Exhibit 99.02
Citigroup Inc.
Index to Supplemental Condensed Consolidated Financial Statements
(Unaudited)for the
Three Months Ended March 31, 1998
- --------------------------------------------------------------------------------
Supplemental Financial Statements (unaudited): Page No.
Supplemental Condensed Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997 1
Supplemental Condensed Consolidated Statement of Financial Position -
March 31, 1998 (Unaudited) and December 31, 1997 2
Supplemental Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) - Three Months Ended March 31, 1998 3
Supplemental Condensed Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 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 11
Other Financial Information 50
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended March 31,
------------------------------------------
In Millions, Except per Share Amounts 1998 1997
- ---------------------------------------------------------------------------------------- --------------------- --------------------
Revenues
Loan interest, including fees $ 5,344 $ 4,955
Other interest and dividends 5,787 4,706
Insurance premiums 2,340 2,224
Commissions and fees 2,875 2,558
Principal transactions 1,365 1,257
Asset management and administration fees 498 389
Realized gains from sales of investments 378 123
Other income 850 737
--------------------- ---------------------
Total revenues 19,437 16,949
Interest expense 6,641 5,431
--------------------- ---------------------
Total revenues, net of interest expense 12,796 11,518
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Provisions for benefits, claims and credit losses
Policyholder benefits and claims 1,994 1,905
Provision for credit losses 595 493
--------------------- ---------------------
Total provisions for benefits, claims and credit losses 2,589 2,398
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Operating expenses
Non-insurance compensation and benefits 3,491 3,208
Insurance underwriting, acquisition and operating 812 805
Other operating 2,436 2,149
--------------------- ---------------------
Total operating expenses 6,739 6,162
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Income before income taxes and minority interest 3,468 2,958
Provision for income taxes 1,249 1,094
Minority interest, net of income taxes 58 49
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Net income $ 2,161 $ 1,815
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Basic Earnings Per Share:
Net income $ 0.94 $ 0.77
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Weighted average common shares outstanding 2,243.3 2,257.4
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Diluted Earnings Per Share:
Net income $ 0.90 $ 0.74
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Adjusted weighted average common shares outstanding 2,328.6 2,371.3
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
1
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In Millions of Dollars March 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------- --------------------- --------------------
(Unaudited)
Assets
Cash and cash equivalents (including segregated cash and other deposits) $ 12,033 $ 12,618
Deposits at interest with banks 13,787 13,049
Investments 96,798 91,633
Federal funds sold and securities borrowed or purchased under agreements to resell 137,794 119,967
Brokerage receivables 41,303 15,627
Trading account assets 164,307 180,088
Loans, net
Consumer 117,313 119,097
Commercial 85,935 79,509
--------------------- --------------------
Loans, net of unearned income 203,248 198,606
Allowance for credit losses (6,159) (6,137)
--------------------- --------------------
Total loans, net 197,089 192,469
Reinsurance recoverables 9,622 9,579
Separate and variable accounts 12,943 11,319
Other assets 53,145 51,035
--------------------- --------------------
Total assets $738,821 $697,384
---------------------------------------------------------------------------------------- --------------------- --------------------
Liabilities
Deposits $214,719 $199,121
Investment banking and brokerage borrowings 18,195 11,464
Short-term borrowings 14,155 14,028
Long-term debt 48,697 47,387
Federal funds purchased and securities loaned or sold under agreements to repurchase 129,418 132,103
Brokerage payables 56,624 12,763
Trading account liabilities 96,468 127,152
Contractholder funds and separate and variable accounts 28,120 26,157
Insurance policy and claims reserves 43,766 43,782
Other liabilities 41,935 38,301
-----------------------------------------
Total liabilities 692,097 652,258
---------------------------------------------------------------------------------------- -----------------------------------------
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 2,395 1,995
---------------------------------------------------------------------------------------- --------------------- --------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 3,050 3,353
Common stock ($.01 par value; authorized shares: 6.0 billion;
issued shares: 1998 - 2,509,028,980 and 1997 - 2,499,949,682) 25 25
Additional paid-in capital 12,963 12,471
Retained earnings 33,698 32,002
Treasury stock, at cost (1998 - 228,273,005 shares and 1997 - 220,026,597 shares) (7,359) (6,595)
Accumulated other changes in equity from nonowner sources 1,152 1,057
Unearned compensation (680) (462)
---------------------- -------------------
Total stockholders' equity 42,849 41,851
---------------------------------------------------------------------------------------- --------------------- --------------------
Total liabilities and stockholders' equity $738,821 $697,384
---------------------------------------------------------------------------------------- --------------------- --------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
2
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (Unaudited)
Three Months Ended March 31, 1998
-----------------------------------------
In Millions of Dollars Amount Shares
---------------------------------------------------------------------------------------- --------------------- -------------------
Preferred stock, at aggregate liquidation value (in thousands)
Balance, beginning of year $ 3,353 14,831
Redemption or retirement of preferred stock (303) (3,031)
---------------------------------------------------------------------------------------- --------------------- --------------------
Balance, end of period 3,050 11,800
---------------------------------------------------------------------------------------- --------------------- --------------------
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 27 2,137
Issuance of shares pursuant to employee benefit plans 318
Other (6)
---------------------------------------------------------------------------------------- --------------------- --------------------
Balance, end of period 12,988 2,509,029
---------------------------------------------------------------------------------------- --------------------- --------------------
Retained earnings
Balance, beginning of year 32,002
Net income 2,161
Common dividends (405)
Preferred dividends (60)
---------------------------------------------------------------------------------------- ---------------------
Balance, end of period 33,698
---------------------------------------------------------------------------------------- ---------------------
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 141 9,414
Treasury stock acquired (905) (17,660)
---------------------------------------------------------------------------------------- --------------------- --------------------
Balance, end of period (7,359) (228,273)
---------------------------------------------------------------------------------------- --------------------- --------------------
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 90
Net translation adjustments, net of tax 5
---------------------------------------------------------------------------------------- ---------------------
Balance, end of period 1,152
---------------------------------------------------------------------------------------- ---------------------
Unearned compensation
Balance, beginning of year (462)
Issuance of restricted stock, net of amortization (218)
---------------------------------------------------------------------------------------- ---------------------
Balance, end of period (680)
---------------------------------------------------------------------------------------- ---------------------
Total common stockholders' equity and common shares outstanding 39,799 2,280,756
---------------------------------------------------------------------------------------- --------------------- --------------------
Total stockholders' equity $42,849
---------------------------------------------------------------------------------------- --------------------- --------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
3
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
-----------------------------------------
In Millions of Dollars 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net Income $ 2,161 $ 1,815
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of deferred policy acquisition costs and value of insurance in force 363 354
Additions to deferred policy acquisition costs (418) (446)
Other non-cash changes 950 718
Change in trading account assets 15,781 (8,126)
Change in trading account liabilities (30,684) 4,609
Change in Federal funds sold and securities purchased under agreements to resell (17,827) (15,381)
Change in Federal funds purchased and securities sold under agreements to repurchase (2,685) 18,189
Change in brokerage receivables net of brokerage payables 18,185 (1,232)
Net gain on sale of securities (378) (123)
Venture capital activity (258) (142)
Other, net 1,587 (255)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (13,223) (20)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Change in deposits at interest with banks (738) (945)
Change in loans (44,747) (27,741)
Proceeds from sales of loans 39,631 27,444
Purchases of investments (22,160) (24,818)
Proceeds from sales of investments 10,694 14,602
Proceeds from maturities of investments 8,438 5,528
Other investments, primarily short-term, net (866) (579)
Capital expenditures on premises and equipment (397) (369)
Proceeds from sales of premises and equipment, subsidiaries and affiliates,
and other real estate owned 145 230
Other, net 75 (62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,925) (6,710)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (469) (430)
Issuance of common stock 90 131
Issuance of redeemable preferred stock of subsidiaries 600 450
Redemption of preferred stock (303) (175)
Treasury stock acquired (905) (952)
Stock tendered for payment of withholding taxes (315) (97)
Issuance of long-term debt 3,367 3,750
Payments and redemptions of long-term debt (2,018) (3,090)
Change in deposits 15,598 3,893
Change in short-term borrowings including investment banking and
brokerage borrowings 6,860 2,923
Contractholder fund deposits 1,213 798
Contractholder fund withdrawals (879) (727)
Other, net (220) (29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,619 6,445
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (56) (97)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (585) (382)
Cash and cash equivalents at beginning of period 12,618 10,165
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $12,033 $ 9,783
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 639 $ 495
Cash paid during the period for interest $ 6,192 $ 5,056
Non-cash investing activities:
Transfers from loans to OREO and assets pending disposition $ 57 $ 93
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
4
Citigroup Inc. and Subsidiaries
Notes to Supplemental Condensed Consolidated Financial Statements (Unaudited)
1. Merger with Citicorp
As discussed in Note 1 of Notes to Supplemental Consolidated Financial
Statements as of December 31, 1997 and for the three years then ended
(included herewith as Exhibit 99.01), on October 8, 1998, Citicorp merged
with and into a newly formed, wholly owned subsidiary of Travelers Group
Inc. (TRV) in a transaction accounted for as a pooling of interests.
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. The following table sets forth
the results of operations for the separate companies and the combined
amounts for the three months ended March 31, 1998 and 1997.
Three Months Ended March 31,
----------------------------------------
In Millions of Dollars 1998 1997
----------------------------------------------------------------------------------- --------------------- ------------------
Revenues:
TRV $10,368 $ 8,700
Citicorp 9,069 8,249
--------------------- ------------------
Citigroup $19,437 $16,949
--------------------- ------------------
Net Income:
TRV $1,093 $ 815
Citicorp 1,065 995
SFAS No. 106 Adjustment (1) 3 3
Other (2) - 2
--------------------- ------------------
Citigroup $2,161 $1,815
----------------------------------------------------------------------------------- --------------------- ------------------
(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.
(2) Other adjustments have been made to conform the accounting policies of the
companies and to record the related tax effects of these adjustments.
- --------------------------------------------------------------------------------
2. Basis of Presentation
The accompanying supplemental condensed consolidated financial statements
as of March 31, 1998 and for the three-month periods ended March 31, 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 condensed consolidated financial statements, including the
notes thereto, should be read in conjunction with the supplemental
consolidated financial statements and related notes of Citigroup Inc. and
subsidiaries for the years ended December 31, 1997, 1996 and 1995 (the 1997
Supplemental Financial Statements).
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles, 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.
3. Changes in Accounting Principles
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 table on the next page sets forth the Company's
total changes in equity from nonowner sources under SFAS No. 130 for the
three months ended March 31, 1998 and 1997.
5
Notes to Supplemental Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31,
-----------------------------------------
In Millions of Dollars 1998 1997
----------------------------------------------------------------------------------- --------------------- -------------------
Net income $2,161 $1,815
Other changes in equity from nonowner sources, net of tax 95 (629)
--------------------- -------------------
Total changes in equity from nonowner sources $2,256 $1,186
----------------------------------------------------------------------------------- --------------------- -------------------
At March 31, 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 $1,782 million and
$1,692 million, respectively, and foreign currency translation of $(630)
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 March 31, 1998, the impact of SFAS No. 127 on
the Company's supplemental condensed consolidated statement of financial
position was an increase to total assets and liabilities of approximately
$15 billion. In addition, as a result of SFAS No. 127, certain inventory
positions, primarily Foreign government securities, have been reclassified
to receivables or payables.
4. Earnings Per Share
Three Months Ended March 31,
----------------------------------------
In Millions, Except per Share Amounts 1998 1997
----------------------------------------------------------------------------------- --------------------- ------------------
Net income $2,161 $1,815
Preferred dividends (63) (74)
--------------------- ------------------
Income available to common stockholders for
basic EPS 2,098 1,741
Effect of dilutive securities 6 10
--------------------- ------------------
Income available to common stockholders
for diluted EPS $2,104 $1,751
--------------------- ------------------
Weighted average common shares
outstanding applicable to basic EPS 2,243.3 2,257.4
Effect of dilutive securities:
Convertible securities 13.2 26.7
Options 45.3 57.2
Warrants 6.1 7.0
Restricted stock 20.7 23.0
--------------------- ------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 2,328.6 2,371.3
--------------------- ------------------
Basic earnings per share $0.94 $0.77
--------------------- ------------------
Diluted earnings per share $0.90 $0.74
----------------------------------------------------------------------------------- --------------------- ------------------
6
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:
March 31, December 31,
In Millions of Dollars 1998 1997
----------------------------------------------------------------------------------- --------------------- ------------------
Fixed maturity, primarily available for sale at fair value $81,225 $77,920
Equity securities, at fair value 3,948 3,928
Venture capital, at fair value (1) 2,857 2,599
Short-term and other 8,768 7,186
--------------------- ------------------
$96,798 $91,633
----------------------------------------------------------------------------------- --------------------- ------------------
(1) For the three months ended March 31, 1998, net gains on investments held by
venture capital subsidiaries totaled $264 million, of which $300 million
and $57 million represented gross unrealized gains and losses,
respectively. For the three months ended March 31, 1997, net gains on
investments held by venture capital subsidiaries totaled $93 million, of
which $72 million and $12 million, represented gross unrealized gains and
losses, respectively.
- --------------------------------------------------------------------------------
The amortized cost and fair value of investments in fixed maturity and
equity securities at March 31, 1998 and December 31, 1997 were as follows:
March 31, 1998 December 31, 1997 (1)
------------ ------------- ------------ ------------- --------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Amortized Fair
In Millions of Dollars Cost Gains Losses Value Cost Value
--------------------------------------------- ------------ ------------- ------------ ------------- ------------ -------------
Fixed maturity securities held to maturity,
principally mortgage- backed securities $ 38 $ 8 $ - $ 46 $ 41 $ 50
Fixed maturity securities available for
sale
Mortgage-backed securities, principally
obligations of U.S. Federal agencies $ 9,737 $ 295 $ 8 $ 10,024 $ 9,795 $ 10,099
U.S. Treasury and Federal agency 8,859 305 9 9,155 6,816 7,128
State and municipal 11,441 571 126 11,886 10,351 10,817
Foreign government 18,720 877 189 19,408 19,381 19,996
U.S. corporate 23,679 928 141 24,466 23,306 24,137
Other debt securities 6,118 176 46 6,248 5,625 5,702
------------ ------------- ------------ ------------- ------------ -------------
$ 78,554 $ 3,152 $ 519 $ 81,187 $ 75,274 $ 77,879
------------ ------------- ------------ ------------- ------------ -------------
Equity securities (2) $ 3,564 $ 440 $ 56 $ 3,948 $ 3,661 $ 3,928
- --------------------------------------------- ------------ ------------- ------------ ------------- ------------ -------------
Securities available for sale include:
Government of Brazil Brady Bonds $ 1,244 $ 548 $ - $ 1,792 $ 1,436 $ 2,048
Government of Venezuela Brady Bonds 535 - 44 491 535 480
- --------------------------------------------- ------------ ------------- ------------ ------------- ------------ ------------
(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.
7
6. Trading Account Assets and Liabilities
March 31, December 31,
In Millions of Dollars 1998 1997
-------------------------------------------------------------------------------------------- ---------------- --------------
Trading Account Assets
U.S. Treasury and Federal agency securities $ 53,609 $ 56,007
State and municipal securities 3,234 3,255
Foreign government securities 31,157 50,924
Corporate and other debt securities 19,096 16,637
Derivative and other contractual commitments (1)(2) 35,044 34,585
Equity securities 10,106 9,236
Mortgage loans and collateralized mortgage securities 4,721 3,160
Commodities 1,328 1,274
Other 6,012 5,010
---------------- --------------
$164,307 $180,088
---------------- --------------
Trading Account Liabilities
Securities sold, not yet purchased $ 58,389 $ 90,247
Derivative and other contractual commitments (1)(2) 38,079 36,905
---------------- --------------
$ 96,468 $127,152
-------------------------------------------------------------------------------------------- ---------------- --------------
(1) Net of master netting agreements. In addition, the asset balances at March
31, 1998 and December 31, 1997 are reduced by $50 million of credit loss
reserves. See page 17 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 $394 million and $391 million
at March 31, 1998 and December 31, 1997, respectively.
- -------------------------------------------------------------------------------
7. Derivative and Foreign Exchange Contracts
The table that follows presents the aggregate notional principal amounts of
Citigroup's outstanding derivative, foreign exchange and commodities
products and related risks at March 31, 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.
