcard fees continued to grow as a result of higher
levels of interchange fees, reflecting pricing changes and charge volume growth.
Global Corporate Banking and Other commissions and fees revenue increased $15
million or 3% and $86 million or 6% from the comparable quarter and year-to-date
periods. The improvement primarily reflected higher global custody and trust
revenue and other transaction banking services revenue, offset by a decline in
corporate finance fees in Global Relationship Banking.
- --------------------------------------------------------------------------------
16
<PAGE>
Trading-Related Revenue
Trading-related revenue is composed of principal transactions (foreign exchange
and trading revenue) and also includes other amounts principally reflected in
Net Interest Revenue. The table below presents trading-related revenue by
business sector, by trading activity, and by income statement line.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
By business sector
Global Corporate Banking
Emerging Markets $ 184 $ 268 (31) $ 714 $ 630 13
Global Relationship Banking 113 296 (62) 848 896 (5)
----------------------- ----------------------
Total Global Corporate Banking 297 564 (47) 1,562 1,526 2
Global Consumer and Other 95 96 (1) 288 234 23
----------------------- ----------------------
Total $ 392 $ 660 (41) $1,850 $1,760 5
- ------------------------------------------------------------------------------------------------------------------------
By trading activity
Foreign exchange (1) $ 386 $ 342 13 $1,163 $ 837 39
Derivative (2) 110 170 (35) 564 506 11
Fixed income (3) (36) 75 NM 51 204 (75)
Other (68) 73 NM 72 213 (66)
----------------------- ----------------------
Total $ 392 $ 660 (41) $1,850 $1,760 5
- ------------------------------------------------------------------------------------------------------------------------
By income statement line
Principal transactions $ 315 $ 569 (45) $1,463 $1,472 (1)
Other (4) 77 91 (15) 387 288 34
----------------------- ----------------------
Total $ 392 $ 660 (41) $1,850 $1,760 5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Foreign exchange activity includes foreign exchange spot, forward, and
option contracts.
(2) Derivative activity primarily includes interest rate and currency swaps,
options, financial futures, and equity and commodity contracts.
(3) Fixed income activity principally includes debt instruments including
government and corporate debt as well as mortgage assets.
(4) Primarily net interest revenue.
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Trading-related revenue declined $268 million in the quarterly comparison but
grew $90 million in the nine-month comparison. The decline in the quarterly
comparison primarily reflects an $87 million loss attributable to the financial
market turmoil in Russia as well as a $138 million writedown of fixed income
inventories attributable to the volatility experienced in the global capital
markets during the quarter, partially offset by improved foreign exchange
results. Growth in the nine-month comparison primarily reflects improved foreign
exchange revenue partially offset by the 1998 third quarter losses in Russia and
fixed income.
Levels of trading-related revenue may fluctuate in the future as a result of
market and asset-specific factors.
Realized Gains from Sales of Investments
Realized gains from sales of investments of $(56) million and $485 million for
the 1998 third quarter and nine months, respectively, declined $242 million and
increased $67 million from the comparable 1997 periods. The 1998 third quarter
reflected a $148 million write-down of impaired Russian available-for-sale
securities, and a lower volume of sales due to the turbulent global capital
markets during the quarter. The 1998 nine-month period also included $363
million of realized gains related to the sale of Brady bonds. The 1997 third
quarter and nine months included realized gains of $80 million and $138 million,
respectively, related to the sale of Brady bonds.
Realized gains from sales of investments in the 1998 third quarter reflected
gross realized gains of $122 million ($713 million for the nine months) and
gross realized losses of $178 million ($228 million for the nine months).
The fair value of securities may fluctuate over time based on general market
conditions as well as events and trends affecting specific securities.
- --------------------------------------------------------------------------------
17
<PAGE>
Other Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit card securitization activity $ 374 $ 134 NM $ 863 $ 417 NM
Venture capital (31) 235 NM 404 501 (19)
Affiliate earnings 47 51 (8) 118 222 (47)
Net asset gains 142 (6) NM 371 150 NM
Other items 30 18 67 96 54 78
----------------------- ----------------------
Total $ 562 $ 432 30 $1,852 $1,344 38
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
The increase in revenue related to credit card securitization activity in the
1998 third quarter and nine months is attributable to the acquisition of UCS
during the 1998 second quarter, higher average securitized volumes, and improved
net interest margins and net credit loss rates. The effect of credit card
securitization activity is discussed in more detail on page 21.
Venture capital revenue in the 1998 third quarter and nine months declined $266
million and $97 million, respectively, from the comparable 1997 periods,
primarily attributable to the volatility in the U.S. equity markets during the
1998 third quarter. Investments of venture capital subsidiaries are carried at
fair value, and revenue volatility can occur in the future based on general
market conditions, as well as events and trends affecting specific venture
capital investments.
Affiliate earnings in the 1998 third quarter declined slightly from the year-ago
period, and reflected an investment dividend, partially offset by reduced
earnings in Credicard, a 33%-owned Brazilian Card affiliate. The decline in
revenue from the 1997 nine months is primarily due to a 1997 second quarter
investment dividend together with reduced earnings in Credicard, partially
offset by a 1998 third quarter investment dividend.
Net asset gains of $142 million in the 1998 third quarter increased $148 million
from the year-ago period, primarily reflecting a gain from the sale of a portion
of an investment in Latin America, partially offset by an investment writedown
of $50 million in Latin America. The 1997 third quarter period included a $23
million investment writedown in Latin America. Revenue in the 1998 nine months
also reflected a $132 million gain on the disposition of two real estate-related
equity interests obtained in connection with loan restructurings. Revenue in the
1997 nine months included gains of $46 million related to the refinancing
agreement concluded with Peru, $32 million from the sale of an investment from
the acquisition finance portfolio by Global Relationship Banking, and $23
million related to the disposition of an automated trading business, partially
offset by investment writedowns of $72 million in Latin America.
Provision and Credit Loss Reserves
The provision for credit losses of $736 million and $1.8 billion in the 1998
third quarter and nine months increased $250 million and $386 million from the
1997 periods. The increase in the quarter and the nine months reflected higher
net write-offs in both Global Corporate Banking and Global Consumer, and lower
recoveries in Investment Activities.
Details of net write-offs, additional provision, and the provision for credit
losses are included in the table below. For additional information on net
write-offs, see "Details of Credit Loss Experience" on page 65 .
- --------------------------------------------------------------------------------
18
<PAGE>
Net Write-offs, Additional Provision, and Provision for Credit Losses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net write-offs (recoveries)
Global Consumer (1) $1,052 $ 860 22 $3,028 $2,678 13
Global Corporate Banking 232 14 NM 327 11 NM
Investment Activities -- (5) NM (10) (64) (84)
----------------------- ----------------------
Total adjusted net write-offs 1,284 869 48 3,345 2,625 27
Effect of credit card securitization
activity (573) (408) 40 (1,613) (1,279) 26
----------------------- ----------------------
Total $ 711 $ 461 54 $1,732 $1,346 29
- ------------------------------------------------------------------------------------------------------------------------
Additional provision
Global Consumer $ 25 $ 25 -- $ 75 $ 75 --
----------------------- ----------------------
Total $ 25 $ 25 -- $ 75 $ 75 --
- ------------------------------------------------------------------------------------------------------------------------
Provision for credit losses
Global Consumer $ 504 $ 477 6 $1,490 $1,474 1
Global Corporate Banking 232 14 NM 327 11 NM
Investment Activities -- (5) NM (10) (64) (84)
----------------------- ----------------------
Total $ 736 $ 486 51 $1,807 $1,421 27
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for the effect of credit card securitization activity. See page
21 for discussion.
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Global Consumer net write-offs, adjusted for the effect of credit card
securitization activity, in the 1998 third quarter and nine months were $1.1
billion and $3.0 billion, up from $860 million and $2.7 billion in the 1997
periods, primarily due to the acquisition of UCS and higher losses in Asia
Pacific and Latin America, partially offset by the effect of foreign currency
translation. Net write-offs also reflected improvements in U.S. mortgages and
other U.S. bankcard portfolios. The Global Consumer provision for credit losses
included an additional provision, in excess of net write-offs, of $25 million
and $75 million in the 1998 and 1997 third quarters and nine months. Net
write-offs and the total provision may increase from the 1998 third quarter as a
result of global economic conditions, particularly in Latin America and Asia
Pacific, the credit performance of the portfolios, including bankruptcies,
seasonal factors, and other changes in portfolio levels. See "Consumer Portfolio
Review" on page 28 for additional discussion of the consumer portfolio.
Global Corporate Banking net write-offs in the 1998 third quarter and nine
months were $232 million and $327 million, compared with net write-offs of $14
million and $11 million in the 1997 third quarter and nine months. The increase
in net write-offs in the quarterly and nine-month comparisons primarily reflects
write-offs of $149 million attributable to the financial market turmoil in
Russia, with the balance concentrated in Indonesia and, in the nine-month
comparison, Thailand. Included in net write-offs are losses related to
derivative and foreign exchange contracts totaling $130 million and $134 million
in the 1998 third quarter and nine months, compared with $20 million in the 1997
third quarter and nine months. Losses on commercial lending activities can vary
widely with respect to timing and amount, particularly within any
narrowly-defined business or loan type. Credit costs and cash-basis loans may
increase from the 1998 third quarter level due to global economic developments,
sovereign or regulatory actions, and other factors.
Investment Activities recoveries of $10 million and $64 million in the 1998 and
1997 nine months included recoveries of $9 million and $50 million related to
the refinancing agreements concluded with the Ivory Coast and Peru,
respectively.
All identified losses are immediately written off, and the credit loss reserves
described on the following page are available to absorb all probable credit
losses inherent in the portfolio. For analytical purposes only, Citicorp
attributes its credit loss reserves as detailed in the following table:
- --------------------------------------------------------------------------------
19
<PAGE>
Credit Loss Reserves
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
In Millions of Dollars 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate allowance for credit losses
Global Consumer (1) $2,911 $2,487 $2,470
Global Corporate Banking 3,429 3,429 3,429
----------------------------------------
Total aggregate allowance for credit losses (2) 6,340 5,916 5,899
Reserves for securitization activities (3) 66 85 89
---------------------------------------
Total credit loss reserves $6,406 $6,001 $5,988
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance as a percent of total loans
Global Consumer 2.60% 2.30% 2.27%
Global Corporate Banking (4) 3.80% 4.38% 4.60%
Total 3.12% 3.16% 3.20%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The balance at September 30, 1998 includes $320 million of credit loss
reserves related to the acquisition of UCS.
(2) Includes $6.2 billion attributable to loans and loan commitments as a
deduction from Loans, $50 million attributable to standby letters of
credit and guarantees included in Other liabilities, and $50 million
attributable to derivative and foreign exchange contracts reported as a
deduction from Trading account assets at September 30, 1998.
(3) Attributable to mortgage loans sold with recourse.
(4) Excludes allowance portion attributable to standby letters of credit and
guarantees, and derivative and foreign exchange contracts.
- --------------------------------------------------------------------------------
Credit loss reserves totaled $6.4 billion as of September 30, 1998, up from $6.0
billion as of both December 31, 1997 and September 30, 1997, primarily
reflecting the addition of $320 million of credit loss reserves related to the
acquisition of UCS.
Uncertainty related to the global economic and credit environment, particularly
in Latin America and Asia Pacific, as well as higher loan volumes, may result in
further increases in the aggregate allowance for credit losses.
Operating Expense
Operating expense of $3.9 billion and $11.2 billion in the 1998 third quarter
and nine months was up $559 million or 17% and $1.5 billion or 15% from the 1997
periods, excluding the $880 million restructuring charge in the 1997 third
quarter. The acquisition of UCS increased expense by $239 million or 7% in the
quarter and $466 million or 5% in the nine months. In addition, expense
increased $166 million for preparation for the Year 2000 and EMU and the
acquisition of certain assets and liabilities of Confia, as well as for
advertising and marketing programs, and electronic banking initiatives. Adjusted
expense in Global Consumer, excluding UCS, increased $157 million and $433
million, or 8% and 7% for the 1998 third quarter and nine months, reflecting
increases of 8% in both periods in the developed markets and 7% and 5% in the
emerging markets. Global Corporate Banking adjusted expense increased $157
million and $519 million in the 1998 third quarter and nine months, or 12% and
14% from the year ago periods, reflecting increases of 16% and 17% in Global
Relationship Banking and 6% and 9% in Emerging Markets. Foreign currency
translation reduced expense growth by approximately 3 percentage points in the
quarter and 4 percentage points for the nine months.
Employee expense of $1.8 billion in the 1998 quarter and $5.4 billion in the
nine months was up $154 million and $421 million, or 9% from both 1997 periods.
The increases primarily reflected salary increases, including incentive
compensation, and higher staff levels related to business expansion in the
emerging markets. Staff levels of 104,200 at September 30, 1998 increased 11,700
(3,400 from UCS and 6,800 in the emerging markets, which included 4,300 from the
acquisition of parts of Confia) or 13% from a year-ago.
Net premises and equipment expense was $550 million in the quarter and $1.6
billion in the nine months, up $54 million or 11% and $112 million or 8% from
1997. Other expense was $1.5 billion and $4.2 billion in the quarter and nine
months, up $351 million or 30% and $961 million or 29% from 1997. Costs
associated with the Year 2000, EMU, Confia, UCS, growth in business volumes,
increases in asset management, and investment spending in the emerging markets
contributed to the increases.
In the 1998 third quarter, Citicorp adopted the American Institute of Certified
Public Accountants recently issued Statement of Position "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
This Statement of Position provides guidance on the accounting for the costs of
computer software that was purchased or developed for internal use. The impact
of adopting SOP 98-1 was not material.
- --------------------------------------------------------------------------------
20
<PAGE>
Restructuring Charge
During the 1997 third quarter, Citicorp recorded an $880 million charge related
to cost-management programs and customer service initiatives to improve
operational efficiency and productivity. These programs include global
operations and technology consolidation and standardization, the reconfiguration
of front-end distribution processes, and the outsourcing of various
technological functions. The implementation of these restructuring programs is
designed to ensure a positive effect on the quality of customer service.
Overall, these programs are estimated to achieve pay-back towards the end of
1999. Expense savings generated by these programs are being reinvested in new
products, marketing programs, and additional cost and quality initiatives to
further increase revenue and reduce costs.
The charge included $487 million for severance benefits associated with
approximately 9,000 positions, with the expectation that about 1,500 new
positions would be added as part of this program, resulting in a net program
reduction of about 7,500 jobs. The charge also included approximately $245
million related to writedowns of equipment and premises and $148 million related
to lease termination and other exit costs. Additional program costs that do not
qualify for recognition in the charge will be expensed as incurred in the
implementation of these programs, but are not expected to be material.
Of the $880 million restructuring charge, approximately $330 million remained in
the reserve as of September 30, 1998, with the difference reflecting the $245
million of equipment and premises write-downs recorded in 1997, as well as $300
million of primarily severance and related costs (of which $229 million has been
paid in cash and $71 million is legally obligated), together with translation
effects. Through September 30, 1998, 3,116 staff positions have been reduced
under this program, 1,335 in the 1998 third quarter.
Effect of Credit Card Securitization Activity
During the nine months of 1998, $12.7 billion of U.S. credit card receivables
were securitized, which included $5.0 billion securitized from the UCS
portfolio. As of September 30, 1998, the total amount of securitized
receivables, net of amortization, was $40.4 billion (including $11.3 billion of
UCS receivables) compared with $26.0 billion as of September 30, 1997.
The securitization of credit card receivables, which is described in the 1997
Supplemental Financial Statements, does not affect the earnings reported in a
period. However, securitization affects the manner in which revenue and the
provision for credit losses are classified in the income statement. For
securitized receivables, amounts that would otherwise be reported as net
interest revenue, as commissions and fees revenue, and as net credit losses on
loans are instead reported as commissions and fees revenue (for servicing fees)
and as other income (for the remaining cash flows to which Citicorp is entitled,
net of credit losses). Because credit losses are a component of these cash
flows, Citicorp's revenue over the terms of these transactions may vary
depending upon the credit performance of the securitized receivables. However,
Citicorp's exposure to credit losses on the securitized receivables is
contractually limited to these cash flows. The table below shows the net effect
of credit card securitization activity as an increase/(decrease) to the amounts
reported in the Supplemental Condensed Consolidated Statement of Income and
Average Balance Sheet, and under the captions of Return on Assets, Net Interest
Margin, and Consumer Net Credit Loss Ratio. The initial and ongoing effects of
adopting Statement of Financial Accounting Standards No. 125 in 1997 did not
result in a change in the income recognition policies for credit card
securitization activity due to immateriality.
- --------------------------------------------------------------------------------
21
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------
In Millions of Dollars 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue $ (951) $ (565) $(2,499) $(1,773)
Commissions and fees revenue 4 23 23 77
Other income 374 134 863 417
Provision for credit losses (573) (408) (1,613) (1,279)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income impact of securitization $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions) $ (40) $ (25) $ (35) $ (25)
Return on assets .06% .05% .11% .09%
Net interest margin (.62%) (.40%) (.59%) (.44%)
Consumer net credit loss ratio (1.02%) (.86%) (1.04%) (.92%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The effect of credit card securitization activity on net interest revenue,
commissions and fees revenue, other income, and the provision for credit losses
has increased in the 1998 third quarter and nine months, compared to the 1997
periods, primarily due to the acquisition of UCS. Additionally, the UCS
acquisition increased the effect of credit card securitization activity on the
net interest margin by 13 basis points and 8 basis points in the 1998 third
quarter and nine months, respectively. The remaining effects of credit card
securitization activity increased in 1998 compared to the 1997 periods due to
the increased level of securitization.
Earnings by Global Business Area
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer $ 477 $ 452 6 $1,264 $1,384 (9)
Global Corporate Banking (127) 417 NM 640 1,271 (50)
----------------------- ----------------------
Core businesses 350 869 (60) 1,904 2,655 (28)
Investment Activities 71 259 (73) 788 665 18
Other Items 112 (57) NM 9 (224) NM
----------------------- ----------------------
Core income (1) 533 1,071 (54) 2,701 3,096 (13)
Restructuring charge -- 550 NM -- 550 NM
----------------------- ----------------------
Total Citicorp $ 533 $ 521 2 $2,701 $2,546 6
- ------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Global Consumer:
Citibanking $ 178 $ 168 6 $ 485 $ 535 (9)
Cards 227 193 18 557 597 (7)
Private Bank 72 91 (21) 222 252 (12)
----------------------- ----------------------
Total $ 477 $ 452 6 $1,264 $1,384 (9)
- ------------------------------------------------------------------------------------------------------------------------
Global Consumer businesses in:
Emerging markets $ 158 $ 218 (28) $ 457 $ 697 (34)
Developed markets 319 234 36 807 687 17
----------------------- ----------------------
Total $ 477 $ 452 6 $1,264 $1,384 (9)
- ------------------------------------------------------------------------------------------------------------------------
Global Corporate Banking businesses in:
Emerging Markets $ (19) $ 280 NM $ 473 $ 839 (44)
Global Relationship Banking (108) 137 NM 167 432 (61)
----------------------- ----------------------
Total $ (127) $ 417 NM $ 640 $1,271 (50)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Core income represents net income adjusted to exclude the restructuring
charge of $550 million in the 1997 third quarter.
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
22
<PAGE>
Margin Analysis
<TABLE>
<CAPTION>
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
In Millions of Dollars 1998 1998 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue, net of interest expense $ 5,494 $ 6,202 $ 5,605 $ 5,568 $ 5,541 $ 5,311 $ 5,196
Effect of credit card securitization activity 573 579 461 434 408 437 434
Net cost to carry (1) 4 11 (1) 4 (5) (1) (3)
-----------------------------------------------------------------------------
Adjusted revenue 6,071 6,792 6,065 6,006 5,944 5,747 5,627
-----------------------------------------------------------------------------
Total operating expense 3,902 3,878 3,389 3,403 4,223 3,168 3,164
Net OREO benefits (2) 13 2 12 9 16 37 10
Restructuring charge -- -- -- -- (880) -- --
-----------------------------------------------------------------------------
Adjusted operating expense 3,915 3,880 3,401 3,412 3,359 3,205 3,174
-----------------------------------------------------------------------------
Operating margin 2,156 2,912 2,664 2,594 2,585 2,542 2,453
-----------------------------------------------------------------------------
Global Consumer net write-offs 479 510 426 432 452 488 459
Effect of credit card securitization activity 573 579 461 434 408 437 434
Net cost to carry and net
OREO (benefits) costs (1) (2) (8) (3) (1) -- (4) (3) 1
-----------------------------------------------------------------------------
Global Consumer credit costs 1,044 1,086 886 866 856 922 894
-----------------------------------------------------------------------------
Global Corporate Banking
net write-offs (recoveries) 232 29 66 29 14 3 (6)
Net cost to carry and net
OREO (benefits) costs (1) (2) (1) 12 (12) (5) (17) (35) (14)
-----------------------------------------------------------------------------
Global Corporate Banking
credit costs (benefits) 231 41 54 24 (3) (32) (20)
-----------------------------------------------------------------------------
Investment Activities credit benefits -- -- (10) -- (5) (4) (55)
-----------------------------------------------------------------------------
Operating margin less credit costs 881 1,785 1,734 1,704 1,737 1,656 1,634
Additional provision (3) 25 25 25 25 25 25 25
Restructuring charge -- -- -- -- 880 -- --
-----------------------------------------------------------------------------
Income before taxes 856 1,760 1,709 1,679 832 1,631 1,609
Income taxes 323 660 641 616 311 604 611
-----------------------------------------------------------------------------
Net income $ 533 $ 1,100 $ 1,068 $ 1,063 $ 521 $ 1,027 $ 998
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the net cost to carry cash-basis loans and other real estate
owned ("OREO").
