Exhibit 99.03
CITIGROUP INC.
Index to Supplemental Condensed Consolidated Financial Statements (Unaudited)
for the Three and Six Months Ended June 30, 1998
- --------------------------------------------------------------------------------------------------------
Supplemental Financial Statements (Unaudited): Page No.
--------
Supplemental Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1998 and 1997 1
Supplemental Condensed Consolidated Statement of Financial Position -
June 30, 1998 (Unaudited) and December 31, 1997 2
Supplemental Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) - Six Months Ended June 30, 1998 3
Supplemental Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1998 and 1997 4
Notes to Supplemental Condensed Consolidated Financial Statements - (Unaudited) 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Other Financial Information 55
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Loan interest, including fees $5,625 $5,140 $10,969 $10,095
Other interest and dividends 6,010 5,369 11,797 10,075
Insurance premiums 2,395 2,220 4,735 4,444
Commissions and fees 2,985 2,613 5,860 5,171
Principal transactions 878 1,117 2,243 2,374
Asset management and administration fees 553 399 1,051 788
Realized gains from sales of investments 332 111 710 234
Other income 1,183 804 2,033 1,541
---------------------------------------------------------------------
Total revenues 19,961 17,773 39,398 34,722
Interest expense 6,996 6,070 13,637 11,501
---------------------------------------------------------------------
Total revenues, net of interest expense 12,965 11,703 25,761 23,221
- ------------------------------------------------------------------------------------------------------------------------------------
PROVISIONS FOR BENEFITS, CLAIMS AND CREDIT LOSSES
Policyholder benefits and claims 2,047 1,906 4,041 3,811
Provision for credit losses 656 588 1,251 1,081
---------------------------------------------------------------------
Total provision for benefits, claims and credit losses 2,703 2,494 5,292 4,892
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Non-insurance compensation and benefits 3,429 3,113 6,920 6,321
Insurance underwriting, acquisition and operating 811 799 1,623 1,604
Other operating 2,440 2,220 4,876 4,369
---------------------------------------------------------------------
Total operating expenses 6,680 6,132 13,419 12,294
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 3,582 3,077 7,050 6,035
Provision for income taxes 1,290 1,120 2,539 2,214
Minority interest, net of income taxes 52 49 110 98
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $2,240 $1,908 $4,401 $3,723
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $ 0.97 $ 0.82 $ 1.91 $ 1.59
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,244.0 2,247.4 2,243.6 2,252.5
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income $ 0.94 $ 0.78 $ 1.84 $ 1.52
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding 2,330.9 2,356.3 2,327.7 2,363.4
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
IN MILLIONS OF DOLLARS JUNE 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents (including segregated cash and other deposits) $ 14,358 $ 12,618
Deposits at interest with banks 14,013 13,049
Investments 98,475 91,633
Federal funds sold and securities borrowed or purchased under agreements to resell 143,693 119,967
Brokerage receivables 22,734 15,627
Trading account assets 175,887 180,088
Loans, net
Consumer 119,473 119,097
Commercial 88,100 79,509
-------------------------------------------
Loans, net of unearned income 207,573 198,606
Allowance for credit losses (6,529) (6,137)
-------------------------------------------
Total loans, net 201,044 192,469
Reinsurance recoverables 9,487 9,579
Separate and variable accounts 13,878 11,319
Other assets 57,189 51,035
-------------------------------------------
Total assets $750,758 $697,384
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits $215,982 $199,121
Investment banking and brokerage borrowings 18,682 11,464
Short-term borrowings 14,781 14,028
Long-term debt 49,533 47,387
Federal funds purchased and securities loaned or sold under agreements to repurchase 135,671 132,103
Brokerage payables 27,053 12,763
Trading account liabilities 124,469 127,152
Contractholder funds and separate and variable accounts 29,418 26,157
Insurance policy and claims reserves 43,744 43,782
Other liabilities 43,414 38,301
-------------------------------------------
Total liabilities 702,747 652,258
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock - Series I 280 280
- ------------------------------------------------------------------------------------------------------------------------------------
Citigroup or subsidiary obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt securities of -- Parent 1,200 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
-- Subsidiary 2,620 1,995
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 2,725 3,353
Common stock ($.01 par value; authorized shares: 6.0 billion;
issued shares: 1998 - 2,512,728,832 and 1997 - 2,499,949,682) 25 25
Additional paid-in capital 13,089 12,471
Retained earnings 35,447 32,002
Treasury stock, at cost (1998 - 232,256,692 shares and 1997 - 220,026,597 shares) (7,695) (6,595)
Accumulated other changes in equity from nonowner sources 893 1,057
Unearned compensation (573) (462)
-------------------------------------------
Total stockholders' equity 43,911 41,851
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $750,758 $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)
Six Months Ended June 30, 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 (628) (4,331)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 2,725 10,500
- -----------------------------------------------------------------------------------------------------------------------------------
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 75 5,837
Issuance of shares pursuant to employee benefit plans 397
Other (7)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 13,114 2,512,729
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 32,002
Net income 4,401
Common dividends (836)
Preferred dividends (120)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period 35,447
- --------------------------------------------------------------------------------------------------------------
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 221 11,991
Treasury stock acquired (1,321) (24,221)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period (7,695) (232,257)
- -----------------------------------------------------------------------------------------------------------------------------------
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 (110)
Net translation adjustments, net of tax (54)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period 893
- --------------------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year (462)
Issuance of restricted stock, net of amortization (111)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period (573)
- --------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING 41,186 2,280,472
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $43,911
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Supplemental Condensed Consolidated Financial Statements
3
CITIGROUP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
IN MILLIONS OF DOLLARS Six Months Ended June 30,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,401 $ 3,723
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 743 709
Additions to deferred policy acquisition costs (874) (854)
Other non-cash changes 1,786 1,694
Change in trading account assets 4,201 (23,824)
Change in trading account liabilities (2,683) 6,270
Change in Federal funds sold and securities purchased under agreements to resell (23,726) (23,810)
Change in Federal funds purchased and securities sold under agreements to repurchase 3,568 35,675
Change in brokerage receivables net of brokerage payables 7,183 229
Net gain on sale of securities (710) (234)
Venture capital activity (518) (29)
Other, net 1,668 (179)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,961) (630)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in deposits at interest with banks (964) (1,154)
Change in loans (92,641) (60,742)
Proceeds from sales of loans 89,919 53,159
Purchases of investments (43,624) (40,733)
Proceeds from sales of investments 19,905 20,566
Proceeds from maturities of investments 18,724 10,780
Other investments, primarily short-term, net (1,270) (632)
Capital expenditures on premises and equipment (833) (721)
Proceeds from sales of premises and equipment, subsidiaries and affiliates,
and other real estate owned 329 1,029
Business acquisitions (3,655) --
Other, net (153) (232)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,263) (18,680)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (960) (853)
Issuance of common stock 192 251
Issuance of preferred stock -- 391
Issuance of redeemable preferred stock of subsidiaries 825 450
Redemption of preferred stock (628) (175)
Treasury stock acquired (1,310) (1,831)
Stock tendered for payment of withholding taxes (402) (156)
Issuance of long-term debt 5,793 7,410
Payments and redemptions of long-term debt (3,565) (4,750)
Change in deposits 16,861 13,735
Change in short-term borrowings including investment banking and
brokerage borrowings 3,543 6,005
Contractholder fund deposits 2,481 1,772
Contractholder fund withdrawals (1,788) (1,310)
Other, net 84 (57)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 21,126 20,882
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (162) (129)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,740 1,443
Cash and cash equivalents at beginning of period 12,618 10,165
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $14,358 $11,608
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 1,455 $ 1,836
Cash paid during the period for interest $12,836 $10,727
NON-CASH INVESTING ACTIVITIES:
Transfers from loans to OREO and assets pending disposition $ 121 $ 185
- -----------------------------------------------------------------------------------------------------------------------------------
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 and six month periods ended June 30, 1998 and 1997,
respectively.