Notional Principal Balance Sheet
Amounts Credit Exposure (1)
----------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31, Dec. 31,
In Billions of Dollars 1998 1997 1998 1997
---------------------------------------------------------- --------------- ---------------- ---------------- --------------
Interest rate products $4,795.4 $4,314.8 $17.6 $16.9
Foreign exchange products 1,838.4 1,920.2 34.6 37.4
Equity products 136.5 127.0 6.0 4.0
Commodity products 30.7 32.5 0.9 1.2
Credit derivative products 11.1 6.9 0.2 -
---------------- --------------
59.3 59.5
Effects of master netting agreements at Citicorp (2) (23.2) (24.1)
Effects of securitization (3) (1.0) (0.8)
---------------- --------------
$35.1 $34.6
---------------------------------------------------------- --------------- ---------------- ---------------- --------------
(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:
In Millions of Dollars March 31, 1998 December 31, 1997
----------------------------------------------------------------------------------- --------------------- -------------------
Commercial paper $13,182 $ 7,110
Bank borrowings 2,271 2,415
Other 2,742 1,939
--------------------- -------------------
$18,195 $11,464
----------------------------------------------------------------------------------- --------------------- -------------------
8
Short-term borrowings consisted of commercial paper and other short-term
borrowings outstanding as follows:
In Millions of Dollars March 31, 1998 December 31, 1997
----------------------------------------------------------------------------------- --------------------- ------------------
Commercial paper
Commercial Credit Company $ 3,776 $ 3,871
Citicorp 1,911 1,941
Travelers Property Casualty Corp. 28 108
--------------------- ------------------
5,715 5,920
Other short-term borrowings 8,440 8,108
--------------------- ------------------
$14,155 $14,028
----------------------------------------------------------------------------------- --------------------- ------------------
Long-term debt, including its current portion, consisted of the following:
In Millions of Dollars March 31, 1998 December 31, 1997
----------------------------------------------------------------------------------- --------------------- -------------------
Citigroup Inc. $ 2,227 $ 1,695
Citicorp 19,409 19,035
Salomon Smith Barney Holdings Inc. 19,373 19,064
Commercial Credit Company 6,400 6,300
Travelers Property Casualty Corp. 1,250 1,249
The Travelers Insurance Group Inc. 38 44
--------------------- -------------------
$48,697 $47,387
----------------------------------------------------------------------------------- --------------------- -------------------
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 March 31,
1998, the reserve balance associated with the Salomon restructuring charge
was $729 million, reflecting $109 million of charges principally related to
severance costs.
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 $520 million remained
in the reserve as of March 31, 1998, with the difference reflecting the
$245 million of equipment and premises write-downs recorded in 1997 as well
as $101 million of primarily severance and related costs (of which $71
million has been paid in cash and $30 million is legally obligated),
together with translation effects. Through March 31, 1998, approximately
1,172 gross direct staff positions have been reduced with 522 occurring in
the 1998 first quarter.
10. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
In January 1998, Travelers Capital IV, a wholly owned subsidiary trust of
Citigroup, 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
Citigroup, 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
9
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.
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 March 31, 1998, regulatory capital as set
forth in guidelines issued by the U.S. federal bank regulators is as
follows:
Minimum
Requirement Citigroup Citicorp Citibank, N.A.
---------------------------------------------------------- ---------------- ---------------- ---------------- --------------
Tier 1 capital ratio 4.00% 8.38% 8.19% 7.99%
Total capital ratio (1) 8.00% 10.97% 12.06% 11.87%
Leverage ratio (2) 3.00%+ 5.67% 6.77% 6.25%
---------------------------------------------------------- ---------------- ---------------- ---------------- --------------
(1) Total capital includes Tier 1 and Tier 2.
(2) 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 March 31,
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 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended March 31,
--------------------- --------------------
In Millions, Except per Share Amounts 1998 1997
-------------------------------------------------------------------------------------------------------------- --------------------
Total revenues $19,437 $16,949
--------------------- --------------------
Total revenues, net of interest expense 12,796 11,518
--------------------- --------------------
Net income $2,161 $1,815
--------------------- --------------------
Earnings per share:
Basic $ 0.94 $ 0.77
--------------------- --------------------
Diluted $ 0.90 $ 0.74
--------------------- --------------------
Weighted average common shares outstanding (Basic) 2,243.3 2,257.4
Adjusted weighted average common shares outstanding (Diluted) 2,328.6 2,371.3
---------------------------------------------------------------------------------------- --------------------- --------------------
Merger with Citicorp
As discussed in Note 1 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, approximately 1.1 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 results of operations include the accounts of Citigroup and its
subsidiaries (collectively, the Company). Consolidated net income for the
quarter ended March 31, 1998 was $2.161 billion, compared to $1.815 billion in
the 1997 comparable period. Income from operations for the first quarter of 1998
increased $346 million or 19% over the comparable period in 1997, reflecting
improved performance at all business units.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 1998 and 1997.
11
Net Income
Three Months Ended March 31,
------------------------------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- --------------------
Banking Services $1,068 $ 998
Investment Services 503 412
Life Insurance Services 263 184
Property & Casualty Insurance Services 289 224
Consumer Finance Services 60 49
Corporate and Other (22) (52)
--------------------- --------------------
$2,161 $1,815
---------------------------------------------------------------------------------------- --------------------- --------------------
The following discussions present in more detail each segment's performance.
BANKING SERVICES
SUMMARY OF FINANCIAL RESULTS
Three Months Ended March 31,
------------------------------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- --------------------
Net interest revenue $2,839 $2,804
Commissions, fees and other income 2,766 2,392
--------------------- --------------------
Total revenue, net of interest expense 5,605 5,196
--------------------- --------------------
Provision for credit losses 507 423
Other operating expense 3,389 3,164
--------------------- --------------------
Total operating expense 3,896 3,587
--------------------- --------------------
Income before taxes 1,709 1,609
Income taxes 641 611
--------------------- --------------------
Net income $1,068 $ 998
---------------------------------------------------------------------------------------- --------------------- --------------------
Citicorp net income for the 1998 first quarter was $1.068 billion, up 7% from
the 1997 first quarter. Earnings growth was led by the Global Corporate Banking
businesses and Citibanking in the developed markets, partially offset by weaker
results in the consumer emerging markets businesses largely as a result of
conditions in Asia Pacific.
Global Consumer earned $458 million in the 1998 first quarter, down $35 million
or 7% from the 1997 quarter, as strong performance in the North America, Europe,
and Japan Citibanking businesses was more than offset by the effect of foreign
currency translation in Asia Pacific. Net income in Global Corporate Banking was
$753 million, up $104 million or 16%, as margin growth, driven by higher
revenue, was partially offset by increased Emerging Markets credit costs.
The Global Consumer business income before taxes in Asia Pacific (excluding
Japan and the Indian subcontinent, but including Australia and New Zealand) was
down $67 million, as decreased revenue of $77 million and an additional credit
provision of $6 million were partially offset by $17 million of lower expense.
Income before taxes in Global Corporate Banking in Asia Pacific was down $16
million, as an operating margin increase of $42 million was offset by additional
credit costs of $58 million.
12
Net Interest Revenue (Taxable Equivalent Basis) (1)
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
In Millions of Dollars 1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Interest revenue $6,320 $6,302 $6,207 $6,154 $5,872
Interest expense 3,464 3,431 3,319 3,278 3,053
--------------------------------------------------------------------
Net interest revenue 2,856 2,871 2,888 2,876 2,819
Effect of credit card securitization activity 640 596 565 578 630
--------------------------------------------------------------------
Total adjusted (2) $3,496 $3,467 $3,453 $3,454 $3,449
- -----------------------------------------------------------------------------------------------------------------------------------
(In Billions of Dollars)
Total average interest-earning assets $265.2 $257.0 $255.7 $252.6 $242.2
Effect of credit card securitization activity 27.4 26.3 24.8 24.7 25.1
--------------------------------------------------------------------
Total adjusted (2) $292.6 $283.3 $280.5 $277.3 $267.3
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin (%)
Total 4.37% 4.43% 4.48% 4.57% 4.72%
Effect of credit card securitization activity .48% .42% .40% .43% .51%
--------------------------------------------------------------------
Total adjusted (2) 4.85% 4.85% 4.88% 5.00% 5.23%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The taxable equivalent adjustment is based on the U.S. federal statutory
tax rate of 35%.
(2) See page 18 for discussion of the effect of credit card securitization
activity.
- -------------------------------------------------------------------------------
Net interest revenue of $2.9 billion in the 1998 first quarter was relatively
unchanged compared to the 1997 fourth quarter, and increased slightly from the
1997 first quarter. The fluctuations from both quarters resulted from an
increase in average interest-earning assets, mostly offset by a decline in the
net interest margin. This spread compression was caused by a decline in the
yields earned on assets compounded by an increase in the rates paid on
liabilities.
Core business net interest revenue compared to the 1997 fourth quarter reflected
higher rates paid on deposits in the Asia Pacific Corporate business, higher
deposit levels and related rates paid in the Corporate Banking business in Latin
America and CEEMEA, higher deposit levels in the consumer businesses in Asia
Pacific, Japan, and Latin America due to the "flight to quality" resulting from
the Asian currency crisis, and the impact of two less days in the 1998 first
quarter. These declines were largely offset by strong growth in average
interest-earning assets across most products in Global Corporate Banking.
Net interest revenue compared to the 1997 first quarter increased modestly in
relation to the 9% increase in business volumes, across most regions, especially
in Global Corporate Banking, primarily due to a sharp reduction in net interest
margins and the effect of foreign currency translation.
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 increased
slightly from both the fourth and first quarters of 1997. The adjusted net
interest margin was unchanged from the 1997 fourth quarter and down from the
1997 first quarter.
Interest revenue was relatively unchanged from the 1997 fourth quarter as
increased loan volumes in Global Corporate Banking and increased rates earned on
loans and investments in Asia Pacific were offset by the impact of two less days
in the quarter and the decline in on-balance sheet U.S. credit card loans
resulting from increased securitization activity.
Interest revenue improved 8% from the 1997 first quarter resulting from
increased average interest-earning assets, primarily loans, across most global
markets, especially Global Corporate Banking, as well as increased rates earned
on most products in Asia Pacific. These increases were partially offset by the
effect of foreign currency translation, a decline in rates earned on loans in
Europe and a decline in on-balance sheet U.S. credit card loans resulting from
increased securitization activity.
Interest expense was relatively unchanged from the 1997 fourth quarter as
increased rates paid on time deposits in Emerging Markets, primarily in Asia
Pacific, were offset by the impact of two less days in the quarter and decreased
borrowings resulting from increased card securitization activity.
Interest expense increased 13% from the 1997 first quarter resulting from
increased rates paid on higher levels of time deposits in Emerging Markets and
the Asia Pacific consumer business, and higher time deposit volumes in Global
13
Relationship Banking. These increases were offset by lower rates paid on time
deposits in the Corporate Banking business in Europe and a decline in borrowings
resulting from increased card securitization activity.
Commissions, Fees and Other Income
Commissions and Fees Revenue
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Global Consumer:
Citibanking $ 286 $ 268 7
Cards 483 472 2
Private Bank 117 113 4
-----------------------------------
Total Global Consumer 886 853 4
Global Corporate Banking and Other 514 468 10
-----------------------------------
Total adjusted (1) 1,400 1,321 6
Effect of credit card securitization activity 41 31 32
-----------------------------------
Total $1,441 $1,352 7
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Global Consumer businesses in:
Emerging markets $266 $289 (8)
Developed markets 620 564 10
-----------------------------------
Total $886 $853 4
- -----------------------------------------------------------------------------------------------------------------------------------
(1) See page 18 for discussion of the effect of credit card securitization
activity.
- -------------------------------------------------------------------------------
Total commissions and fees revenue of $1.4 billion in the 1998 first quarter
increased $89 million or 7% from the 1997 first quarter. Commissions and fees
revenue was increased in both periods by the effect of credit card
securitization activity which reflected increased servicing fees on a 9% higher
level of average securitized loans. Adjusted for the effect of credit card
securitization, commissions and fees revenue in the 1998 quarter of $1.4 billion
was up $79 million or 6% from the 1997 quarter.
Global Consumer commissions and fees revenue was up $33 million or 4% in the
first quarter from the 1997 quarter. Growth in fee revenue was led by a 10%
increase in the developed markets, and was partially offset by an 8% decrease in
the emerging markets, primarily due to the effect of foreign currency
translation, mostly in Asia Pacific. Increased assets under management led to
growth in trust, agency, and custodial fees for both Citibanking and the Private
Bank. Cards fees increased in the developed markets, were relatively flat in
Latin America, and decreased in Asia Pacific reflecting the effect of foreign
currency translation.
Global Corporate Banking and Other commissions and fees revenue increased $46
million or 10% from a year ago, primarily reflecting higher business volumes in
corporate finance and credit-related activities in Global Relationship Banking.
Emerging Markets commissions and fees revenue was relatively unchanged as
increases in most product lines in Latin America and Central and Eastern Europe,
Middle East, and Africa (CEEMEA) were offset by decreases in Asia Pacific,
reflecting the effects of foreign currency translation.
14
Trading-Related Revenue
Trading-related revenue is composed of principal transactions revenue (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.
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
By business sector:
Global Corporate Banking:
Emerging Markets $288 $215 34
Global Relationship Banking 361 322 12
-----------------------------------
Total Global Corporate Banking 649 537 21
Global Consumer and Other 79 52 52
-----------------------------------
Total $728 $589 24
- ------------------------------------------------------------------------------------------------------------------------------------
By trading activity:
Foreign exchange (1) $384 $236 63
Derivative (2) 231 198 17
Fixed income (3) 63 80 (21)
Other 50 75 (33)
-----------------------------------
Total $728 $589 24
- ------------------------------------------------------------------------------------------------------------------------------------
By income statement line:
Principal transactions $585 $495 18
Other (4) 143 94 52
-----------------------------------
Total $728 $589 24
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
- -------------------------------------------------------------------------------
Trading-related revenue in the 1998 first quarter increased $139 million from
the 1997 first quarter primarily reflecting strong foreign exchange revenue
driven by unsettled markets in certain Asian currencies and modest improvement
in derivatives revenue, partially offset by lower fixed income and other trading
results.
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 were $241 million in the 1998 first
quarter, compared with $108 million in the comparable 1997 period. The net gains
reflected gross realized gains of $263 million and $126 million, and gross
realized losses of $22 million and $18 million, in the 1998 and 1997 first
quarters. The 1998 first quarter included realized gains of $189 million related
to the sale of Brady bonds.
The fair value of securities may fluctuate over time based on general market
conditions as well as events and trends affecting specific securities.
Other Income
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Credit card securitization activity $138 $165 (16)
Venture capital 264 93 NM
Affiliate earnings 29 59 (51)
Net asset gains 31 92 (66)
Other items 37 28 32
-----------------------------------
Total $499 $437 14
- -----------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- -----------------------------------------------------------------------------------------------------------------------------------
15
The decrease in revenue related to credit card securitization activity in the
1998 first quarter principally reflected a decline in the net interest margin,
partially offset by higher average securitized volumes. The effect of credit
card securitization activity is discussed in more detail on page 18.
Venture capital revenue of $264 million in the 1998 first quarter reflected a
$171 million improvement from the low level a year ago, benefiting from
continued buoyant equity markets. 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 first quarter declined $30 million from the
year-ago quarter, primarily due to a decline in earnings in Credicard, a 33%
owned Brazilian affiliate.
Net asset gains declined by $61 million compared to the 1997 first quarter due
to gains during the 1997 period related to the refinancing agreement concluded
with Peru ($46 million) and the sale of an investment ($32 million) by Global
Relationship Banking, partially offset by investment writedowns of $20 million
in Latin America.
Provision and Credit Loss Reserves
The provision for credit losses of $507 million in the 1998 first quarter
increased $84 million or 20% from the 1997 first quarter, primarily due to
increased net write-offs in Global Corporate Banking, partially offset by a
decline in net write-offs in the Global Consumer business.
Details of net write-offs, additional provision, and the provision for credit
losses are included in the following table:
Net Write-offs, Additional Provision, and Provision for Credit Losses
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Net write-offs (recoveries):
Global Consumer (1) $887 $893 (1)
Global Corporate Banking 56 (61) NM
-----------------------------------
Total adjusted net write-offs 943 832 13
Effect of credit card securitization activity (461) (434) 6
-----------------------------------
Total $482 $398 21
- ------------------------------------------------------------------------------------------------------------------------------------
Additional provision:
Global Consumer $25 $25 -
-----------------------------------
Total $25 $25 -
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses:
Global Consumer $451 $484 (7)
Global Corporate Banking 56 (61) NM
-----------------------------------
Total $507 $423 20
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for the effect of credit card securitization activity. See page
18 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 first quarter were $887 million, down from
$893 million in the 1997 first quarter, reflecting the effect of foreign
currency translation and improvements in the U.S. mortgage business, partially
offset by an increase in Asia Pacific. Net write-offs in the quarter also
included a $15 million increase in U.S. bankcards related to the
reclassification of certain collection agency fees from operating expense. The
Global Consumer provision for credit losses included an additional provision in
excess of net write-offs of $25 million in both the 1998 and 1997 first
quarters. Net write-offs and the total provision may increase from the 1998
first quarter as a result of economic conditions, seasonal factors, the credit
performance of the portfolios, including bankruptcies, and other changes in
portfolio levels. Also, net write-offs and the total provision will increase as
a result of the acquisition of Universal Card Services from AT&T. See "Consumer
Portfolio Review" on page 25 for additional discussion of the consumer
portfolio.