(2) Includes gains and losses on sales, direct revenue and expense, and
writedowns of OREO.
(3) Represents amounts in excess of net write-offs. See page 19 for
discussion.
- --------------------------------------------------------------------------------
Global Consumer
The Global Consumer business meets the financial services needs of consumer
customers across the regions of the world.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $4,199 $3,534 19 $11,748 $10,581 11
Adjusted operating expense 2,407 2,011 20 6,779 5,880 15
----------------------- ----------------------
Operating margin 1,792 1,523 18 4,969 4,701 6
Credit costs (1) 1,044 856 22 3,016 2,672 13
----------------------- ----------------------
Operating margin less credit costs 748 667 12 1,953 2,029 (4)
Additional provision 25 25 -- 75 75 --
Restructuring charge -- 580 NM -- 580 NM
----------------------- ----------------------
Income before taxes 723 62 NM 1,878 1,374 37
Income taxes (benefit) 246 (39) NM 614 341 80
----------------------- ----------------------
Net income $ 477 $ 101 NM $1,264 $1,033 22
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 144 $ 134 7 $ 139 $ 132 5
Return on assets (%) 1.31 0.30 -- 1.22 1.05 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 477 $ 452 6 $1,264 $1,384 (9)
Return on assets (%) 1.31 1.34 -- 1.22 1.40 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the effect of credit card securitization activity and the effect
related to credit card receivables held for sale.
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
On August 5, 1998, Citicorp completed the previously announced acquisition of
certain assets and liabilities of Confia, a consumer and corporate bank in
Mexico. The acquisition added approximately $4.7 billion in assets.
- --------------------------------------------------------------------------------
23
<PAGE>
Global Consumer income before taxes was $723 million and $1.9 billion in the
1998 third quarter and nine months, compared with $642 million and $2.0 billion
in 1997 (excluding the 1997 third quarter $580 million restructuring charge)
reflecting strong results in U.S. bankcards and in Japan, offset by lower
earnings in Asia Pacific and Latin America. Income before taxes also reflected
increases in the U.S. and Europe Citibanking businesses, and higher spending on
technology initiatives primarily related to electronic banking. In the quarter
and nine months, UCS' pretax loss of approximately $51 million ($32 million
after-tax) and $119 million ($77 million after-tax) reflected $107 million and
$214 million of acquisition premium costs (including funding costs associated
with the acquisition purchase premium). Core business income was $477 million
and $1.3 billion in the 1998 third quarter and nine months, compared with $452
million and $1.4 billion for 1997. Return on assets was 1.31% and 1.22% in the
1998 third quarter and nine months, compared to 1.34% and 1.40% a year ago.
Worldwide Citibanking accounts totaled 23 million as of September 30, 1998, up
15% from a year ago, reflecting growth across all regions. Card accounts
worldwide totaled 50 million as of September 30, 1998, up from 36 million a year
ago, principally reflecting the acquisition of UCS. U.S. bankcard accounts,
excluding UCS, declined 1% from a year ago, while Cards in the emerging markets
grew 12%, primarily in Latin America.
Adjusted revenue of $4.2 billion in the quarter and $11.7 billion in the nine
months was up $665 million and $1.2 billion from 1997. Revenue growth was led by
U.S bankcards, up 46% and 27%, including UCS, and reflected increases in the
Citibanking businesses in North America, Europe, and Japan. Revenue in Latin
America was up in both periods, while revenue in Asia Pacific declined due to
economic conditions in the region. The acquisition of UCS contributed
approximately 10 percentage points and 7 percentage points to Global Consumer
revenue growth in the 1998 third quarter and nine months. Net interest revenue
increased 21% in the quarter and 11% in the nine months, while commissions and
fees revenue was up 11% and 10%, principally in U.S. bankcards, including UCS.
Foreign currency translation reduced revenue growth by approximately 4
percentage points in both the 1998 third quarter and nine months.
Adjusted operating expense increased $396 million and $899 million in the
quarter and nine months from the 1997 periods. The additions of UCS (including
the amortization of the acquisition premium) and certain assets and liabilities
of Confia, higher advertising and marketing, and spending on technology
initiatives, primarily related to electronic banking, represented approximately
$315 million and $646 million of the expense increase from the 1997 third
quarter and nine months. Foreign currency translation reduced expense growth by
approximately 4 percentage points and 5 percentage points in 1998 third quarter
and nine months.
Credit costs in the quarter were $1.0 billion, compared with $1.1 billion in the
1998 second quarter and $856 million a year ago, reflecting ratios of net credit
losses to average managed loans of 2.69%, 2.88%, and 2.50% in the respective
quarters. The increase in credit costs and the related ratio from a year ago
primarily reflects the acquisition of UCS.
The Global Consumer business continued to build the allowance for credit losses
with charges of $25 million in excess of net write-offs in both the 1998 and
1997 third quarters, and $75 million in both nine month periods.
Net credit losses and the related loss ratios may increase from the 1998 third
quarter as a result of global economic conditions, particularly in Latin America
and Asia Pacific, the credit performance of the portfolios, including
bankruptcies, seasonal factors, and other changes in portfolio levels. See
"Consumer Portfolio Review" on page 28 and "Provision and Credit Loss Reserves"
on page 18 for additional discussion of the consumer portfolio.
With income taxes attributed to core businesses on the basis of local tax rates,
effective tax rates were 34% and 33% in the 1998 third quarter and nine months,
up from 30% and 29% (excluding the effect of the restructuring charge) in the
year-ago periods, reflecting changes in the geographic mix and nature of
earnings. The difference between the local tax rates attributed to core
businesses and Citicorp's overall effective tax rate is included in Other Items.
- --------------------------------------------------------------------------------
24
<PAGE>
Global Consumer Businesses in Emerging Markets
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $ 982 $ 970 1 $2,781 $2,905 (4)
Adjusted operating expense 638 598 7 1,818 1,728 5
----------------------- ----------------------
Operating margin 344 372 (8) 963 1,177 (18)
Credit costs 139 91 53 373 280 33
----------------------- ----------------------
Operating margin less credit costs 205 281 (27) 590 897 (34)
Additional provision 11 15 (27) 33 26 27
Restructuring charge -- 131 NM -- 131 NM
----------------------- ----------------------
Income before taxes 194 135 44 557 740 (25)
Income taxes (benefits) 36 (1) NM 100 125 (20)
----------------------- ----------------------
Net income $ 158 $ 136 16 $ 457 $ 615 (26)
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 45 $ 43 5 $ 43 $ 42 2
Return on assets (%) 1.39 1.25 -- 1.43 1.96 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 158 $ 218 $ (28) $ 457 $ 697 $ (34)
Return on assets (%) 1.39 2.01 -- 1.43 2.22 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Income before taxes in the emerging markets was $194 million and $557 million in
the 1998 third quarter and nine months, down $72 million and $314 million from
1997 (excluding the $131 million 1997 third quarter restructuring charge),
reflecting economic conditions, including weakened currencies, which reduced
income before taxes in Asia Pacific (excluding Japan and the Indian
subcontinent, but including Australia and New Zealand) by approximately $36
million and $179 million, respectively. Earnings in Latin America benefited from
the addition of certain assets and liabilities of Confia, that was more than
offset by higher credit costs and a decline in Credicard earnings, a 33% owned
Brazilian Card affiliate. Additionally, economic conditions in India and
Pakistan contributed to the lower earnings in the emerging markets. Core
business income for the 1998 third quarter and nine months was $158 million and
$457 million, compared with $218 million and $697 million in 1997. Cards
represented 20% and 27% of emerging markets core business income in the 1998
third quarter and nine months, compared with 33% and 37% in the 1997 periods.
Revenue in Latin America was up 14% and 4% in the 1998 third quarter and nine
months, reflecting the acquisition of certain assets and liabilities of Confia
and account and business volume growth, partially offset by lower earnings in
Credicard and reduced spreads in certain countries. Asia Pacific revenue
declined 10% and 13% in the quarter and nine months, reflecting the effect of
foreign currency translation, and spread compression in certain countries,
offset by account and business volume growth resulting from the "flight to
quality" in the region. Foreign currency translation reduced revenue growth by
approximately 13 percentage points in the 1998 third quarter and nine months.
Adjusted operating expense grew 7% and 5% in the 1998 third quarter and nine
months, reflecting the addition of certain assets and liabilities of Confia and
continued spending in new markets, as well as account and business volume
growth, partially offset by the effect of foreign currency translation. Foreign
currency translation reduced expense growth by approximately 13 percentage
points in both the 1998 third quarter and nine months.
Credit costs were $139 million in the quarter, up $6 million from the 1998
second quarter and $48 million from the 1997 third quarter, reflecting economic
conditions in Latin America and Asia Pacific. The net credit loss ratio in Asia
Pacific was 1.10%, down from 1.16% in the 1998 second quarter and up from 0.63%
a year ago. The net credit loss ratio in Latin America was 2.82%, up from 2.51%
in the 1998 second quarter and 2.09% a year ago. Emerging markets managed loans
delinquent 90 days or more were $748 million or 2.20% at quarter-end, compared
with $647 million or 1.95% at June 30, 1998 and $453 million or 1.31% a year
ago. Foreign currency translation reduced reported net credit losses by
approximately $22 million and $83 million in the 1998 third quarter and nine
months.
The emerging markets businesses continued to build the allowance for credit
losses with charges in excess of net write-offs of $11 million and $33 million
in the 1998 third quarter and nine months.
- --------------------------------------------------------------------------------
25
<PAGE>
Global Consumer Businesses in Developed Markets
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $3,217 $2,564 25 $8,967 $7,676 17
Adjusted operating expense 1,769 1,413 25 4,961 4,152 19
----------------------- ----------------------
Operating margin 1,448 1,151 26 4,006 3,524 14
Credit costs 905 765 18 2,643 2,392 10
----------------------- ----------------------
Operating margin less credit costs 543 386 41 1,363 1,132 20
Additional provision 14 10 40 42 49 (14)
Restructuring charge -- 449 NM -- 449 NM
----------------------- ----------------------
Income before taxes 529 (73) NM 1,321 634 NM
Income taxes (benefit) 210 (38) NM 514 216 NM
----------------------- ----------------------
Net income $ 319 $ (35) NM $ 807 $ 418 93
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 99 $ 91 9 $ 96 $ 90 7
Return on assets (%) 1.28 -- -- 1.13 0.62 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 319 $ 234 36 $ 807 $ 687 17
Return on assets (%) 1.28 1.02 -- 1.13 1.02 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Income before taxes in the developed markets was $529 million and $1.3 billion
in the 1998 third quarter and nine months, up $153 million or 41% and $238
million or 22% from the 1997 periods (excluding the $449 million restructuring
charge in the 1997 third quarter), despite $107 million and $214 million of UCS
acquisition premium costs. The growth in income before taxes reflected strong
performance in U.S. bankcards and in Japan, and increases in the U.S. and Europe
Citibanking businesses, partially offset by higher spending on technology
initiatives primarily related to electronic banking. Core business income for
the 1998 third quarter and nine months was $319 million and $807 million,
compared to $234 million and $687 million in 1997.
Adjusted revenue of $3.2 billion and $9.0 billion in the 1998 third quarter and
nine months was up 25% and 17% from 1997, reflecting improvements in U.S.
bankcards, including the acquisition of UCS in the 1998 second quarter, and
increases in Citibanking and the Private Bank. Excluding UCS, U.S. bankcards
revenue was up 16% and 8% in the quarter and nine months, benefiting from
risk-based pricing strategies and higher interchange fee revenue, and in the
nine months, offset by reduced spreads. Interchange fee revenue reflected
pricing changes, and charge volume increases due to UCS and 8% and 7% overall
growth, in the quarter and nine months, in other U.S. bankcard portfolios.
Adjusted operating expense increased $356 million and $809 million in the
quarter and nine months, reflecting UCS (including the amortization of the
acquisition premium), increased advertising and marketing, spending on
technology initiatives primarily related to electronic banking, and an increased
sales force and higher product development costs in the Private Bank, together
with business volume growth.
Credit costs in the developed markets were down $48 million from the 1998 second
quarter, reflecting improvements in U.S bankcards. Credit costs in U.S.
bankcards were $795 million or 5.23% of average managed loans for the quarter,
compared to $842 million or 5.73% in the 1998 second quarter, and $639 million
or 5.58% a year ago. Excluding UCS, the 12-month-lagged loss ratio was 5.49% in
the quarter, compared with 5.98% in the 1998 second quarter and 5.93% a year
ago. U.S. bankcards managed loans delinquent 90 days or more were $924 million
or 1.51% at quarter-end, compared with $942 million or 1.58% for the prior
quarter and $806 million or 1.76% a year ago.
The developed markets businesses continued to build the allowance for credit
losses with charges in excess of net write-offs of $14 million and $42 million
in the 1998 third quarter and nine months.
- --------------------------------------------------------------------------------
26
<PAGE>
Citibanking
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net of interest expense $1,680 $1,532 10 $4,803 $4,536 6
Operating expense 1,260 1,148 10 3,647 3,318 10
----------------------- ----------------------
Operating margin 420 384 9 1,156 1,218 (5)
Credit costs 144 135 7 425 428 (1)
----------------------- ----------------------
Operating margin less credit costs 276 249 11 731 790 (7)
Additional provision (1) -- NM (7) -- NM
Restructuring charge -- 457 NM -- 457 NM
----------------------- ----------------------
Income (loss) before taxes 277 (208) NM 738 333 NM
Income taxes (benefit) 99 (101) NM 253 73 NM
----------------------- ----------------------
Net income (loss) $ 178 $ (107) NM $ 485 $ 260 87
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 92 $ 85 8 $ 89 $ 84 6
Return on assets (%) 0.77 -- -- 0.73 0.41 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 178 $ 168 6 $ 485 $ 535 (9)
Return on assets (%) 0.77 0.78 -- 0.73 0.85 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Cards
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $2,225 $1,707 30 $6,064 $5,200 17
Adjusted operating expense 942 673 40 2,529 2,024 25
----------------------- ----------------------
Operating margin 1,283 1,034 24 3,535 3,176 11
Credit costs 907 729 24 2,609 2,254 16
----------------------- ----------------------
Operating margin less credit costs 376 305 23 926 922 --
Additional provision 26 25 4 82 75 9
Restructuring charge -- 95 NM -- 95 NM
----------------------- ----------------------
Income before taxes 350 185 89 844 752 12
Income taxes 123 50 NM 287 213 35
----------------------- ----------------------
Net income $ 227 $ 135 68 $ 557 $ 539 3
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 35 $ 32 9 $ 33 $ 31 6
Return on assets (%) 2.57 1.67 -- 2.26 2.32 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 227 $ 193 18 $ 557 $ 597 (7)
Return on assets (%) 2.57 2.39 -- 2.26 2.57 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27
<PAGE>
Private Bank
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- % ---------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $ 294 $ 295 -- $ 881 $ 845 4
Adjusted operating expense 205 190 8 603 538 12
----------------------- ----------------------
Operating margin 89 105 (15) 278 307 (9)
Credit benefits (7) (8) (13) (18) (10) 80
----------------------- ----------------------
Operating margin less credit benefits 96 113 (15) 296 317 (7)
Restructuring charge -- 28 NM -- 28 NM
----------------------- ----------------------
Income before taxes 96 85 13 296 289 2
Income taxes 24 12 NM 74 55 35
----------------------- ----------------------
Net income $ 72 $ 73 (1) $ 222 $ 234 (5)
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 17 $ 17 -- $ 17 $ 17 --
Return on assets (%) 1.68 1.70 -- 1.75 1.84 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ 72 $ 91 (21) $ 222 $ 252 (12)
Return on assets (%) 1.68 2.12 -- 1.75 1.98 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Consumer Portfolio Review
In the consumer portfolio, credit loss experience is often expressed in terms of
annualized net credit losses as a percentage of average loans. Pricing and
credit policies reflect the loss experience of each particular product. Consumer
loans are generally written off no later than a predetermined number of days
past due on a contractual basis, or earlier in the event of bankruptcy. The
number of days is set at an appropriate level according to loan product and
country.
- --------------------------------------------------------------------------------
28
<PAGE>
The table below summarizes delinquency and net credit loss experience in both
the managed and on-balance sheet loan portfolio in terms of loans 90 days or
more past due, net credit losses, and as a percentage of related loans.
Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios
<TABLE>
<CAPTION>
Total Average
Loans 90 Days or More Past Due (1) Loans Net Credit Losses (1)
---------------------------------------------------------------------------------------------
(In Millions of Dollars, Sept. 30, Sept. 30, June 30, Sept. 30, 3rd Qtr. 3rd Qtr. 2nd Qtr. 3rd Qtr.
except loan amounts in billions) 1998 1998 1998 1997 1998 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Citibanking $ 70.1 $ 2,119 $ 1,995 $ 2,082 $ 69.0 $ 144 $ 144 $ 135
Ratio 3.02% 2.93% 3.07% 0.83% 0.85% 0.80%
Cards
U.S. Bankcards (2) 61.2 924 942 806 60.3 795 842 639
Ratio 1.51% 1.58% 1.76% 5.23% 5.73% 5.58%
Other (3) 10.0 230 220 182 9.5 112 103 90
Ratio 2.31% 2.30% 1.98% 4.66% 4.42% 3.92%
Private Bank 16.4 195 197 146 16.3 1 -- (4)
Ratio 1.19% 1.23% 0.94% 0.02% NM NM
Total Managed 157.7 3,468 3,354 3,216 155.1 1,052 1,089 860
Ratio 2.20% 2.19% 2.32% 2.69% 2.88% 2.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Securitization Activity (4)
Securitized credit card receivables (40.4) (611) (601) (452) (39.9) (539) (542) (378)
Loans held for sale (5.2) (38) (40) (34) (5.2) (34) (37) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $ 112.1 $ 2,819 $ 2,713 $ 2,730 $ 110.0 $ 479 $ 510 $ 452
Ratio 2.51% 2.53% 2.51% 1.72% 1.86% 1.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed portfolio in
Developed markets $ 123.7 $ 2,720 $ 2,707 $ 2,763 $ 121.6 $ 913 $ 956 $ 769
Ratio 2.20% 2.25% 2.66% 2.97% 3.24% 2.98%
Emerging markets 34.0 748 647 453 33.5 139 133 91
Ratio 2.20% 1.95% 1.31% 1.65% 1.61% 1.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging markets portfolio (5)
Asia Pacific $ 22.6 $ 448 $ 374 $ 253 $ 22.2 $ 60 $ 63 $ 38
Ratio 1.99% 1.70% 1.04% 1.10% 1.16% 0.63%
Latin America 9.9 254 227 162 9.9 70 61 45
Ratio 2.56% 2.28% 1.83% 2.82% 2.51% 2.09%
CEEMEA (6) 1.5 46 46 38 1.4 9 9 8
Ratio 3.13% 3.40% 2.67% 2.71% 2.86% 2.13%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The ratios of 90 days or more past due and net credit losses are
calculated based on end-of-period and average loans, respectively, both
net of unearned income.
(2) The U.S. bankcards managed ratios of 90 days or more past due and net
credit losses were reduced by 11 basis points and 23 basis points,
respectively, in the current quarter, and by 12 basis points and 24 basis
points in the preceding quarter, due to the addition of the UCS portfolio.
(3) Includes bankcards outside of the U.S., worldwide Diners Club, and private
label cards.
(4) See page 21 for a description of the effect of credit card securitization
activity.
(5) Includes Private Bank and excludes Japan.
(6) Central and Eastern Europe, Middle East, and Africa.
NM Not meaningful.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
<PAGE>
Consumer Loan Balances, Net of Unearned Income
<TABLE>
<CAPTION>
End of Period Average
---------------------------------------------------------------------------------
Sept. 30, June 30, Sept. 30, 3rd Qtr. 2nd Qtr. 3rd Qtr.