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------------------
Revenues:
TRV $10,096 $ 9,184 $20,464 $17,884
Citicorp 9,865 8,589 18,934 16,838
-------------------------------------------------------------------
Citigroup $19,961 $17,773 $39,398 $34,722
-------------------------------------------------------------------
Net Income:
TRV $ 1,141 $ 883 $ 2,234 $ 1,698
Citicorp 1,097 1,024 2,162 2,019
SFAS No. 106 Adjustment (1) 3 3 6 6
Other (2) (1) (2) (1) -
-------------------------------------------------------------------
Citigroup $ 2,240 $ 1,908 $ 4,401 $ 3,723
------------------------------------------------------------------------------------------------------------------------------
(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 to 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 June 30, 1998 and for the three and six month periods ended June 30,
1998 and 1997 are unaudited and include the accounts of Citigroup Inc. and
its subsidiaries, including Citicorp (collectively, the Company). In the
opinion of management all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected. The
supplemental 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 following table sets forth the Company's total
changes in equity from nonowner sources under SFAS No. 130 for the three
and six month periods ended June 30, 1998 and 1997, respectively.
5
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------------------
Net income $2,240 $1,908 $4,401 $3,723
Other changes in equity from nonowner sources, net of tax (259) 804 (164) 175
-------------------------------------------------------------------
Total changes in equity from nonowner sources $1,981 $2,712 $4,237 $3,898
------------------------------------------------------------------------------------------------------------------------------
At June 30, 1998 and December 31, 1997, accumulated other changes in equity
from nonowner sources on the supplemental condensed consolidated statement
of financial position include the after-tax amounts for net unrealized
gains on investments available for sale of $1,582 million and $1,692
million, respectively, and foreign currency translation of $(689) 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 June 30, 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
$6.1 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 Six Months Ended
June 30, June 30,
-------------------------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------------------
Net income $2,240 $1,908 $4,401 $3,723
Preferred dividends (58) (70) (121) (144)
-------------------------------------------------------------------
Income available to common stockholders for
basic EPS $2,182 $1,838 $4,280 $3,579
Effect of dilutive securities 6 10 12 20
-------------------------------------------------------------------
Income available to common stockholders
for diluted EPS $2,188 $1,848 $4,292 $3,599
-------------------------------------------------------------------
Weighted average common shares
outstanding applicable to basic EPS 2,244.0 2,247.4 2,243.6 2,252.5
Effect of dilutive securities:
Convertible securities 13.2 26.6 13.2 26.6
Options 48.5 50.4 47.0 53.7
Warrants 3.4 7.0 3.3 6.9
Restricted stock 21.8 24.9 20.6 23.7
-------------------------------------------------------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 2,330.9 2,356.3 2,327.7 2,363.4
-------------------------------------------------------------------
Basic earnings per share $ 0.97 $ 0.82 $ 1.91 $ 1.59
-------------------------------------------------------------------
Diluted earnings per share $ 0.94 $ 0.78 $ 1.84 $ 1.52
------------------------------------------------------------------------------------------------------------------------------
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:
JUNE 30, December 31,
IN MILLIONS OF DOLLARS 1998 1997
------------------------------------------------------------------------------------------------------------------------------
Fixed maturity, primarily available for sale at fair value $83,054 $77,920
Equity securities, at fair value 4,068 3,928
Venture capital, at fair value (1) 3,117 2,599
Short-term and other 8,236 7,186
------------------------------------------
$98,475 $91,633
------------------------------------------------------------------------------------------------------------------------------
(1) For the six months ended June 30, 1998, net gains on investments held
by venture capital subsidiaries totaled $435 million, of which $518
million and $148 million represented gross unrealized gains and losses,
respectively. For the six months ended June 30, 1997, net gains on
investments held by venture capital subsidiaries totaled $266 million,
of which $138 million and $46 million represented gross unrealized
gains and losses, respectively.
---------------------------------------------------------------------------
6
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The amortized cost and fair value of investments in fixed maturity and
equity securities at June 30, 1998 and December 31, 1997 were as follows:
JUNE 30, 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 $ 36 $ 7 $ - $ 43 $ 41 $ 50
FIXED MATURITY SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities, principally
obligations of U.S. Federal agencies $10,035 $ 337 $ 5 $10,367 $ 9,795 $10,099
U.S. Treasury and Federal Agency 9,082 409 - 9,491 6,816 7,128
State and municipal 12,626 612 155 13,083 10,351 10,817
Foreign government 18,976 556 315 19,217 19,381 19,996
U.S. corporate 23,190 1,039 145 24,084 23,306 24,137
Other debt securities 6,610 206 40 6,776 5,625 5,702
-------------------------------------------------------------------------------
$80,519 $3,159 $660 $83,018 $75,274 $77,879
-------------------------------------------------------------------------------
EQUITY SECURITIES (2) $ 3,847 $ 334 $113 $ 4,068 $ 3,661 $ 3,928
-----------------------------------------------------------------------------------------------------------------------------
Securities available for sale include:
Government of Brazil Brady Bonds $ 701 $ 301 $ - $ 1,002 $ 1,436 $ 2,048
Government of Venezuela Brady Bonds 507 - 80 427 535 480
-----------------------------------------------------------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------
6. TRADING ACCOUNT ASSETS AND LIABILITIES
JUNE 30, Dec. 31,
IN MILLIONS OF DOLLARS 1998 1997
------------------------------------------------------------------------------------------------------------------------------
TRADING ACCOUNT ASSETS
U.S. Treasury and Federal agency securities $ 58,472 $ 56,007
State and municipal securities 3,653 3,255
Foreign government securities 37,005 50,924
Corporate and other debt securities 18,785 16,637
Derivative and other contractual commitments (1)(2) 34,498 34,585
Equity securities 9,136 9,236
Mortgage loans and collateralized mortgage securities 6,643 3,160
Commodities 1,176 1,274
Other 6,519 5,010
---------------------------------
$175,887 $180,088
---------------------------------
TRADING ACCOUNT LIABILITIES
Securities sold, not yet purchased $ 87,962 $ 90,247
Derivative and other contractual commitments (1)(2) 36,507 36,905
---------------------------------
$ 124,469 $ 127,152
------------------------------------------------------------------------------------------------------------------------------
(1) Net of master netting agreements. In addition, the asset balances at
June 30, 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 $432 million and $391
million at June 30, 1998 and December 31, 1997, respectively.