16
Global Corporate Banking net write-offs in the 1998 first quarter were $56
million compared with net recoveries of $61 million in the 1997 first quarter,
which included a $50 million recovery related to the refinancing agreement
concluded with Peru. Excluding the 1997 first quarter refinancing recovery, the
increase in net write-offs is primarily attributable to higher gross write-offs
in the Emerging Markets business and lower recoveries in Global Relationship
Banking. There were no material credit losses related to derivative and foreign
exchange contracts or standby letters of credit and guarantees in either
quarter. 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 first quarter
level due to unsettled global markets, economic conditions, or other factors.
All identified losses are immediately written off and the credit loss reserves
described below 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 table below:
Credit Loss Reserves
March 31, December 31, March 31,
In Millions of Dollars 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate allowance for credit losses
Global Consumer $2,499 $2,487 $2,442
Global Corporate Banking 3,429 3,429 3,424
---------------------------------------------------
Total aggregate allowance for credit losses (1) 5,928 5,916 5,866
Reserves for securitization activities (2) 70 85 91
---------------------------------------------------
Total credit loss reserves $5,998 $6,001 $5,957
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance as a percent of total loans
Global Consumer 2.36% 2.30% 2.29%
Global Corporate Banking (3) 4.03% 4.38% 5.06%
Total 3.09% 3.16% 3.34%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes $5.828 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.
(2) Attributable to mortgage loans sold with recourse.
(3) Excludes allowance portion attributable to standby letters of credit and
guarantees, and derivative and foreign exchange contracts.
- -------------------------------------------------------------------------------
Credit loss reserves remained strong at $6.0 billion as of March 31, 1998.
Uncertainty related to the economic and credit environment, as well as higher
loan volumes, may result in further increases in the allowance for credit
losses.
Operating Expense
Operating expense of $3.4 billion in the 1998 first quarter was up $225 million
or 7% from the comparable 1997 period, 10% excluding the estimated effect of
foreign currency translation. Global Corporate Banking expense increased $163
million or 14% from the 1997 first quarter, reflecting increases of 16% in
Global Relationship Banking and 12% in Emerging Markets. Expense in Global
Consumer increased $49 million or 3%, reflecting increases in Citibanking and
the Private Bank partially offset by a decline in Cards.
Employee expense of $1.7 billion in the 1998 quarter rose $49 million or 3% from
the 1997 quarter. The increase primarily reflected salary increases and higher
staff levels related to business expansion in the emerging markets. In addition,
expense in 1998 included a $25 million charge associated with performance-based
stock options granted in 1998, and the 1997 quarter included a $72 million
charge related to performance-based stock options which vested in that quarter.
Staff levels of 94,500 at March 31, 1998 increased 4,300 (2,600 in the emerging
markets) or 5% from a year-ago.
Net premises and equipment expense of $499 million in the quarter was up $9
million or 2% from 1997. Other expense was $1.2 billion in the quarter, up $167
million or 16% from 1997. The increase primarily reflected investment spending
and higher business volumes in the emerging markets. In addition, increased
spending on technology initiatives (including Year 2000 costs), incentive
compensation, and broadly-based volume growth across most businesses and
geographic segments, all contributed to the increase.
17
As further described in the 1997 Supplemental Financial Statements, Citicorp
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 and, like other companies, has assessed and is repairing
its computer applications and business processes to provide for their continued
functionality. 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. In addition an assessment of the readiness of external
entities which it interfaces with is ongoing. Citicorp does not anticipate that
the related overall costs will be material to any single year or quarter. In
total, Citicorp's global operations and technology organization estimates that
its costs for the remediation and testing of computer applications will amount
to approximately $650 million over the three-year period from 1997 through 1999,
of which approximately $230 million has been incurred to date, including $80
million in the 1998 first quarter.
Work is also under way to prepare for the coming European economic and monetary
union, costs of which are also not expected to be material.
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,
which are expected to be substantially completed by the end of 1998, 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. It is estimated that about 1,500 new positions
will be added as part of this program, resulting in a net program reduction of
about 7,500 jobs. This charge also included approximately $245 million related
to writedowns of equipment and premises and $148 million related to lease
terminations 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 $520 million remained in
the reserve as of March 31, 1998, with the difference reflecting the $245
million of equipment and premises write-downs recorded in 1997 as well as $101
million of primarily severance and related costs (of which $71 million has been
paid in cash and $30 million is legally obligated), together with translation
effects. Through March 31, 1998, approximately 1,172 gross direct staff
positions have been reduced with 522 occurring in the 1998 first quarter.
Additional information about the 1997 restructuring charge, including the
businesses and regions affected, may be found in the 1997 Supplemental Financial
Statements.
Effect of Credit Card Securitization Activity
During the first quarter of 1998, $2.5 billion of U.S. credit card receivables
were securitized. As of March 31, 1998, the total amount of securitized
receivables, net of amortization, was $27.6 billion compared with $26.8 billion
as of December 31, 1997 and $25.4 billion as of March 31, 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 revenues over the terms of these transactions may vary
depending upon 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 or (decrease) to the
amounts reported in the Supplemental Condensed Consolidated Statement of Income
and Average Balance Sheet, and under the captions of
18
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.
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------
In Millions of Dollars 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest revenue ($640) ($630)
Commissions and fees revenue 41 31
Other income 138 165
Provision for credit losses (461) (434)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income impact of securitization $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) ($27) ($25)
Return on assets .11% .11%
Net interest margin (.48)% (.51)%
Consumer net credit loss ratio (1.02)% (.94)%
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings by Global Business Area
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Global Consumer $ 458 $ 493 (7)
Global Corporate Banking 753 649 16
-----------------------------------
Core businesses 1,211 1,142 6
Other Items (143) (144) (1)
-----------------------------------
Total Citicorp $1,068 $ 998 7
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Global Consumer:
Citibanking $198 $190 4
Cards 187 223 (16)
Private Bank 73 80 (9)
-----------------------------------
Total $458 $493 (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Global Consumer businesses in:
Emerging markets $164 $247 (34)
Developed markets 294 246 20
-----------------------------------
Total $458 $493 (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Global Corporate Banking businesses in:
Emerging Markets $499 $449 11
Global Relationship Banking 254 200 27
-----------------------------------
Total $753 $649 16
- ------------------------------------------------------------------------------------------------------------------------------------
19
Margin Analysis
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
In Millions of Dollars 1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue, net of interest expense $5,605 $5,568 $5,541 $5,311 $5,196
Effect of credit card securitization activity 461 434 408 437 434
Net cost to carry (1) (1) 4 (5) (1) (3)
-----------------------------------------------------------
Adjusted revenue 6,065 6,006 5,944 5,747 5,627
-----------------------------------------------------------
Total operating expense 3,389 3,403 4,223 3,168 3,164
Net OREO benefits (2) 12 9 16 37 10
Restructuring charge - - (880) - -
-----------------------------------------------------------
Adjusted operating expense 3,401 3,412 3,359 3,205 3,174
-----------------------------------------------------------
Operating margin 2,664 2,594 2,585 2,542 2,453
-----------------------------------------------------------
Global Consumer net write-offs 426 432 452 488 459
Effect of credit card securitization activity 461 434 408 437 434
Net cost to carry and net OREO (benefits) costs (1) (2) (1) - (4) (3) 1
-----------------------------------------------------------
Global Consumer credit costs 886 866 856 922 894
-----------------------------------------------------------
Global Corporate Banking net write-offs (recoveries) 56 29 9 (1) (61)
Net cost to carry and net OREO benefits (1) (2) (12) (5) (17) (35) (14)
-----------------------------------------------------------
Global Corporate Banking credit costs (benefits) 44 24 (8) (36) (75)
-----------------------------------------------------------
Operating margin less credit costs 1,734 1,704 1,737 1,656 1,634
Additional provision (3) 25 25 25 25 25
Restructuring charge - - 880 - -
-----------------------------------------------------------
Income before taxes 1,709 1,679 832 1,631 1,609
Income taxes 641 616 311 604 611
-----------------------------------------------------------
Net income $1,068 $1,063 $ 521 $1,027 $ 998
- -----------------------------------------------------------------------------------------------------------------------------------
(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 16 for discussion.
- -------------------------------------------------------------------------------
Global Consumer
The Global Consumer business meets the financial services needs of consumer
customers across the regions of the world.
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $3,493 $3,490 -
Adjusted operating expense 1,915 1,866 3
-----------------------------------
Operating margin 1,578 1,624 (3)
Credit costs (1) 886 894 (1)
-----------------------------------
Operating margin less credit costs 692 730 (5)
Additional provision 25 25 -
-----------------------------------
Income before taxes 667 705 (5)
Income taxes 209 212 (1)
-----------------------------------
Net income $ 458 $ 493 (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $131 $131 -
Return on assets (%) 1.42 1.53 -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the effect of credit card securitization activity and the effect
related to credit card receivables held for sale.
- --------------------------------------------------------------------------------
Global Consumer net income in the 1998 first quarter was $458 million, compared
with $493 million in 1997, primarily reflecting strong performance in the North
America, Europe, and Japan Citibanking businesses, which was more than offset by
the effect of foreign currency translation in Asia Pacific and lower Cards
earnings in Latin America. Return on assets was 1.42% in the quarter, compared
to 1.53% in 1997.
On April 2, 1998, Citicorp completed the previously announced acquisition of
Universal Card Services from AT&T. This acquisition strengthens Citibank's
position as the leading credit card issuer, adding $15 billion in customer
receivables and 13.5 million accounts for a total of $60 billion in managed
receivables and 38 million accounts in the U.S. bankcard business. In addition,
Citicorp entered into a ten-year cobranding and joint marketing agreement with
AT&T.
Total consumer accounts were 56 million as of March 31, 1998 in 57 countries and
territories. The U.S. bankcards business reported a 4% decline in accounts,
reflecting continued risk management initiatives, while accounts in other
20
consumer businesses grew by 6% from a year ago, including 17% account growth in
Latin America and 9% in Asia Pacific.
Adjusted revenue of $3.5 billion was essentially unchanged from 1997 (up 5%
excluding the effect of foreign currency translation). Net interest revenue was
essentially unchanged in the quarter, reflecting worldwide business volume
growth offset by spread compression in Asia Pacific, U.S. bankcards, and Latin
America. Excluding the effect of foreign currency translation, fee and
commission revenue increased 9%, primarily reflecting double digit growth in the
Cards and Citibanking businesses.
Adjusted operating expense of $1.9 billion grew 3%--6% excluding the effect of
foreign currency translation--in support of business volume growth, investment
product development, and increased advertising and marketing expense.
Credit costs in the quarter were $886 million, compared with $866 million in the
1997 fourth quarter and $894 million in the 1997 first quarter. The ratio of net
credit losses to average managed loans was 2.64% in the quarter, compared to
2.50% in the 1997 fourth quarter and 2.69% a year-ago.
The Global Consumer business continued to build the allowance for credit losses
with charges in excess of net write-offs of $25 million in both the 1998 and
1997 first quarters.
Net credit losses and the related loss ratios may increase from the 1998 first
quarter as a result of economic conditions, seasonal factors, the credit
performance of the portfolios, including bankruptcies, and other changes in
portfolio levels. Also, the inclusion of net credit losses and customer
receivables related to the acquisition of AT&T Universal Card Services will
increase Global Consumer net credit losses and the related loss ratio. See
"Global Consumer Portfolio Review" on page 25 and "Provision and Credit Loss
Reserves" on page 16 for additional discussion of the consumer portfolio.
Income taxes are attributed to core businesses on the basis of local tax rates,
which resulted in an effective tax rate of 31% in the first quarter, compared to
30% in the year-ago period, 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.
Citibanking
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue, net of interest expense $1,511 $1,469 3
Operating expense 1,089 1,042 5
-----------------------------------
Operating margin 422 427 (1)
Credit costs 137 148 (7)
-----------------------------------
Operating margin less credit costs 285 279 2
Additional provision (2) - NM
-----------------------------------
Income before taxes 287 279 3
Income taxes 89 89 -
-----------------------------------
Net income $ 198 $ 190 4
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $86 $82 5
Return on assets (%) 0.93 0.94 -
- -----------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- -----------------------------------------------------------------------------------------------------------------------------------
Net income from Citibanking activities--delivering a wide array of products and
services to customers through a worldwide branch network and electronic delivery
systems--was $198 million in the quarter, up $8 million or 4% from 1997,
reflecting a $36 million improvement in the developed markets of North America,
Europe, and Japan, partially offset by a decline of $28 million in the emerging
markets. Return on assets was 0.93% in the quarter, compared to 0.94% in 1997.
Revenue of $1.5 billion increased 3% in the quarter. Excluding the effect of
foreign currency translation, revenue increased 10%--10% in the developed
markets and 9% in the emerging markets, as customer accounts increased 6% to 20
21
million and average customer deposits grew 8% (15% excluding the effect of
foreign currency translation) to $99 billion. Developed markets revenue
reflected growth in all regions, including higher fee revenue and spread
improvements in the United States. Emerging markets revenue reflected business
volume and account growth in Asia Pacific and Latin America, and reduced spreads
due to higher funding costs and the maintenance of greater liquidity.
Operating expense of $1.1 billion in the quarter was up 5% from 1997. Excluding
the effect of foreign currency translation, operating expense increased 8% in
both the developed and emerging markets--reflecting account and business volume
growth, and business initiatives, including franchise expansion and new product
development.
Credit costs of $137 million in the quarter declined by $11 million or 7% from a
year ago, reflecting improvement in the U.S. and Europe, and the effect of
foreign currency translation, partially offset by higher net credit losses in
Asia Pacific. The ratio of net credit losses to average managed loans was 0.83%
in the first quarter of 1998, unchanged from the prior quarter and down from
0.91% in the 1997 first quarter. In the 1998 first quarter, the additional
provision reflected increases in Asia Pacific and Latin America that were more
than offset by reserve releases in North America due to continued credit
improvement in the mortgage portfolio.
Cards
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $1,701 $1,752 (3)
Adjusted operating expense 634 659 (4)
-----------------------------------
Operating margin 1,067 1,093 (2)
Credit costs 757 747 1
-----------------------------------
Operating margin less credit costs 310 346 (10)
Additional provision 27 25 8
-----------------------------------
Income before taxes 283 321 (12)
Income taxes 96 98 (2)
-----------------------------------
Net income $ 187 $ 223 (16)
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $29 $32 (9)
Return on assets (%) 2.62 2.83 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income from Cards worldwide--bankcards, Diners Club, and private label
cards--was $187 million in the quarter, down $36 million from a year ago,
primarily due to a decline in earnings in Credicard, a 33%-owned Brazilian
affiliate, and economic conditions in Asia Pacific, including the effect of
foreign currency translation, lower consumer spending, and more selective credit
criteria. U.S. bankcards earnings were unchanged from the 1997 first quarter.
Emerging markets earnings represented approximately 22% of Cards earnings in the
quarter compared with 41% in 1997. Cards worldwide return on managed assets
(including securitized card receivables) in the quarter was 1.35%, compared with
1.61% in the year-ago quarter.
Cards adjusted revenue of $1.7 billion in the 1998 first quarter was down 3%
from 1997. U.S. bankcards adjusted revenue was essentially unchanged; charge
volumes increased by $1.1 billion or 5% to $24.1 billion, managed receivables
were up slightly at $45.3 billion, and spreads declined as a result of
competitive pricing and changes in the portfolio mix. First quarter revenue in
emerging markets Cards was down 20%--down 2% excluding the effect of foreign
currency translation--reflecting higher loan volumes offset by reduced spreads,
and lower earnings in Credicard.
Adjusted operating expense of $634 million in the 1998 first quarter was down
$25 million or 4% from 1997, reflecting a $15 million reclassification of
certain collection agency fees from expense to credit costs in the U.S.
bankcards business. Excluding the effect of foreign currency translation,
expense was essentially unchanged--up 16% in the emerging markets, offset by a
4% decline in the developed markets. The increase in emerging markets expense
reflects franchise enhancement and expansion efforts, as well as higher loan
volumes.
Credit costs of $757 million increased $21 million from the preceding quarter
and $10 million from the 1997 quarter. Credit costs in U.S. bankcards were $668
million or 5.96% of average managed loans for the quarter, up $13 million from
$655 million or 5.64% in the 1997 fourth quarter and up $12 million from $656
million or 5.91% a year ago. The 12-month-lagged loss ratio was 6.03% in the
quarter, compared with 5.86% in the 1997 fourth quarter and 6.21% a year-ago.
22
U.S. bankcards credit costs in the quarter included a $15 million (14 bps)
increase related to the reclassification of certain collection agency fees from
operating expense. The percentage of gross write-offs from bankruptcies in the
quarter was 37.0%, compared with 40.8% in the prior quarter and 36.6% in the
1997 first quarter. U.S. bankcards managed loans delinquent 90 days or more were
$842 million or 1.88% at quarter-end, compared with $856 million or 1.80% for
the prior quarter and $884 million or 1.98% a year-ago.