In Billions of Dollars 1998 1998 1997 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed $157.7 $153.4 $138.6 $155.1 $151.8 $136.5
Securitized credit card receivables (40.4) (41.3) (26.0) (39.9) (36.8) (24.8)
Loans held for sale (5.2) (4.7) (4.0) (5.2) (4.6) (4.1)
----------------------------------- ---------------------------------
Loan portfolio $112.1 $107.4 $108.6 $110.0 $110.4 $107.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total delinquencies 90 days or more past due in the managed portfolio were $3.5
billion with a related delinquency ratio of 2.20% ($3.3 billion or 2.31%
excluding UCS) at September 30, 1998, compared with $3.4 billion or 2.19% ($3.2
billion or 2.29% excluding UCS) at June 30, 1998 and $3.2 billion or 2.32% a
year ago. Total managed net credit losses in the 1998 third quarter were $1.1
billion and the related loss ratio was 2.69% ($886 million and 2.50% excluding
UCS) compared with $1.1 billion and 2.88% ($913 million and 2.66% excluding UCS)
in the 1998 second quarter and $860 million and 2.50% in the 1997 third quarter.
In Citibanking, managed loans delinquent 90 days or more were $2.1 billion with
a related ratio of 3.02% at September 30, 1998, compared with $2.0 billion or
2.93% at June 30, 1998 and $2.1 billion or 3.07% a year ago. The change in
delinquencies from both June 30, 1998 and September 30, 1997 reflects increases
in Asia Pacific and Latin America and improvements in the U.S. mortgage
portfolio, as well as the effect of foreign currency translation. Net credit
losses in the 1998 third quarter were $144 million and the related loss ratio
was 0.83%, compared with $144 million and 0.85% in the 1998 second quarter and
$135 million and 0.80% in the 1997 third quarter. The increase in net credit
losses from a year ago reflects higher losses in Latin America and Asia Pacific,
offset by lower losses in U.S. mortgages and Germany, and the effect of foreign
currency translation.
U.S. bankcards managed loans delinquent 90 days or more were $924 million or
1.51% at quarter-end, compared with $942 million or 1.58% at June 30, 1998 and
$806 million or 1.76% a year ago. Net credit losses were $795 million and the
related loss ratio was 5.23% in the quarter, compared with $842 million and
5.73% in the 1998 second quarter and $639 million and 5.58% a year ago.
Excluding UCS, the 12-month-lagged loss ratio was 5.49% in the quarter, compared
with 5.98% in the 1998 second quarter and 5.93% a year ago. The percent of gross
write-offs from bankruptcies in the quarter was 42.7% compared with 41.1% in the
prior quarter and 39.8% in the 1997 third quarter.
The other Cards businesses include bankcards outside the United States,
worldwide Diners Club, and private label cards. Loans delinquent 90 days or more
of $230 million at September 30, 1998 were up from $220 million at June 30, 1998
and $182 million at September 30, 1997. Net credit losses in the 1998 third
quarter of $112 million increased from $103 million in the prior quarter and $90
million a year ago. The increase in both delinquencies and net credit losses
primarily reflects higher amounts in Asia Pacific and Latin America. As compared
to a year ago, delinquencies and net credit losses were reduced by the effect of
foreign currency translation.
Private Bank loans delinquent 90 days or more were $195 million or 1.19% of
loans at September 30, 1998, compared with $197 million or 1.23% at June 30,
1998 and $146 million or 0.94% a year ago. The increase from a year ago
primarily reflects an increase in nonaccrual loans in Asia Pacific, partially
offset by improvements in North America.
Total consumer loans on the balance sheet delinquent 90 days or more on which
interest continued to be accrued were $1.0 billion as of September 30, 1998,
compared with $983 million as of both June 30, 1998 and September 30, 1997.
Included in these amounts are U.S. government-guaranteed student loans of $284
million, $247 million, and $250 million, respectively. Other consumer loans
delinquent 90 days or more on which interest continued to be accrued (which
primarily include worldwide bankcard receivables and certain portfolios in
Germany) were $741 million, $736 million, and $733 million, respectively. The
majority of these other loans are written off upon reaching a stipulated number
of days past due. See the table entitled "Cash-Basis, Renegotiated, and Past Due
Loans" on page 63.
Citicorp's policy for suspending the accrual of interest on consumer loans
varies depending on the terms, security, and credit loss experience
characteristics of each product, as well as write-off criteria in place. As of
September 30, 1998, interest accrual had been suspended on $1.9 billion of
consumer loans, primarily consisting of Citibanking loans,
- --------------------------------------------------------------------------------
30
<PAGE>
unchanged from both the prior quarter and a year ago, reflecting improvements in
U.S. mortgages offset by increases in Asia Pacific and Latin America. U.S.
mortgages on which the accrual of interest had been suspended were $377 million
at September 30, 1998, down from $424 million at June 30, 1998 and $542 million
at September 30, 1997, reflecting continued improvement in the credit quality of
the portfolio.
The portion of Citicorp's aggregate allowance for credit losses attributed to
the consumer portfolio was $2.9 billion as of September 30, 1998 and June 30,
1998, up from $2.5 billion a year ago, reflecting the addition of $320 million
of credit loss reserves related to the acquisition of UCS in the 1998 second
quarter. The aggregate allowance for credit losses reflected an additional
provision of $25 million in excess of net write-offs per quarter for each period
presented. The allowance as a percentage of loans on the balance sheet was 2.60%
as of September 30, 1998, compared with 2.66% at June 30, 1998 and 2.27% a year
ago. See "Provision and Credit Loss Reserves" on page 18 for further discussion.
Net credit losses and the related loss ratios may increase from the 1998 third
quarter as a result of global economic conditions, particularly in Latin America
and Asia Pacific, the credit performance of the portfolios, including
bankruptcies, seasonal factors, and other changes in portfolio levels.
Additionally, delinquencies and loans on which the accrual of interest is
suspended could remain at relatively high levels.
Global Corporate Banking
Global Corporate Banking serves corporations, financial institutions,
governments, investors, and other participants in capital markets throughout the
world.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- % ---------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $1,472 $1,785 (18) $5,377 $5,204 3
Adjusted operating expense 1,424 1,267 12 4,138 3,619 14
-------------------------- ----------------------------
Operating margin 48 518 (91) 1,239 1,585 (22)
Credit costs (benefits) 231 (3) NM 326 (55) NM
-------------------------- ----------------------------
Operating margin less credit costs
(benefits) (183) 521 NM 913 1,640 (44)
Restructuring charge - 281 NM -- 281 NM
-------------------------- ----------------------------
Income (loss) before taxes (183) 240 NM 913 1,359 (33)
Income taxes (benefit) (56) (9) (84) 273 256 7
-------------------------- ----------------------------
Net income (loss) $ (127) $ 249 NM $ 640 $1,103 (42)
- ------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $173 $ 151 15 $169 $145 17
Return on assets (%) - 0.65 -- 0.51 1.02 --
- ------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $ (127) $ 417 NM $ 640 $1,271 (50)
Return on assets (%) - 1.10 -- 0.51 1.17 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Global Corporate Banking reported declines in core business income of $544
million and $631 million in the 1998 third quarter and nine-month comparisons.
Excluding a 1997 third quarter restructuring charge of $281 million, income
before taxes in the quarterly and nine-month comparisons declined $704 million
and $727 million, respectively. The 1998 third quarter and nine months included
a pretax loss of $384 million attributable to the financial market turmoil in
Russia, which affected revenue and credit costs, as well as a pretax $138
million writedown of fixed income inventories. The effective income tax rates
rose to 31% and 30% in the 1998 third quarter and nine months from 20% and 23%
in the respective 1997 periods due to changes in the nature and geographic mix
of pretax earnings.
Adjusted revenue declined $313 million or 18% (13% excluding the effect of
foreign currency translation) in the quarterly comparison but grew $173 million
or 3% (9% excluding the effect of foreign currency translation) in the
nine-month comparison. The decline in the quarterly comparison reflects lower
results in both the Emerging Markets business and Global Relationship Banking
primarily attributable to the volatility experienced in the global capital
markets during the quarter, while the improvement in the nine-month comparison
reflects moderate growth in Global Relationship Banking. Adjusted operating
expense increased $157 million or 12% and $519 million or 14% (15% and 18%
excluding the effect of foreign currency translation) in the quarterly and
nine-month comparisons. Credit costs rose $234 million and $381
- --------------------------------------------------------------------------------
31
<PAGE>
million in the quarterly and nine-month comparisons primarily due to higher
write-offs in Russia and Indonesia and, in the nine-month comparison, Thailand.
Cash-basis loans of $1.3 billion declined $13 million from the 1998 second
quarter, but increased $312 million from the 1997 third quarter. Cash-basis
loans in Global Relationship Banking of $286 million declined $14 million from
the 1998 second quarter and declined $150 million from the year-ago quarter,
primarily in the real estate portfolio. Cash-basis loans in the Emerging Markets
business of $982 million were essentially unchanged from the 1998 second
quarter, but grew $462 million from a year ago. The increase from the year-ago
quarter is primarily due to the economic turmoil affecting Indonesia and
Thailand. At September 30, 1998 and June 30, 1998, the Emerging Markets business
cash-basis loans included $44 million of balance sheet credit exposures related
to foreign currency derivative contracts for which the recognition of
revaluation gains has been suspended. The amounts included a year ago were not
material. Commercial OREO of $345 million was essentially unchanged from the
1998 second quarter and improved $134 million from the year-ago quarter,
primarily in the real estate portfolio. See the tables entitled "Cash Basis,
Renegotiated and Past Due Loans" and "Other Real Estate Owned (OREO) and Assets
Pending Disposition" on page 63.
Exposure to hedge funds under foreign exchange and derivatives contracts totaled
$45 million at September 30, 1998 and was fully collateralized by cash and U.S.
Treasury securities. Other outstandings and commitments to hedge funds totaled
$162 million, of which $129 million was secured and $33 million was unsecured.
There was no equity investment in hedge funds. The value of foreign exchange and
derivatives contracts, and the value of collateral, will fluctuate with market
conditions.
Levels of trading-related revenue, realized gains from sales of investments, and
net asset gains in Global Corporate Banking may fluctuate in the future as a
result of market and asset-specific factors. See pages 18 and 19 for discussions
of trading-related revenue, realized gains from sales of investments, and net
asset gains that supplement the comments in the Emerging Markets and Global
Relationship Banking sections that follow. Losses on commercial lending
activities can vary widely with respect to timing and amount, particularly
within any narrowly-defined business or loan type. Credit costs and cash-basis
loans may increase from the 1998 third quarter level due to global economic
developments, sovereign or regulatory actions, and other factors. See "Provision
and Credit Loss Reserves" on page 18 for additional discussion of the Global
Corporate Banking portfolio.
Emerging Markets
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ % ---------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $713 $883 (19) $2,536 $2,511 1
Adjusted operating expense 531 499 6 1,549 1,415 9
------------------------------ ----------------------------
Operating margin 182 384 (53) 987 1,096 (10)
Credit costs 212 35 NM 378 82 NM
------------------------------ ----------------------------
Operating margin less credit costs (30) 349 NM 609 1,014 (40)
Restructuring charge - 54 NM -- 54 NM
------------------------------ ----------------------------
Income (loss) before taxes (30) 295 NM 609 960 (37)
Income taxes (benefits) (11) 47 NM 136 153 (11)
------------------------------ ----------------------------
Net income (loss) ($ 19) $248 NM $ 473 $ 807 (41)
- ---------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $81 $ 68 19 $79 $64 23
Return on assets (%) - 1.45 -- 0.80 1.69 --
- ---------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $(19) $280 NM $473 $ 839 $(44)
Return on assets (%) - 1.63 -- 0.80 1.75 --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
The Emerging Markets business reported declines in core business income of $299
million and $366 million in the 1998 third quarter and nine-month comparisons.
Excluding a 1997 third quarter restructuring charge of $54 million, income
before taxes in the quarterly and nine-month comparisons declined $379 million
and $405 million, respectively. The 1998 third quarter and nine months included
a pretax loss of $301 million attributable to the financial market turmoil in
Russia, which affected revenue and credit costs as discussed below. The
effective income tax rates rose to 37% and 22%
- --------------------------------------------------------------------------------
32
<PAGE>
in the 1998 third quarter and nine months from 20% and 17% in the respective
1997 periods due to changes in the nature and geographic mix of pretax earnings.
Adjusted revenue declined $170 million or 19% (10% excluding the effect of
foreign currency translation) in the quarterly comparison, but grew $25 million
or 1% (11% excluding the effect of foreign currency translation) in the
nine-month comparison. The decline in the quarterly comparison reflected an $84
million decline in trading-related revenue attributable to the volatility
experienced in the global capital markets during the quarter (including $57
million attributable to Russia), a $148 million writedown of impaired Russian
available-for-sale securities, and lower corporate finance revenue, partially
offset by double-digit growth in transaction banking services and loan product
revenue. The improvement in the nine-month comparison is attributable to an $84
million improvement in trading-related revenue and double-digit growth in
transaction banking services revenue, partially offset by lower corporate
finance revenue. See page 18 for an analysis of trends in the components of
trading-related revenue.
Adjusted revenue in Asia Pacific (comprising 13 countries and territories
excluding Japan and the Indian subcontinent, but including Australia and New
Zealand) declined 2% in the quarterly comparison but grew 12% in the nine-month
comparison. The decline in the quarterly comparison is attributable primarily to
lower trading-related revenue, partially offset by improved treasury results.
The improvement in the nine-month comparison resulted from higher
trading-related revenue, improved treasury results, and moderate growth in
transaction banking services. Revenue attributed to the Embedded Bank and
Emerging Local Corporate strategies (Citicorp's plans to gain market share in
selected emerging market countries), together with new franchises, accounted for
9% and 7% of the Emerging Markets business revenue in the 1998 third quarter and
nine months, and was up 59% and 62% in the quarterly and nine-month comparisons.
About 37% and 30% of the revenue in the Emerging Markets business in the 1998
third quarter and nine months was attributable to business from multinational
companies managed jointly with Global Relationship Banking, with that revenue
having grown 6% and 12% in the quarterly and nine-month comparisons.
Adjusted operating expense increased $32 million or 6% (13% excluding the effect
of foreign currency translation) and $134 million or 9% (16% excluding the
effect of foreign currency translation) in the quarterly and nine-month
comparisons. The growth in both comparisons reflected investment spending to
build the franchise, including costs associated with Citicorp's Embedded Bank
and Emerging Local Corporate strategies, and volume-related expense growth.
Credit costs rose $177 million and $296 million in the quarterly and nine-month
comparisons. The increases in both comparisons reflected $96 million
attributable to the financial market turmoil in Russia, with the balance
concentrated in Indonesia and, in the nine-month comparison, Thailand.
Average assets in the 1998 third quarter and nine months grew $13 billion or 19%
and $15 billion or 23% reflecting growth across all geographic segments, and was
concentrated in the loan portfolio and treasury initiatives, together with trade
finance products.
Global Relationship Banking
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ % ----------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted revenue, net of interest expense $759 $902 (16) $2,841 $2,693 5
Adjusted operating expense 893 768 16 2,589 2,204 17
------------------------------ -----------------------------
Operating margin (134) 134 NM 252 489 (48)
Credit costs (benefits) 19 (38) NM (52) (137) 62
------------------------------ -----------------------------
Operating margin less credit costs
(benefits) (153) 172 NM 304 626 (51)
Restructuring charge -- 227 NM -- 227 NM
------------------------------ -----------------------------
Income (loss) before taxes (153) (55) NM 304 399 (24)
Income taxes (benefits) (45) (56) 20 137 103 33
------------------------------ -----------------------------
Net income (loss) ($108) $ 1 NM $ 167 $ 296 (44)
- ------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $92 $ 83 11 $90 $81 11
Return on assets (%) -- -- -- 0.25 0.49 --
- ------------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Core business income $(108) 137 NM $ 167 $ 432 $(61)
Return on assets (%) -- 0.65 -- 0.25 0.71 --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE>
The Global Relationship Banking business in North America, Europe, and Japan
reported declines in core business income of $245 million and $265 million in
the 1998 third quarter and nine-month comparisons. Excluding a 1997 third
quarter restructuring charge of $227 million, income before taxes in the
quarterly and nine-month comparisons declined $325 million and $322 million,
respectively. The 1998 third quarter and nine months included a pretax loss of
$83 million attributable to the financial market turmoil in Russia, which
affected revenue and credit costs as discussed below. The effective income tax
rates rose to 29% and 45% in the 1998 third quarter and nine months from 20% and
31% in the respective 1997 periods due to changes in the nature and geographic
mix of pretax earnings.
Adjusted revenue declined $143 million or 16% in the quarterly comparison but
grew $148 million or 5% in the nine-month comparison. The decline in the
quarterly comparison is attributable to a $183 million decline in
trading-related revenue resulting from the volatility experienced in global
capital markets during the quarter (including $30 million attributable to Russia
and a $138 million writedown of fixed income inventories), partially offset by
moderate growth in transaction banking services revenue. The improvement in the
nine-month comparison is attributable to a $132 million gain on the disposition
of two real-estate-related equity interests obtained in connection with loan
restructurings, double-digit growth in investment management fees, and moderate
growth in transaction banking services revenue, partially offset by a decline in
trading-related revenue of $48 million coupled with gains of $23 million and $32
million recognized in 1997 from the sales of a business and an investment from
the acquisition finance portfolio. See page 17 for an analysis of trends in the
components of trading-related revenue.
Adjusted operating expense grew $125 million or 16% and $385 million or 17% in
the quarterly and nine-month comparisons, primarily from increased spending on
technology, including costs related to the Year 2000 and the European EMU,
volume-related expense growth, and increases in asset management. Incentive
compensation declined in the quarterly comparison but grew in the nine-month
comparison.
Credit costs (benefits) declined $57 million and $85 million in the quarterly
and nine-month comparisons reflecting write-offs of $53 million attributable to
the financial market turmoil in Russia and, in the nine-month comparison, a
lower level of gains on the sale of OREO.
Average assets rose $9 billion or 11% in both the quarterly and nine-month
comparisons, primarily reflecting an increase in the fair value of trading
assets, including derivative and foreign exchange contracts and, in the
nine-month comparison, growth in the loan portfolio.
Investment Activities (1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- % ---------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net of interest expense $117 $348 (66) $1,024 $802 28
Operating expense 11 9 22 34 26 31
---------------------------- ----------------------------
Operating margin 106 339 (69) 990 776 28
Credit benefits -- (5) NM (10) (64) (84)
---------------------------- ----------------------------
Income before taxes 106 344 (69) 1,000 840 19
Income taxes 35 85 (59) 212 175 21
---------------------------- ----------------------------
Net income $ 71 $259 (73) $ 788 $665 18
- -----------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 8 $9 (11) $ 9 $ 9 --
Return on assets (%) 3.52 11.42 -- 11.75 9.88 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Investment Activities comprises Citicorp's venture capital activities,
certain corporate investments, and the results of certain investments in
the former refinancing countries.
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Revenue from Investment Activities declined $231 million or 66% in the quarterly
comparison but grew $222 million or 28% in the nine-month comparison. The
decline in the quarterly comparison reflected a $266 million reduction in
venture capital revenue primarily attributable to the volatility in the U.S.
equity markets during the quarter and a $129 million decline in realized gains
from sales of investments attributable to a lower volume of sales due to the
turbulent global capital markets during the quarter, partially offset by a $153
million improvement in net asset gains that resulted primarily from the sale of
a portion of an investment in Latin America. Revenue growth in the nine-month
comparison reflected a
- --------------------------------------------------------------------------------
34
<PAGE>
$262 million improvement in realized gains from sales of investments and a $129
million improvement in net asset gains, partially offset by a $97 million
decline in venture capital revenue coupled with lower net interest revenue
attributable to a lower level of interest-earning assets. Net asset gains in the
1998 and 1997 third quarters and the 1997 nine months included investment
writedowns in Latin America of $50 million, $23 million, and $72 million,
respectively, and in the 1997 nine months included $46 million related to the
refinancing agreement concluded with Peru.
Credit benefits in the 1998 and 1997 nine months included recoveries of $9
million from the refinancing agreement concluded with the Ivory Coast and $50
million from the refinancing agreement concluded with Peru, respectively.
The increase in the effective income tax rate to 33% from 25% in the quarterly
comparison is attributable to changes in the nature and geographic mix of pretax
earnings.
Levels of venture capital revenue, realized gains from sales of investments, and
net asset gains may fluctuate in the future as a result of market and
asset-specific factors. See pages 18 and 18 for further discussions of these
revenues.