---------------------------------------------------------------------------
7. DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
The table on the next page presents the aggregate notional principal
amounts of Citigroup's outstanding derivative, foreign exchange and
commodities products and related risks at June 30, 1998 and December 31,
1997, along with the related balance sheet credit exposure. Additional
information concerning Citigroup's derivative, foreign exchange, and
commodities products and related risks and activities, including a
description of accounting policies, and credit and market risk management
process is provided in Notes 1 and 21 of Notes to the 1997 Supplemental
Financial Statements.
7
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTIONAL PRINCIPAL BALANCE SHEET
AMOUNTS CREDIT EXPOSURE (1)
---------------------------------------------------------------------
JUNE 30, Dec. 31, JUNE 30, Dec, 31,
IN BILLIONS OF DOLLARS 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------------
Interest rate products $5,239.4 $4,314.8 $18.8 $16.9
Foreign exchange products 2,224.3 1,920.2 31.0 37.4
Equity products 125.8 127.0 6.8 4.0
Commodity products 30.0 32.5 1.0 1.2
Credit derivative products 15.0 6.9 0.2 -
---------------------------------
57.8 59.5
Effects of master netting
agreements at Citicorp (2) (21.3) (24.1)
Effects of securitization (3) (2.0) (0.8)
---------------------------------
$34.5 $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 JUNE 30, 1998 December 31, 1997
----------------------------------------------------------------------------------------------------------------------------
Commercial paper $14,187 $ 7,110
Other short-term borrowings 4,495 4,354
----------------------------------
$18,682 $11,464
----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings consisted of commercial paper and other short-term
borrowings outstanding as follows:
IN MILLIONS OF DOLLARS JUNE 30, 1998 December 31, 1997
----------------------------------------------------------------------------------------------------------------------------
Commercial paper
Commercial Credit Company $ 4,392 $ 3,871
Citicorp 1,833 1,941
Travelers Property Casualty Corp. - 108
----------------------------------
$ 6,225 $ 5,920
Other short-term borrowings 8,556 8,108
----------------------------------
$ 14,781 $ 14,028
----------------------------------------------------------------------------------------------------------------------------
Long-term debt, including its current portion, consisted of the following:
IN MILLIONS OF DOLLARS JUNE 30, 1998 December 31, 1997
----------------------------------------------------------------------------------------------------------------------------
Citigroup Inc. $ 1,975 $ 1,695
Citicorp 18,982 19,035
Salomon Smith Barney Holdings Inc. 20,988 19,064
Commercial Credit Company 6,300 6,300
Travelers Property Casualty Corp. 1,250 1,249
The Travelers Insurance Group Inc. 38 44
----------------------------------
$ 49,533 $ 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 June 30,
1998, the reserve balance was $371 million, primarily reflecting a $324
million ($191 million after-tax) adjustment, in the second quarter,
relating to the Seven World Trade Center lease. This reduction in the
reserve resulted from negotiations on a sub-lease which indicated that
excess space would be disposed of on terms more favorable than had been
originally estimated. A current reassessment of space needs, including the
merger with Citicorp, could indicate a need for increased occupancy by the
Company of space previously considered excess, and could result in a
further adjustment to reduce the restructuring reserve.
8
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $457 million remained
in the reserve as of June 30, 1998, with the difference reflecting the $245
million of equipment and premises write-downs recorded in 1997, as well as
$164 million of primarily severance and related costs (of which $132
million has been paid in cash and $32 million is legally obligated),
together with translation effects. Through June 30, 1998, 1,781 staff
positions have been reduced under this program, 609 in the second quarter.
10. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
In January 1998, Travelers Capital IV, a wholly owned subsidiary trust of
TRV, issued 8 million 6.850% Trust Preferred Securities (the TRV IV
Preferred Securities) with a liquidation preference of $25 per TRV IV
Preferred Security to the public and 247,440 common securities to TRV, the
proceeds of which were invested by Travelers Capital IV in $206 million of
6.850% Junior Subordinated Deferrable Interest Debentures issued by
Citigroup (the Citigroup Debentures). The $206 million of Citigroup
Debentures is the sole asset of Travelers Capital IV. The Citigroup
Debentures mature on January 22, 2038 and are redeemable by Citigroup in
whole or in part at any time after January 22, 2003. Travelers Capital IV
will use the proceeds from any such redemption to redeem a like amount of
TRV IV Preferred Securities and common securities. Distributions on the TRV
IV Preferred Securities and common securities are cumulative and payable
quarterly in arrears. Citigroup's obligations under the agreements that
relate to the TRV IV Preferred Securities, the Trust and the Citigroup
Debentures constitute a full and unconditional guarantee by Citigroup of
the Trust's obligations under the TRV IV Preferred Securities. Upon
consummation of the Citicorp merger, the name of Travelers Capital IV was
changed to Citigroup Capital IV.
In January 1998, SSBH Capital I, a wholly owned subsidiary trust of Salomon
Smith Barney, issued 16 million 7.2% Trust Preferred Securities (SSBH
Capital Preferred Securities) with a liquidation preference of $25 per SSBH
Capital Preferred Security to the public and 494,880 common securities to
Salomon Smith Barney, the proceeds of which were invested by SSBH Capital I
in $412 million of 7.2% Subordinated Deferrable Interest Debentures issued
by Salomon Smith Barney (the Salomon Smith Barney Debentures). The $412
million of Salomon Smith Barney Debentures is the sole asset of SSBH
Capital I. The Salomon Smith Barney Debentures mature on January 28, 2038
and are redeemable by Salomon Smith Barney in whole or in part at any time
after January 28, 2003. SSBH Capital I will use the proceeds from any such
redemption to redeem a like amount of SSBH Capital Preferred Securities and
common securities. Distributions on the SSBH Capital Preferred Securities
and common securities are cumulative and payable quarterly in arrears.
Salomon Smith Barney's obligations under the agreements that relate to the
SSBH Capital Preferred Securities, the Trust and the Salomon Smith Barney
Debentures constitute a full and unconditional guarantee by Salomon Smith
Barney of the Trust's obligations under the SSBH Capital Preferred
Securities.
In June 1998, Citicorp Capital III, a wholly owned subsidiary trust of
Citicorp, issued 9 million 7.1% Trust Preferred Securities (the Capital
Securities) with a liquidation preference of $25 per Capital Security, the
proceeds of which were invested by Citicorp Capital III in $231.75 million
of 7.1% Junior Subordinated Deferrable Interest Debentures issued by
Citicorp (the Subordinated Debt Securities). The Subordinated Debt
Securities are the sole asset of Citicorp Capital III. The Subordinated
Debt Securities mature on August 15, 2028 and are redeemable by Citicorp in
whole or in part at any time on or after August 15, 2003. Citicorp used
substantially all of the net proceeds of the sale of the Subordinated Debt
Securities to redeem, substantially concurrently with the issuance of the
Capital Securities, all of the $216,550,000 outstanding principal amount of
Subordinated Bank Adjustable Note Capital Securities issued by Citicorp on
December 9, 1986. Distributions on the Capital Securities are cumulative
and payable quarterly in arrears. Under these arrangements, taken as a
whole, payments due are fully and unconditionally guaranteed on a
subordinated basis.