Credit costs in non-U.S. bankcard portfolios were $89 million or 3.95% of
managed loans, compared with $81 million or 3.52% in the preceding quarter and
$91 million or 4.25% in the 1997 quarter. Loans delinquent 90 days or more were
$216 million or 2.30%, compared with $194 million or 2.12% in the prior quarter
and $214 million or 2.42% a year-ago. Credit costs and loans delinquent 90 days
or more primarily reflect higher amounts in Asia Pacific offset by the effect of
foreign currency translation.
Private Bank
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $281 $269 4
Adjusted operating expense 192 165 16
-----------------------------------
Operating margin 89 104 (14)
Credit benefits (8) (1) NM
-----------------------------------
Income before taxes 97 105 (8)
Income taxes 24 25 (4)
-----------------------------------
Net income $ 73 $ 80 (9)
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $16 $17 (6)
Return on assets (%) 1.85 1.91 -
- ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- ------------------------------------------------------------------------------------------------------------------------------------
Private Bank--which provides personalized wealth management services for high
net-worth clients--reported net income of $73 million in the quarter, down $7
million or 9% from the 1997 first quarter, reflecting spread compression on
revenue and increased investment spending.
Client business volumes under management at the end of the quarter reached $105
billion, up $7 billion or 7% from $98 billion a year earlier, primarily
reflecting growth and investment performance in the U.S., partially offset by a
decrease in the value of assets managed in Asia Pacific due to the effect of
foreign currency translation. Growth in custody, discretionary investment
management, banking, and trust and fiduciary balances were partially offset by
decreases in certain non-discretionary investment management activities.
Adjusted revenue of $281 million increased $12 million or 4% in the quarter--5%
excluding the effect of foreign currency translation--as growth in
client-related foreign exchange revenue and other fee revenue was partially
offset by lower net interest revenue as a result of reduced net interest
margins. Emerging markets revenue grew 6% in the quarter, reflecting increased
client revenue and investment performance fees in Latin America, partially
offset by reduced revenue from Asia Pacific resulting from the turmoil in that
market. More than 40% of revenue continued to be derived from the emerging
markets. Developed markets revenue was up 3%.
Adjusted operating expense increased 16% from the 1997 first quarter--19%
excluding the effect of foreign currency translation--primarily reflecting
investment in additional Private Bankers and product specialists, as well as
higher technology and other expense. Expense decreased $5 million or 3% from the
1997 fourth quarter.
Credit costs for the quarter were a net benefit of $8 million, primarily as a
result of recoveries in North America. Loans delinquent 90 days or more were
$186 million or 1.21% of loans, compared to $110 million or 0.72% in the
preceding quarter and $198 million or 1.28% in the first quarter of 1997. The
increase from the 1997 fourth quarter primarily reflects an increase in
nonaccrual loans in Asia Pacific.
23
Global Consumer Businesses in Emerging Markets
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $869 $948 (8)
Adjusted operating expense 554 532 4
-----------------------------------
Operating margin 315 416 (24)
Credit costs 101 91 11
-----------------------------------
Operating margin less credit costs 214 325 (34)
Additional provision 11 4 NM
-----------------------------------
Income before taxes 203 321 (37)
Income taxes 39 74 (47)
-----------------------------------
Net income $164 $247 (34)
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $41 $42 (2)
Return on assets (%) 1.62 2.39 -
- ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
Net income in the emerging markets was $164 million in the quarter, down $83
million from a year ago, and down $6 million from the 1997 fourth quarter,
reflecting the economic conditions, including weakened currencies, in Asia
Pacific, and lower earnings in Latin America Cards.
Adjusted revenue declined by 8% in the quarter. Excluding the effect of foreign
currency translation, revenue was up 5%. Business volume growth, particularly
deposits, was partially offset by reduced spreads, mainly due to higher funding
costs and the maintenance of greater liquidity. Revenue in Asia Pacific
(excluding Japan and the Indian subcontinent, but including Australia and New
Zealand) declined by 17% in the quarter, but was up 8% excluding the effect of
foreign currency translation. Adjusted operating expense grew 4%--11% excluding
the effect of foreign currency translation--reflecting account and volume growth
including "flight-to-quality" deposit flows, increased credit monitoring, and
technology initiatives.
Credit costs in the emerging markets increased $13 million from the 1997 fourth
quarter, and increased $10 million from the 1997 first quarter. The net credit
loss ratio in Asia Pacific was 0.77%, up from 0.69% in the 1997 fourth quarter
and 0.73% a year ago. The net credit loss ratio in Latin America was 1.99%
compared to 1.84% in the 1997 fourth quarter and 2.33% a year ago. Emerging
markets loans delinquent 90 days or more were $620 million or 1.85% at
quarter-end, compared with $465 million or 1.43% at December 31, 1997 and $414
million or 1.23% a year-ago, primarily reflecting increases in the Private Bank.
The emerging markets businesses built the allowance for loan losses by $11
million.
Global Consumer Businesses in Developed Markets
Three Months Ended March 31, %
-----------------------------------
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $2,624 $2,542 3
Adjusted operating expense 1,361 1,334 2
-----------------------------------
Operating margin 1,263 1,208 5
Credit costs 785 803 (2)
-----------------------------------
Operating margin less credit costs 478 405 18
Additional provision 14 21 (33)
-----------------------------------
Income before taxes 464 384 21
Income taxes 170 138 23
-----------------------------------
Net income $ 294 $ 246 20
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $90 $89 1
Return on assets (%) 1.32 1.12 -
Net income in the developed markets was $294 million in the quarter, up $48
million or 20% from 1997, principally reflecting strong performance in
Citibanking in North America, Europe, and Japan.
24
Adjusted revenue was up 3% in the quarter--5% excluding the effect of foreign
currency translation, primarily in Germany--reflecting strong growth in the
Citibanking businesses across all regions. Adjusted expense grew 2%--4%
excluding the effect of foreign currency translation--in support of regional
marketing and new product development.
Credit costs in the developed markets decreased 2% compared to the 1997 first
quarter, due to improvements in Citibanking and the Private Bank. Managed loans
delinquent 90 days or more were $2.6 billion or 2.54% at quarter-end, compared
with $2.7 billion or 2.58% at December 31, 1997 and $3.1 billion or 3.03% a year
ago. The developed markets businesses built the allowance for loan losses by $14
million.
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.
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
Total Average
Loans 90 Days or More Past Due (1) Loans Net Credit Losses (1)
---------------------------------------------------------------------------------------------
In Millions of Dollars, Mar. 31, Mar. 31, Dec. 31, Mar. 31, 1st Qtr. 1st Qtr. 4th Qtr. 1st Qtr.
except Loan Amounts in Billions 1998 1998 1997 1997 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Citibanking $ 67.7 $2,014 $2,038 $2,193 $ 66.8 $137 $139 $148
Ratio 2.97% 3.07% 3.30% 0.83% 0.83% 0.91%
Cards
U.S. Bankcards 44.8 842 856 884 45.5 668 655 656
Ratio 1.88% 1.80% 1.98% 5.96% 5.64% 5.91%
Other (2) 9.4 216 194 214 9.1 89 81 91
Ratio 2.30% 2.12% 2.42% 3.95% 3.52% 4.25%
Private Bank 15.4 186 110 198 15.1 (7) (9) (2)
Ratio 1.21% 0.72% 1.28% NM NM NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total managed 137.3 3,258 3,198 3,489 136.5 887 866 893
Ratio 2.37% 2.31% 2.58% 2.64% 2.50% 2.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Securitization activity (3)
Credit card receivables (27.6) (519) (481) (500) (27.4) (430) (403) (402)
Loans held for sale (3.8) (39) (35) (39) (3.6) (31) (31) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $105.9 $2,700 $2,682 $2,950 $105.5 $426 $432 $459
Ratio 2.55% 2.48% 2.76% 1.64% 1.60% 1.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed Portfolio
Developed $103.8 $2,638 $2,733 $3,075 $103.8 $790 $778 $801
Ratio 2.54% 2.58% 3.03% 3.09% 2.96% 3.19%
Emerging 33.5 620 465 414 32.7 97 88 92
Ratio 1.85% 1.43% 1.23% 1.21% 1.06% 1.12%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Portfolio (4)
Asia Pacific $22.5 $386 $261 $259 $22.0 $42 $39 $43
Ratio 1.72% 1.19% 1.06% 0.77% 0.69% 0.73%
Latin America 9.6 202 176 150 9.3 46 42 44
Ratio 2.10% 1.89% 1.91% 1.99% 1.84% 2.33%
CEEMEA (5) 1.4 32 28 5 1.4 9 7 5
Ratio 2.26% 2.01% 0.40% 2.78% 1.96% 1.60%
- ------------------------------------------------------------------------------------------------------------------------------------
(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) Includes bankcards outside of the U.S., worldwide Diners Club, and
private label cards.
(3) See page 18 for a description of the effect of credit card securitization
activity.
(4) Includes Private Bank and excludes Japan.
(5) Central and Eastern Europe, Middle East, and Africa.
NM Not meaningful.
25
Consumer Loan Balances, Net of Unearned Income
End of Period Average
--------------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31, 1st Qtr. 4th Qtr. 1st Qtr.
In Billions of Dollars 1998 1997 1997 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Managed $137.3 $138.4 $135.2 $136.5 $137.4 $134.6
Securitized credit card receivables (27.6) (26.8) (25.4) (27.4) (26.3) (25.1)
Loans held for sale (3.8) (3.5) (3.1) (3.6) (3.6) (3.1)
--------------------------------------------------------------------------------
Loan portfolio $105.9 $108.1 $106.7 $105.5 $107.5 $106.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquencies 90 days or more past due in the managed portfolio were $3.3
billion with a related delinquency ratio of 2.37% at March 31, 1998, compared to
$3.2 billion or 2.31% at December 31, 1997 and $3.5 billion or 2.58% a year-ago.
The increase in delinquencies from December 31, 1997 reflects an increase in the
Asia Pacific region, partially offset by improvements in U.S. Citibanking. Total
managed net credit losses in the 1998 first quarter of $887 million and the
related loss ratio of 2.64% were up from $866 million and 2.50% in the 1997
fourth quarter, but down from $893 million and 2.69% in the 1997 first quarter.
In Citibanking, managed loans delinquent 90 days or more were $2.0 billion with
a related ratio of 2.97% at March 31, 1998, compared to $2.0 billion or 3.07% at
December 31, 1997 and $2.2 billion or 3.30% at March 31, 1997, reflecting
improvements in the U.S. and the effect of foreign currency translation,
partially offset by increases in Asia Pacific and in certain countries in Latin
America. Net credit losses in the 1998 first quarter of $137 million and the
related loss ratio of 0.83% were essentially unchanged from the 1997 fourth
quarter and declined from $148 million and 0.91% a year-ago. The decrease in
losses from the 1997 first quarter primarily reflects improvement in the U.S.
and Europe, and the effect of foreign currency translation, partially offset by
higher losses in Asia Pacific.
U.S. bankcards managed loans delinquent 90 days or more were $842 million or
1.88% at quarter-end, compared with $856 million or 1.80% at December 31, 1997
and $884 million or 1.98% a year-ago. Net credit losses of $668 million and the
related loss ratio of 5.96% were up $13 million from $655 million and 5.64% in
the 1997 fourth quarter and up $12 million from $656 million and 5.91% a
year-ago. The 12-month-lagged loss ratio was 6.03% in the quarter, compared with
5.86% in the 1997 fourth quarter and 6.21% a year-ago. Net credit losses in the
quarter included a $15 million (14 bps) increase related to the reclassification
of certain collection agency fees from operating expense. Personal bankruptcies
accounted for 37.0% of gross write-offs in the quarter, compared with 40.8% in
the prior quarter and 36.6% in the 1997 first quarter.
The other Cards businesses include bankcards outside the United States,
worldwide Diners Club, and private label cards. As of the 1998 first quarter,
loans delinquent 90 days or more of $216 million and net credit losses of $89
million increased from the prior quarter by $22 million and $8 million,
respectively, primarily due to increases in Asia Pacific. Delinquencies and net
credit losses were essentially unchanged from a year-ago, reflecting increases
in Asia Pacific offset by the effect of foreign currency translation.
Private Bank loans delinquent 90 days or more were $186 million or 1.21% of
loans at March 31, 1998, compared to $110 million or 0.72% at December 31, 1997
and $198 million or 1.28% a year-ago. The increase from the 1997 fourth quarter
primarily reflects an increase in nonaccrual loans in Asia Pacific. Net
recoveries were $7 million in the 1998 first quarter, compared to $9 million in
the preceding quarter and $2 million a year-ago.
Total consumer loans on the balance sheet delinquent 90 days or more on which
interest continued to be accrued were $988 million at March 31, 1998, compared
with $1.0 billion at December 31, 1997 and $983 million at March 31, 1997.
Included in these amounts are U.S. government-guaranteed student loans of $256
million, $240 million, and $227 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 $732 million, $762 million, and $756 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 51.
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. At
March 31, 1998, interest accrual had been suspended on $1,850 million of
consumer loans, primarily consisting of Citibanking loans, compared
26
with $1,849 million at December 31, 1997 and $2,119 million at March 31, 1997.
The decline from March 31, 1997 reflects improvements in U.S. mortgages and the
effect of foreign currency translation, partially offset by increases in Asia
Pacific. U.S. mortgages on which the accrual of interest had been suspended were
$475 million at March 31, 1998, down from $514 million at December 31, 1997 and
$671 million at March 31, 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 $2.5 billion as of March 31, 1998 and December 31,
1997, up from $2.4 billion as of March 31, 1997. The aggregate allowance for
credit losses reflected an additional provision in excess of net write-offs of
$25 million in the 1998 and 1997 first quarters, as well as the 1997 fourth
quarter. The allowance as a percentage of loans on the balance sheet was 2.36%
as of March 31, 1998, compared with 2.30% at December 31, 1997 and 2.29% at
March 31, 1997. See "Provision and Credit Loss Reserves" on page 16 for further
discussion.
Net credit losses and the related loss ratios may increase from the 1998 first
quarter as a result of economic conditions, seasonal factors, the credit
performance of the portfolios, including bankruptcies, and other changes in
portfolio levels. Additionally, delinquencies and loans on which the accrual of
interest is suspended could remain at relatively high levels. Also, the
inclusion of net credit losses and customer receivables related to the
acquisition of Universal Card Services from AT&T will increase Global Consumer
net credit losses and the related loss ratio.
Global Corporate Banking
The Global Corporate Banking business serves corporations, financial
institutions, governments, investors, and other participants in capital markets
throughout the world.
Three Months Ended March 31,
----------------------------------- %
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $2,310 $1,926 20
Adjusted operating expense 1,309 1,146 14
-----------------------------------
Operating margin 1,001 780 28
Credit costs (benefits) 44 (75) NM
-----------------------------------
Income before taxes 957 855 12
Income taxes 204 206 (1)
-----------------------------------
Net income $ 753 $ 649 16
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $173 $149 16
Return on assets (%) 1.77 1.77 -
- ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
Global Corporate Banking net income was $753 million in the quarter, up $104
million or 16% from 1997. Return on average assets of 1.77% was unchanged from
the 1997 first quarter as average assets also grew 16%. Net income from the
Emerging Markets business was $499 million or 66% of total Global Corporate
Banking net income and Global Relationship Banking's net income was $254 million
or 34% of total Global Corporate Banking net income.
The results reflect improved contributions from both the Emerging Markets
business and Global Relationship Banking. Adjusted revenue in the quarter
increased $384 million or 20% (24% excluding the effect of foreign currency
translation) from the year-ago quarter, with $185 million of the increase
attributable to the Emerging Markets business (a 20% growth rate) and $199
million attributable to Global Relationship Banking (also a 20% growth rate).
Adjusted operating expense increased $163 million or 14% (18% excluding the
effect of foreign currency translation) from 1997, with $52 million of the
increase in the Emerging Markets business and $111 million in Global
Relationship Banking. Revenue growth outpaced expense growth by a 2.4 to 1
ratio, resulting in operating margin growth of $221 million or 28%. Credit costs
were $44 million, and compared with a net benefit of $75 million in 1997, which
included a $50 million recovery from the refinancing agreement concluded with
Peru. The growth in operating margin, partially offset by the growth in credit
costs, yielded a $102 million or 12% improvement in income before taxes. Net
income further benefited from a decline in the effective tax rate to 21% from
24%, attributable to changes in the nature and geographic mix of pretax
earnings. The Emerging Markets business reported an 11% improvement in net
income and Global Relationship Banking reported a 27% improvement in net income.
27
Commercial cash-basis loans at March 31, 1998 were $1.3 billion, up $280 million
and $415 million from year end and the year-ago quarter, reflecting increases in
the Emerging Markets business, primarily in Indonesia and Thailand, and
improvements in Global Relationship Banking, primarily real-estate related.