Other Items
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ % ----------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net of interest expense $283 $277 2 $779 $ 731 7
Operating expense 76 72 6 245 213 15
------------------------------ -----------------------------
Operating margin 207 205 -- 534 518 3
Restructuring charge -- 19 NM -- 19 NM
------------------------------ -----------------------------
Income before taxes 207 186 11 534 499 7
Income taxes 95 274 (65) 525 754 (30)
------------------------------ -----------------------------
Net income (loss) $112 $(88) NM $ 9 (255) NM
- -----------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $ 7 $ 9 40 $ 7 $ 6 17
- -----------------------------------------------------------------------------------------------------------------------------
Excluding restructuring charge:
Income (loss) $112 $(57) NM $ 9 $(224) NM
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Other Items includes revenue derived from charging businesses for funds
employed, based upon a marginal cost of funds concept, unallocated corporate
costs and the offset created by attributing income taxes to core business
activities on a local tax-rate basis. Changes in the nature and geographic mix
of earnings resulted in an unusually high effective business tax rate of 35% in
the 1998 quarter, and 29% in the nine months, up from 25% in both 1997 periods.
The increase in the effective rate charged to businesses resulted in a reduction
of the tax offset expense held in Other Items in the 1998 quarter and nine
months. Citicorp's effective tax rate was 37.5% in both 1998 and 1997 periods.
Expense in the 1998 third quarter and nine months included a $10 million and $60
million charge associated with performance-based stock options granted in
January 1998, and in the nine month period increases in certain technology
expense and other unallocated corporate costs. The 1997 nine months included a
$72 million charge associated with performance-based stock options which vested
in that period.
- --------------------------------------------------------------------------------
35
<PAGE>
Citibank Global Asset Management
The amounts shown below for Citibank Global Asset Management are also included
in the results of Global Consumer, Emerging Markets, and Global Relationship
Banking.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- % ---------------------------- %
In Millions of Dollars 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $103 $104 (1) $324 $286 13
Operating expense 98 86 14 280 238 18
---------------------------- ----------------------------
Income before taxes 5 18 (72) 44 48 (8)
Income taxes (benefit) (2) -- NM 2 2 --
---------------------------- ----------------------------
Net income $ 7 $ 18 (61) $ 42 $ 46 (9)
- ---------------------------------------------------------------------------------------------------------------
(In Billions of Dollars)
Assets under management $126 $107 18 $126 $107 18
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Although included in the results of Global Consumer and Global Corporate
Banking, this division is focused upon as a separate core business.
Citibank Global Asset Management ("CGAM") manages $126 billion of assets
worldwide for major institutional clients, as well as for high net worth
individuals and other retail mutual fund shareholders. CGAM offers a broad range
of equity, fixed-income, and liquidity products through its investment centers
in twenty countries. CGAM's $126 billion in assets under management are
comprised of 14% in money market funds, 42% in mutual and institutional
commingled funds, and 44% in accounts managed for high net worth individuals,
pension funds, corporations, and other institutions.
Declines in market prices depressed third quarter revenue growth. Revenue of
$324 million for the 1998 nine months is up 13% from 1997 reflecting an 18%
increase in assets under management since last year. Expense growth reflects
CGAM's continuing build-up of its fundamental research and quantitative analysis
investment teams, as well as incremental technology costs, including costs
associated with Year 2000 and EMU.
In the 1998 nine months, CGAM raised over $2 billion from 32 new funds
distributed worldwide through the Global Consumer and Global Corporate Banking
channels.
INVESTMENT SERVICES
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------
1998 1997
---------------------------------------------------------------
Net income
In Millions of Dollars Revenues (loss) Revenues Net income
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment banking and brokerage $ 3,691 $(395) $ 5,661 $ 449
Asset management 244 70 213 59
---------------------------------------------------------------
Salomon Smith Barney $ 3,935 $(325) $ 5,874 $ 508
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------
1998 1997
---------------------------------------------------------------
In Millions of Dollars Revenues Net income Revenues Net Income
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment banking and brokerage (1) $15,105 $ 586 $15,468 $1,221
Asset management 696 193 593 152
---------------------------------------------------------------
Salomon Smith Barney $15,801 $ 779 $16,061 $1,373
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income in 1998 includes a $191 million after-tax credit to the
restructuring charge related to the merger with Salomon Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
36
<PAGE>
Salomon Smith Barney reported an after tax loss of $325 million for the quarter
ended September 30, 1998. Included in this is an after-tax loss of $700 million
related to Global Arbitrage and Russian-related credit losses. Extreme
volatility in the global fixed income markets affected trading results
negatively for the quarter, while Private Client and Asset Management
performance continued at high levels. Total revenues, net of interest expense,
were $921 million in the 1998 quarter compared to $3.033 billion in the 1997
quarter.
For the nine months ended September 30, 1998 Salomon Smith Barney reported
earnings (before the restructuring reserve credit) of $588 million. Total
revenues, net of interest expense, were $6.797 billion in the 1998 period
compared to $8.473 billion in the 1997 period.
Salomon Smith Barney Revenues
<TABLE>
<CAPTION>
In Millions of Dollars Three Months Ended September 30,
- ------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------
<S> <C> <C>
Commissions $ 797 $ 783
Investment banking 531 597
Principal transactions (1,331) 790
Asset management and administration fees 563 448
Interest income, net (1) 325 366
Other income 36 49
--------------------------------------------------
Net revenues (2) $ 921 $3,033
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of interest expense of $3.014 billion and $2.841 billion for the
three-month period ended September 30, 1998 and 1997, respectively.
(2) Revenues included in the condensed consolidated statement of income are
before deductions for interest expense.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------
In Millions of Dollars 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Commissions $2,376 $2,185
Investment banking 1,799 1,556
Principal transactions (236) 2,261
Asset management and administration fees 1,614 1,236
Interest income, net (1) 1,121 1,118
Other income 123 117
--------------------------------------------------
Net revenues (2) $6,797 $8,473
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of interest expense of $9.004 billion and $7.588 billion for the
nine-month period ended September 30, 1998 and 1997, respectively.
(2) Revenues included in the condensed consolidated statement of income are
before deductions for interest expense.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
37
<PAGE>
Third Quarter
Commission revenues in the third quarter of 1998 were relatively unchanged from
the prior year quarter. An increase in listed commissions was offset by
decreases in other commissions.
Investment banking revenues decreased to $531 million in the third quarter of
1998 compared with $597 million in the 1997 quarter. Record merger and
acquisition fees were more than offset by declines in equity, high yield, high
grade debt, and unit trust underwritings. Salomon Smith Barney held its number
one rank in municipal underwriting for the third quarter of 1998.
Principal transaction revenues decreased in the third quarter of 1998 to a loss
of $1.331 billion. Decreases in fixed income trading results include losses due
to risk reduction of U.S. fixed income arbitrage, losses in other Global
Arbitrage, and losses in the customer business. These were partially offset by
an increase in equity trading results. Fixed income trading results were
adversely impacted by significant dislocations in the global fixed income
markets, including greatly reduced liquidity and widening credit spreads.
Included in these results are Russian-related credit losses.
Asset management and administration fees increased 26% to a record $563 million
in the third quarter of 1998, up from $448 million in the third quarter of 1997.
This reflects broad growth in all recurring fee-based products. At September 30,
1998, internally managed assets were $183.4 billion and total assets under
fee-based management were $247.3 billion compared to $157.8 billion and $216.2
billion, respectively, at September 30, 1997.
Net interest and dividends decreased to $325 million in the third quarter of
1998, from $366 million in the third quarter of 1997 due to a decrease in the
level of net interest-earning assets.
Total non-interest expenses were $1.445 billion in the third quarter of 1998
compared to $2.203 billion in the 1997 quarter, reflecting a reduction in
compensation and benefits of $711 million, largely related to performance based
compensation accruals.
Nine Months
Commission revenues increased 9% to $2.376 billion in the 1998 period from
$2.185 billion in the 1997 period. Investment banking revenues increased 16% to
$1.799 billion in the 1998 period, up from $1.556 billion in the 1997 period,
primarily due to increased merger and acquisition advisory fees. Principal
transaction revenues decreased in the 1998 period to a loss of $236 million.
Asset management and administration fees increased 31% to $1.614 billion in the
1998 period, up from $1.236 billion in the 1997 period.
Assets Under Fee-Based Management
<TABLE>
At September 30,
-------------------------------------------------
In Billions of Dollars 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 55.1 $ 45.3
Mutual funds 53.5 46.4
Managed accounts 61.0 55.0
-------------------------------------------------
Salomon Smith Barney Asset Management 169.6 146.7
Financial Consultant managed accounts 13.8 11.1
-------------------------------------------------
Total internally managed accounts 183.4 157.8
Consulting Group externally managed assets 63.9 58.4
-------------------------------------------------
Total assets under fee-based management $247.3 $216.2
- -------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
Although included in Salomon Smith Barney's overall results, the following
highlights the revenues and operating earnings of the asset management division:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------
In Millions of Dollars 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Investment advisory, administration and distribution fees $217 $186
Unit Investment Trust revenues - net 18 19
Other revenues 9 8
------------------------------------------
Total revenues $244 $213
Operating earnings $ 70 $ 59
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
In Millions of Dollars 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Investment advisory, administration and distribution fees $633 $527
Unit Investment Trust revenues - net 38 35
Other revenues 25 31
------------------------------------------
Total revenues $696 $593
Operating earnings $193 $152
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Third Quarter
The division's 19% increase in earnings reflects continued strength in mutual
funds, retail and institutional managed accounts, and its share of unit trust
revenues. The pretax profit margin from this unit was 47.8%, up from 46.2% in
the prior-year period, and among the highest in the industry.
At September 30, 1998, assets under fee-based management for Salomon Smith
Barney Asset Management (SSBAM) consisted of 33% in money market funds, 31% in
mutual funds and 36% in accounts managed for high net worth individuals, pension
funds, corporations and other institutions. The slight increase in money market
funds as a percentage of the total reflects investor reaction to recent market
volatility. Investment advisory, administration and distribution fees rose 16%
to $217 million in the third quarter of 1998, paralleling a 16% increase in
assets under fee-based management from the comparable period last year.
During the quarter, SSBAM completed its acquisition of the Australian asset
management business of JP Morgan, which added $4.8 billion in assets under
fee-based management. Included in this projected market growth are the rapid
changes taking place in the retirement market in Australia.
Nine Months
The division's 27% increase in earnings reflects continued strength in mutual
funds, managed accounts, and its share of unit trust revenues, as well as the
acquisition of $5.9 billion of Common Sense(R) Trust assets at year-end 1997.
Investment advisory, administration and distribution fees rose 20% to $633
million in the first nine months of 1998, compared to $527 million in the
comparable period last year.
- --------------------------------------------------------------------------------
39
<PAGE>
CONSUMER FINANCE SERVICES
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------
In Millions of Dollars 1998 1997
- ----------------------------------------------------------------------------------------------------
Revenues Net income Revenues Net income
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer Finance Services $543 $81 $448 $60
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------
In Millions of Dollars 1998 1997
- ----------------------------------------------------------------------------------------------------
Revenues Net income Revenues Net income
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer Finance Services $1,542 $209 $1,205 $161
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Consumer Finance Services segment includes the consumer lending operations
(including secured and unsecured personal loans, real estate-secured loans and
consumer goods financing) and credit card operations of Commercial Credit
Company. Also included in this segment are credit-related insurance services
provided through American Health and Life Insurance Company (AHL) and its
affiliate.
Third Quarter
Earnings in the third quarter of 1998 were $81 million compared to $60 million
in the third quarter of 1997. This excellent performance reflects continued
internal receivables growth in all major products, an improved charge-off rate,
and the integration of Security Pacific Financial Services into the Commercial
Credit branch system since July 1997.
Receivables owned reached a record of $12.56 billion, up 20% from the prior year
period, and up $1.61 billion or 15% since year-end 1997. This excludes $255.1
million in credit card receivables securitized on March 6, 1998. Much of the
growth in real estate-secured loans resulted from the continued strong
performance of the $.M.A.R.T. loan(R) program, as well as solid sales in the
branch network. On a managed basis, including securitized assets, receivables
totaled $12.90 billion, an increase of $1.77 billion since year-end 1997.
During the third quarter of 1998, the average yield on owned receivables was
14.34%, down from 14.72% in the third quarter of 1997, reflecting the shift in
the portfolio mix toward lower-risk real estate-secured loans, which have lower
margins. At September 30, 1998, the owned portfolio consisted of 48% real
estate-secured loans, 34% personal loans, 11% credit cards, and 7% sales finance
and other.
The charge-off rate on owned receivables of 2.57% in the third quarter of 1998
continued to improve from 2.87% in the third quarter of 1997 and from 2.72% in
the second quarter of 1998. Delinquencies over 60 days on owned receivables were
1.76% at September 30, 1998, down from 1.78% at year-end 1997, but up from 1.61%
at the end of the comparable quarter last year, which contained a short-term
benefit from the transition of Security Pacific's portfolio to Commercial
Credit's charge-off policies.
<TABLE>
<CAPTION>
As of, or for the
Three Months Ended September 30,
-----------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for credit losses as a % of
net outstandings 2.90% 3.08%
Charge-off rate for the period 2.57% 2.87%
60 + days past due on a contractual basis as a % of gross consumer
finance receivables at quarter end 1.76% 1.61%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Nine Months
During the first nine months of 1998, the average yield on owned receivables was
14.33%, down from 14.70% in the first nine months of 1997. The charge-off rate
on owned receivables of 2.70% in the first nine months of 1998 was improved from
the 2.90% rate in the first nine months of 1997.
- --------------------------------------------------------------------------------
40
<PAGE>
LIFE INSURANCE SERVICES
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------
In Millions of Dollars Revenues Net income Revenues Net income
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity (1) $ 721 $128 $ 716 $150
Primerica Financial Services (2) 414 100 385 87
--------------------------------------------------------------
Total Life Insurance Services $1,135 $228 $1,101 $237
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $5 million and $43 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million and $2 million of reported investment
portfolio gains in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------
1998 1997
---------------------------------------------------------------
In Millions of Dollars Revenues Net income Revenues Net income
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity (1) $2,293 $449 $2,000 $370
Primerica Financial Services (2) 1,236 298 1,135 247
---------------------------------------------------------------
Total Life Insurance Services $3,529 $747 $3,135 $617
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $77 million and $58 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million and $2 million of reported investment
portfolio gains in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) under the Travelers name.
Among the range of products offered are fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Salomon Smith Barney Financial Consultants and a nationwide
network of independent agents. The majority of the annuity business and a
substantial portion of the life business written by Travelers Life and Annuity
is accounted for as investment contracts, with the result that the premium
deposits collected are not included in revenues.
Third Quarter
Earnings before portfolio gains increased 16% to $123 million in the third
quarter of 1998, from $107 million in the comparable 1997 period. Earnings
growth for the quarter reflects strong double-digit business volume growth in
annuity account balances and life and long term care premiums. A decline in
investment income yields for the quarter, which vary by product line, results
primarily from participation in partnership investment interests being
negatively impacted by the downturn in marketplace conditions. This decline was
substantially offset by a favorable reserve settlement in the runoff group life
and health business.
In deferred annuities, significant sales through the established distribution
channels of Salomon Smith Barney Financial Consultants and Copeland were
complemented by the successful third quarter launches of the Primerica Financial
Services (PFS) and Citibank branch network cross-selling initiatives. Total
premium deposits for the third quarter of 1998 increased 52% to $872.9 million.
Account balances aggregated $17.5 billion at September 30, 1998, up 12% from a
year ago, but down 3% since June 30, 1998, reflecting the downturn in the market
value of the variable annuity account balances.
Payout and group annuity account balances and benefit reserves reached $13.3
billion at September 30, 1998, up 14% from a year ago. The revitalization of
this business is reflected in the 208% increase in net written premiums and
deposits (excluding the Company's employee pension plan deposits) in the third
quarter of 1998 to $1.082 billion, up from $350.5 million in the comparable 1997
period.
For individual life insurance, net premiums and deposits in the third quarter of
1998 were $78.5 million, up 13% from $69.5 million in the third quarter of 1997.
Single deposits rose to $17.1 million, and new periodic premium sales increased
73%, reflecting a 30% increase in sales at Salomon Smith Barney. Sales by
Salomon Smith Barney in the third quarter of 1998 increased to over 33% of new
periodic premium and single deposits. Life insurance in force was $54.2 billion
at September 30, 1998, up $3.3 billion from a year ago.
- --------------------------------------------------------------------------------
41
<PAGE>
Earned premiums for the growing long term care insurance product line increased
26% in the third quarter of 1998 to $51.8 million, from $41.2 million in the
third quarter of 1997.
Strong sustained operating performance over the past several quarters was
recognized by Standard & Poor's in their September 1998 upgrade of TIC's
claims-paying rating to AA (Excellent). This rating is not a recommendation to
buy, sell or hold securities, and it may be revised or withdrawn at any time.
Nine Months
Deferred annuities, net written premium and deposits for the first nine months
of 1998 were up 39% to $2.467 billion from $1.776 billion in the first nine
months of 1997.
Payout and group annuity net written premiums and deposits (excluding the
Company's employee pension plan deposits) in the first nine months of 1998 were
$2.970 billion, up from $1.630 billion in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the first
nine months of 1998 were $246.4 million, up 19% from $207.3 million in the first
nine months of 1997. Single deposits were $61.4 million compared to $39.2
million in the 1997 period.
Earned premiums for the growing long-term care insurance product line increased
27% to $146.1 million in the first nine months of 1998 from $115.2 million in
the first nine months of 1997.
Primerica Financial Services
Third Quarter
Earnings before portfolio gains for the third quarter of 1998 increased 17% to
$99 million from $85 million in the third quarter of 1997, reflecting continued
success at cross-selling a range of products, growth in life insurance in force,
favorable mortality experience and disciplined expense management.
Life insurance in force reached a record $380.6 billion at September 30, 1998,
up 3% from September 30, 1997, reflecting good policy persistency and stable
sales growth. New term life insurance sales during the third quarter of 1998
were $14.2 billion in face value, up 8% from $13.1 billion in the third quarter
of 1997. Although the number of policies issued declined quarter-over-quarter,
the average face amount per policy issued during the third quarter of 1998 rose
11%, reaching $223,485.
Cross-selling initiatives continued to enhance PFS's earnings. During the third
quarter of 1998, earnings related to the distribution of non-life insurance
products accounted for $22.0 million, or 22%, of PFS's operating earnings, an
increase of 28% from the prior year quarter. Sales of mutual funds (at net asset
value) were $725.0 million for the third quarter of 1998, a 14% increase over
third quarter 1997 sales of $635.9 million despite significant market volatility
in both the U.S. and Canada. During the third quarter of 1998, Salomon Smith
Barney funds accounted for 61% of PFS's U.S. sales and 53% of PFS's total sales.
Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan products underwritten
by Commercial Credit was $351.1 million in the third quarter of 1998, up 11%
from the comparable period in 1997. The TRAVELERS SECURE(R) line of property and
casualty insurance products showed strong growth, with premiums up 213% to $60.8
million and the number of policies sold in the third quarter of 1998 up 60% to
41,483 from the comparable 1997 period. The number of agents licensed to sell
auto and homeowners insurance jumped to almost 12,700 individuals at September
30, 1998, a 46% increase since the beginning of the year. Variable annuity
continued to show momentum, reaching net written premiums and deposits of $171.9
million in the third quarter of 1998.
- --------------------------------------------------------------------------------
42
<PAGE>
One of the primary factors in PFS's cross-selling success, the Financial Needs
Analysis (FNA), continues to help the company's Personal Financial Analysts
define and address their clients' needs. Nearly 404,000 FNA's were submitted in
the first nine months of 1998.
Nine Months
New term life insurance sales during the first nine months of 1998 were $43.0
billion in face value, up from $39.2 billion in the first nine months of 1997.
During the first nine months of 1998, earnings related to the distribution of
non-life insurance products accounted for $64.6 million, or 22%, of PFS's
operating earnings, an increase of 45% from the prior year period.
Sales of mutual funds (at net asset value) were $2.327 billion for the first
nine months of 1998, a 15% increase over the first nine months of 1997 sales of
$2.027 billion.
Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan products was up 14% to
$1.078 billion in the first nine months of 1998. The TRAVELERS SECURE(R) line of
property and casualty insurance products showed strong growth, with premiums up
almost four-fold to $154.6 million. Variable annuity sales also climbed,
reaching net written premiums and deposits of $473.4 million in the first nine
months of 1998.
PROPERTY & CASUALTY INSURANCE SERVICES
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------
In Millions of Dollars 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net income Net income
Revenues (loss) Revenues (loss)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial (1)(2) $1,655 $247 $1,651 $255
Personal (1)(3) 944 95 853 101
Financing costs and other (1) 2 (27) 3 (29)
Minority interest -- (53) -- (55)
-----------------------------------------------------------
Total Property & Casualty Insurance Services $2,601 $262 $2,507 $272
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before minority interest.