11. REGULATORY CAPITAL
Citigroup and Citicorp are subject to risk-based capital and leverage
guidelines issued by the Board of Governors of the Federal Reserve Board
(FRB), and its U.S. insured depository institution subsidiaries, including
Citibank, N.A., are subject to similar guidelines issued by their
respective primary regulators. These guidelines are supplemented by
9
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a leverage ratio requirement. At June 30, 1998, regulatory capital as set
forth in guidelines issued by U.S. federal bank regulators is as follows:
Minimum
Requirement Citigroup Citicorp Citibank, N.A.
---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital ratio 4.00% 8.46% 8.23% 7.88%
Total capital ratio (1) 8.00% 11.00% 11.98% 11.66%
Leverage ratio (2) 3.00% 5.65% 6.68% 6.11%
---------------------------------------------------------------------------------------------------------------------------
(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 June 30, 1998
are the Company's best estimate of ultimate claims and claim adjustment
expenses based upon known facts and current law. However, the conditions
surrounding the final resolution of these claims continue to change.
Currently, it is not possible to predict changes in the legal and
legislative environment and their impact on the future development of
asbestos and environmental claims. Such development will be affected by
future court decisions and interpretations and changes in Superfund and
other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount
that would be material to the Company's operating results in a future
period. However, the Company believes that 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 June 30, Six Months Ended June 30,
--------------------------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------------
Total revenues $19,961 $17,773 $39,398 $34,722
Total revenues, net of interest expense $12,965 $11,703 $25,761 $23,221
Net income $ 2,240 $ 1,908 $ 4,401 $ 3,723
Earnings per share:
Basic $ 0.97 $ 0.82 $ 1.91 $ 1.59
Diluted $ 0.94 $ 0.78 $ 1.84 $ 1.52
Weighted average common shares
outstanding (Basic) 2,244.0 2,247.4 2,243.6 2,252.5
Adjusted weighted average common shares
outstanding (Diluted) 2,330.9 2,356.3 2,327.7 2,363.4
---------------------------------------------------------------------------------------------------------------------------
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 June 30, 1998 was $2.240 billion, compared to $1.908 billion in
the 1997 period. Consolidated net income for the quarter ended June 30, 1998
includes a credit of $191 million representing a reduction in the restructuring
reserve recorded in the fourth quarter of 1997 in connection with the Salomon
Merger (see Note 9 of Notes to Supplemental Condensed Consolidated Financial
Statements). Excluding the restructuring reserve credit, income from operations
for the second quarter of 1998 increased $141 million or 7% over the comparable
period in 1997, primarily reflecting improved performance at the banking,
consumer finance and insurance operations, offset by a decline in earnings at
Salomon Smith Barney. Excluding the restructuring reserve credit, net income for
the first six months of 1998 increased $487 million or 13% above the comparable
period in 1997.
11
SEGMENT RESULTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
THE BUSINESSES OF CITIGROUP
Citigroup is a diversified, integrated financial services company engaged in
banking, investment services, life and property and casualty insurance services,
and consumer finance. The following table presents net income for these industry
segments for the three and six months ended June 30, 1998 and 1997.
NET INCOME
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
Banking Services $1,100 $1,027 $2,168 $2,025
Investment Services 601 453 1,104 865
Life Insurance Services 256 196 519 380
Property & Casualty Insurance Services 261 227 550 451
Consumer Finance Services 68 52 128 101
Corporate and Other (46) (47) (68) (99)
--------------------------------------------------------------------
$2,240 $1,908 $4,401 $3,723
-----------------------------------------------------------------------------------------------------------------------------
The following discussions present in more detail each segment's performance.
BANKING SERVICES
SUMMARY OF FINANCIAL RESULTS
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------------------
Net interest revenue $2,995 $2,863 $5,834 $5,667
Commissions, fees and other income 3,207 2,448 5,973 4,840
--------------------------------------------------------------------
TOTAL REVENUE 6,202 5,311 11,807 10,507
--------------------------------------------------------------------
Provision for credit losses 564 512 1,071 935
Operating expense 3,878 3,168 7,267 6,332
--------------------------------------------------------------------
TOTAL OPERATING EXPENSE 4,442 3,680 8,338 7,267
--------------------------------------------------------------------
INCOME BEFORE TAXES 1,760 1,631 3,469 3,240
Income taxes 660 604 1,301 1,215
--------------------------------------------------------------------
NET INCOME $1,100 $1,027 $2,168 $2,025
-----------------------------------------------------------------------------------------------------------------------------
Citicorp reported net income for the 1998 second quarter of $1.1 billion, up 7%
from the 1997 second quarter. Growth in income before taxes was led by U.S.
bankcards (excluding the results of Universal Card Services (UCS) purchased from
AT&T on April 2, 1998), Global Relationship Banking, and Citibanking in North
America, along with a benefit from Corporate investment portfolio gains,
partially offset by weaker earnings in the Consumer emerging markets businesses,
largely due to conditions in Asia Pacific. Net income for the 1998 six months
was $2.2 billion, up 7% from the 1997 six months.
Global Consumer income before taxes declined $67 million or 11% and $131 million
or 10% in the quarterly and six-month comparisons, reflecting improved results
in U.S. bankcards and the Citibanking businesses in North America, Japan, and
Europe, more than offset by UCS acquisition premium costs and lower earnings in
Asia Pacific and Latin America. Global Corporate Banking income before taxes
grew $112 million or 14% and $212 million or 13% in the quarterly and six-month
comparisons, largely attributable to Global Relationship Banking. Global
Consumer income before taxes in Asia Pacific declined $70 million and $138
million in the quarterly and six-month comparisons primarily reflecting lower
revenue and higher credit costs while Global Corporate Banking income before
taxes was up $3 million in the quarter, as increased revenue was partially
offset by higher expense and credit costs but was down $13 million in the six
months as higher expense and credit costs more than offset revenue growth.
12
NET INTEREST REVENUE (TAXABLE EQUIVALENT BASIS) (1)
2ND QTR. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
IN MILLIONS OF DOLLARS 1998 1998 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
Interest revenue. $6,672 $6,320 $6,302 $6,207 $6,154
Interest expense 3,663 3,464 3,431 3,319 3,278
---------------------------------------------------------------------
NET INTEREST REVENUE 3,009 2,856 2,871 2,888 2,876
Effect of credit card securitization activity 908 640 596 565 578
---------------------------------------------------------------------
TOTAL ADJUSTED (2) $3,917 $3,496 $3,467 $3,453 $3,454
- --------------------------------------------------------------------------------------------------------------------------------
IN BILLIONS OF DOLLARS
TOTAL AVERAGE INTEREST-EARNING ASSETS $276.0 $265.2 $257.0 $255.7 $252.6
Effect of credit card securitization activity 36.8 27.4 26.3 24.8 24.7
---------------------------------------------------------------------
TOTAL ADJUSTED (2) $312.8 $292.6 $283.3 $280.5 $277.3
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN (%)
TOTAL 4.37% 4.37% 4.43% 4.48% 4.57%
Effect of credit card securitization activity .65% .48% .42% .40% .43%
---------------------------------------------------------------------
TOTAL ADJUSTED (2) 5.02% 4.85% 4.85% 4.88% 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
(1) The taxable equivalent adjustment is based on the U.S. federal statutory
tax rate of 35%.
(2) See page 19 for discussion of the effect of credit card securitization
activity.