Commercial cash-basis loans in the Emerging Markets business were $967 million
at March 31, 1998, an increase of $304 million from year end and $552 million
from a year ago. Emerging Markets cash-basis loans included $83 million and $59
million at March 31, 1998 and December 31, 1997, respectively, of balance sheet
credit exposures related to foreign currency derivative contracts from several
Asian customers for which the recognition of revaluation gains has been
suspended. The amounts included a year ago were not material. Commercial OREO of
$350 million declined $111 million and $243 million from year end and the
year-ago quarter, primarily reflecting improvements in real estate in Global
Relationship Banking. See the tables entitled "Cash-Basis, Renegotiated, and
Past Due Loans" and "Other Real Estate Owned and Assets Pending Disposition" on
page 51.
Average assets of $173 billion in the 1998 first quarter increased $24 billion
or 16% from the 1997 first quarter with $17 billion of the increase in the
Emerging Markets business and $7 billion of the increase in Global Relationship
Banking. The increase primarily reflects growth in both businesses in loan
portfolio, transaction banking, and trading products together with treasury
initiatives.
Levels of trading-related and venture capital revenue and securities
transactions and net asset gains in Global Corporate Banking may fluctuate in
the future as a result of market and asset-specific factors. See pages 15 and 16
for discussions of trading-related and venture capital revenue and realized
gains from sales of investments and net asset gains that supplement the analyses
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 first quarter level
due to unsettled global markets, economic conditions, or other factors. See
"Provision and Credit Loss Reserves" on page 16 for additional discussion of the
Global Corporate Banking portfolio.
Emerging Markets
Three Months Ended March 31,
----------------------------------- %
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $1,113 $928 20
Adjusted operating expense 499 447 12
-----------------------------------
Operating margin 614 481 28
Credit costs (benefits) 63 (36) NM
-----------------------------------
Income before taxes 551 517 7
Income taxes 52 68 (24)
-----------------------------------
Net income $ 499 $449 11
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $83 $66 26
Return on assets (%) 2.44 2.76 -
- ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
Emerging Markets net income of $499 million grew $50 million or 11% from 1997.
Operating margin grew $133 million or 28%, as revenue growth outpaced expense
growth by a 3.6 to 1 ratio, but credit costs increased to $63 million, resulting
in income before taxes increasing 7% from the 1997 quarter. Net income for the
quarter benefited from a decline in the effective income tax rate due to changes
in the geographic mix and nature of pretax earnings.
Adjusted revenue in the quarter of $1.1 billion increased $185 million or 20%
(27% excluding the effect of foreign currency translation) from the year-ago
first quarter. The increase reflected a $73 million improvement in
trading-related revenue, higher realized gains from sales of investments and net
asset gains, and double-digit growth in transaction banking and corporate
finance revenue. The increase in trading-related revenue reflected improved
foreign exchange results in Asia Pacific attributable to unsettled markets in
certain Asian currencies. Aggregate realized gains from sales of investments and
net asset gains of $218 million and $154 million in the 1998 and 1997 first
quarters, respectively, included $189 million from the sale of Brady bonds in
the 1998 quarter and $46 million related to the refinancing agreement concluded
with Peru in the 1997 quarter.
28
Adjusted revenue in Asia Pacific (comprising 13 countries and territories
excluding Japan and the Indian subcontinent, but including Australia and New
Zealand) grew 15% from the 1997 first quarter due to improved trading-related
results. No single country or territory in the Emerging Markets Asia Pacific
business exceeded 2% of Citicorp's adjusted revenue or average assets. Revenue
attributed to the Embedded Bank and Emerging Local Corporate strategies,
together with new franchises, accounted for 8% of Emerging Markets revenue, up
49% from the 1997 quarter. About 21% of the revenue in the Emerging Markets
business was attributable to business from multinational companies managed
jointly with Global Relationship Banking, with that revenue having grown 27%
from the 1997 first quarter.
Adjusted operating expense of $499 million in the 1998 first quarter increased
$52 million or 12% (19% excluding the effect of foreign currency translation)
from the year-ago quarter. The growth reflected investment spending to build the
franchise, including costs associated with Citicorp's plan to gain market share
in selected emerging market countries, and broadly-based volume growth across
most products and geographic segments.
Credit costs totaled $63 million in the quarter, up from a net benefit of $36
million in the 1997 quarter, which included a $50 million recovery from the
refinancing agreement concluded with Peru. Credit costs in the 1998 quarter
increased $58 million in Asia Pacific, primarily in Thailand and Indonesia.
Recoveries in the 1998 quarter included $9 million from the refinancing
agreement concluded with the Ivory Coast.
Negotiations among the Republic of Korea and international creditor banks, which
were chaired by Citibank, were successful in extending the maturities of nearly
$22 billion in short-term loans to Korean banks. Pursuant to the terms, on April
8, 1998 Citibank exchanged $398 million of such loans for new loans guaranteed
by the Republic of Korea with maturities of one, two, and three years.
Global Relationship Banking
Three Months Ended March 31,
----------------------------------- %
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $1,197 $998 20
Adjusted operating expense 810 699 16
-----------------------------------
Operating margin 387 299 29
Credit benefits (19) (39) (51)
-----------------------------------
Income before taxes 406 338 20
Income taxes 152 138 10
-----------------------------------
Net income $ 254 $200 27
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $90 $83 8
Return on assets (%) 1.14 0.98 -
Net income of $254 million from the Global Relationship Banking business in
North America, Europe, and Japan in the 1998 first quarter increased $54 million
or 27% from 1997. Operating margin increased $88 million or 29%, and net credit
benefits declined $20 million to $19 million, resulting in a $68 million or 20%
improvement in income before taxes. Net income benefited from a decline in the
effective income tax rate to 37% from 41%.
Adjusted revenue of $1.2 billion increased $199 million or 20% from the 1997
first quarter reflecting a $171 million improvement in venture capital results
compared with the low year-ago level, a $39 million improvement in
trading-related revenue, and moderate growth in transaction banking services and
corporate finance revenue, partially offset by a $32 million gain recognized in
the 1997 quarter from the sale of an investment, and lower treasury results
attributable to a flatter yield curve.
Adjusted operating expense of $810 million increased $111 million or 16%
compared with the 1997 first quarter, primarily attributable to increased
spending on technology, higher incentive compensation, and volume-related
expense in transaction banking services.
Credit costs in the quarter were a net benefit of $19 million, down from a net
benefit of $39 million in the 1997 first quarter, due primarily to a lower level
of recoveries.
29
Other Items
Three Months Ended March 31,
----------------------------------- %
In Millions of Dollars 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue, net of interest expense $262 $211 24
Operating expense 177 162 9
-----------------------------------
Income before taxes 85 49 73
Income taxes 228 193 18
-----------------------------------
Net loss (143) (144) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets (In Billions of Dollars) $9 $5 80
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. Citicorp's effective tax rate was 38% in
both the 1998 and 1997 first quarters. Income taxes are attributed to core
businesses on the basis of local tax rates, which resulted in effective tax
rates for the core businesses of 25% in the 1998 quarter and 27% in the 1997
quarter, primarily reflecting changes in the nature and geographic mix of
earnings.
Revenue in the 1998 quarter included $19 million of gains on sales of investment
securities held in the Corporate portfolio, while the 1997 quarter reflected
investment writedowns of $20 million. Expense in the 1998 first quarter included
a $25 million charge associated with performance-based stock options granted in
January 1998, and increases in certain technology expenses and other unallocated
corporate costs. The 1997 quarter included a $72 million charge related to
performance-based stock options which vested in that quarter. Average assets in
the 1998 quarter included certain liquid assets to pre-fund the acquisition of
Universal Card Services from AT&T completed on April 2, 1998.
INVESTMENT SERVICES
Three Months Ended March 31,
--------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
In Millions of Dollars Revenues Net income Revenues Net income
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Investment banking and brokerage $5,832 $443 $4,691 $368
Asset management 225 60 186 44
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Salomon Smith Barney $6,057 $503 $4,877 $412
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Salomon Smith Barney reported net income of $503 million for the quarter ended
March 31, 1998, an increase of 22% from the $412 million reported for the
quarter ended March 31, 1997. Revenues, net of interest expense, increased 16%
to $3.134 billion in the 1998 quarter compared to $2.708 billion in the 1997
quarter. Salomon Smith Barney's return on equity was 23.1% in the first quarter
of 1998, up from 21.7% in the first quarter of 1997 and significantly better
than the 12.5% in the fourth quarter of 1997. The pretax profit margin was 25.9%
in the first quarter of 1998, significantly improved from 16.6% in the fourth
quarter of 1997.
Salomon Smith Barney Revenues
Three Months Ended March 31,
------------------------------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- --------------------
Commissions $ 795 $ 716
Investment banking 628 484
Principal transactions 780 762
Asset management and administration fees 498 389
Interest income, net (1) 395 322
Other income 38 35
--------------------- --------------------
Net revenues (1) $3,134 $2,708
---------------------------------------------------------------------------------------- --------------------- --------------------
(1) Net of interest expense of $2.923 billion and $2.169 billion for the
three-month period ended March 31, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Commission revenues increased 11% to $795 million in the first quarter of 1998
from $716 million in the first quarter of 1997. This increase is a result of
strong activity in sales of listed and over-the-counter securities and mutual
fund commissions.
30
Investment banking revenues increased 30% to $628 million in the first quarter
of 1998 up from $484 million in the first quarter of 1997. The increase in
investment banking revenues is primarily attributable to an increase in merger
and acquisition advisory fees as well as revenue growth from unit trust,
equities, high yield and investment grade debt underwriting.
Principal transaction revenues were $780 million in the first quarter of 1998,
up slightly from $762 million in the first quarter of 1997. The increase in
principal transaction revenues was a result of higher revenues from commodities
trading conducted by Phibro Inc. and was somewhat offset by a decline in
equities trading.
Asset management and administration fees increased 28% to $498 million in the
first quarter of 1998, up from $389 million in the first quarter of 1997. This
reflects broad growth in all recurring fee-based products. At March 31, 1998,
internally managed assets were $178.3 billion and total assets under fee-based
management were $245.4 billion compared to $139.2 billion and $185.9 billion,
respectively, at March 31, 1997.
Net interest and dividends increased 23% to $395 million in the first quarter of
1998, up from $322 million in the first quarter of 1997.
Compensation and benefits expense, as a percentage of net revenues, for the
first quarter of 1998 was 54.9% compared to 54.6% in the first quarter of 1997
and non-compensation expense as a percentage of net revenues was 19.2% in the
1998 quarter compared to 20.3% in the 1997 quarter. Salomon Smith Barney
continues to maintain its focus on controlling fixed expenses.
Assets Under Fee-Based Management
At March 31,
--------------------- -------------------
1998 1997
In Billions of Dollars
---------------------------------------------------------------------------------------- --------------------- -------------------
Money market funds $ 51.6 $ 43.9
Mutual funds 56.0 40.5
Managed accounts 57.4 46.3
--------------------- -------------------
Salomon Smith Barney Asset Management 165.0 130.7
Financial Consultant managed accounts 13.3 8.5
--------------------- -------------------
Total internally managed accounts 178.3 139.2
Consulting Group externally managed assets 67.1 46.7
--------------------- -------------------
Total assets under fee-based management $245.4 $185.9
---------------------------------------------------------------------------------------- --------------------- -------------------
Although included in Salomon Smith Barney's overall results, the following
highlights the revenues and operating earnings of the asset management division:
Three Months Ended March 31,
--------------------- -------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- -------------------
Revenues:
Investment advisory, administration and distribution fees $202 $168
Unit Investment Trust revenues - net 13 9
Other revenues 10 9
--------------------- -------------------
Total revenues $225 $186
Operating earnings $ 60 $ 44
---------------------------------------------------------------------------------------- --------------------- -------------------
The division's 36% 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.
Assets under fee-based management for Salomon Smith Barney Asset Management
break down to 31% in money market funds, 34% in mutual funds and 35% in accounts
managed for high net worth individuals, pension funds, corporations and other
institutions. Investment advisory, administration and distribution fees rose 20%
to $202 million in the first quarter of 1998, reflecting a 26% increase in
assets under fee-based management from the comparable period last year.
31
In the mutual fund sector, there was a significant increase not only in dollar
inflows but also in performance, with the number of Morningstar 4- and 5- star
funds rising to 23, up from 15 in the prior year period.
New products successfully introduced include the Total Return Bond Fund as well
as a unit investment trust consisting of Real Estate Investment Trusts.
CONSUMER FINANCE SERVICES
Three Months Ended March 31,
--------------------------------------------------------------------
1998 1997
---------------- ----------------- ---------------- ----------------
In Millions of Dollars Revenues Net Income Revenues Net Income
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Consumer Finance Services $485 $60 $377 $49
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
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.
Earnings in the first quarter of 1998 were $60 million compared to $49 million
in the first quarter of 1997. This segment's performance, in a traditionally
slow quarter, reflects the integration of Security Pacific Financial Services
(Security Pacific) into the Commercial Credit branch system since July 1997,
continued internal receivables growth and an improved charge-off rate.
Net receivables owned reached a record $11.4 billion, up 35% from the prior year
period and up $335 million or 3% since year-end 1997. This excludes $255.1
million in credit card receivables securitized on March 6, 1998. Most of the
receivables growth was in real estate-secured loans, which reflects the strength
of this product among Primerica Financial Services (PFS) representatives. On a
managed basis, including securitized assets, receivables totaled $11.6 billion,
an increase of $404 million from year-end 1997.
During the first quarter of 1998, the average yield on owned receivables was
14.18%, down from 14.65% in the first quarter of 1997, reflecting the shift in
the portfolio mix toward lower-risk real estate loans which have lower margins.
At March 31, 1998, the owned portfolio consisted of 47% real estate-secured
loans, 35% personal loans, 11% credit cards and 7% sales finance and other.
Delinquencies in excess of 60 days on owned receivables were 1.77% at March 31,
1998, down slightly from 1.78% at year-end 1997, but up from 1.63% at March 31,
1997. The charge-off rate on owned receivables of 2.81% in the first quarter of
1998 was improved from the 2.90% rate in the first quarter of 1997. As expected,
it was up from the 2.56% rate in the fourth quarter of 1997, which contained a
short-term benefit from the transition of Security Pacific's portfolio to the
Company's charge-off policies. The charge-off rate is expected to return to
lower levels during the second half of 1998.
As of or for the
Three Months Ended March 31,
--------------------- --------------------
1998 1997
--------------------------------------------------------------------------------------- --------------------- --------------------
Allowance for credit losses as a % of net outstandings 2.94% 3.00%
Charge-off rate for the period 2.81% 2.90%
60 + days past due on a contractual basis as a % of gross consumer finance receivables
at quarter end 1.77% 1.63%
--------------------------------------------------------------------------------------- --------------------- --------------------
LIFE INSURANCE SERVICES
Three Months Ended March 31,
--------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
In Millions of Dollars Revenues Net income Revenues Net income
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Travelers Life and Annuity (1) $ 772 $168 $618 $ 105
Primerica Financial Services (2) 401 95 375 79
---------------- ----------------- ---------------- ----------------
Total Life Insurance Services $1,173 $263 $993 $184
-------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
(1) Net income includes $50 million and $4 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million of reported investment portfolio gains in
1997.
32
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.
Earnings before portfolio gains increased 17% to $118 million in the first
quarter of 1998, from $101 million in the comparable 1997 period. These record
earnings were largely driven by strong investment income and double-digit growth
in individual and group annuity account balances as well as long-term care
premiums. Positive earnings momentum attributable to strong sales growth of less
capital-intensive products--including variable life insurance and annuities -
continues to be partially offset by a gradual decline in the amount of higher
margin business written in prior years.
In deferred annuities, significant sales through Salomon Smith Barney Financial
Consultants and Copeland, combined with favorable market returns from variable
annuities, drove account balances to $17.5 billion at March 31, 1998, up 29% or
$4.0 billion from a year ago. Net written premium and deposits for the quarter
were up 43% to $819.8 million, of which more than 80% was generated by
cross-selling through Salomon Smith Barney Financial Consultants and Copeland.
Net written premium and deposits through Salomon Smith Barney rose 94% to $348
million, reflecting the momentum of a fourth quarter 1997 cross-selling
initiative, while Copeland's net written premium and deposits increased 31% to
$319 million, reflecting growth in its core business and continued success with
the Salomon Smith Barney joint venture in the small company segment of the
401(k) market.
Payout and group annuity account balances and benefit reserves reached $12.2
billion at March 31, 1998, up 10% from a year ago. The revitalization of this
business is reflected in the 33% increase in net written premiums and deposits
(excluding the Company's employee pension plan deposits) in the first quarter of
1998 to $859.9 million, up from $647.1 million in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the first
quarter of 1998 were $85.2 million, up 22% from $69.8 million in the first
quarter of 1997. Single deposits doubled to $23.8 million, and new periodic
premium sales increased 22%, reflecting a doubling of sales at Salomon Smith
Barney. For the first quarter of 1998, sales by Salomon Smith Barney increased
to over 40% of new periodic premium and single deposits. Life insurance in force
was $52.4 billion at March 31, 1998, up $1.9 billion from a year ago.