(2) Net income includes $16 million and $31 million of reported investment
portfolio gains in 1998 and 1997, respectively
(3) Net income includes $5 million and $6 million of reported investment
portfolio gains in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
In Millions of Dollars 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial (1)(2) $4,971 $742 $4,887 $666
Personal (1)(3) 2,747 318 2,473 303
Financing costs and other (1) 9 (85) 9 (93)
Minority interest -- (163) -- (153)
-----------------------------------------------------------
Total Property & Casualty Insurance Services $7,727 $812 $7,369 $723
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before minority interest.
(2) Net income includes $59 million and $39 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(3) Net income includes $12 million of reported investment portfolio gains in
1998 and $1 million of reported investment portfolio losses in 1997.
- --------------------------------------------------------------------------------
Third Quarter
Earnings before portfolio gains and minority interest increased to $294 million
in the third quarter of 1998 from $290 million in the third quarter of 1997.
Results for the third quarter of 1998 were solid compared to the third quarter
of 1997, especially in view of the current quarter's catastrophe losses, after
taxes and reinsurance, of $36.7 million and unusually high losses from other
weather-related claims. Contributing to the increase in earnings were lower
expenses and increased production in Personal Lines.
- --------------------------------------------------------------------------------
43
<PAGE>
Commercial Lines
Third Quarter
Earnings before portfolio gains increased to $231 million in the third quarter
of 1998 from $224 million in the third quarter of 1997. The 3% increase reflects
continued expense savings and a decline in asbestos and environmental incurred
losses, partially offset by increased losses from catastrophes and other
weather-related events.
Commercial Lines net written premiums for the third quarter of 1998 totaled
$1.168 billion, compared to $1.176 billion in the third quarter of 1997. Net
written premium levels continue to be unfavorably impacted by the difficult
pricing environment and reflect TAP's disciplined approach to underwriting and
risk management.
Fee income for the third quarter of 1998 was $74.2 million, a $16.2 million
decrease from the third quarter of 1997. This decrease was the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, TAP's continued
success in lowering workers' compensation losses of service customers and a
slight increase in demand in the marketplace for guaranteed cost products as
opposed to service fee-based products.
National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the alternative market
business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans, self-insurance pools throughout
the United States and to niche voluntary markets. National Accounts net written
premiums of $175.3 million for the third quarter of 1998 increased $24.2 million
from the third quarter of 1997. This increase was primarily the result of two
new large accounts written in the third quarter of 1998, partially offset by
pricing declines due to the highly competitive marketplace and TAP's continued
disciplined approach to underwriting and risk management. National Accounts new
business was significantly higher in the third quarter of 1998 than in the third
quarter of 1997, reflecting the addition of two large accounts in the third
quarter of 1998. National Accounts business retention ratio was significantly
higher in the third quarter of 1998 than in the third quarter of 1997, due to
the loss of one large account in the third quarter of 1997.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $446.0 million
in the third quarter of 1998 compared to $502.3 million in the third quarter of
1997. The decrease in net written premiums reflected continued pricing declines
due to the highly competitive marketplace and TAP's continued disciplined
approach to underwriting and risk management, partially offset by growth through
programs designed to leverage underwriting experience in specific industries.
Commercial Accounts new business in the third quarter of 1998 was significantly
lower than in the third quarter of 1997. The decrease in new business reflected
TAP's focus on maintaining its selective underwriting policy. Commercial
Accounts business retention ratio remained strong and was virtually the same in
the third quarter of 1998 and 1997.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $365.7 million in the third quarter of
1998 compared to $353.9 million in the third quarter of 1997. The increase in
Select Accounts net written premiums was due to a decrease in ceded premiums,
partially offset by the highly competitive marketplace and TAP's continued
disciplined approach to underwriting and risk management. New premium business
in Select Accounts in the third quarter of 1998 was significantly lower than in
the third quarter of 1997. The decrease in new business reflected TAP's focus on
maintaining its selective underwriting policy. Select Accounts business
retention ratio remained strong in the third quarter of 1998 and was virtually
the same as the third quarter of 1997.
Specialty Accounts markets products to national, midsize and small customers,
including individuals, and distributes them through both wholesale brokers and
retail agents and brokers throughout the United States. Specialty Accounts net
written premiums were $181.2 million in the third quarter of 1998 compared to
$169.1 million in the third quarter of 1997. This increase primarily reflects
strong production in excess and surplus lines.
Catastrophe losses, net of taxes and reinsurance, were $15 million in the third
quarter of 1998, primarily due to Hurricane Georges. There were no catastrophe
losses in the third quarter of 1997.
- --------------------------------------------------------------------------------
44
<PAGE>
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the third quarter of 1998 was 108.0% compared to 109.2% in the third
quarter of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the third quarter of 1998 was 107.9% compared to 108.0% in
the third quarter of 1997. Although the combined ratios remained relatively
flat, the loss and loss adjustment expense ratio component increased in the
third quarter of 1998 compared to the third quarter of 1997 due to higher
catastrophe and other weather-related property losses and lower fee income, and
was offset by a decrease in the underwriting expense ratio component due to
continued expense reductions.
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
Nine Months
Commercial Lines net written premiums for the first nine months of 1998 totaled
$3.501 billion, compared to $3.656 billion in the first nine months of 1997. The
first nine months of 1997 net written premiums included an adjustment of $142
million due to a change to conform the Aetna P&C method with The Travelers
Indemnity Company and its subsidiaries (Travelers P&C) method of recording
certain net written premiums. Without this adjustment, net written premiums were
about level with the prior year.
Fee income for the first nine months of 1998 was $233.1 million, a $45.7 million
decrease from the first nine months of 1997.
National Accounts net written premiums of $483.5 million for the first nine
months of 1998 decreased $38.9 million from the first nine months of 1997.
National Accounts new business in the first nine months of 1998 was
significantly higher compared to the first nine months of 1997. New business
reflects the addition of two large accounts in the third quarter of 1998.
National Accounts business retention ratio was virtually the same in the first
nine months of 1998 compared to the first nine months of 1997. National Accounts
experienced an increase in claim service-only business as well as favorable
results from continued product development efforts, especially in workers'
compensation managed care programs.
Commercial Accounts net written premiums were $1.349 billion in the first nine
months of 1998 compared to $1.516 billion in the first nine months of 1997. The
1997 net written premiums included an adjustment of $127.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. Excluding this adjustment, net written
premiums decreased $40 million reflecting the highly competitive marketplace and
TAP's continued disciplined approach to underwriting and risk management. For
the first nine months of 1998, new premium business in Commercial Accounts
significantly declined compared to the first nine months of 1997, reflecting
TAP's focus on obtaining new business accounts where it can maintain its
selective underwriting policy. The Commercial Accounts business retention ratio
in the first nine months of 1998 remained strong and was virtually the same
compared to the first nine months of 1997. Commercial Accounts continues to
focus on the retention of existing business while maintaining its product
pricing standards and its selective underwriting policy.
Select Accounts net written premiums were $1.138 billion in the first nine
months of 1998 compared to $1.087 billion in the first nine months of 1997. The
1997 net written premiums included an adjustment of $15.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. New premium business in Select Accounts
was moderately lower in the first nine months of 1998 compared to the first nine
months of 1997, reflecting TAP's focus on maintaining its selective underwriting
policy. Select Accounts business retention ratio remained strong in the first
nine months of 1998 and was virtually the same as that in the first nine months
of 1997.
Specialty Accounts net written premiums were $529.9 million in the first nine
months of 1998 compared to $530.1 million in the first nine months of 1997.
Catastrophe losses, net of taxes and reinsurance, were $25.3 million and $5.1
million in the first nine months of 1998 and 1997, respectively. The 1998
catastrophe losses were primarily due to Hurricane Georges in the third quarter
and
- --------------------------------------------------------------------------------
45
<PAGE>
tornadoes in Nashville, Tennessee in the second quarter. The 1997 catastrophe
losses were primarily due to tornadoes in the Midwest in the first quarter.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first nine months of 1998 was 108.1% compared to 109.3% in the
first nine months of 1997. The GAAP combined ratio (before policyholder
dividends) for Commercial Lines in the first nine months of 1998 was 108.5%
compared to 108.3% in the first nine months of 1997.
The 1997 first nine months statutory and GAAP combined ratios for Commercial
Lines include an adjustment due to the change to conform the Aetna P&C method
with the Travelers P&C method of recording certain net written premiums.
Excluding this adjustment, the statutory and GAAP combined ratios before
policyholder dividends for the first nine months of 1997 would have been 109.9%
and 109.5%, respectively. The decrease in the first nine months of 1998
statutory and GAAP combined ratios compared to the first nine months of 1997
statutory and GAAP combined ratios excluding this adjustment was due to
continued expense reductions and a decline in asbestos and environmental
incurred losses, partially offset by higher catastrophe and other
weather-related losses and lower fee income.
Personal Lines
Third Quarter
Earnings before portfolio gains were $90 million in the third quarter of 1998,
compared to $95 million in the third quarter of 1997. The 1998 results reflect
higher catastrophe losses, partially offset by an increase in production and net
investment income compared to the third quarter of 1997. Catastrophe losses, net
of taxes and reinsurance, were $21.8 million in the third quarter of 1998. There
were no catastrophe losses in the third quarter of 1997. The 1998 catastrophe
losses were primarily due to Hurricanes Bonnie and Georges and windstorms in the
Midwest and Northeast.
Net written premiums in the third quarter of 1998 grew 17% over the prior year
to $908.7 million. This increase reflects growth in target markets served by
independent agents and growth in affinity group marketing, joint marketing
arrangements and the TRAVELERS SECURE(R) program. The TRAVELERS SECURE(R)
program markets Personal Lines products through the independent agents of PFS.
The growth in independent agent premiums has been primarily due to TAP's success
in pursuing book-of-business transfers within certain independent insurance
agencies. Many independent agencies are consolidating their business to a
smaller number of insurance carriers resulting in transfers of business to their
preferred carriers.
The statutory combined ratio for Personal Lines in the third quarter of 1998 was
96.3% compared to 93.0% in the 1997 third quarter. The GAAP combined ratio for
Personal Lines in the third quarter of 1998 was 94.5% compared to 93.2% in the
1997 third quarter. The loss and loss adjustment expense ratio component
increased in the third quarter of 1998 compared to the third quarter of 1997 due
to the higher level of catastrophe losses and a decrease in favorable prior year
reserve development in the automobile bodily injury line, and was offset by a
decrease in the underwriting expense ratio component due to benefits from
productivity improvements as premium levels increase.
GAAP combined ratios differ from statutory combined ratios for Personal Lines
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
Nine Months
Total net written premiums in the first nine months of 1998 grew 16% over the
prior year to $2.589 billion, excluding a one-time adjustment in 1997 of $68.7
million due to a change in the quota share reinsurance arrangement.
Catastrophe losses, after taxes and reinsurance, were $43.5 million in the first
nine months of 1998 compared to $4.5 million in the first nine months of 1997.
The 1998 catastrophe losses were due to Hurricanes Bonnie and Georges and
windstorms in the Midwest and Northwest in the third quarter, tornadoes and wind
and hail storms in the Southeast and Midwest in the second quarter and ice
storms in northern New York and New England and windstorms on the East Coast in
the first quarter.
- --------------------------------------------------------------------------------
46
<PAGE>
The statutory combined ratio for Personal Lines in the first nine months of 1998
was 94.2% compared to 91.9% in the 1997 first nine months. The GAAP combined
ratio for Personal Lines in the first nine months of 1998 was 92.8% compared to
91.3% in the first nine months of 1997.
The 1997 first nine months statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with a change in the quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for the first nine months of 1997 would have been 91.8% and 92.1%, respectively.
The increase in the first nine months of 1998 statutory and GAAP combined ratios
compared to the first nine months of 1997 statutory and GAAP combined ratios
excluding this adjustment was due to higher catastrophe losses and a decrease in
favorable prior year reserve development in the automobile bodily injury line,
partially offset by productivity improvements.
Financing Costs and Other
The primary component of net income (loss) for the third quarter of 1998 and
1997, as well as for the nine months of 1998 and 1997, was interest expense of
$26 million after tax in both quarters and $79 million after tax in both nine
month periods, reflecting financing costs associated with the 1996 acquisition
of Travelers Casualty and Surety Company (formerly The Aetna Casualty and Surety
Company) and The Standard Fire Insurance Company (collectively, Aetna P&C).
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At September 30, 1998, approximately 16% of
the net aggregate reserve (i.e., approximately $149 million) consists of case
reserve for resolved claims. The balance, approximately 84% of the net aggregate
reserve (i.e., approximately $761 million), is carried in a bulk reserve and
includes incurred but not reported environmental claims for which the Company
has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1998 and 1997:
Environmental Losses Nine Months Ended Nine Months Ended
In Millions of Dollars September 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
Beginning reserves:
Direct $1,193 $1,369
Ceded (74) (127)
-------------------------------------------
Net 1,119 1,242
Incurred losses and loss expenses:
Direct 96 55
Ceded (57) (1)
Losses paid:
Direct 292 181
Ceded (44) (48)
Ending reserves:
Direct 997 1,243
Ceded (87) (80)
-------------------------------------------
Net $ 910 $1,163
- --------------------------------------------------------------------------------
Asbestos Claims
At September 30, 1998, approximately 22% of the net aggregate reserve (i.e.,
approximately $226 million) is for pending asbestos claims. The balance,
approximately 78% (i.e., approximately $794 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
- --------------------------------------------------------------------------------
47
<PAGE>
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the
nine months ended September 30, 1998 and 1997:
Asbestos Losses Nine Months Ended Nine Months Ended
In Millions of Dollars September 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
Beginning reserves:
Direct $1,363 $1,443
Ceded (249) (370)
------------------------------------------
Net 1,114 1,073
Incurred losses and loss expenses:
Direct 119 60
Ceded (69) (15)
Losses paid:
Direct 193 114
Ceded (49) (60)
Ending reserves:
Direct 1,289 1,389
Ceded (269) (325)
------------------------------------------
Net $1,020 $1,064
- --------------------------------------------------------------------------------
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at September 30, 1998
are the Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, the conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and their
impact on the future development of asbestos and environmental claims. Such
development will be affected by future court decisions and interpretations and
changes in Superfund and other legislation. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.
Cumulative Injury Other Than Asbestos (CIOTA) Claims
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to potentially harmful products or
substances. Such potentially harmful products or substances include, but are not
limited to, lead paint, pesticides, pharmaceutical products, silicone-based
personal products, solvents and other deleterious substances.
At September 30, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $184 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $864 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
- --------------------------------------------------------------------------------
48
<PAGE>
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the nine
months ended September 30, 1998 and 1997:
CIOTA Losses Nine Months Ended Nine Months Ended
In Millions of Dollars September 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
Beginning reserves:
Direct $1,520 $1,560
Ceded (432) (446)
-----------------------------------------
Net 1,088 1,114
Incurred losses and loss expenses:
Direct (15) 26
Ceded 22 (6)
Losses paid:
Direct 52 51
Ceded (5) (14)
Ending reserves:
Direct 1,453 1,535
Ceded (405) (438)
-----------------------------------------
Net $1,048 $1,097
- --------------------------------------------------------------------------------
CORPORATE AND OTHER
Three Months Ended September 30,
--------------------------------------------------
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
--------------------------------------------------
Total Corporate and Other (1) $8 $(50) $31 $(54)
- --------------------------------------------------------------------------------
(1) Net income (expense) includes $1 million and $6 million of reported
investment portfolio gains in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
--------------------------------------------------
Total Corporate and Other (1) $87 $(118) $75 $(153)
- --------------------------------------------------------------------------------
(1) Net income (expense) includes $1 million and $6 million of reported
investment portfolio gains in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Net treasury and corporate staff expenses for the third quarter of 1998 include
a reduction in incentive compensation accruals and an increase in net treasury
expense. Net treasury and corporate staff expenses for the first nine months of
1998 were up from the prior year period. The decline in total operating expense
for the segment reflects income from the disposition of a real estate
development property in the first quarter of 1998.
YEAR 2000 DATE CONVERSION
Citigroup recognizes that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. Citigroup has assessed and is repairing
its computer systems and business processes to provide for their continued
functionality. In addition, an assessment of the readiness of third parties with
which it interfaces is ongoing.
CITICORP
For Citicorp's computer applications, a process of inventory, scoping and
analysis, modification, testing and certification, and implementation is under
way, funded from a combination of a reprioritization of technology development
initiatives and incremental costs. Citicorp expects this work to be
substantially complete by year-end 1998, leaving the year 1999 primarily for
full integration testing and production assurance. Citicorp does not anticipate
that the related overall costs will be material to any single year or quarter.
Citicorp's Global Operations and Technology organization estimates that its
total costs related to the Year 2000 effort will amount to approximately $650
million over the three-year period from 1997 through 1999, of which
approximately $400 million has been incurred to date, including $80 million in
the 1998 third quarter.
- --------------------------------------------------------------------------------
49
<PAGE>
Substantially all of the lines of code in Citicorp's business applications are
through the modification phase, and the majority have been tested and certified.
In addition, the majority of business applications to be sunset (that is,
removed from use in favor of replacement applications) have been sunset as part
of Citicorp's ongoing technology expenditures.
In other efforts related to information technology, Citicorp is addressing its
end-user computing applications, networks, data center systems, and the desktop
environment. The majority of Citicorp's end-user computing applications have
been certified, the majority of such applications to be sunset have been sunset,
the majority of inventory items related to Citicorp's networks have been
deployed compliant, and the majority of hardware and software elements of data
center systems are complete.
Citicorp is also addressing Year 2000 issues that may exist outside its own
information technology activities, including its facilities and other business
processes, as well as the external service providers and other third parties
with which it interfaces. Substantially all of Citicorp's facilities and related
systems have been investigated, and modification and certification are under
way. Other business processes are likewise being addressed across the
corporation.
Significant third parties with which Citicorp interfaces with regard to the Year
2000 problem include customers and business partners (counterparties, supply
chains), technology vendors and service providers, the global financial market
infrastructure (payment and clearing systems), and the utility infrastructure
(power, transportation, telecommunications) on which all corporations rely.
Unreadiness by these third parties would expose Citicorp to the potential for
loss, impairment of business processes and activities, and disruption of
financial markets. Citicorp is assessing these risks through bilateral and
multiparty efforts and participation in industry, country, and global
initiatives.
Citicorp is creating contingency plans intended to address perceived risks
associated with its Year 2000 effort. These activities include remediation
contingency planning intended to mitigate any risks associated with a failure to
complete remediation of mission-critical systems, scenario planning to identify
potential problems, business resumption contingency planning to address the
possibility of systems failure, event management, and market resumption
contingency planning to address the possibility of the failure of systems or
processes outside Citicorp's control. The primary focus for contingency planning
will be during 1999. Citicorp cannot predict what effect the failure of efforts
to address, in a timely manner, the Year 2000 problem would have on Citicorp.
TRAVELERS
In addition to these initiatives within Citicorp, TRV is in the process of
implementing necessary changes, in accordance with its Year 2000 plan, to bring
all its critical business systems into Year 2000 compliance by early 1999. As
part of and following, achievement of Year 2000 compliance, systems have been,
and will continue to be, subjected to a certification process which validates
the renovated code before it is certified for use in production. In addition,
TRV is developing contingency plans to be used in the event of an unexpected
failure, which may result from the complex interrelationships among our clients,
business partners, and other parties upon whom it relies. These plans are
expected to be in place by December 31, 1998.
The total pre-tax cost associated with the required modifications and
conversions is expected to be between $200 million and $275 million and is being
expensed as incurred in the period 1996 through 1999, and is not expected to
have a material effect on TRV's financial position, results of operations or
liquidity. TRV also has third party customers, financial institutions, vendors
and others with which it conducts business and has communicated with them on
their plans to address and resolve Year 2000 issues on a timely basis. While it
is likely that these efforts by third party vendors will be successful, it is
possible that a series of failures by third parties could have a material
adverse effect on TRV's results of operations in future years.
An additional Year 2000 issue for TAP is the potential future impact of its
insurance coverages. It is possible that Year 2000 related losses may emerge in
future periods. TAP has taken certain initiatives to mitigate the risks
surrounding the Year 2000 issue including addressing Year 2000 issues, where
applicable, in the underwriting process and modifying certain contract language.
Property and casualty indemnity losses for possible future Year 2000 claims and
litigation costs to defend or deny such claims if any, are not reasonably
estimable at this time.
Work is also under way to prepare for the coming European Economic and Monetary
Union, costs of which are not expected to be material.
- --------------------------------------------------------------------------------
50
<PAGE>
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 3 for a discussion of recently issued accounting pronouncements.