- -----------------------------------------------------------------------------
Net interest revenue and net interest margin for all periods presented were
reduced by the effect of credit card securitization activity. Adjusted for the
effect of credit card securitization activity, net interest revenue of $3.917
billion increased 12% from the 1998 first quarter and 13% from the 1997 second
quarter. The adjusted net interest margin increased from the 1998 first quarter,
but remained relatively unchanged from the 1997 second quarter. These
improvements in net interest revenue and the net interest margin from both
periods reflected the addition of UCS, as well as an increase due to risk-based
pricing strategies in U.S. bankcards.
Net interest revenue of $3.009 billion in the 1998 second quarter increased 5%
from both the 1998 first quarter and 1997 second quarter, primarily reflecting
the acquisition of the UCS portfolio in the current quarter as well as an
increase in other average interest-earning assets, and was reduced by increased
levels of securitization. The change from the 1997 second quarter also reflected
a decline in the net interest margin primarily from reduced yields earned on
assets.
Excluding UCS, net interest revenue compared to both periods reflected increased
business volumes across most regions, especially in Global Corporate Banking.
The increase from the 1998 first quarter also reflected the impact of one more
day in the current quarter, partially offset by a slightly lower net interest
margin. The improvement from the year ago quarter also reflected increases in
Global Corporate Banking, including trading-related net interest revenue, offset
by lower spreads in the Global Consumer businesses in Latin America and Asia
Pacific, as well as the effect of foreign currency translation.
Interest revenue improved $352 million or 6% from the 1998 first quarter,
primarily resulting from the addition of the UCS portfolio ($187 million);
increased loan volumes in Global Corporate Banking in Latin America, Europe, and
CEEMEA; as well as the impact of one more day in the 1998 second quarter.
Interest revenue improved $518 million or 8% from the 1997 second quarter,
principally from higher loan volumes at higher rates in Emerging Markets, and
from the addition of UCS and higher loan volumes in the Global Consumer
businesses in North America and Latin America. These improvements were partially
offset by a decline in revenue resulting from increased levels of securitization
activity.
Interest expense increased $199 million or 6% from the 1998 first quarter,
primarily from the addition of the UCS portfolio ($81 million) and from
increased time deposit volumes in Global Corporate Banking in Europe. Interest
expense increased $385 million or 12% from the 1997 second quarter, primarily
resulting from increased time deposit volumes across most global markets, and
from increased rates paid in Emerging Markets and the addition of UCS, partially
offset by a decline in purchased fund volumes and other borrowings in U.S.
bankcards.
13
COMMISSIONS, FEES AND OTHER INCOME
COMMISSIONS AND FEES REVENUE
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
GLOBAL CONSUMER
Citibanking $ 314 $ 308 2 $ 614 $ 590 4
Cards (1) 600 491 22 1,083 964 12
Private Bank 133 117 14 251 229 10
------------------------------ -------------------------------
TOTAL GLOBAL CONSUMER (1) 1,047 916 14 1,948 1,783 9
GLOBAL CORPORATE BANKING AND OTHER 528 502 5 1,027 956 7
------------------------------ -------------------------------
TOTAL ADJUSTED 1,575 1,418 11 2,975 2,739 9
Effect of credit card securitization
activity (22) 23 NM 19 54 (65)
------------------------------ -------------------------------
TOTAL $1,553 $1,441 8 $2,994 $2,793 7
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
GLOBAL CONSUMER BUSINESSES IN:
Emerging markets $ 279 $300 (7) $ 549 $ 588 (7)
Developed markets 768 616 25 1,399 1,195 17
------------------------------ ------------------------------
TOTAL $1,047 $916 14 $1,948 $1,783 9
- ------------------------------------------------------------------------------------------------------------------------------
(1) See page 19 for discussion of the effect of credit card securitization
activity.
NM Not meaningful, as percentage equals or exceeds 100%.
- ----------------------------------------------------------------------------
Total commissions and fees revenue of $1.6 billion in the 1998 second quarter
and $3.0 billion for the 1998 six months increased $112 million or 8% and $201
million or 7% from the comparable 1997 periods. The effect of credit card
securitization decreased commissions and fees revenue in the 1998 second
quarter, and increased it in all other periods. Adjusted commissions and fees
revenue in the second quarter of $1.6 billion and in the six months of $3.0
billion was up $157 million or 11% and $236 million or 9% from the comparable
1997 periods.
Global Consumer commissions and fees revenue was up $131 million or 14% (up $34
million or 4% excluding UCS) in the second quarter and $165 million or 9% in the
six months. Growth in fee revenue in the 1998 second quarter was led by a 9%
increase in the developed markets, excluding UCS, principally in U.S. bankcards
and the Private Bank, and was partially offset by a 7% decrease in the emerging
markets, principally Asia Pacific Cards, including the effect of foreign
currency translation. U.S. bankcard fees increased as a result of higher levels
of interchange fees, reflecting charge volume growth and pricing changes.
Private Bank fee revenue increased in the quarter and six months as a result of
higher trust, agency, and custodial fees on higher client business volumes under
management.
Global Corporate Banking and Other commissions and fees revenue increased $26
million or 5% and $71 million or 7% from the comparable quarter and year-to-date
periods. The improvement primarily reflected higher transaction banking services
revenue, investment management fees, and corporate finance fees in Global
Relationship Banking. Commissions and fees revenue in Emerging Markets was
essentially unchanged in the 1998 quarter and six months from the comparable
1997 periods.
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 June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
BY BUSINESS SECTOR
Global Corporate Banking
Emerging Markets $259 $155 67 $ 530 $ 362 46
Global Relationship Banking 357 270 32 735 600 23
------------------------------ ------------------------------
Total Global Corporate Banking 616 425 45 1,265 962 31
Global Consumer and Other 114 86 33 193 138 40
------------------------------ ------------------------------
TOTAL $730 $511 43 $ 1,458 $ 1,100 33
- ------------------------------------------------------------------------------------------------------------------------------
BY TRADING ACTIVITY
Foreign exchange (1) $391 $258 52 $ 777 $ 495 57
Derivative (2) 218 129 69 454 336 35
Fixed income (3) 31 59 (47) 88 129 (32)
Other 90 65 38 139 140 (1)
------------------------------ ------------------------------
TOTAL $730 $511 43 $ 1,458 $ 1,100 33
- ------------------------------------------------------------------------------------------------------------------------------
BY INCOME STATEMENT LINE
Principal transactions $563 $408 38 $ 1,148 $ 903 27
Other (4) 167 103 62 310 197 57
------------------------------ ------------------------------
TOTAL $730 $511 43 $ 1,458 $ 1,100 33
- ------------------------------------------------------------------------------------------------------------------------------
(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 second quarter and six months increased $219
million and $358 million from the respective 1997 periods, primarily reflecting
higher foreign exchange and derivatives revenue driven by global currency
volatility, particularly in certain Asian currencies.
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 $300 million in the second quarter
and $541 million in the six months of 1998, compared with $124 million and $232
million in the comparable 1997 periods. The net gains in the second quarter of
1998 reflected gross realized gains of $328 million ($591 million for the six
months) and gross realized losses of $28 million ($50 million for the six
months). The 1998 second quarter and six months included realized gains of $174
million and $363 million, respectively, related to the sale of Brady bonds. The
1997 second quarter included a realized gain of $58 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 June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
Credit card securitization activity $351 $118 NM $ 489 $283 73
Venture capital 171 173 (1) 435 266 64
Affiliate earnings 42 112 (63) 71 171 (58)
Net asset gains 198 64 NM 229 156 47
Other items 29 8 NM 66 36 83
------------------------------ ------------------------------
TOTAL $791 $475 67 $ 1,290 $912 41
- --------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------------------------------------------------
15
The increase in revenue related to credit card securitization activity in the
1998 second quarter and six months reflected the acquisition of UCS, improved
net interest margins, and higher average securitized volumes. The effect of
credit card securitization activity is discussed in more detail on page 19.