Earned premiums for the growing long-term care insurance product line increased
31% to $45.6 million in the first quarter of 1998 from $34.9 million in the
first quarter of 1997. During the first quarter of 1998 sales through Salomon
Smith Barney increased to over 15% of total sales.
Primerica Financial Services
Earnings before portfolio gains for the first quarter of 1998 increased 21% to
$95 million from $78 million in the first 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 $372.5 billion at March 31, 1998, up 3%
from the prior year quarter, reflecting good policy persistency and stable sales
growth. New term life insurance sales during the first quarter of 1998 were
$13.0 billion in face value, up from $12.0 billion in the first quarter of 1997.
Although the number of policies issued declined quarter-over-quarter, the
average face amount per policy issued during the first quarter of 1998 rose 16%
to $222,600.
33
Cross-selling ventures demonstrated continued success. During the first quarter
of 1998, earnings related to the distribution of non-life insurance products
accounted for $19.6 million, or 21%, of PFS's operating earnings, an increase of
39% from the prior year quarter.
Sales of mutual funds (at net asset value) were $768.7 million for the first
quarter of 1998, a 6% increase over first quarter 1997 sales of $722.0 million
despite some softness in the Canadian mutual fund market. During the first
quarter 1998, Salomon Smith Barney funds accounted for almost 60% of PFS's U.S.
sales and approximately 44% of total sales.
Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan products underwritten
by Commercial Credit was up 15% to $332.5 million in the first quarter of 1998.
The TRAVELERS SECURE(R) line of property and casualty insurance products showed
strong growth, with premiums up almost four-fold to $38 million and the number
of policies sold in the first quarter of 1998 up 123% to 37,192. The number of
agents licensed to sell auto and homeowners insurance jumped 51% to over 10,000
people. Variable annuity sales also climbed, reaching net written premiums and
deposits of $126.3 million in the first quarter of 1998.
One of the primary factors in PFS's cross-selling success, the Financial Needs
Analysis, continues to help the company's Personal Financial Analysts define and
address their client's needs. More than 140,000 FNA's were submitted in the
quarter of 1998, indicating the potential that more than one-half million people
will have an analysis done for them before year-end 1998.
PROPERTY & CASUALTY INSURANCE SERVICES
Three Months Ended March 31,
----------------------------
1998 1997
-------------------------- ---------------------------
Net Net
Income Income
In Millions of Dollars Revenues (Loss) Revenues (Loss)
---------------------- -------- -------- --------- --------
Commercial (1) (2) $1,697 $260 $ 1,624 $201
Personal (1) (3) 893 116 805 105
Financing costs and other (1) 4 (29) 2 (33)
Minority interest - (58) - (49)
-------- -------- --------- --------
Total Property & Casualty Insurance Services $2,594 $289 $2,431 $224
-------- -------- --------- --------
(1) Before minority interest.
(2) Net income includes $35 million and $8 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(3) Net income includes $8 million of reported investment portfolio gains in
1998 and $3 million of reported investment portfolio losses in 1997.
Earnings before portfolio gains and minority interest increased 13% to $304
million in the first quarter of 1998 from $268 million in the first quarter of
1997. This increase in earnings was primarily the result of increased after-tax
net investment income and continued productivity improvements.
Commercial Lines
Earnings before portfolio gains increased 16% to $225 million in the first
quarter of 1998 from $193 million in the first quarter of 1997, primarily
reflecting continued expense savings, favorable loss experience and no
catastrophe losses in the first quarter of 1998 versus $4.9 million in
catastrophe losses, after taxes and reinsurance, in the prior year period.
Commercial Lines net written premiums for the first quarter of 1998 totaled
$1.212 billion, compared to $1.338 billion in the first quarter of 1997. The
first quarter 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. Excluding this adjustment, net written premiums
increased slightly. Net written premiums continue to be unfavorably impacted by
the difficult pricing environment and also reflect the Company's disciplined
approach to underwriting and risk management.
Fee income for the first quarter of 1998 was $82 million, a $15 million decrease
from the first 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 and the Company's continued success in
lowering workers'
34
compensation losses of service customers, partially offset by National Accounts
writing of more service fee-based product versus premium-based product.
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 $186.6 million for the first quarter of 1998 decreased $35 million
from the first quarter of 1997. This decrease was primarily the result of
pricing declines due to the highly competitive marketplace, a decrease in the
Company's level of involuntary pool participation as well as National Accounts
writing less premium-based product versus service fee-based product and the
Company's continued disciplined approach to underwriting and risk management.
National Accounts new business and the business retention ratio were moderately
higher in the first quarter of 1998 than in the first quarter of 1997,
reflecting an increase in claim service-only business as well as continued
product development efforts, especially in workers' compensation managed care
programs.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $462.6 million
in the first quarter of 1998 compared to $560.5 million in the first quarter of
1997. The first quarter of 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 increased reflecting the continued growth
through programs designed to leverage underwriting experience in specific
industries, partially offset by pricing declines due to the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. Commercial Accounts new business in the first quarter of 1998
was moderately lower than in the first quarter of 1997, reflecting the Company's
focus on obtaining new accounts where it can maintain its selective underwriting
policy. Commercial Accounts business retention ratio was moderately higher in
the first quarter of 1998 than in the first quarter 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 serves small businesses through a network of independent agents.
Select Accounts net written premiums were $378.6 million in the first quarter of
1998 compared to $363.7 million in the first quarter of 1997. The first quarter
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. Excluding this adjustment, the increase
in Select Accounts net written premiums reflects the continued benefit from the
broader industry and product line expertise of the combined company, partially
offset by the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. New premium business
in Select Accounts was significantly higher in the first quarter of 1998
compared to the first quarter of 1997. The Select Accounts business retention
ratio remained strong in the first quarter of 1998 and was virtually the same as
the first 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 $184.0 million in the first quarter of 1998 compared to
$192.6 million in the first quarter of 1997. This decrease primarily reflects a
highly competitive marketplace and the Company's continued disciplined approach
to underwriting and risk management.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first quarter of 1998 was 106.8% compared to 109.1% in the first
quarter of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the first quarter of 1998 was 108.1% compared to 107.4% in
the first quarter of 1997.
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.
The 1997 first quarter statutory and GAAP combined ratios for Commercial Lines
include an adjustment due to a 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 quarter of 1997
35
would have been 110.5% and 110.6%, respectively. The decrease in the first
quarter of 1998 statutory and GAAP combined ratios compared to the first quarter
of 1997 statutory and GAAP combined ratios excluding this adjustment was due to
lower catastrophe losses, continued productivity improvements and favorable loss
experience, partially offset by lower fee income.
Personal Lines
Earnings before portfolio gains/losses were $108 million in the first quarter of
1998, about equal with the first quarter of 1997. The 1998 results were driven
by growth in premium income and strong net investment income and were offset by
catastrophe losses, after taxes and reinsurance, of $8.6 million, compared to no
such losses in the 1997 quarter, and an increase in investments in service
centers and market expansions.
Total net written premiums in the first quarter of 1998 grew 14% over the
prior year to $806.0 million, excluding a one-time adjustment in 1997 of
$68.7 million due to a change in the quota share arrangement. This increase
reflects growth in target markets served by independent agents and growth in
the affinity group marketing, joint marketing arrangements and the TRAVELERS
SECURE-Registered Trademark- program. Business retention continued to be
strong.
The statutory combined ratio for Personal Lines in the first quarter of 1998 was
93.2% compared to 90.1% in the 1997 first quarter. The GAAP combined ratio for
Personal Lines in the first quarter of 1998 was 92.3% compared to 88.6% in the
1997 first quarter.
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.
The 1997 first quarter statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with a change in the quota share arrangement.
Excluding this adjustment, the statutory and GAAP combined ratios for the first
quarter of 1997 would have been 89.8% and 91.2%, respectively. The increase in
the first quarter of 1998 statutory and GAAP combined ratios compared to the
first quarter of 1997 excluding this adjustment was primarily due to the higher
level of catastrophe losses and a decrease in favorable prior year reserve
development in the automobile bodily injury line.
Financing Costs and Other
The primary component of net income (loss) in the first quarter of 1998 was
interest expense of $27 million after-tax, compared to $26 million after-tax in
the first quarter of 1997, reflecting financing costs associated with the
acquisition of 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 March 31, 1998, approximately 18% of the
net aggregate reserve (i.e., approximately $193 million) consists of case
reserve for resolved claims. The balance, approximately 82% of the net aggregate
reserve (i.e., approximately $887 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 first table on the next page displays activity for environmental losses and
loss expenses and reserves for the three months ended March 31, 1998 and 1997.
36
Environmental Losses
Three Months Ended March 31,
---------------------------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- -----------------
Beginning reserves:
Direct $1,193 $1,369
Ceded (74) (127)
--------------------- -----------------
Net 1,119 1,242
Incurred losses and loss expenses:
Direct 20 18
Ceded (6) (1)
Losses paid:
Direct 75 50
Ceded (22) (4)
Ending reserves:
Direct 1,138 1,337
Ceded (58) (124)
--------------------- -----------------
Net $1,080 $1,213
---------------------------------------------------------------------------------------- --------------------- -----------------
Asbestos Claims
At March 31, 1998, approximately 24% of the net aggregate reserve (i.e.,
approximately $261 million) is for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $848 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
The following table displays activity for asbestos losses and loss expenses and
reserves for the three months ended March 31, 1998 and 1997. In general, the
Company posts case reserves for pending asbestos claims within approximately 30
business days of receipt of such claims.
Asbestos Losses
Three Months Ended March 31,
----------------------------------------
In Millions of Dollars 1998 1997
---------------------------------------------------------------------------------------- --------------------- ------------------
Beginning reserves:
Direct $1,363 $1,443
Ceded (249) (370)
--------------------- ------------------
Net 1,114 1,073
Incurred losses and loss expenses:
Direct 29 20
Ceded (12) (7)
Losses paid:
Direct 52 52
Ceded (30) (23)
Ending reserves:
Direct 1,340 1,411
Ceded (231) (354)
--------------------- ------------------
Net $1,109 $1,057
---------------------------------------------------------------------------------------- --------------------- ------------------
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 March 31, 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
37
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 March 31, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $188 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $888 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for the three months ended March 31, 1998 and 1997. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
CIOTA Losses
Three Months Ended
-----------------------------------------
In Millions of Dollars March 31, 1998 March 31, 1997
---------------------------------------------------------------------------------------- --------------------- -------------------
Beginning reserves:
Direct $1,520 $1,560
Ceded (432) (446)
--------------------- -------------------
Net 1,088 1,114
Incurred losses and loss expenses:
Direct (3) 6
Ceded 7 -
Losses paid:
Direct 17 8
Ceded (1) (5)
Ending reserves:
Direct 1,500 1,558
Ceded (424) (441)
--------------------- -------------------
Net $1,076 $1,117
---------------------------------------------------------------------------------------- --------------------- -------------------
CORPORATE AND OTHER
Three Months Ended March 31,
-------------------------------------------------------------------
In Millions of Dollars 1998 1997
-------------------------------------------------------------- ---------------------------------- --------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
---------------- ----------------- ---------------- ---------------
Total Corporate and Other $59 $(22) $22 $(52)
-------------------------------------------------------------- ---------------- ----------------- ---------------- ---------------
Net treasury and corporate staff expenses for the first quarter of 1998 were up
slightly 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.
RISK MANAGEMENT
MANAGING GLOBAL RISK AT CITICORP
Management of Price Risk Exposure 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.
38
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 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.
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 March 31, 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 March 31, 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 17 to
727 basis points, depending on the currency.
The table below illustrates that as of March 31, 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 $105 million in the next twelve
months, and a positive impact of approximately $112 million for the five year
period 1998-2003, while a two standard deviation increase in non-U.S. dollar
interest rates would have had a potential negative impact on Citicorp's pretax
earnings of approximately $85 million in the next twelve months, and
approximately $203 million for the five year period 1998-2003.
Earnings-at-Risk
Assuming a U.S. Dollar Assuming a Non-U.S. Dollar Rate
Rate Move of Move of
--------------------------------------------------------------------
Impact on Pretax Earnings Two Standard Deviations Two Standard Deviations (1)
In Millions of Dollars at March 31, 1998 Increase Decrease Increase Decrease
- -----------------------------------------------------------------------------------------------------------------------------------
Overnight to three months ($ 59) $ 64 ($ 20) $20
Four to six months (24) 30 (22) 22
Seven to twelve months (22) 31 (43) 43
--------------------------------------------------------------------
Total overnight to twelve months (105) 125 (85) 85
Year two (10) 14 (77) 78
Year three 44 (47) (36) 36
Year four 85 (88) (8) 8
Year five 149 (164) (33) 33
Effect of discounting (51) 57 36 (36)
--------------------------------------------------------------------
Total $112 ($103) ($203) $204
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Total assumes a two standard deviation increase or decrease for every
currency, not taking into account any correlation among currencies.
39
The table below summarizes Citicorp's twelve month Earnings-at-Risk over recent
periods.
Twelve Month Earnings-at-Risk (impact on pretax earnings)
U.S. Dollar Non-U.S. Dollar
-----------------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31, Mar. 31, Dec. 31, Mar. 31,
In Millions of Dollars 1998(1) 1997(1) 1997(1) 1998(1) 1997(1) 1997(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Assuming a two standard deviation rate:
Increase ($105) ($180) ($174) ($85) ($25) ($31)
Decrease 125 211 204 85 25 31
- ------------------------------------------------------------------------------------------------------------------------------------
The tables on page 39 and 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 follows:
Twelve Month Earnings-at-Risk (excluding effects of derivatives)
U.S. Dollar
----------------------------------------
Impact on Pretax Earnings Mar. 31, Dec. 31, Mar. 31,
In Millions of Dollars 1998 (1) 1997 (1) 1997 (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Assuming a two standard deviation rate:
Increase $98 $64 $159
Decrease (86) (44) (124)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Excluding the effects of derivatives, Citicorp's non-U.S. dollar
Earnings-at-Risk would have had a negative impact of $85 million and $26
million assuming a two standard deviation increase in rates and a positive
impact of $85 million and $27 million assuming a two standard deviation
decrease in rates at March 31, 1998 and December 31, 1997 respectively.
The tables on page 39 and above 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 beginning on page 50.
During the 1998 first quarter, 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
$137 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 first quarter was primarily due to
the reduction in the level of received fixed swaps. 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
$85 million in the aggregate at each month-end during the 1998 first quarter,
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 first quarter
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
correlations 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 aggregate pretax Value-at-Risk in the trading portfolios was $21 million at
March 31, 1998 and daily exposures averaged $24 million in the 1998 first
quarter for Citicorp's major trading centers and ranged from $18 million to $31
million. The level of exposure taken depends on the market environment and
expectations of future price and market
40
movements, and will vary from period to period. The trading-related revenue for
the 1998 first quarter was $728 million, compared with $347 million in the 1997
fourth quarter.
The table below summarizes Citicorp's Value-at-Risk in its trading portfolio as
of March 31, 1998.
Value-at-Risk
1998
Mar. 31, First Quarter Dec. 31,
In Millions of Dollars 1998 Daily Average 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate $20 $21 $23
Foreign exchange 6 10 8
All other (primarily equity and commodity) 9 9 8
Covariance adjustment (14) (16) (14)
----------------------------------------
Total $21 $24 $25
- ----------------------------------------------------------------------------------------------------------------------------------
Management of Cross-Border Risk at Citicorp
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 42 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.