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may increase," "may fluctuate," "may result
in," and similar expressions. These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: changes in general
economic conditions, including the performance of financial markets and interest
rates; events and trends affecting specific venture capital investments, on
venture capital revenue volatility and events and trends affecting specific
securities on the fair value of securities; the effect of global economic
conditions, particularly in Latin America and Asia Pacific, and sovereign or
other regulatory actions; the effect of credit quality, market perceptions of
value, and the changing composition of assets and liabilities on the fair values
of financial instruments; the credit performance of the portfolios, including
bankruptcies, seasonal factors, and other changes in the portfolio levels;
market and asset-specific factors related to principal transactions revenue,
realized gains (losses) on sales of investments, and asset sales; timely
implementation of restructuring programs; and the ability of the Company and
third-party vendors to modify computer systems for the Year 2000 date conversion
in a timely manner; the resolution of legal proceedings and related matters; the
conduct of the Company's businesses following the Citicorp merger and pending
global strategic alliance with The Nikko Securities Co., Ltd.; customer
responsiveness to both new products and distribution channels; and the ability
of the Company generally to achieve anticipated levels of operational
efficiencies related to recently acquired companies, as well as achieving its
other cost-savings initiatives. Readers also are directed to other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission.
RISK MANAGEMENT
MANAGING GLOBAL RISK AT CITICORP
Management of Price Risk at Citicorp
Price risk is the risk to earnings from changes in interest rates, foreign
exchange rates, commodity and equity prices, and in their implied volatilities.
This exposure arises in the normal course of business of a global financial
intermediary.
Citicorp has established procedures for managing price risk which are described
in the 1997 Supplemental Financial Statements. These procedures include limits
set annually for each major category of risk; these limits are monitored and
managed by the businesses, and reviewed monthly at the corporate level.
Price risk is measured using various tools, including the Earnings-at-Risk
method, which is applied to interest rate risk of the non-trading portfolios,
and the Value-at-Risk method, which is applied to the trading portfolios.
See Note 1 of Notes to the 1997 Supplemental Consolidated Financial Statements
regarding the future application of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Price Risk in Non-Trading Portfolios
Earnings-at-Risk measures the potential pretax earnings impact over a specified
time horizon of a specified parallel shift in the yield curve for the
appropriate currency. The yield curve shift is statistically derived as a two
standard deviation change in a short-term interest rate over the period required
to defease the position (usually four weeks). Earnings-at-Risk is calculated
separately for each currency, and reflects the repricing gaps in the position,
as well as option positions, both explicit and embedded.
- --------------------------------------------------------------------------------
51
<PAGE>
Business units manage the potential earnings effect of interest rate movements
by modifying the asset and liability mix, either directly or through the use of
derivatives. These include interest rate swaps and other derivative instruments
which are either designated and effective as hedges or designated and effective
in modifying the interest rate characteristics of specified assets or
liabilities. The utilization of derivatives is managed in response to changing
market conditions as well as to changes in the characteristics and mix of the
related assets and liabilities.
Citicorp's non-trading price risk exposure is mainly to movements in U.S. dollar
interest rates, however recent interest rate volatility in certain Asian
countries has resulted in an increased measure of non-U.S. dollar
Earnings-at-Risk. As of September 30, 1998, the rate shift over a four-week
defeasance period applied to the U.S. dollar yield curve for purposes of
calculating Earnings-at-Risk was 55 basis points. As of September 30, 1998, the
rate shifts applied to non-U.S. currencies for purposes of calculating
Earnings-at-Risk over a one to eight week defeasance period ranged from 18 to
1,098 basis points, depending on the currency.
The table below illustrates that as of September 30, 1998, a 55 basis point
increase in the U.S. dollar yield curve would have a potential negative impact
on Citicorp's pretax earnings of approximately $159 million in the next twelve
months, and approximately $33 million for the five year period 1998-2003. A two
standard deviation increase in non-U.S. dollar interest rates would have a
potential negative impact on Citicorp's pretax earnings of approximately $72
million in the next twelve months, and approximately $113 million for the
five-year period 1998-2003.
Earnings-at-Risk
<TABLE>
<CAPTION>
Assuming a U.S. Dollar Assuming a Non-U.S. Dollar
Rate Move of Rate Move of
---------------------------------------------------------------
Impact on Pretax Earnings Two Standard Deviations Two Standard Deviations (1)
In Millions of Dollars at September 30, 1998 Increase Decrease Increase (2) Decrease (2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Overnight to Three Months $ ( 84) $ 89 $ (18) $ 18
Four to Six Months (37) 46 (23) 23
Seven to Twelve Months (38) 45 (31) 31
---------------------------------------------------------------
Total Overnight to Twelve Months (159) 180 (72) 72
Year Two (36) 35 (58) 59
Year Three 10 (16) -- 1
Year Four 55 (62) 15 (14)
Year Five 126 (142) 3 (2)
Effect of Discounting (29) 33 (1) --
---------------------------------------------------------------
Total $ ( 33) $ 28 $(113) $116
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total assumes a two standard deviation increase or decrease for every
currency, not taking into account any covariance between currencies.
(2) Primarily results from Earnings-at-Risk in Thai baht, Singapore dollar,
and Hong Kong dollar.
- --------------------------------------------------------------------------------
The table below summarizes Citicorp's twelve-month Earnings-at-Risk over recent
periods.
Twelve Month Earnings-at-Risk (impact on pretax earnings)
<TABLE>
<CAPTION>
U.S. Dollar Non-U.S. Dollar
--------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30, Sept. 30, Dec. 31, Sept. 30,
In Millions of Dollars 1998 1997 1997 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assuming a Two Standard Deviation Rate:
Increase $(159) $(180) $(193) $(72) $(25) $(41)
Decrease 180 211 223 72 25 41
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The tables above illustrate that Citicorp's pretax earnings in its non-trading
activities over the subsequent 12 months would be reduced by an increase in
interest rates and would benefit from a decrease in interest rates. For the U.S.
dollar portfolio this primarily reflects the utilization of receive-fixed
interest rate swaps and similar instruments to effectively modify the repricing
characteristics of certain consumer and commercial loan portfolios, deposits,
and long-term debt. Correspondingly, derivatives are not used extensively to
modify the repricing characteristics of the non-U.S. dollar portfolio. Excluding
the effects of these instruments, Citicorp's twelve month Earnings-at-Risk over
recent periods would be as shown in the following table:
- --------------------------------------------------------------------------------
52
<PAGE>
Twelve Month Earnings-at-Risk (excluding effects of derivatives)
U.S. Dollar
--------------------------------------
U.S. Dollar Impact on Pretax Earnings Sept. 30, Dec. 31, Sept. 30,
In Millions of Dollars 1998 (1) 1997 (1) 1997
- --------------------------------------------------------------------------------
Assuming a Two Standard Deviation Rate:
Increase $20 $64 $103
Decrease (9) (44) (80)
- --------------------------------------------------------------------------------
(1) Excluding the effects of derivatives, Citicorp's non-U.S. dollar
Earnings-at-Risk would have had a negative impact of $77 million and $26
million assuming a two standard deviation increase in rates and a positive
impact of $77 million and $27 million assuming a two standard deviation
decrease in rates at September 30, 1998 and December 31, 1997
respectively.
- --------------------------------------------------------------------------------
The table on page 52 also illustrates that the risk profile in the one-to-two
year time horizon was directionally similar, but generally tends to reverse in
subsequent periods. This reflects the fact that the majority of the derivative
instruments utilized to modify repricing characteristics as described above will
mature within three years. Additional detail regarding these derivative
instruments may be found on page 62.
During the 1998 nine months, the U.S. dollar Earnings-at-Risk for the following
12 months assuming a two standard deviation increase in rates would have had a
potential negative impact ranging from approximately $65 million to $173 million
in the aggregate at each month end, compared with a range from $142 million to
$209 million during 1997. The relatively lower U.S. dollar Earnings-at-Risk
experienced during the 1998 nine months was primarily due to the reduction in
the level of received-fixed swaps, offset slightly by the acquisition of UCS. A
two standard deviation increase in non-U.S. dollar interest rates for the
following twelve months would have had a potential negative impact ranging from
approximately $53 million to $93 million in the aggregate at each month-end
during the 1998 nine months, compared with a range from $15 million to $33
million during 1997. The higher non-U.S. dollar Earnings-at-Risk experienced
during the 1998 nine months primarily reflected the higher interest rate
volatility seen across the Asia Pacific region.
Price Risk in Trading Portfolios
The price risk of trading activities is measured using the Value-at-Risk method,
which estimates, at a 99% confidence level, the largest potential loss in pretax
market value that could occur over a one day holding period. The Value-at-Risk
method incorporates the market factors to which the market value of the trading
position is exposed (interest rates, foreign exchange rates, equity and
commodity prices, and their implied volatilities), the sensitivity of the
position to changes in those market factors, and the volatilities and
correlation of those factors. The Value-at-Risk measurement includes the foreign
exchange risks that arise in traditional banking businesses as well as in
explicit trading positions. The volatilities and correlations used in the
Value-at-Risk computation are based on historical experience. The Value-at-Risk
method is not a predictor of future results, but rather a probability based
measure of potential price risk.
The aggregate pretax Value-at-Risk in the trading portfolios was $18 million at
September 30, 1998, and daily exposures averaged $15 million in the 1998 third
quarter for Citicorp's major trading centers and ranged from $12 million to $19
million. The level of exposure taken depends on the market environment and
expectations of future price and market movements, and will vary from period to
period. The trading-related revenue for the 1998 third quarter was $392 million,
compared with $730 million for the 1998 second quarter, $728 million for the
1998 first quarter, and $347 million for the 1997 fourth quarter. See
"Trading-Related Revenue" on page 18 for additional information.
The table below summarizes Citicorp's Value-at-Risk in its trading portfolio.
Value-at-Risk
1998 Third
Sept. 30, Quarter Dec. 31,
In Millions of Dollars 1998 Daily Average 1997
- --------------------------------------------------------------------------------
Interest Rate $16 $14 $23
Foreign Exchange 7 6 8
All Other (primarily Equity and Commodity) 5 5 8
Covariance Adjustment (10) (10) (14)
-------------------------------------
Total $18 $15 $25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
53
<PAGE>
Management of Cross-Border Risk
Cross-border risk is the risk that Citicorp will be unable to obtain payment
from customers on their contractual obligations as a result of actions taken by
foreign governments such as exchange controls, debt moratorium, and restrictions
on the remittance of funds. Citicorp manages cross-border risk as part of the
Windows on Risk process described in the 1997 Supplemental Financial Statements.
The table on page 55 presents total cross-border outstandings on a regulatory
basis in accordance with Federal Financial Institutions Examination Council
("FFIEC") guidelines. Total cross-border outstandings include cross-border
claims on third parties as well as investments in and funding of local
franchises.
Cross-border claims on third parties (trade, short-term, and medium- and
long-term claims) include cross-border loans, securities, deposits at interest
with banks, investments in affiliates, and other monetary assets, as well as net
revaluation gains on foreign exchange and derivative products. Adjustments have
been made to assign externally guaranteed outstandings to the country of the
guarantor and outstandings for which tangible, liquid collateral is held outside
of the obligor's country to the country in which the collateral is held. For
securities received as collateral, outstandings are assigned to the domicile of
the issuer of the securities.
Investments in and funding of local franchises represents the excess of local
country assets over local country liabilities, as defined by the FFIEC. Local
country assets are claims on local residents recorded by branches and
majority-owned subsidiaries of Citicorp domiciled in the country, adjusted for
externally guaranteed outstandings and certain collateral. Local country
liabilities are obligations of branches and majority-owned subsidiaries of
Citicorp domiciled in the country for which no cross-border guarantee is issued
by Citicorp offices outside the country.
- --------------------------------------------------------------------------------
54
<PAGE>
Citicorp Cross-Border Outstandings and Commitments (1)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------------------------------------------------------------------------------------
Cross-Border Claims on Third Parties
------------------------------------------
Investments
Trading in and
and Funding of Total Total
(In Billions ------------------------------ Short-Term Local Cross-Border Cross-Border
of Dollars) Banks Public Private Total Claims(2) Franchises Outstandings Commitments(3) Outstandings Commitments(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $ 2.3 $ 1.2 $ 1.0 $ 4.5 $ 4.2 $ 1.9 $ 6.4 (4) $ 1.7 $ 4.7 (4) $ 1.7
United Kingdom 1.7 -- 3.2 4.9 3.8 -- 4.9 (4) 9.0 4.5 (4) 7.8
Switzerland 2.9 -- 1.5 4.4 4.3 -- 4.4 (4) 1.3 2.7 (5) 1.1
France 2.4 0.7 0.8 3.9 3.7 0.3 4.2 (4) 1.9 3.1 (4) 0.6
Italy 0.9 0.5 0.4 1.8 1.7 2.3 4.1 (4) 1.0 3.4 (4) 0.5
Netherlands 1.4 0.2 1.3 2.9 2.5 -- 2.9 (5) 0.7 2.2 0.8
Spain 0.4 -- 0.2 0.6 0.5 1.9 2.5 0.6 2.3 (5) 0.4
Japan 1.2 0.4 0.6 2.2 1.6 -- 2.2 0.2 3.2 (4) 1.1
Belgium 0.5 0.2 0.6 1.3 1.3 0.7 2.0 0.3 0.9 0.2
Canada 1.0 0.1 0.5 1.6 1.3 -- 1.6 1.2 1.6 1.8
Sweden 0.6 0.2 0.5 1.3 1.2 -- 1.3 0.8 1.1 0.7
Finland 0.4 0.1 0.4 0.9 0.6 -- 0.9 0.6 0.7 0.4
Russia -- -- 0.1 0.1 0.1 -- 0.1 -- 0.4 0.1
Other (23
countries
in 1998) 1.4 1.1 2.6 5.1 3.9 0.7 5.8 2.6 3.6 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Europe, Canada,
and Japan 17.1 4.7 13.7 35.5 30.7 7.8 43.3 21.9 34.4 18.7
- ------------------------------------------------------------------------------------------------------------------------------------
Brazil 0.1 0.8 1.8 2.7 1.4 1.2 3.9 (4) -- 4.4 (4) 0.1
Mexico 0.1 1.7 0.9 2.7 1.3 0.5 3.2 (5) 0.3 3.0 (5) 0.6
Argentina 0.2 0.2 0.8 1.2 0.6 0.1 1.3 0.2 2.2 0.1
Venezuela 0.1 0.7 0.1 0.9 0.3 -- 0.9 0.1 1.0 --
Chile -- 0.2 0.4 0.6 0.2 0.1 0.7 0.2 1.0 --
Colombia 0.1 0.1 0.2 0.4 0.2 0.1 0.5 -- 0.9 0.1
Peru -- 0.1 0.2 0.3 0.2 0.1 0.4 0.1 0.4 0.1
Uruguay -- 0.2 0.1 0.3 0.1 -- 0.3 -- 0.3 --
Other (19
countries
in 1998) 0.4 0.1 0.9 1.4 1.3 0.4 1.8 0.5 1.1 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America 1.0 4.1 5.4 10.5 5.6 2.5 13.0 1.4 14.3 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
South Korea 0.6 0.2 0.7 1.5 1.1 1.2 2.7 (5) 0.4 2.6 (5) 0.2
Saudi Arabia 0.6 0.3 0.2 1.1 0.3 -- 1.1 0.1 0.8 0.3
Singapore 0.2 -- 0.4 0.6 0.5 -- 0.6 0.6 0.5 0.3
Malaysia 0.1 -- 0.2 0.3 0.2 0.2 0.5 0.1 0.7 0.1
Indonesia -- -- 0.5 0.5 0.4 -- 0.5 0.1 0.6 0.2
Taiwan 0.1 -- 0.3 0.4 0.3 -- 0.4 0.5 0.4 0.5
China -- -- 0.1 0.1 0.1 0.2 0.3 0.4 0.6 0.4
Kuwait 0.2 -- 0.1 0.3 0.2 -- 0.3 -- 0.2 --
India -- -- 0.3 0.3 0.1 -- 0.3 0.3 0.2 0.3
Thailand -- -- 0.1 0.1 -- 0.2 0.3 0.1 0.3 0.1
Philippines 0.1 -- 0.1 0.2 0.1 -- 0.2 0.1 0.2 0.1
Hong Kong 0.1 -- 0.1 0.2 0.2 -- 0.2 0.1 0.7 0.3
Other (12
countries
in 1998) -- 0.2 -- 0.2 0.2 0.1 0.3 0.6 0.8 0.5
- ------------------------------------------------------------------------------------------------------------------------------------
Asia/Middle East 2.0 0.7 3.1 5.8 3.7 1.9 7.7 3.4 8.6 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Australia 0.2 -- 0.6 0.8 0.6 0.9 1.7 0.1 0.7 0.4
New Zealand -- -- 0.1 0.1 0.1 0.4 0.5 0.1 0.7 --
All Other -- 0.7 0.5 1.2 1.1 0.5 1.7 0.5 1.5 0.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other 0.2 0.7 1.2 2.1 1.8 1.8 3.9 0.7 2.9 0.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Citicorp $20.3 $10.2 $23.4 $53.9 $41.8 $14.0 $67.9 $27.4 $60.2 $24.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes details of selected countries within each region.
(2) Included in total cross-border claims on third parties.
(3) Commitments (not included in total cross-border outstandings) include
legally binding cross-border letters of credit and loan commitments.
(4) Total cross-border outstandings were in excess of 1.0% of total assets at
the end of the respective periods.
(5) Total cross-border outstandings were between 0.75% and 1.0% of total
assets at the end of the respective periods.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
55
<PAGE>
Details of investments in and funding of local franchises for selected countries
included in the table on page 55 at September 30, 1998 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Local Country Assets (1) Local Country Liabilities(2)
--------------------------------------------------------------------- ----------------------------
Gross Gross
Unrealized Unrealized
Gains on Losses on Investments
Derivative Derivative in and
In Billions of and Foreign All Local and Foreign All Other Funding of
Dollars at Consumer Commercial Exchange Other Country Exchange Local Country Local
Sept. 30, 1998 Loans Loans Contracts Assets(3) Adjustments(4) Assets Contracts Liabilities(5) Franchises
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
South Korea $1.1 $1.7 $0.3 $2.1 ($0.4) $4.8 $0.2 $3.4 $1.2
Brazil 0.5 2.4 0.2 3.1 (0.9) 5.3 0.2 3.9 1.2
Malaysia 1.4 1.0 0.1 1.4 (0.5) 3.4 0.1 3.1 0.2
Thailand 1.0 0.9 0.1 0.9 (0.3) 2.6 0.1 2.3 0.2
Philippines 0.3 1.0 -- 1.3 (0.3) 2.3 -- 2.3 --
Indonesia 0.1 0.4 -- 0.7 (0.3) 0.9 -- 0.9 --
Russia -- 0.5 -- 0.1 (0.5) 0.1 -- 0.1 --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1997, local country assets were $4.5 billion in South
Korea, $5.1 billion in Brazil, $3.4 billion in Malaysia, $2.7 billion in
Thailand, $2.2 billion in Philippines, $2.0 billion in Indonesia, and $0.5
billion in Russia.
(2) At December 31, 1997, local country liabilities were $3.4 billion in South
Korea, $3.7 billion in Brazil, $3.0 billion in Malaysia, $3.0 billion in
Thailand, $2.2 billion in Philippines, $2.2 billion in Indonesia, and $0.2
billion in Russia.
(3) Includes deposits at interest with banks, securities, customers'
acceptance liability, and other monetary assets.
(4) Adjustments include externally guaranteed outstandings, locally booked
claims on nonresidents, and certain other claims as defined by the FFIEC.
(5) Primarily deposits, purchased funds and other borrowings, and acceptances
outstanding.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Citigroup services its obligations primarily with dividends and other advances
that it receives from subsidiaries. The subsidiaries' dividend-paying abilities
are limited by certain covenant restrictions in credit agreements and/or by
regulatory requirements. Citigroup believes it will have sufficient funds to
meet current and future commitments. Each of Citigroup's major operating
subsidiaries finances its operations on a stand-alone basis consistent with its
capitalization and ratings. Additional information regarding Citigroup and its
subsidiaries' liquidity and capital resources can be found in the 1997
Supplemental Financial Statements.
Citigroup Inc. (Citigroup)
Citigroup issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding.
Citigroup, Commercial Credit Company (CCC) and The Travelers Insurance Company
(TIC) have a five-year revolving credit facility with a syndicate of banks to
provide $1.0 billion of revolving credit, to be allocated to any of Citigroup,
CCC or TIC. The participation of TIC in this agreement is limited to $250
million. This facility expires in June 2001. At September 30, 1998, $700 million
was allocated to Citigroup and $300 million was allocated to CCC. Under this
facility, Citigroup is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1998, this
requirement was exceeded by approximately $10.9 billion. Citigroup and CCC also
have $200 million in 364-day facilities which expire in August 1999 and may be
allocated to either of Citigroup or CCC. At September 30, 1998, $150 million was
allocated to Citigroup and $50 million was allocated to CCC. In addition
Citigroup and CCC also have a $500 million 60-day facility which expires in
November 1998 and may be allocated to either of Citigroup or CCC. At September
30, 1998 all of this facility was allocated to CCC. At September 30, 1998, there
were no borrowings outstanding under any of these facilities.