Venture capital revenue of $171 million in the 1998 second quarter remained
essentially unchanged from the year-ago quarter. Revenue in the 1998 six months
reflected a $169 million improvement, 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 second quarter and six months declined $70
million and $100 million from the year-ago periods, primarily due to a 1997
second quarter investment dividend together with reduced earnings in Credicard,
a 33%-owned Brazilian affiliate.
Net asset gains of $198 million and $229 million in the 1998 second quarter and
six months increased $134 million and $73 million from the year-ago periods,
reflecting a $132 million gain on the disposition of two real estate-related
equity interests obtained in connection with loan restructurings. Net asset
gains in the 1997 second quarter included a $23 million gain related to the
disposition of an automated trading business, partially offset by an investment
writedown of $29 million in Latin America. Revenue in the 1997 six months also
included gains of $46 million related to the refinancing agreement concluded
with Peru, and $32 million from the sale of an investment from the acquisition
finance portfolio by Global Relationship Banking, partially offset by an
investment writedown of $20 million in Latin America.
PROVISION AND CREDIT LOSS RESERVE
The provision for credit losses of $564 million and $1.1 billion in the 1998
second quarter and six months increased $52 million and $136 million from the
1997 periods. The increase in the quarter reflected higher net write-offs in
both Global Corporate Banking and Global Consumer, while the increase in the six
months was attributable to Global Corporate Banking.
Details of net write-offs, additional provision, and the provision for credit
losses are included in the table below:
NET WRITE-OFFS, ADDITIONAL PROVISION, AND PROVISION FOR CREDIT LOSSES
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
NET WRITE-OFFS (RECOVERIES)
Global Consumer (1) $1,089 $925 18 $1,976 $1,818 9
Global Corporate Banking 29 (1) NM 85 (62) NM
------------------------------- ------------------------------
TOTAL ADJUSTED NET WRITE-OFFS 1,118 924 21 2,061 1,756 17
Effect of credit card securitization
activity (579) (437) 32 (1,040) (871) 19
------------------------------- ------------------------------
TOTAL $ 539 $487 11 $1,021 $ 885 15
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PROVISION
Global Consumer $ 25 $ 25 - $ 50 $ 50 -
------------------------------- ------------------------------
TOTAL $ 25 $ 25 - $ 50 $ 50 -
- ------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES
Global Consumer $ 535 $513 4 $ 986 $ 997 (1)
Global Corporate Banking 29 (1) NM 85 (62) NM
------------------------------- ------------------------------
TOTAL $ 564 $512 10 $1,071 $ 935 15
- ------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for the effect of credit card securitization activity.
See page 19 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 second quarter and six months were $1.1
billion and $2.0 billion, up from $925 million and $1.8 billion in the 1997
periods, primarily reflecting the acquisition of UCS and higher losses in Asia
Pacific and Latin America, partially offset by the effect of foreign currency
translation and improvements in the U.S. mortgage portfolio. The Global Consumer
provision for credit losses included an additional provision, in excess of net
write-offs, of $25 million and $50 million in the 1998 and 1997 second quarters
and six month periods. Net write-offs and the total provision may increase from
the 1998 second quarter
16
as a result of economic conditions, particularly in Asia Pacific and Latin
America, the credit performance of the portfolios, including bankruptcies,
seasonal factors, and other changes in portfolio levels. See "Consumer
Portfolio Review" on page 26 for additional discussion of the consumer
portfolio.
Global Corporate Banking net write-offs in the 1998 second quarter were $29
million, compared with net recoveries of $1 million in the 1997 second quarter.
The increase in net write-offs is primarily attributable to higher gross
write-offs in the Emerging Markets business, partially offset by higher
recoveries in Global Relationship Banking. Global Corporate Banking net
write-offs in the 1998 six months were $85 million, compared with net recoveries
of $62 million in the 1997 six months (including a 1997 first quarter $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. There were no material credit losses related to derivative and
foreign exchange contracts or standby letters of credit and guarantees in either
six month period. 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
second 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
JUNE 30, Dec. 31, June 30,
IN MILLIONS OF DOLLARS 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------
AGGREGATE ALLOWANCE FOR CREDIT LOSSES
Global Consumer (1) $2,853 $2,487 $2,453
Global Corporate Banking 3,429 3,429 3,429
------------------------------------------
TOTAL AGGREGATE ALLOWANCE FOR CREDIT LOSSES (2) 6,282 5,916 5,882
Reserves for securitization activities (3) 61 85 91
------------------------------------------
TOTAL CREDIT LOSS RESERVES $6,343 $6,001 $5,973
- -----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE AS A PERCENT OF TOTAL LOANS
Global Consumer 2.66% 2.30% 2.24%
Global Corporate Banking (4) 3.92% 4.38% 4.80%
TOTAL 3.22% 3.16% 3.23%
- -----------------------------------------------------------------------------------------------------------------------------
(1) The balance at June 30, 1998 includes $320 million of credit loss reserves
related to the acquisition of UCS.
(2) Includes $6.2 billion attributable to loans and loan commitments as a
deduction from Loans, $50 million attributable to standby letters of credit
and guarantees included in Other liabilities, and $50 million attributable
to derivative and foreign exchange contracts reported as a deduction from
Trading account assets at June 30, 1998.
(3) Attributable to mortgage loans sold with recourse.
(4) Excludes allowance portion attributable to standby letters of credit and
guarantees, and derivative and foreign exchange contracts.
- --------------------------------------------------------------------------------
Credit loss reserves totaled $6.3 billion as of June 30, 1998, up from $6.0
billion as of December 31, 1997 and June 30, 1997, reflecting the addition of
$320 million of credit loss reserves related to the acquisition of UCS.
Uncertainty related to the economic and credit environment, as well as higher
loan volumes, may result in further increases in the aggregate allowance for
credit losses.
OPERATING EXPENSE
Operating expense of $3.9 billion and $7.3 billion in the 1998 second quarter
and six months was up $710 million or 22% and $935 million or 15% from 1997. The
acquisition of UCS increased expense in the quarter and six months by $227
million. In addition, approximately $200 million of the change in the second
quarter was due to increased spending on preparations for the Year 2000 and the
European Economic and Monetary Union ("EMU"), as well as for advertising and
marketing programs, electronic banking initiatives, and incentive compensation.
Global Corporate Banking adjusted expense increased $226 million and $389
million in the 1998 second quarter and six months, or 19% and 16% from year ago
periods, reflecting increases of 23% and 19% in Global Relationship Banking and
12% for both periods in Emerging Markets. Expense in Global Consumer, including
UCS, increased $403 million and $478 million, or 21% and 12% for the 1998 second
quarter and six months, reflecting increases of 28% and 16% in the developed
markets and 3% and 4% in
17
the emerging markets. Foreign currency translation reduced expense by
approximately 4% in both the quarter and six months.