41
Citicorp Cross-Border Outstandings and Commitments
March 31, 1998 December 31, 1997
----------------------------------------------------------------------------------- ----------------------------
Cross-Border Claims on Third Parties
------------------------------------------
Investments
Trading in and
In Billions of and Short- Funding of Total Total
----------------------------- Term Local Cross-Border Cross-Border
Dollars Banks Public Private Total Claims (1) Franchises Outstandings Commitments (2) Outstandings Commitments (2)
- ------------------------------------------------------------------------------------------------------------------------------------
United Kingdom $ 1.5 $ 0.8 $ 2.7 $ 5.0 $ 3.8 $ - $ 5.0 (3) $ 7.0 $ 4.5 (3) $ 7.8
France 2.1 0.7 0.7 3.5 3.3 0.6 4.1 (3) 0.8 3.1 (3) 0.6
Italy 0.7 - 0.3 1.0 1.0 3.0 4.0 (3) 0.5 3.4 (3) 0.5
Germany 1.3 0.9 0.4 2.6 2.4 1.2 3.8 (3) 1.6 4.7 (3) 1.7
Japan 2.2 0.2 0.9 3.3 2.9 - 3.3 (4) 0.7 3.2 (3) 1.1
Spain 0.2 - 0.3 0.5 0.4 2.3 2.8 (4) 0.4 2.3 (4) 0.4
Switzerland 1.1 - 1.7 2.8 2.5 - 2.8 (4) 1.2 2.7 (4) 1.1
Netherlands 0.8 0.2 1.0 2.0 1.7 0.1 2.1 1.0 2.2 0.8
Canada 0.9 0.1 0.4 1.4 1.2 - 1.4 1.7 1.6 1.8
Belgium 0.4 0.2 0.4 1.0 1.0 0.4 1.4 0.2 0.9 0.2
Sweden 0.5 0.2 0.3 1.0 0.9 0.1 1.1 0.8 1.1 0.7
Finland 0.3 0.1 0.4 0.8 0.6 0.1 0.9 0.4 0.7 0.4
Other (22 countries
in 1998) 1.4 0.5 2.0 3.9 2.9 0.6 4.5 1.8 4.0 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
Europe, Canada,
and Japan 13.4 3.9 11.5 28.8 24.6 8.4 37.2 18.1 34.4 18.7
- ------------------------------------------------------------------------------------------------------------------------------------
Brazil 0.4 1.3 1.6 3.3 1.6 1.7 5.0 (3) 0.3 4.4 (3) 0.1
Mexico 0.1 1.8 0.6 2.5 1.0 0.5 3.0 (4) 0.5 3.0 (4) 0.6
Argentina - 0.3 1.1 1.4 0.8 0.8 2.2 0.1 2.2 0.1
Chile - 0.3 0.4 0.7 0.2 0.3 1.0 0.1 1.0 -
Venezuela 0.1 0.7 0.1 0.9 0.2 0.1 1.0 0.1 1.0 -
Colombia 0.2 - 0.1 0.3 0.2 0.6 0.9 0.2 0.9 0.1
Peru 0.1 0.1 0.2 0.4 0.3 0.1 0.5 0.2 0.4 0.1
Uruguay - 0.2 0.1 0.3 0.1 - 0.3 - 0.3 -
Other (20
countries 0.2 0.6 0.6 1.4 1.0 0.1 1.5 0.6 1.1 0.6
in 1998)
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America 1.1 5.3 4.8 11.2 5.4 4.2 15.4 2.1 14.3 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
South Korea 0.6 0.2 0.9 1.7 1.5 1.1 2.8 (4) 0.4 2.6 (4) 0.2
Saudi Arabia 0.5 0.1 0.1 0.7 0.3 - 0.7 0.2 0.8 0.3
Malaysia 0.1 - 0.2 0.3 0.3 0.3 0.6 0.1 0.7 0.1
Indonesia 0.1 - 0.5 0.6 0.5 - 0.6 0.2 0.6 0.2
Singapore 0.1 - 0.4 0.5 0.4 - 0.5 0.6 0.5 0.3
Hong Kong 0.2 - 0.2 0.4 0.4 - 0.4 0.3 0.7 0.3
Taiwan 0.1 - 0.3 0.4 0.3 - 0.4 0.4 0.4 0.5
Bahrain 0.2 0.1 - 0.3 0.2 - 0.3 0.1 0.3 0.1
China 0.1 - 0.1 0.2 0.1 - 0.2 0.4 0.6 0.4
Thailand - - 0.2 0.2 0.1 - 0.2 0.1 0.3 0.1
India - - 0.2 0.2 0.1 - 0.2 0.2 0.2 0.3
Pakistan 0.1 - - 0.1 0.1 0.1 0.2 - 0.2 -
Kuwait 0.1 - - 0.1 0.1 - 0.1 - 0.2 -
Philippines - - 0.1 0.1 0.1 - 0.1 0.1 0.2 0.1
Other (10
countries - 0.1 0.2 0.3 0.2 - 0.3 0.4 0.3 0.4
in 1998)
- ------------------------------------------------------------------------------------------------------------------------------------
Asia/ Middle East 2.2 0.5 3.4 6.1 4.7 1.5 7.6 3.5 8.6 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Australia 0.4 - 0.2 0.6 0.5 0.1 0.7 0.3 0.7 0.4
New Zealand 0.1 - - 0.1 0.1 0.5 0.6 0.1 0.7 -
All Other - 0.7 0.2 0.9 0.7 0.4 1.3 0.4 1.5 0.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other 0.5 0.7 0.4 1.6 1.3 1.0 2.6 0.8 2.9 0.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Citicorp $17.2 $10.4 $20.1 $47.7 $36.0 $15.1 $62.8 $24.5 $60.2 $24.4
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Included in total cross-border claims on third parties.
(2) Commitments (not included in total cross-border outstandings) include
legally binding cross-border letters of credit and loan commitments.
(3) Total cross-border outstandings were in excess of 1.0% of total assets at
the end of the respective periods.
(4) Total cross-border outstandings were between 0.75% and 1.0% of total assets
at the end of the respective periods.
42
Details of Citicorp's investments in and funding of local franchises for
selected Asian countries included in the table on page 42 at March 31, 1998 were
as follows:
Local Country Assets (1) Local Country Liabilities
(2)
------------------------------------------------------------------------ ----------------------------
Gross Gross
Unrealized Unrealized
Gains on Losses on
Derivative Derivative Investments in
In Billions of and Foreign Local and Foreign All Other and Funding of
Dollars at Consumer Commercial Exchange All Other Country Exchange Local Country Local
March 31, 1998 Loans Loans Contracts Assets (3) Adjustments (4) Assets Contracts Liabilities (5) Franchises
- ------------------------------------------------------------------------------------------------------------------------------------
South Korea $0.8 $1.2 $1.2 $1.9 ($0.5) $4.6 $1.0 $2.5 $1.1
Malaysia.. 1.4 0.8 0.2 1.1 (0.2) 3.3 0.1 2.9 0.3
Indonesia. 0.2 0.4 0.2 1.0 (0.1) 1.7 0.3 1.5 -
Thailand.. 1.1 0.9 0.4 1.2 (0.3) 3.3 0.4 2.9 -
Philippines 0.3 0.9 0.1 1.4 (0.5) 2.2 - 2.2 -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 1997, local country assets were $4.5 billion in South
Korea, $3.4 billion in Malaysia, $2.0 billion in Indonesia, $2.7 billion
in Thailand, and $2.2 billion in Philippines.
(2) At December 31, 1997, local country liabilities were $3.4 billion in
South Korea, $3.0 billion in Malaysia, $2.2 billion in Indonesia, $3.0
billion in Thailand, and $2.2 billion in Philippines.
(3) Includes deposits at interest with banks, securities, customers'
acceptance liabilities, 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.
On January 28, 1998 an agreement was reached between the Republic of Korea and a
group of international banks (including Citicorp) on a plan to extend the
maturities of short-term credits to the Korean banking system. On April 8, 1998
Korean banks exchanged $21.75 billion of their short-term cross-border credits
for new loans with maturities of one-, two-, or three-years, guaranteed by the
Republic of Korea, and bearing a floating rate of interest at rates of 2.25%,
2.50%, and 2.75%, respectively, over the six-month London Interbank Offering
Rate (LIBOR). Of the total, $3.76 billion was exchanged into one-year loans,
$9.79 billion into two-year loans, and $8.2 billion into three-year loans.
Under the plan, Citicorp exchanged $398 million of short-term loans to Korean
banks for new loans with maturities of one, two, and three years.
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
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 March 31, 1998, $500 million was
allocated to Citigroup, $450 million was allocated to CCC and $50 million was
allocated to TIC. Under this facility, Citigroup is required to maintain a
certain level of consolidated stockholders' equity (as defined in the
agreement). At March 31, 1998, this requirement was exceeded by approximately
$11 billion. At March 31, 1998, there were no borrowings outstanding under this
facility.
As of March 31, 1998, Citigroup had unused credit availability of $500 million
under the five-year revolving credit facility. Citigroup may borrow under this
revolving credit facility at various interest rate options (LIBOR, CD and base
rate) and compensates the banks for the facility through commitment fees.
43
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 $214.7
billion represented 65% of total funding at March 31, 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 $21.3
billion at March 31, 1998 compared with $21.0 billion at 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 March 31, 1998, was $19.4 billion, compared with
$19.0 billion at year-end 1997.
Asset securitization programs remain an important source of liquidity. Total
consumer loans securitized during the quarter were $4.2 billion, including $2.5
billion of U.S. credit cards and $1.7 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 March 31, 1998, the scheduled amortization of
certain credit card securitization transactions made available $1.8 billion of
new receivables. In addition, $4.8 billion and $6.1 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 March 31, 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 $2.5 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 March 31, 1998, its bank subsidiaries could have
distributed dividends to Citicorp, directly or through their parent holding
company, of approximately $2.1 billion of the available $2.5 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
Mar. 31, Dec. 31, Mar. 31,
1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital 8.19% 8.27% 8.32%
Total capital (Tier 1 and Tier 2) 12.06 12.25 12.04
Leverage (1) 6.77 6.95 7.32
Common stockholders' equity 5.96 6.15 6.44
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Tier 1 capital divided by adjusted average assets.
Citicorp continued to maintain a strong capital position during the 1998 first
quarter. Total capital (Tier 1 and Tier 2) amounted to $31.1 billion at March
31, 1998 representing 12.06% of net risk-adjusted assets. This compares with
$31.0 billion and 12.25% at December 31, 1997 and $29.1 billion and 12.04% at
March 31, 1997. Tier 1 capital of $21.1 billion at March 31, 1998 represented
8.19% of net risk-adjusted assets, compared with $20.9 billion and 8.27% at
December 31, 1997 and $20.1 billion and 8.32% at March 31, 1997. The Tier 1
capital ratio at March 31, 1998 was within Citicorp's target range of 8.00% to
8.30%.
The excess of Tier 1 capital generated during a period reduced by capital
utilized for business expansion is referred to as "free capital." As shown in
the following table, Citicorp generated $283 million of free capital during the
1998 first quarter compared with $729 million in the 1997 first quarter. The
amount of free capital is impacted by a number of factors including the level of
income, issuances, dividends, and changes in risk-adjusted assets.
44
Free Capital
Three Months Ended March 31,
---------------------------------
In Millions of Dollars 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital generated:
Net income $1,068 $ 998
Issuances/other (1) (118) 495
Cash dividends declared (290) (281)
---------------------------------
Total Tier 1 capital generated 660 1,212
Capital utilized for growth in net risk-adjusted assets (377) (483)
---------------------------------
Free capital generated $ 283 $ 729
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes issuance of common stock under various employee benefit plans
and the dividend reinvestment plan. During the 1998 first quarter,
Citicorp redeemed $303 million of Adjustable Rate Preferred Stock, Second
and Third Series. The 1997 first quarter reflects the issuance of $450
million of mandatorily redeemable preferred securities of subsidiary
trusts and the redemption of $175 million of Series 14 Preferred Stock.
In order to return available free capital to its shareholders, Citicorp
initiated a common stock repurchase program in June 1995. Citicorp repurchased
10.0 million and 15.3 million equivalent shares of Citigroup common stock under
the repurchase program using capital of $483 million ($48.91 average cost per
share) and $704 million ($45.94 average cost per share) in the first quarters of
1998 and 1997, respectively. Under the program, Citicorp repurchased 205.0
million equivalent shares of Citigroup common stock through March 31, 1998,
using free capital of $7.3 billion. Citicorp's stock repurchase program was
terminated immediately prior to consummation of the merger with Travelers Group.
Common stockholders' equity increased a net $581 million during the first
quarter of 1998 to $19.7 billion at March 31, 1998, representing 5.96% of
assets, compared with 6.15% at December 31, 1997 and 6.44% at March 31, 1997.
The increase in common stockholders' equity during the quarter principally
reflected net income, the issuance of stock under various employee benefit plans
and an increase in net unrealized gains on securities available for sale,
partially offset by shares repurchased under the common stock repurchase program
and dividends declared on common and preferred stock. The decline in the common
stockholders' equity ratio during the first quarter of 1998 reflected the above
items as well as the growth in total assets during the quarter.
During the first quarter of 1998, Citicorp redeemed $303 million of Adjustable
Rate Preferred Stock, Second and Third Series. The $750 million of guaranteed
preferred beneficial interests (commonly known as "trust preferred securities")
outstanding at March 31, 1998 qualify as Tier 1 capital. For the three months
ended March 31, 1998, interest expense on the guaranteed preferred beneficial
interests amounted to $15 million compared to $13 million for the 1997 quarter.
In April 1998, Citicorp announced that in June 1998 it will redeem for cash all
outstanding shares of its 8.00% Noncumulative Preferred Stock, Series 16.
45
Components of Capital Under Regulatory Guidelines
March 31, December 31, March 31,
In Millions of Dollars 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital
Common stockholders' equity $ 19,704 $ 19,123 $ 18,692
Perpetual preferred stock 1,600 1,903 1,903
Mandatorily redeemable preferred securities of subsidiary trusts 750 750 750
Minority interest 104 104 97
Less: Net unrealized gains -- securities available for sale (1) (661) (535) (687)
Intangible assets (2) (296) (304) (314)
50% investment in certain subsidiaries (3) (98) (115) (325)
--------------------------------------------------
Total Tier 1 capital 21,103 20,926 20,116
--------------------------------------------------
Tier 2 capital
Allowance for credit losses (4) 3,254 3,198 3,060
Qualifying debt (5) 6,802 6,977 6,263
Less: 50% investment in certain subsidiaries (3) (97) (115) (324)
--------------------------------------------------
Total Tier 2 capital 9,959 10,060 8,999
--------------------------------------------------
Total capital (Tier 1 and Tier 2) $ 31,062 $ 30,986 $ 29,115
- -----------------------------------------------------------------------------------------------------------------------------------
Net risk-adjusted assets (6) $257,545 $252,999 $241,887
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Tier 1 capital excludes unrealized gains and losses on securities
available for sale in accordance with regulatory risk-based capital
guidelines.
(2) Includes goodwill and certain other identifiable intangible assets.
(3) For March 31, 1998 and December 31, 1997, represents investment in
certain overseas insurance activities. For March 31, 1997 primarily
includes investment in Citicorp Securities, Inc. ("CSI"). During the
fourth quarter of 1997, the FRB eliminated the capital deduction required
for Section 20 subsidiaries, including CSI.
(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 $13.6 billion for interest rate,
commodity and equity derivative contracts and foreign exchange contracts,
as of March 31, 1998, compared with $13.7 billion as of December 31, 1997
and $10.0 billion as of March 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.
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. At March 31, 1998, net risk-adjusted
assets includes $5.7 billion of market risk equivalent assets.
Citicorp has entered into forward purchase agreements on its common stock, to be
settled on a net basis, in order to partially offset the dilutive effects of
various employee benefit plans. At Citicorp's option, such settlements may be
made in shares of Citicorp's common stock or in cash. Both the number of shares
covered and the forward prices of these contracts are adjusted on a quarterly
basis and reflect the stock price at the time of adjustment. As of March 31,
1998, agreements for which forward prices had been established covered
approximately $1.2 billion of Citicorp common stock (23.8 million equivalent
Citigroup shares) with forward prices averaging $51.17 per share. During the
1998 first quarter, settlements resulted in Citicorp receiving approximately 1.5
million shares of equivalent Citigroup common stock and delivering 0.5 million
shares. If these agreements were settled based on the March 31, 1998 market
price ($56.80 per share), Citicorp would be entitled to receive approximately
2.3 million shares of equivalent Citigroup common stock. These forward purchase
agreements were terminated in accordance with their terms prior to the
consummation of the merger with Travelers Group.
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 March 31,
1998, all of Citicorp's subsidiary depository institutions were "well
capitalized" under the federal bank regulatory agencies' definitions.
Commercial Credit Company (CCC)
CCC also 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. As of March 31, 1998, CCC had
unused credit availability of $3.850 billion under five-year revolving credit
facilities, including the $450 million referred to on page 43, and $1.0 billion
under a 364-day facility. 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.
46
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 March 31, 1998, CCC would have been able to remit $622 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 $500 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 March 31, 1998, this
requirement was exceeded by approximately $3.6 billion. At March 31, 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 $110
million of dividends from its insurance subsidiaries during the first three
months of 1998.
Salomon Smith Barney
Salomon Smith Barney's total assets were $294 billion at March 31, 1998, up from
$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. 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.
At March 31, 1998, Salomon Smith Barney had a committed uncollateralized
revolving line of credit totaling $2.0 billion. In addition, Salomon Brothers
Inc (SBI), a wholly owned subsidiary of Salomon Smith Barney, had a $2.1 billion
committed secured standby bank credit facility for financing securities
positions which enabled it to borrow on a secured basis using a variety of
financial instruments as collateral and Salomon Brothers International Limited
(SBIL), a wholly owned subsidiary of Salomon Smith Barney, had a committed
securities repurchase facility in the amount of $1 billion. At March 31, 1998,
there were no outstanding borrowings under these facilities. 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.