At September 30, 1998, Citigroup had unused credit availability of $700 million
under the five-year revolving credit facility and $150 million under the 364-day
facilities. Citigroup may borrow under these revolving credit facilities at
various interest rate options (LIBOR, CD and base rate) and compensates the
banks for the facility through commitment fees.
- --------------------------------------------------------------------------------
56
<PAGE>
Citicorp
A diversity of funding sources, currencies, and maturities is used to gain a
broad practical access to the investor base. Citicorp's deposits of $222.4
billion represented 65% of total funding at September 30, 1998, compared with
$199.1 billion (64% of total funding) at December 31, 1997, and are broadly
diversified by both geography and customer segment. Stockholders' equity, which
was $21.0 billion at September 30, 1998 and December 31, 1997, continues to be
an important component of the overall funding structure. In addition, long-term
debt is issued by Citicorp and its subsidiaries. Total long-term debt
outstanding at September 30, 1998 and December 31, 1997 was $19.0 billion.
Asset securitization programs remain an important source of liquidity. Total
consumer loans securitized during the quarter were $4.0 billion, including $1.5
billion of U.S. credit cards and $2.5 billion of U.S. mortgages. Total consumer
loans securitized during the 1998 nine months were $19.7 billion, including
$12.7 billion of U.S. credit cards and $6.8 billion of U.S. mortgages. As credit
card securitization transactions amortize, newly originated receivables are
recorded on Citicorp's balance sheet and become available for asset
securitization. During the three months ended September 30, 1998, the scheduled
amortization of certain credit card securitization transactions made available
$2.4 billion of new receivables ($6.7 billion for the nine months). In addition,
$1.1 billion and $3.8 billion of credit card securitization transactions are
scheduled to amortize during the remainder of 1998 and in 1999, respectively.
Citicorp is a legal entity separate and distinct from Citibank, N.A. and its
other subsidiaries and affiliates. There are various legal limitations on the
extent to which Citicorp's subsidiaries may extend credit, pay dividends, or
otherwise supply funds to Citicorp. As of September 30, 1998, under their
applicable dividend limitations, Citicorp's national and state-chartered bank
subsidiaries could have declared dividends to their respective parent companies
without regulatory approval of approximately $3.6 billion. In determining
whether and to what extent to pay dividends, each bank subsidiary must also
consider the effect of dividend payments on applicable risk-based capital and
leverage ratio requirements, as well as policy statements of the federal
regulatory agencies that indicate that banking organizations should generally
pay dividends out of current operating earnings. Consistent with these
considerations, Citicorp estimates that as of September 30, 1998, its bank
subsidiaries could have distributed dividends to Citicorp, directly or through
their parent holding company, of approximately $3.2 billion of the available
$3.6 billion.
Citicorp is subject to risk-based capital guidelines issued by the Federal
Reserve Board (FRB). These guidelines are supplemented by a leverage ratio
requirement. The risk-based capital guidelines and the leverage ratio
requirement are detailed in the 1997 Supplemental Financial Statements.
Citicorp Ratios
- --------------------------------------------------------------------------------
Sept. 30, June 30, Dec. 31,
1998 1998 1997
- --------------------------------------------------------------------------------
Tier 1 capital 7.97% 8.23% 8.27%
Total capital (Tier 1 and Tier 2) 11.65 11.98 12.25
Leverage (1) 6.56 6.68 6.95
Common stockholders' equity 5.86 6.13 6.15
- --------------------------------------------------------------------------------
(1) Tier 1 capital divided by adjusted average assets.
- --------------------------------------------------------------------------------
Citicorp maintained a strong capital position during the 1998 third quarter.
Total capital (Tier 1 and Tier 2) amounted to $31.7 billion at September 30,
1998, representing 11.65% of net risk-adjusted assets. This compares with $31.6
billion and 11.98% at June 30, 1998 and $31.0 billion and 12.25% at December 31,
1997. Tier 1 capital of $21.7 billion at September 30, 1998 represented 7.97% of
net risk-adjusted assets, compared with $21.7 billion and 8.23% at June 30, 1998
and $20.9 billion and 8.27% at December 31, 1997. The decline in the Tier 1 and
total capital ratios at September 30, 1998 was primarily attributable to the
growth in customer-driven risk-adjusted assets, and the redemption of Graduated
Rate Cumulative Preferred Stock, Series 8A and 7.5% Noncumulative Preferred
Stock, Series 17 (total preferred stock redemptions of $412 million). Citicorp's
capital and ratios have been adjusted to reflect the adoption by Citicorp of the
immediate recognition of the transition obligation under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
effective January 1, 1993, to conform to the method used by TRV.
- --------------------------------------------------------------------------------
57
<PAGE>
In June 1995, Citicorp initiated a common stock repurchase program. During the
nine months of 1998 and 1997, Citicorp repurchased 10.0 million and 31.8 million
equivalent shares of Citigroup common stock under the repurchase program at a
cost of $483 million ($48.91 average cost per share) and $1.5 billion ($46.54
average cost per share), respectively. During the 1998 second and third
quarters, no shares were repurchased due to the suspension of the stock
repurchase program in connection with the announced agreement to merge with
Travelers Group. The stock repurchase program was terminated immediately prior
to the consummation of the merger. Total repurchases since the program was
inaugurated on June 20, 1995 were 205.0 million equivalent Citigroup shares for
an outlay of $7.3 billion.
Components of Capital Under Regulatory Guidelines
<TABLE>
<CAPTION>
Sept. 30, June 30, Dec. 31,
(In Millions of Dollars) 1998 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital
Common stockholders' equity $20,122 $20,278 $19,123
Perpetual preferred stock 863 1,275 1,903
Mandatorily redeemable preferred securities of subsidiary trusts 975 975 750
Minority interest 111 107 104
Net unrealized (gains)/losses -- ecurities available for sale(1) 178 (308) (535)
Less: Intangible assets(2) (543) (507) (304)
50% investment in certain subsidiaries(3) (7) (98) (115)
------------------------------------------
Total Tier 1 capital 21,699 21,722 20,926
------------------------------------------
Tier 2 capital
Allowance for credit losses(4) 3,440 3,337 3,198
Qualifying debt(5) 6,561 6,669 6,977
Less: 50% investment in certain subsidiaries(3) (6) (97) (115)
------------------------------------------
Total Tier 2 capital 9,995 9,909 10,060
------------------------------------------
Total capital (Tier 1 and Tier 2) $31,694 $31,631 $30,986
- ---------------------------------------------------------------------------------------------------------------
Net risk-adjusted assets (6) $272,148 $263,925 $252,999
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Tier 1 capital excludes unrealized gains and losses on debt securities
available for sale. In accordance with regulatory risk-based capital
guidelines, Tier 1 capital at September 30, 1998 has been reduced for net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values, net of applicable tax effects, of $64
million.
(2) Includes goodwill and certain other identifiable intangible assets. The
increase during 1998 reflects the acquisition of a global trust and agency
services business during the second quarter and the acquisition of certain
assets and liabilities of Confia during the third quarter.
(3) Represents investment in certain overseas insurance activities.
(4) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is
deducted from risk-adjusted assets.
(5) Includes qualifying senior and subordinated debt in an amount not
exceeding 50% of Tier 1 capital, and subordinated capital notes subject to
certain limitations.
(6) Includes risk-weighted credit equivalent amounts net of applicable
bilateral netting agreements of $16.0 billion for interest rate, commodity
and equity derivative contracts and foreign exchange contracts, as of
September 30, 1998, compared with $14.1 billion as of June 30, 1998 and
$13.7 billion as of December 31, 1997. Net risk-adjusted assets also
includes the effect of other off-balance sheet exposures such as unused
loan commitments and letters of credit and reflects deductions for
intangible assets and any excess allowance for credit losses.
- --------------------------------------------------------------------------------
Common stockholders' equity decreased a net $156 million during the third
quarter of 1998 to $20.1 billion at September 30, 1998, representing 5.86% of
assets, compared with 6.13% at June 30, 1998 and 6.15% at December 31, 1997. The
decrease in common stockholders' equity during the quarter principally reflected
a decrease in the securities available for sale component of stockholders'
equity and dividends declared on common and preferred stock, partially offset by
net income for the quarter. The decrease in the common stockholders' equity
ratio during the quarter reflected the above items, as well as growth in total
assets.
During the third quarter of 1998, Citicorp redeemed $62 million of its Graduated
Rate Cumulative Preferred Stock, Series 8A and $350 million of its 7.5%
Noncumulative Preferred Stock, Series 17. The $975 million of mandatorily
redeemable preferred securities of subsidiary trusts (commonly known as "trust
preferred securities") outstanding at September 30, 1998 qualify as Tier 1
capital. For the nine months ended September 30, 1998, interest expense on the
mandatorily redeemable preferred securities of subsidiary trusts amounted to $49
million, compared with $43 million for the 1997 nine month period. During the
first six months of 1998, Citicorp redeemed $325 million of its 8% Noncumulative
Preferred Stock, Series 16 and $303 million of Adjustable Rate Preferred Stock,
Second and Third Series, and issued an additional $225 million of mandatorily
redeemable preferred securities of subsidiary trusts.
On January 1, 1998, Citicorp adopted the U.S. bank regulatory agencies amendment
to their risk-based capital guidelines to incorporate market risk in the
measurement of net risk-adjusted assets. The adoption of the market risk
guidelines did not have a significant impact on net risk-adjusted assets.
- --------------------------------------------------------------------------------
58
<PAGE>
Citicorp's subsidiary depository institutions are subject to the risk-based
capital guidelines issued by their respective primary federal bank regulatory
agencies, which are generally similar to the FRB's guidelines. At September 30,
1998, all of Citicorp's subsidiary depository institutions were "well
capitalized" under the federal bank regulatory agencies' definitions.
Commercial Credit Company (CCC)
CCC issues commercial paper directly to investors and maintains unused credit
availability under committed revolving credit agreements at least equal to the
amount of commercial paper outstanding. Currently CCC has unused credit
availability of $3.7 billion under five-year revolving credit facilities,
including the $300 million referred to on page 57, and $1.4 billion in 364-day
facilities including the $50 million referred to on page 57, and $500 million
under the 60-day facility referred to on page 57. CCC may borrow under its
revolving credit facilities at various interest rate options (LIBOR, CD, base
rate or money market) and compensates the banks for the facilities through
commitment fees.
CCC is limited by covenants in its revolving credit agreements as to the amount
of dividends and advances that may be made to its parent or its affiliated
companies. At September 30, 1998, CCC would have been able to remit $751 million
to its parent under its most restrictive covenants.
Travelers Property Casualty Corp. (TAP)
TAP also issues commercial paper directly to investors and maintains unused
credit availability under a committed revolving credit agreement at least equal
to the amount of commercial paper outstanding.
TAP has a five-year revolving credit facility in the amount of $250 million with
a syndicate of banks that expires in December 2001. TAP may borrow under this
revolving credit facility at various interest rate options (LIBOR or base rate)
and compensates the banks for the facility through commitment fees. Under this
facility, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1998, this
requirement was exceeded by approximately $4.0 billion. At September 30, 1998,
there were no borrowings outstanding under this facility.
TAP's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $805 million in 1998 without
prior approval of the Connecticut Insurance Department. TAP has received $430
million of dividends from its insurance subsidiaries during the first nine
months of 1998.
Salomon Smith Barney
Salomon Smith Barney's total assets were $238 billion at September 30, 1998,
compared to $277 billion at December 31, 1997. Due to the nature of trading
activities, including matched book activities, it is not uncommon for asset
levels to fluctuate from period to period. A "matched book" transaction involves
a security purchased under an agreement to resell (i.e., reverse repurchase
transaction) and simultaneously sold under an agreement to repurchase (i.e.,
repurchase transaction). Salomon Smith Barney's balance sheet is highly liquid,
with the vast majority of its assets consisting of marketable securities and
collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides Salomon Smith
Barney with flexibility in financing and managing its business. Salomon Smith
Barney monitors and evaluates the adequacy of its capital and borrowing base on
a daily basis in order to allow for flexibility in its funding, to maintain
liquidity and to ensure that its capital base supports the regulatory capital
requirements of its subsidiaries.
- --------------------------------------------------------------------------------
59
<PAGE>
Financial instruments and commodities owned and contractual commitments declined
as a result of decreased inventory positions in U.S. and Non-government and
agency securities. The decline in U.S. government and government agency
securities can, in part, be attributed to the risk reduction of the U.S. Fixed
Income Arbitrage business while the decline in Non-U.S. government and
government agency long and short securities is primarily FAS No. 127 related.
Financial instruments and commodities sold, not yet purchased and contractual
commitments decreased as a result of a decline in Non-U.S. government and
government agency securities. This decline is the result of a decrease in
inventory positions of Japanese and United Kingdom government bonds.
Salomon Smith Barney has a $1.5 billion revolving credit agreement with a bank
syndicate that extends through May 2001, and a $3.5 billion 364-day revolving
credit agreement that extends through May 1999. Salomon Smith Barney may borrow
under its revolving credit facilities at various interest rate options (LIBOR,
CD or base rate) and compensates the banks for the facilities through commitment
fees. Under these facilities Salomon Smith Barney is required to maintain a
certain level of consolidated adjusted net worth (as defined in the agreements).
At September 30, 1998, this requirement was exceeded by approximately $2.8
billion. At September 30, 1998, there were no outstanding borrowings under
either facility. Salomon Smith Barney also has substantial borrowing
arrangements consisting of facilities that it has been advised are available,
but where no contractual lending obligation exists. These arrangements are
reviewed on an ongoing basis to ensure flexibility in meeting short-term
requirements.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Term debt totaled $20.9 billion at September 30, 1998,
compared with $19.1 billion at December 31, 1997.
Salomon Smith Barney's borrowing relationships are with a broad range of banks,
financial institutions and other firms from which it draws funds. The volume of
borrowings generally fluctuates in response to changes in the level of
securities inventories, customer balances, the amount of reverse repurchase
transactions outstanding (i.e., purchases of securities under agreements to
resell the same security) and securities borrowed transactions. As these
activities increase, borrowings generally increase to fund the additional
activities. Availability of financing can vary depending upon market conditions,
credit ratings and the overall availability of credit to the securities
industry. Salomon Smith Barney seeks to expand and diversify its funding mix as
well as its creditor sources. Concentration levels for these sources,
particularly for short-term lenders, are closely monitored both in terms of
single investor limits and daily maturities.
Salomon Smith Barney monitors liquidity by tracking asset levels, collateral and
funding availability to maintain flexibility to meet its financial commitments.
As a policy, Salomon Smith Barney attempts to maintain sufficient capital and
funding sources in order to have the capacity to finance itself on a fully
collateralized basis in the event that its access to uncollateralized financing
is temporarily impaired. Its liquidity management process includes a contingency
funding plan designed to ensure adequate liquidity even if access to
uncollateralized funding sources is severely restricted or unavailable. This
plan is reviewed periodically to keep the funding options current and in line
with market conditions. The management of this plan includes an analysis which
is utilized to determine the ability to withstand varying levels of stress,
which could impact its liquidation horizons and required margins. In addition,
Salomon Smith Barney monitors its leverage and capital ratios on a daily basis.
Salomon Smith Barney's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt, preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of Salomon Smith Barney's holdings of "Brady Bonds," but
include such securities to the extent they are not collateralized. The trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $4.9 billion at September 30, 1998, the largest high yield exposure to
one counterparty was $280 million.
As of October 1, 1998, Salomon Smith Barney had mark-to-market exposure to hedge
funds of $2.122 billion, collateralized by $2.167 billion of cash and government
securities, resulting in excess collateral of $45 million. Within these amounts,
certain hedge funds have collateral in excess of the mark-to-market deficit, and
others have deficits in excess of collateral held. The total exposure to hedge
funds with mark-to-market deficits in excess of collateral held is
- --------------------------------------------------------------------------------
60
<PAGE>
$48 million. No single hedge fund had a mark-to-market deficit of more than $8
million in excess of collateral held from that hedge fund. Mark-to-market
exposure includes those hedge funds that owe Salomon Smith Barney on foreign
exchange and derivative contracts such as swaps, swap options, and other
over-the-counter options and only the uncollateralized portion of receivables on
reverse repurchase and repurchase agreements. This exposure can change
significantly as a result of extreme market movements.
In addition, Salomon Smith Barney has no unsecured loans or loan commitments to
hedge funds. Salomon Smith Barney has no investments in hedge funds other than
an investment in Long-Term Capital Management, LP, made in concert with a
consortium of banks and securities firms.
The following table shows the results of Salomon Smith Barney's value at risk
(VAR) analysis, which includes substantially all of its financial assets and
liabilities, including all financial instruments and commodities owned and sold,
contractual commitments, repurchase and resale agreements, and related funding
at September 30, 1998 and December 31, 1997. The VAR relating to non-trading
instruments has been excluded from this analysis.
- -------------------------------------------------------------------------------
In Millions of Dollars September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------
Interest rate $46 $41
Equities 4 8
Commodities 8 8
Currency 18 9
Diversification benefit (24) (22)
--------------------------------------------
Total $52 $44
- -------------------------------------------------------------------------------
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating the above market amounts, Salomon Smith Barney used
a 95% confidence level and a one day interval. The standard deviations and
correlation assumptions are based on historical data and reflect a horizon of
one year or more and no more than five years. VAR reflects the risk profile of
Salomon Smith Barney at a point in time and is not a predictor of future
results.
The Travelers Insurance Company (TIC)
At September 30, 1998, TIC had $25.3 billion of life and annuity product deposit
funds and reserves. Of that total, $13.7 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.6 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal is $2.2 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 4.8%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.3 billion of liabilities is surrenderable without charge. More than 15% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
TIC issues commercial paper to investors and maintains unused committed
revolving credit facilities at least equal to the amount of commercial paper
outstanding. TIC may borrow under this revolving credit facility at various rate
options (LIBOR, CD or base rate) and compensates the banks for the facility
through commitment fees.
TIC is subject to various regulatory restrictions that limit the maximum amount
of dividends available to its parent without prior approval of the Connecticut
Insurance Department. A maximum of $551 million of statutory surplus is
available in 1998 for such dividends without the prior approval of the
Connecticut Insurance Department, of which $110 million has been paid during the
first nine months of 1998.
- --------------------------------------------------------------------------------
61
<PAGE>
- --------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The tables below provide data on the notional principal amounts and maturities
of end-user (non-trading) derivatives, along with additional data on end-user
interest rate swaps and net purchased option positions at the end of the third
quarter of 1998.
End-User Derivative Interest Rate and Foreign Exchange Contracts
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of September 30,
Notional Principal Amounts(1) 1998 Amount Maturing
- ----------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Within 1 to 2 to 3 to 4 to After
In Billions of Dollars 1998 1997 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate products
Futures contracts $ 32.7 $ 29.3 74% 22% 2% 2% --% --%
Forward contracts 7.8 6.9 97 1 -- -- -- 2
Swap agreements 120.2 122.8 33 17 11 8 11 20
Option contracts 10.7 20.1 45 26 6 5 2 16
Foreign exchange products
Futures and forward contracts 67.4 67.2 94 4 -- 1 1 --
Cross-currency swaps 5.8 4.8 6 13 9 25 31 16
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes third-party and intercompany contracts.
- --------------------------------------------------------------------------------
End-User Interest Rate Swaps and Net Purchased Options as of September 30, 1998
<TABLE>
<CAPTION>
Remaining Contracts Outstanding at September 30,
-------------------------------------------------------------------------
Notional Principal Amounts In Billions of Dollars 1998 1999 2000 2001 2002 2003
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Receive fixed swaps $84.4 $67.1 $52.9 $40.5 $31.4 $19.4
Weighted-average fixed rate 6.6% 6.6% 6.5% 6.6% 6.6% 6.9%
Pay fixed swaps 17.3 9.2 7.1 6.1 5.4 4.4
Weighted-average fixed rate 6.3% 6.4% 6.4% 6.5% 6.6 6.7
Basis swaps 18.5 4.7 0.5 0.3 0.3 0.2
Purchased caps (including collars) 4.7 2.3 -- -- -- --
Weighted-average cap rate purchased 6.7 6.7% -- -- -- --
Purchased floors 2.2 0.7 0.7 0.1 0.1 0.1
Weighted-average floor rate purchased 5.1 5.1 5.1 5.8% 5.8% 5.8%
Written floors related to purchased caps (collars) .5 0.3 -- -- -- --
Weighted-average floor rate written 6.1% 5.1 -- -- -- --
Written caps related to other purchased caps(1) 3.3 2.5 2.3 2.3 1.8 1.6
Weighted-average cap rate written 8.9 9.8% 9.8% 9.8% 10.6% 10.7
- ---------------------------------------------------------------------------------------------------------------------------------
Three-month forward LIBOR rates(2) 5.3% 4.5% 4.7% 5.0% 5.3% 5.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes written options related to purchased options embedded in other
financial instruments.