Employee expense of $1.8 billion in the 1998 quarter and $3.5 billion in the six
months was up $218 million or 14% and $267 million or 8% from the 1997 periods.
The increase primarily reflected salary increases, including incentive
compensation, and higher staff levels related to business expansion in the
emerging markets. In addition, expense in the 1998 quarter and six months
included charges of $25 million and $50 million associated with
performance-based stock options granted in January 1998. Staff levels of 99,000
at June 30, 1998 increased 7,500 (3,800 from UCS and 2,200 in the emerging
markets) or 8% from a year-ago.
Net premises and equipment expense was $528 million in the quarter and $1.0
billion in the six months, up $49 million or 10% and $58 million or 6% from
1997. Other expense was $1.5 billion and $2.7 billion in the quarter and six
months, up $443 million or 41% and $610 or 29% from 1997. Costs associated with
the Year 2000, EMU, the inclusion of UCS, and investment spending and higher
business volumes in the emerging markets all contributed to the increase.
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 $320 million has been incurred to date, including $90
million in the 1998 second 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. The charge also included approximately $245 million related to
writedowns of equipment and premises and $148 million related to lease
termination and other exit costs. Additional program costs that do not qualify
for recognition in the charge will be expensed as incurred in the implementation
of these programs, but are not expected to be material.
Of the $880 million restructuring charge, approximately $457 million remained in
the reserve as of June 30, 1998, with the difference reflecting the $245 million
of equipment and premises write-downs recorded in 1997, as well as $164 million
of primarily severance and related costs (of which $132 million has been paid in
cash and $32 million is legally obligated), together with translation effects.
Through June 30, 1998, 1,781 staff positions have been reduced under this
program, 609 in the 1998 second quarter. Additional information about the 1997
restructuring charge, including the businesses and regions affected, may be
found in the 1997 Supplemental Financial Statements.
18
EFFECT OF CREDIT CARD SECURITIZATION ACTIVITY
During the six months of 1998, $11.1 billion of U.S. credit card receivables
were securitized, which included $3.5 billion securitized from the UCS
portfolio. As of June 30, 1998, the total amount of securitized receivables, net
of amortization, was $41.3 billion (including $11.0 billion related to UCS)
compared with $27.6 billion as of March 31, 1998 and $24.2 billion as of June
30, 1997.
The securitization of credit card receivables, which is described in the 1997
Supplemental Financial Statements, does not affect the earnings reported in a
period. However, securitization affects the manner in which revenue and the
provision for credit losses are classified in the income statement. For
securitized receivables, amounts that would otherwise be reported as net
interest revenue, as commissions and fees revenue, and as net credit losses on
loans are instead reported as commissions and fees revenue (for servicing fees)
and as other income (for the remaining cash flows to which Citicorp is entitled,
net of credit losses). Because credit losses are a component of these cash
flows, Citicorp's 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 following table 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 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 June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
IN MILLIONS OF DOLLARS 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net interest revenue $(908) $(578) $(1,548) $(1,208)
Commissions and fees revenue (22) 23 19 54
Other income 351 118 489 283
Provision for credit losses (579) (437) (1,040) (871)
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME IMPACT OF SECURITIZATION $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS) $(37) $(25) $ (32) $ (25)
Return on assets .14% .11% .12% .11%
Net interest margin (.65)% (.43)% (.57)% (.47)%
Consumer net credit loss ratio (1.06)% (.91)% (1.04)% (.93)%
- -----------------------------------------------------------------------------------------------------------------------------
The effect of credit card securitization activity on net interest revenue,
commissions and fees revenue, other income, and the provision for credit losses
in the 1998 second quarter and six months included ($174) million, ($9) million,
$96 million, and ($87) million, respectively, related to UCS. Additionally, the
UCS acquisition increased the effect of credit card securitization activity on
the net interest margin by 8 basis points and 5 basis points in the 1998 second
quarter and six months respectively. The remaining impact of credit card
securitization is due to the increased level of securitization.
19
EARNINGS BY GLOBAL BUSINESS AREA
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------
Global Consumer $ 377 $ 459 (18) $ 806 $ 936 (14)
Global Corporate Banking 662 663 - 1,411 1,312 8
---------------------------- -------------------------------
CORE BUSINESSES 1,039 1,122 (7) 2,217 2,248 (1)
Other Items 61 (95) NM (49) (223) 78
---------------------------- -------------------------------
TOTAL CITICORP $ 1,100 $ 1,027 7 $ 2,168 $ 2,025 7
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION:
GLOBAL CONSUMER:
Citibanking $ 155 $ 194 (20) $ 335 $ 371 (10)
Cards 146 186 (22) 322 406 (21)
Private Bank 76 79 (4) 149 159 (6)
---------------------------- -------------------------------
TOTAL $ 377 $ 459 (18) $ 806 $ 936 (14)
- ---------------------------------------------------------------------------------------------------------------------------
GLOBAL CONSUMER BUSINESSES IN:
Emerging markets $ 146 $ 243 (40) $ 308 $ 485 (36)
Developed markets 231 216 7 498 451 10
---------------------------- -------------------------------
TOTAL $ 377 $ 459 (18) $ 806 $ 936 (14)
- ---------------------------------------------------------------------------------------------------------------------------
GLOBAL CORPORATE BANKING
BUSINESSES IN:
Emerging Markets $ 403 $ 421 (4) $ 904 $ 870 4
Global Relationship Banking 259 242 7 507 442 15
---------------------------- -------------------------------
TOTAL $ 662 $ 663 - $ 1,411 $ 1,312 8
- ---------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS
2ND QTR. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
IN MILLIONS OF DOLLARS 1998 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue, net of interest expense $6,202 $5,605 $5,568 $5,541 $5,311 $5,196
Effect of credit card securitization
activity 579 461 434 408 437 434
Net cost to carry (1) 11 (1) 4 (5) (1) (3)
------------------------------------------------------------------------------------
ADJUSTED REVENUE 6,792 6,065 6,006 5,944 5,747 5,627
------------------------------------------------------------------------------------
Total operating expense 3,878 3,389 3,403 4,223 3,168 3,164
Net OREO benefits (2) 2 12 9 16 37 10
Restructuring charge - - - (880) - -
------------------------------------------------------------------------------------
ADJUSTED OPERATING EXPENSE 3,880 3,401 3,412 3,359 3,205 3,174
------------------------------------------------------------------------------------
OPERATING MARGIN 2,912 2,664 2,594 2,585 2,542 2,453
------------------------------------------------------------------------------------
Global Consumer net write-offs 510 426 432 452 488 459
Effect of credit card securitization
activity 579 461 434 408 437 434
Net cost to carry and net
OREO (benefits) costs (1) (2) (3) (1) - (4) (3) 1
------------------------------------------------------------------------------------
GLOBAL CONSUMER CREDIT COSTS 1,086 886 866 856 922 894
------------------------------------------------------------------------------------
Global Corporate Banking
net write-offs (recoveries) 29 56 29 9 (1) (61)
Net cost to carry and net
OREO costs (benefits) (1) (2) 12 (12) (5) (17) (35) (14)
------------------------------------------------------------------------------------
GLOBAL CORPORATE BANKING
CREDIT COSTS (BENEFITS) 41 44 24 (8) (36) (75)
------------------------------------------------------------------------------------
OPERATING MARGIN LESS CREDIT COSTS 1,785 1,734 1,704 1,737 1,656 1,634
Additional provision (3) 25 25 25 25 25 25
Restructuring charge - - - 880 - -
------------------------------------------------------------------------------------
INCOME BEFORE TAXES 1,760 1,709 1,679 832 1,631 1,609
Income taxes 660 641 616 311 604 611
------------------------------------------------------------------------------------
NET INCOME $1,100 $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.