During the second quarter of 1998, Salomon Smith Barney terminated the
facilities for SBI and SBIL and amended its revolving credit facilities to
increase the amount available under its committed uncollateralized revolving
lines of credit to $5.0 billion, comprised of a $1.5 billion three-year facility
which expires May 2001 and a $3.5 billion 364-day revolving credit facility that
extends through May 1999.
Unsecured term debt is a significant component of the Salomon Smith Barney's
long-term capital. Term debt totaled $19.4 billion at March 31, 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
47
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 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 $6.6 billion at March 31, 1998, the largest high yield exposure to one
counterparty was $401 million.
The Travelers Insurance Company (TIC)
At March 31, 1998, TIC had $24.5 billion of life and annuity product deposit
funds and reserves. Of that total, $13.0 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.5 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 $2.1 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.2 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 4.7%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.2 billion of liabilities is surrenderable without charge. More than 15.1% 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. As of March 31, 1998, TIC had unused credit
availability of $50 million under the five-year revolving credit facility
referred to above.
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 quarter of 1998.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to the 1997 Supplemental Financial Statements for a
discussion of recently issued accounting pronouncements.
48
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, interest
rates, and the level of personal bankruptcies; customer responsiveness to both
new products and distribution channels; competitive, regulatory, or tax changes
that affect the cost of or demand for the Company's products; adverse litigation
results; and the possibility that the Company will be unable to achieve
anticipated levels of operational efficiencies related to recently acquired
companies, as well as achieving its other cost-saving initiatives. Readers also
are directed to other risks and uncertainties discussed in documents filed by
the Company with the Securities and Exchange Commission.
49
OTHER FINANCIAL INFORMATION
End-User Derivative Interest Rate and Foreign Exchange Contracts
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 first
quarter of 1998.
Notional Principal Amounts (1) Percentage of March 31, 1998 Amount Maturing
------------------------------ -----------------------------------------------------------
Mar. 31, 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
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate products
Futures contracts $33.4 $ 29.3 53% 42% 5% -% -% -%
Forward contracts 8.1 6.9 90 10 - - - -
Swap agreements 115.2 122.8 35 17 11 8 8 21
Option contracts 16.4 20.1 68 19 6 3 - 4
Foreign exchange products
Futures and forward contracts 67.7 67.2 93 6 - - 1 -
Cross-currency swaps 5.5 4.8 15 14 8 7 43 13
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes third-party and intercompany contracts.
- -----------------------------------------------------------------------------------------------------------------------------------
End-User Interest Rate Swaps and Net Purchased Options as of March 31, 1998
Remaining Contracts Outstanding at March 31, -- Notional Principal Amounts
---------------------------------------------------------------------------
In Billions of Dollars 1998 1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps $87.9 $66.2 $50.4 $38.2 $29.9 $20.3
Weighted-average fixed rate 6.6% 6.7% 6.6% 6.6% 6.6% 6.8%
Pay fixed swaps $14.3 $7.2 $5.3 $4.5 $4.0 $3.5
Weighted-average fixed rate 6.7% 6.7% 6.9% 6.9% 6.9% 7.0%
Basis swaps $13.0 $1.7 $0.3 $0.2 $0.2 $0.2
Purchased caps (including collars) $7.8 $3.6 $0.9 - - -
Weighted-average cap rate purchased 6.4% 6.9% 7.2% - - -
Purchased floors $3.1 $0.1 $0.1 $0.1 $0.1 $0.1
Weighted-average floor rate purchased 5.4% 5.8% 5.8% 5.8% 5.8% 5.8%
Written floors related to purchased caps (collars) $2.6 $0.3 $0.1 - - -
Weighted-average floor rate written 5.4% 5.3% 8.4% - - -
Written caps related to other purchased caps (1) $2.9 $1.2 $1.0 $1.0 $0.5 $0.5
Weighted-average cap rate written 7.0% 8.6% 8.4% 8.3% 9.8% 9.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Three-month forward LIBOR rates (2) 5.7% 5.9% 6.0% 6.0% 6.1% 6.2%
- -----------------------------------------------------------------------------------------------------------------------------------
(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
March 31, 1998, provided for reference.
50
Cash-Basis, Renegotiated and Past Due Loans (1)
Mar. 31, Dec. 31, Mar. 31,
In Millions of Dollars 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial cash-basis loans
Collateral dependent (at lower of cost or collateral value) (2) $ 242 $ 258 $288
Other (3) 1,102 806 641
----------------------------------------
Total $1,344 $1,064 $929
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial cash-basis loans
In U.S. offices $ 261 $ 296 $316
In offices outside the U.S. (3) 1,083 768 613
----------------------------------------
Total $1,344 $1,064 $929
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial renegotiated loans
In U.S. offices $20 $20 $242
In offices outside the U.S. 41 39 54
----------------------------------------
Total $61 $59 $296
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer loans on which accrual of interest had been suspended
In U.S. offices $ 864 $ 967 $1,121
In offices outside the U.S. 1,104 993 1,066
----------------------------------------
Total $1,968 $1,960 $2,187
- -----------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 or more days delinquent (4)
In U.S. offices $ 553 $ 606 $ 677
In offices outside the U.S. 480 467 417
----------------------------------------
Total $1,033 $1,073 $1,094
- -----------------------------------------------------------------------------------------------------------------------------------
(1) For a discussion of risks in the consumer loan portfolio and of
commercial cash-basis loans, see pages 25 and 28, 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 $83 million and $59 million at March 31, 1998 and
December 31, 1997, respectively, for which the recognition of revaluation
gains has been suspended.
(4) Includes Consumer loans of $988 million, $1.0 billion, and $983 million
at March 31, 1998, December 31, 1997, and March 31, 1997, of which $256
million, $240 million, and $227 million, respectively, are
government-guaranteed student loans.
- -----------------------------------------------------------------------------------------------------------------------------------
Other Real Estate Owned (OREO) And Assets Pending Disposition (1)
Mar. 31, Dec. 31, Mar. 31,
In Millions of Dollars 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer OREO $258 $275 $ 416
Commercial OREO 350 461 593
----------------------------------------
Total $608 $736 $1,009
- -----------------------------------------------------------------------------------------------------------------------------------
Assets pending disposition (2) $103 $96 $174
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Carried at lower of cost or collateral value.
(2) Represents consumer residential mortgage loans that have a high
probability of foreclosure.
51
Details Of Credit Loss Experience
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
In Millions of Dollars 1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate allowance for credit losses at beginning of period $6,237 $6,225 $6,147 $6,118 $5,743
--------------------------------------------------------------------
Provision for credit losses 595 557 559 588 493
--------------------------------------------------------------------
Gross credit losses
Consumer
In U.S. offices 410 423 448 452 408
In offices outside the U.S. 207 209 219 221 219
Commercial
In U.S. offices 9 11 11 9 3
In offices outside the U.S. 76 56 42 29 36
--------------------------------------------------------------------
702 699 720 711 666
--------------------------------------------------------------------
Credit recoveries
Consumer
In U.S. offices 60 71 83 62 54
In offices outside the U.S. 53 60 59 59 56
Commercial
In U.S. offices 11 27 20 31 29
In offices outside the U.S. 18 11 24 8 71
--------------------------------------------------------------------
142 169 186 160 210
--------------------------------------------------------------------
Net credit losses
In U.S. offices 348 336 356 368 328
In offices outside the U.S. 212 194 178 183 128
--------------------------------------------------------------------
560 530 534 551 456
--------------------------------------------------------------------
Other-net (1) (13) (15) 53 (8) 338
--------------------------------------------------------------------
Aggregate allowance for credit losses at end of period 6,259 6,237 6,225 6,147 6,118
Reserves for securitization activities 70 85 89 91 91
--------------------------------------------------------------------
Total credit loss reserves $6,329 $6,322 $6,314 $6,238 $6,209
- -----------------------------------------------------------------------------------------------------------------------------------
Net consumer credit losses. $ 504 $ 501 $ 525 $ 552 $ 517
As a percentage of average consumer loans 1.75% 1.68% 1.77% 1.91% 1.83%
Net commercial credit losses (recoveries) $56 $29 $9 ($1) ($61)
As a percentage of average commercial loans 0.28% 0.15% 0.05% NM NM
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Primarily includes net transfers (to) from the reserves for
securitization activities and foreign currency translation effects. In
the 1997 first quarter, Citicorp restored to the aggregate allowance for
credit losses $373 million that had previously been attributed to credit
card securitization transactions where the exposure to credit losses is
contractually limited to the cash flows from the securitized receivables.
NM Not meaningful, as net recoveries result in a negative percentage.
- --------------------------------------------------------------------------------
52
- ----------------------------------------------------------------------------------------------------------------------------------
Citicorp Average Balances and Interest Rates (Taxable Equivalent Basis)(1) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Average Volume Interest Revenue/Expense % Average Rate
--------------------------------------------------------------------------------------
1st Qtr. 4th Qtr. 1st Qtr. 1st Qtr. 4th Qtr. 1st Qtr. 1st Qtr. 4th Qtr. 1st Qtr.
In Millions of Dollars 1998 1997 1997 1998 1997 1997 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Loans (Net of Unearned Income) (3)
Consumer Loans
In U.S. Offices $ 55,955 $ 57,048 $ 55,229 $1,413 $1,482 $1,407 10.24 10.31 10.33
In Offices Outside the U.S. (4) 49,532 50,408 51,208 1,496 1,537 1,577 12.25 12.10 12.49
--------------------------------------------------------------
Total Consumer Loans 105,487 107,456 106,437 2,909 3,019 2,984 11.18 11.15 11.37
--------------------------------------------------------------
Commercial Loans
In U.S. Offices
Commercial and Industrial 11,316 11,307 9,258 228 240 202 8.17 8.42 8.85
Mortgage and Real Estate 2,777 2,383 2,973 62 95 59 9.05 15.82 8.05
Loans to Financial Institutions 358 249 609 11 11 14 12.46 17.53 9.32
Lease Financing 3,007 3,094 2,963 50 54 44 6.74 6.92 6.02
In Offices Outside the U.S. (4) 59,583 55,572 46,134 1,584 1,465 1,252 10.78 10.46 11.01
--------------------------------------------------------------
Total Commercial Loans 77,041 72,605 61,937 1,935 1,865 1,571 10.19 10.19 10.29
--------------------------------------------------------------
Total Loans 182,528 180,061 168,374 4,844 4,884 4,555 10.76 10.76 10.97
--------------------------------------------------------------
Federal Funds Sold and Resale Agreements
In U.S. Offices 8,655 6,099 7,827 93 73 100 4.36 4.75 5.18
In Offices Outside the U.S. (4) 6,214 5,791 5,412 149 161 112 9.72 11.03 8.39
--------------------------------------------------------------
Total 14,869 11,890 13,239 242 234 212 6.60 7.81 6.49
--------------------------------------------------------------
Securities, At Fair Value
In U.S. Offices
Taxable 8,689 7,593 8,555 93 81 102 4.34 4.23 4.84
Exempt from U.S. Income Tax 2,646 2,645 2,512 44 43 41 6.74 6.45 6.62
In Offices Outside the U.S. (4) 22,400 22,041 18,665 451 423 389 8.17 7.61 8.45
--------------------------------------------------------------
Total 33,735 32,279 29,732 588 547 532 7.07 6.72 7.26
--------------------------------------------------------------
Trading Account Assets (5)
In U.S. Offices 6,585 5,072 4,936 100 82 70 6.16 6.41 5.75
In Offices Outside the U.S. (4) 9,900 10,166 9,411 155 179 174 6.35 6.99 7.50
--------------------------------------------------------------
Total 16,485 15,238 14,347 255 261 244 6.27 6.80 6.90
-------------------------------------------------------------
Loans Held for Sale, In U.S. Offices 3,615 3,597 3,123 109 108 105 12.23 11.91 13.64
Deposits at Interest with Banks (4) 13,957 13,973 13,366 282 268 224 8.19 7.61 6.80
--------------------------------------------------------------
Total Interest-Earning Assets 265,189 257,038 242,181 $6,320 $6,302 $5,872 9.67 9.73 9.83
----------------------------------------------------
Non-Interest-Earning Assets (5) 47,726 45,255 42,837
---------------------------------
Total Assets $312,915 $302,293 $285,018
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits
In U.S. Offices
Savings Deposits $ 30,068 $ 28,292 $ 26,801 $ 224 $ 220 $ 191 3.02 3.09 2.89
Other Time Deposits 11,191 11,336 12,501 129 172 139 4.67 6.02 4.51
In Offices Outside the U.S. (4) 136,661 132,120 122,337 2,269 2,133 1,899 6.73 6.41 6.30
--------------------------------------------------------------
Total 177,920 171,748 161,639 2,622 2,525 2,229 5.98 5.83 5.59
--------------------------------------------------------------
Trading Account Liabilities (5)
In U.S. Offices 4,391 3,160 2,030 60 43 27 5.54 5.40 5.39
In Offices Outside the U.S. (4) 2,149 2,515 2,448 32 40 46 6.04 6.31 7.62
--------------------------------------------------------------
Total 6,540 5,675 4,478 92 83 73 5.71 5.80 6.61
--------------------------------------------------------------
Purchased Funds and Other Borrowings
In U.S. Offices 11,971 11,984 14,113 150 167 210 5.08 5.53 6.03
In Offices Outside the U.S. (4) 8,253 9,160 7,047 279 314 228 13.71 13.60 13.12
--------------------------------------------------------------
Total 20,224 21,144 21,160 429 481 438 8.60 9.03 8.39
--------------------------------------------------------------
Long-Term Debt
In U.S. Offices 15,328 15,878 14,839 236 251 215 6.24 6.27 5.88
In Offices Outside the U.S. (4) 3,997 4,279 4,346 85 91 98 8.62 8.44 9.15
--------------------------------------------------------------
Total 19,325 20,157 19,185 321 342 313 6.74 6.73 6.62
--------------------------------------------------------------
Total Interest-Bearing Liabilities 224,009 218,724 206,462 $3,464 $3,431 $3,053 6.27 6.22 6.00
--------------------------------------------------
Demand Deposits in U.S. Offices 11,511 11,740 10,801
Other Non-Interest-Bearing Liabilities (5) 56,384 50,974 47,008
Total Stockholders' Equity. 21,011 20,855 20,747
---------------------------------
Total Liabilities and Stockholders' Equity $312,915 $302,293 $285,018
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST-EARNING ASSETS
In U.S. Offices (6) $103,634 $ 99,130 $ 98,047 $1,235 $1,254 $1,232 4.83 5.02 5.10
In Offices Outside the U.S. (6) 161,555 157,908 144,134 1,621 1,617 1,587 4.07 4.06 4.47
--------------------------------------------------------------
Total $265,189 $257,038 $242,181 $2,856 $2,871 $2,819 4.37 4.43 4.72
- ----------------------------------------------------------------------------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
53
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 42 for a listing of Citicorp's cross-border outstandings
and commitments at March 31, 1998 and December 31, 1997.
March 31, 1998 December 31, 1997
------------------------------------------------------------------------------------------ ---------------------
Cross-Border Claims on Trading and Short- Investments Total
Third Parties Term Claims(1) in and Cross- Total
--------------------------------- --------------------- Funding Border Cross-Border
In Billions of Citi- Insur- of Local Outstand- Commit- Outstand- Commit-
Dollars Banks Public Private Total SSB corp ance Franchises ings ments(2) ings ments(2)
---------------- ------- ------- ---------- ------ ------ ------ ------- ------------ ----------- --------- ---------- --------
Germany $2.3 $9.7 $0.9 $12.9 $10.0 $2.4 $- $1.1 $14.0 (3) $1.6 $15.1 (3) $1.7
Japan 2.6 7.1 2.6 12.3 9.0 2.0 - - 12.3 (3) 0.7 12.7 (3) 1.1
Italy 1.1 7.0 0.4 8.5 7.5 1.0 - 2.9 11.4 (3) 0.5 15.9 (3) 0.5
France 2.5 4.9 1.8 9.2 5.5 3.3 - 0.6 9.8 (3) 0.8 9.5 (3) 0.6
Brazil 0.4 3.0 2.9 6.3 2.9 1.6 - 1.7 8.0 (4) 0.3 7.3 (3) 0.1
United Kingdom 2.1 0.8 4.4 7.3 0.5 3.8 0.1 - 7.3 (4) 7.0 6.5 (4) 7.8
Spain 0.6 2.9 0.4 3.9 3.3 0.4 - 2.3 6.2 (4) 0.4 6.0 (4) 0.4
Mexico 0.1 4.4 0.9 5.4 2.7 1.0 0.1 0.5 5.9 (4) 0.5 6.4 (4) 0.6
Sweden 1.0 3.7 1.1 5.8 4.4 0.9 - 0.1 5.9 (4) 0.8 5.9 (4) 0.7
----------------------------------------------------------------------------------------------------------------------------------
(1) Included in total cross-border claims on third parties. SSB refers to
Salomon Smith Barney. Insurance includes Life Insurance Services and
Property and Casualty Insurance Services.
(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).
54