(2) Represents the implied forward yield curve for three-month LIBOR as of
September 30, 1998, provided for reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
62
<PAGE>
Cash-Basis, Renegotiated, and Past Due Loans (1)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
In Millions of Dollars 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial cash-basis loans
Collateral dependent (at lower of cost or collateral value)(2) $ 170 $ 258 $ 271
Other(3) 1,110 806 698
-------------------------------------------
Total $1,280 $1,064 $ 969
- ----------------------------------------------------------------------------------------------------------------
Commercial cash-basis loans
In U.S. offices $ 204 $ 296 $ 336
In offices outside the U.S.(3) 1,076 768 633
-------------------------------------------
Total $1,280 $1,064 $ 969
- ----------------------------------------------------------------------------------------------------------------
Commercial renegotiated loans
In U.S. offices $ -- $ 20 $ 19
In offices outside the U.S. 48 39 51
-------------------------------------------
Total $ 48 $ 59 $ 70
- ----------------------------------------------------------------------------------------------------------------
Consumer loans on which accrual of interest had been suspended
In U.S. offices $ 753 $ 967 $ 981
In offices outside the U.S. 1,304 993 1,013
-------------------------------------------
Total $2,057 $1,960 $1,994
- ----------------------------------------------------------------------------------------------------------------
Accruing loans 90 or more days delinquent(4)
In U.S. offices $ 545 $ 606 $ 535
In offices outside the U.S. 492 467 470
-------------------------------------------
Total $1,037 $1,073 $1,005
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For a discussion of risks in the consumer loan portfolio and of commercial
cash-basis loans, see pages 28 and 32, respectively.
(2) A cash-basis loan is defined as collateral dependent when repayment is
expected to be provided solely by the underlying collateral and there are
no other available and reliable sources of repayment, in which case the
loans are written down to the lower of cost or collateral value.
(3) Includes foreign currency derivative contracts with a balance sheet credit
exposure of $44 million and $59 million at September 30, 1998 and December
31, 1997, respectively, for which the recognition of revaluation gains has
been suspended.
(4) Includes Consumer loans of $1.0 billion, $1.0 billion, and $983 million at
September 30, 1998, December 31, 1997, and September 30, 1997, of which
$284 million, $240 million, and $250 million, respectively, are
government-guaranteed student loans.
- --------------------------------------------------------------------------------
Other Real Estate Owned (OREO) and Assets Pending Disposition (1)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
In Millions of Dollars 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer OREO $ 260 $ 275 $ 325
Commercial OREO 345 461 479
-------------------------------------------
Total $ 605 $ 736 $ 804
- ----------------------------------------------------------------------------------------------------------------
Assets pending disposition(2) $ 103 $ 96 $ 88
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Carried at lower of cost or collateral value.
(2) Represents consumer residential mortgage loans that have a high
probability of foreclosure.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
63
<PAGE>
Details of Credit Loss Experience
<TABLE>
<CAPTION>
3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
In Millions of Dollars 1998 1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate allowance for credit losses at beginning of period $ 6,629 $ 6,259 $ 6,237 $ 6,225 $ 6,147
------------------------------------------------------------------
Provision for credit losses 826 656 595 557 559
------------------------------------------------------------------
Gross credit losses
Consumer
In U.S. offices 423 468 410 423 448
In offices outside the U.S. 262 246 207 209 219
Commercial
In U.S. offices 57 3 9 11 11
In offices outside the U.S. 216 81 76 56 42
------------------------------------------------------------------
958 798 702 699 720
------------------------------------------------------------------
Credit recoveries
Consumer
In U.S. offices 58 64 60 71 83
In offices outside the U.S. 69 61 53 60 59
Commercial
In U.S. offices 27 51 11 27 20
In offices outside the U.S. 14 4 18 11 24
------------------------------------------------------------------
168 180 142 169 186
------------------------------------------------------------------
Net credit losses
In U.S. offices 395 356 348 336 356
In offices outside the U.S. 395 262 212 194 178
------------------------------------------------------------------
790 618 560 530 534
------------------------------------------------------------------
Other, net(1) 39 332 (13) (15) 53
------------------------------------------------------------------
Aggregate allowance for credit losses at end of period 6,704 6,629 6,259 6,237 6,225
Reserves for securitization activities 66 61 70 85 89
------------------------------------------------------------------
Total credit loss reserves $ 6,770 $ 6,690 $ 6,329 $ 6,322 $ 6,314
- ---------------------------------------------------------------------------------------------------------------------------------
Net consumer credit losses $ 558 $ 589 $ 504 $ 501 $ 525
As a percentage of average consumer loans 1.80% 1.93% 1.75% 1.68% 1.77%
Net commercial credit losses 232 $ 29 $ 56 $ 29 $ 9
As a percentage of average commercial loans 1.07% 0.14% 0.28% 0.15% 0.05%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1998 second quarter reflects the addition of $320 million of credit
loss reserves related to the acquisition of UCS. The remaining amounts
primarily include the effects of foreign currency translation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
64
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Citicorp Average Balances and Interest Rates (Taxable Equivalent Basis) -- Quarterly (1)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Average Volume Interest Revenue/Expense % Average Rate
---------------------------------------------------------------------------------------
3rd 2nd 3rd 3rd 2nd 3rd 3rd 2nd 3rd
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
In Millions of Dollars 1998 1998 1997 1998 1998 1997 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (Net of Unearned Income)(3)
Consumer Loans
In U.S. Offices $ 58,076 $ 59,896 $ 55,953 $1,549 $1,517 $1,476 10.58 10.16 10.47
In Offices Outside the U.S.(4) 51,880 50,547 51,603 1,639 1,553 1,590 12.53 12.32 12.22
-----------------------------------------------------------------
Total Consumer Loans 109,956 110,443 107,556 3,188 3,070 3,066 11.50 11.15 11.31
-----------------------------------------------------------------
Commercial Loans
In U.S. Offices
Commercial and Industrial 11,395 11,327 10,912 229 230 242 7.97 8.14 8.80
Mortgage and Real Estate 2,365 3,088 2,458 51 67 63 8.56 8.70 10.17
Loans to Financial Institutions 354 279 523 8 9 10 8.97 12.94 7.59
Lease Financing 2,939 2,928 3,085 47 47 53 6.34 6.44 6.82
In Offices Outside the U.S.(4) 65,889 63,205 52,067 1,808 1,674 1,380 10.89 10.62 10.52
-----------------------------------------------------------------
Total Commercial Loans 82,942 80,827 69,045 2,143 2,027 1,748 10.25 10.06 10.04
-----------------------------------------------------------------
Total Loans 192,898 191,270 176,601 5,331 5,097 4,814 10.96 10.69 10.81
-----------------------------------------------------------------
Federal Funds Sold and Resale Agreements
In U.S. Offices 6,434 6,673 6,431 67 59 82 4.13 3.55 5.06
In Offices Outside the U.S.(4) 5,853 5,869 6,306 107 128 141 7.25 8.75 8.87
-----------------------------------------------------------------
Total 12,287 12,542 12,737 174 187 223 5.62 5.98 6.95
-----------------------------------------------------------------
Securities, At Fair Value
In U.S. Offices
Taxable 9,777 10,371 7,998 92 106 88 3.73 4.10 4.37
Exempt from U.S. Income Tax 3,104 2,828 2,642 49 42 43 6.26 5.96 6.46
In Offices Outside the U.S.(4) 25,263 23,164 21,672 626 510 425 9.83 8.83 7.78
-----------------------------------------------------------------
Total 38,144 36,363 32,312 767 658 556 7.98 7.26 6.83
-----------------------------------------------------------------
Trading Account Assets(5)
In U.S. Offices 4,639 5,452 4,828 86 84 67 7.35 6.18 5.51
In Offices Outside the U.S.(4) 10,240 11,487 10,061 227 242 169 8.79 8.45 6.66
-----------------------------------------------------------------
Total 14,879 16,939 14,889 313 326 236 8.35 7.72 6.29
-----------------------------------------------------------------
Loans Held for Sale, In U.S. Offices 5,188 4,525 4,150 147 137 120 11.24 12.14 11.47
Deposits at Interest with Banks(4) 15,338 14,404 15,005 263 267 258 6.80 7.43 6.82
-----------------------------------------------------------------
Total Interest-Earning Assets 278,734 276,043 255,694 $6,995 $6,672 $6,207 9.96 9.69 9.63
-----------------------------------------------------
Non-Interest-Earning Assets(5) 52,862 50,511 43,103
-----------------------------------
Total Assets $331,596 $326,554 $298,797
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits
In U.S. Offices
Savings Deposits $ 31,400 $ 31,094 $ 26,683 $ 237 $ 229 $ 203 2.99 2.95 3.02
Other Time Deposits 10,466 10,698 12,695 122 121 152 4.62 4.54 4.75
In Offices Outside the U.S.(4) 149,368 146,711 130,825 2,621 2,433 2,083 6.96 6.65 6.32
-----------------------------------------------------------------
Total 191,234 188,503 170,203 2,980 2,783 2,438 6.18 5.92 5.68
-----------------------------------------------------------------
Trading Account Liabilities(5)
In U.S. Offices 2,315 3,698 2,288 36 48 31 6.17 5.21 5.38
In Offices Outside the U.S.(4) 2,377 2,578 2,851 30 37 47 5.01 5.76 6.54
-----------------------------------------------------------------
Total 4,692 6,276 5,139 66 85 78 5.58 5.43 6.02
-----------------------------------------------------------------
Purchased Funds and Other Borrowings
In U.S. Offices 12,607 12,708 14,156 154 165 212 4.85 5.21 5.94
In Offices Outside the U.S.(4) 10,165 9,056 8,225 360 309 256 14.05 13.69 12.35
-----------------------------------------------------------------
Total 22,772 21,764 22,381 514 474 468 8.96 8.74 8.30
-----------------------------------------------------------------
Long-Term Debt
In U.S. Offices 15,388 17,773 15,469 241 245 240 6.21 5.53 6.16
In Offices Outside the U.S.(4) 3,229 3,218 4,249 77 76 95 9.46 9.47 8.87
-----------------------------------------------------------------
Total 18,617 20,991 19,718 318 321 335 6.78 6.13 6.74
-----------------------------------------------------------------
Total Interest-Bearing Liabilities 237,315 237,534 217,441 $3,878 $3,663 $3,319 6.48 6.19 6.06
-----------------------------------------------------
Demand Deposits in U.S. Offices 10,306 10,031 11,375
Other Non-Interest-Bearing Liabilities(5) 62,495 57,485 48,445
Total Stockholders' Equity 21,480 21,504 21,536
-----------------------------------
Total Liabilities and Stockholders' Equity $331,596 $326,554 $298,797
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST-EARNING ASSETS
In U.S. Offices(6) $104,297 $107,392 $ 99,040 $1,325 $1,281 $1,264 5.04 4.78 5.06
In Offices Outside the U.S.(6) 174,437 168,651 156,654 1,792 1,728 1,624 4.08 4.11 4.11
-----------------------------------------------------------------
Total $278,734 $276,043 $255,694 $3,117 $3,009 $2,888 4.44 4.37 4.48
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The taxable equivalent adjustment is based on the U.S. federal statutory
tax rate of 35%.
(2) Interest rates and amounts include the effects of risk management
activities associated with the respective asset and liability categories.
(3) Includes cash-basis loans.
(4) Average rates reflect prevailing local interest rates including
inflationary effects and monetary correction in certain countries.
(5) The fair value carrying amounts of derivative and foreign exchange
contracts are reported in non-interest-earning assets and other
non-interest-bearing liabilities.
(6) Includes allocations for capital and funding costs based on the location
of the asset.
- --------------------------------------------------------------------------------
65
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Citicorp Average Balances and Interest Rates (Taxable Equivalent Basis) -- Nine Months(1)(2)
- -----------------------------------------------------------------------------------------------------------------------------
Interest
Average Volume Revenue/Expense % Average Rate
------------------------------------------------------------------------
9 Months 9 Months 9 Months 9 Months 9 Months 9 Months
In Millions of Dollars 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans (Net of Unearned Income)(3)
Consumer Loans
In U.S. Offices $ 57,976 $ 55,580 $ 4,479 $ 4,327 10.33 10.41
In Offices Outside the U.S.(4) 50,653 51,562 4,688 4,771 12.37 12.37
------------------------------------------------
Total Consumer Loans 108,629 107,142 9,167 9,098 11.28 11.35
------------------------------------------------
Commercial Loans
In U.S. Offices
Commercial and Industrial 11,346 10,210 687 665 8.10 8.71
Mortgage and Real Estate 2,743 2,771 180 190 8.77 9.17
Loans to Financial Institutions 330 583 28 37 11.34 8.49
Lease Financing 2,958 3,032 144 151 6.51 6.66
In Offices Outside the U.S.(4) 62,893 49,197 5,066 3,946 10.77 10.72
------------------------------------------------
Total Commercial Loans 80,270 65,793 6,105 4,989 10.17 10.14
------------------------------------------------
Total Loans 188,899 172,935 15,272 14,087 10.81 10.89
------------------------------------------------
Federal Funds Sold and Resale Agreements
In U.S. Offices 7,254 7,264 219 281 4.04 5.17
In Offices Outside the U.S.(4) 5,979 5,581 384 357 8.59 8.55
------------------------------------------------
Total 13,233 12,845 603 638 6.09 6.64
------------------------------------------------
Securities, At Fair Value
In U.S. Offices
Taxable 9,612 9,213 291 331 4.05 4.80
Exempt from U.S. Income Tax 2,859 2,610 135 127 6.31 6.51
In Offices Outside the U.S.(4) 23,609 20,292 1,587 1,238 8.99 8.16
------------------------------------------------
Total 36,080 32,115 2,013 1,696 7.46 7.06
------------------------------------------------
Trading Account Assets(5)
In U.S. Offices 5,559 4,844 270 207 6.49 5.71
In Offices Outside the U.S.(4) 10,542 9,849 624 546 7.91 7.41
------------------------------------------------
Total 16,101 14,693 894 753 7.42 6.85
------------------------------------------------
Loans Held for Sale, In U.S. Offices 4,443 3,562 393 332 11.83 12.46
Deposits at Interest with Banks(4) 14,566 14,014 812 727 7.45 6.94
------------------------------------------------
Total Interest-Earning Assets 273,322 250,164 $ 19,987 $ 18,233 9.78 9.74
------------------------------------------------
Non-Interest-Earning Assets(5) 50,366 42,134
------------------------
Total Assets $323,688 $292,298
- -----------------------------------------------------------------------------------------------------------------------------
Deposits
In U.S. Offices
Savings Deposits $ 30,854 $ 26,768 $ 690 $ 591 2.99 2.95
Other Time Deposits 10,785 12,624 372 438 4.61 4.64
In Offices Outside the U.S.(4) 144,247 127,354 7,323 6,059 6.79 6.36
------------------------------------------------
Total 185,886 166,746 8,385 7,088 6.03 5.68
------------------------------------------------
Trading Account Liabilities(5)
In U.S. Offices 3,468 2,222 144 92 5.55 5.54
In Offices Outside the U.S.(4) 2,368 2,597 99 135 5.59 6.95
------------------------------------------------
Total 5,836 4,819 243 227 5.57 6.30
------------------------------------------------
Purchased Funds and Other Borrowings
In U.S. Offices 12,429 14,821 469 674 5.05 6.08
In Offices Outside the U.S.(4) 9,158 7,653 948 659 13.84 11.51
------------------------------------------------
Total 21,587 22,474 1,417 1,333 8.78 7.93
------------------------------------------------
Long-Term Debt
In U.S. Offices 16,163 15,029 722 681 5.97 6.06
In Offices Outside the U.S.(4) 3,481 4,505 238 321 9.14 9.53
------------------------------------------------
Total 19,644 19,534 960 1,002 6.53 6.86
------------------------------------------------
Total Interest-Bearing Liabilities 232,953 213,573 $ 11,005 $ 9,650 6.32 6.04
------------------------------------------------
Demand Deposits in U.S. Offices 10,616 10,976
Other Non-Interest-Bearing Liabilities(5) 58,787 46,709
Total Stockholders' Equity 21,332 21,040
------------------------
Total Liabilities and Stockholders' Equity $323,688 $292,298
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST-EARNING ASSETS
In U.S. Offices (6) $105,108 $ 99,866 $ 3,841 $ 3,753 4.89 5.02
In Offices Outside the U.S. (6) 168,214 150,298 5,141 4,830 4.09 4.30
------------------------------------------------
Total $273,322 $250,164 $ 8,982 $ 8,583 4.39 4.59
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The taxable equivalent adjustment is based on the U.S. federal statutory
tax rate of 35%.
(2) Interest rates and amounts include the effects of risk management
activities associated with the respective asset and liability categories.
(3) Includes cash-basis loans.
(4) Average rates reflect prevailing local interest rates including
inflationary effects and monetary correction in certain countries.
(5) The fair value carrying amounts of derivative and foreign exchange
contracts are reported in non-interest-earning assets and other
non-interest-bearing liabilities.
(6) Includes allocations for capital and funding costs based on the location
of the asset.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
66
<PAGE>
Citigroup Cross Border Outstandings And Commitments
The following table presents total cross-border outstandings and commitments on
a regulatory basis in accordance with Federal Financial Institutions Examination
Council (FFIEC) guidelines. Total cross-border outstandings include cross-border
claims on third parties as well as investments in and funding of local
franchises. See page 55 for a listing of Citicorp's cross-border outstandings
and commitments at September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------------------------------------------------------------------- -----------------------
Trading and
Cross-Border Claims on Short-Term Investments Total
Third Parties Claims(1) in and Cross- Total
--------------------------------- ----------------- Funding Border Cross-Border
In Billions of Citi- of Local Outstand Commit- Outstand- Commit-
Dollars Banks Public Private Total SSB corp Franchises ings ments(2) ings ments(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $4.0 $13.3 $1.9 $19.2 $14.6 $4.2 $0.2 $19.4 (3) $1.7 $15.1 (3) $1.7
Italy 1.3 13.2 1.1 15.6 13.8 1.7 1.7 17.3 (3) 1.0 15.9 (3) 0.5
Japan 1.5 9.8 2.2 13.5 11.3 1.6 3.1 16.6 (3) 0.2 12.7 (3) 1.1
France 2.9 3.7 2.6 9.2 5.2 3.7 0.4 9.6 (3) 1.9 9.5 (3) 0.6
United Kingdom 2.3 0.1 5.0 7.4 0.7 3.8 -- 7.4 (3) 9.0 6.5 (4) 7.8
Sweden 1.1 4.6 1.0 6.7 5.0 1.2 -- 6.7 (4) 0.8 5.9 (4) 0.7
Switzerland 3.1 -- 2.4 5.5 1.0 4.3 -- 5.5 (4) 1.3 3.7 1.1
Mexico 0.1 3.8 1.1 5.0 2.1 1.3 0.5 5.5 (4) 0.3 6.4 (4) 0.6
Spain 0.8 1.7 0.3 2.8 2.1 0.5 1.9 4.7 0.6 6.0 (4) 0.4
Brazil 0.1 1.1 2.1 3.3 0.6 1.4 1.2 4.5 -- 7.3 (3) 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in total cross-border claims on third parties. SSB refers to
Salomon Smith Barney.
(2) Commitments (not included in total cross-border outstandings) include
legally binding cross-border letters of credit and other commitments and
contingencies.
(3) Total cross-border outstandings were in excess of 1.0% of Citigroup's
total assets at the end of the respective periods.
(4) Total cross-border outstandings were between 0.75% and 1.0% of Citigroup's
total assets at the end of the respective periods.
- --------------------------------------------------------------------------------
Trading and short-term claims (included in total cross-border claims on third
parties) include cross-border debt and equity securities in the trading account,
resale agreements, trade finance receivables, net revaluation gains on foreign
exchange and derivative contracts, and other claims with a maturity of less than
one year. Under resale agreements, the counterparty has the legal obligation for
repayment; however, for purposes of the above table, resale agreements are
reported based on the domicile of the issuer of the securities that are held as
collateral, as required by FFIEC guidelines. A substantial portion of resale
agreements are with investment grade counterparties in the G-7 countries
(Canada, France, Germany, Italy, Japan, United Kingdom and the United States).
67