- --------------------------------------------------------------------------
20
GLOBAL CONSUMER
The Global Consumer business meets the financial services needs of consumer
customers across the regions of the world.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest
expense $4,044 $3,544 14 $7,551 $7,048 7
Adjusted operating expense 2,362 1,959 21 4,343 3,865 12
--------------- --------------- --------------- --------------
OPERATING MARGIN 1,682 1,585 6 3,208 3,183 1
Credit costs (1) 1,086 922 18 1,972 1,816 9
--------------- --------------- --------------- --------------
OPERATING MARGIN LESS CREDIT COSTS 596 663 (10) 1,236 1,367 (10)
Additional provision 25 25 - 50 50 -
--------------- --------------- --------------- --------------
INCOME BEFORE TAXES 571 638 (11) 1,186 1,317 (10)
Income taxes 194 179 8 380 381 -
--------------- --------------- --------------- --------------
NET INCOME $ 377 $ 459 (18) $ 806 $ 936 (14)
- ---------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 140 $ 132 6 $ 136 $ 131 4
Return on assets (%) 1.08 1.39 - 1.20 1.44 -
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes the effect of credit card securitization activity and the effect
related to credit card receivables held for sale.
- -------------------------------------------------------------------------------
Global Consumer income before taxes was $571 million and $1.2 billion in the
1998 second quarter and six months, compared with $638 million and $1.3 billion
in 1997, reflecting improved results in U.S. bankcards and the Citibanking
businesses in North America, Japan, and Europe, offset by UCS acquisition
premium costs and lower earnings in the emerging markets of Asia Pacific and
Latin America. Net income was $377 million and $806 million in the 1998 second
quarter and six months, compared with $459 million and $936 million for 1997.
Return on assets was 1.08% and 1.20% in the quarter and six months, compared to
1.39% and 1.44% a year ago.
Total consumer accounts reached 70 million as of June 30, 1998 in 57 countries
and territories, up from 55 million a year ago, principally reflecting an
increase of 14 million related to UCS, and increases in Latin America and Asia
Pacific.
Adjusted revenue of $4.0 billion in the quarter and $7.6 billion in the six
months was up $500 million and $503 million from 1997, primarily due to the
acquisition of UCS (which contributed $336 million of revenue growth) and
improvements in U.S. bankcards. Revenue also reflected improvements in the
Citibanking businesses in North America and Japan, and in the Private Bank, and
a decline in Asia Pacific, reflecting the effect of foreign currency translation
and spread compression that was partially offset by business volume growth,
principally in customer deposits. Net interest revenue increased 13% in the
quarter and 6% in the six months, while fee and commission revenue was up 14%
and 9%, respectively, principally due to U.S. bankcards, including UCS. Foreign
currency translation reduced revenue growth by approximately 5 percentage points
in both the 1998 second quarter and six months.
Adjusted operating expense increased $403 million or 21% in the quarter and $478
million or 12% in the six months from the 1997 periods, reflecting the
acquisition of UCS (which added $227 million), higher advertising and marketing,
and spending on technology initiatives primarily related to electronic banking,
together with business volume growth and investment in new markets. Foreign
currency translation reduced expense growth by approximately 5 percentage points
in both the 1998 second quarter and six months.
Credit costs in the quarter were $1.1 billion ($910 million excluding UCS),
compared with $886 million in the 1998 first quarter and $922 million a year
ago, reflecting ratios of net credit losses to average managed loans of 2.88%
(2.66% excluding UCS), 2.64%, and 2.73% in the respective quarters.
The Global Consumer business continued to build the allowance for credit losses
with charges of $25 million in excess of net write-offs in both the 1998 and
1997 second quarters and $50 million in both six month periods.
Net credit losses and the related loss ratios may increase from the 1998 second
quarter as a result of economic conditions, the credit performance of the
portfolios, including bankruptcies, seasonal factors, and other changes in
portfolio levels. See "Global Consumer Portfolio Review" on page 26 and
"Provision and Credit Loss Reserves" on page 17 for additional discussion of the
consumer portfolio.
21
With income taxes attributed to core businesses on the basis of local tax rates,
effective tax rates were 34% and 32% in the 1998 second quarter and six months,
up from 28% and 29% in the year-ago periods, reflecting changes in the
geographic mix and nature of earnings. The difference between the local tax
rates attributed to core businesses and Citicorp's overall effective tax rate is
included in Corporate Items.
CITIBANKING
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue, net of interest expense $1,620 $1,531 6 $3,150 $3,012 5
Operating expense 1,229 1,100 12 2,374 2,172 9
------------------------------- ------------------------------
OPERATING MARGIN 391 431 (9) 776 840 (8)
Credit costs 144 145 (1) 281 293 (4)
------------------------------- ------------------------------
OPERATING MARGIN LESS CREDIT COSTS 247 286 (14) 495 547 (10)
Additional provision (4) - NM (6) - NM
------------------------------- ------------------------------
INCOME BEFORE TAXES 251 286 (12) 501 547 (8)
Income taxes 96 92 4 166 176 (6)
------------------------------- ------------------------------
NET INCOME $ 155 $ 194 (20) $ 335 $ 371 (10)
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 88 $ 84 5 $ 87 $ 83 5
Return on assets (%) 0.71 0.93 - 0.78 0.90 -
- -----------------------------------------------------------------------------------------------------------------------------------
(1) NM Not meaningful, as percentage equals or exceeds 100%.
- -----------------------------------------------------------------------------
Income before taxes from Citibanking activities -- delivering products and
services to customers through branches and electronic delivery systems -- was
$251 million and $501 million in the 1998 second quarter and six months. The
1998 results compared with $286 million and $547 million in the same 1997
periods, reflecting improvements in North America, Japan, and Europe that were
more than offset by spending on technology initiatives primarily related to
electronic banking, and declines in Asia Pacific and Latin America. Net income
in the 1998 second quarter and six months was $155 million and $335 million,
compared with $194 million and $371 million in 1997, respectively. Return on
assets was 0.71% and 0.78% in the quarter and six months, compared with 0.93%
and 0.90% a year ago.
Revenue of $1.6 billion and $3.1 billion in the 1998 second quarter and six
months, increased 6% and 5% from 1997, as customer accounts increased 8% to 21
million and average customer deposits grew 9% (15% excluding the effect of
foreign currency translation) to $101 billion. Developed markets revenue grew 9%
and 8% in the quarter and six months, principally reflecting growth in the U.S.
and Japan, and in the quarter, an increase in Europe. Emerging markets revenue
was essentially unchanged in the quarter, and declined 2% in the six months,
reflecting economic conditions in Asia Pacific (including weakened currencies)
and moderate growth in Latin America, including reduced spreads in certain
countries. Foreign currency translation reduced Citibanking revenue growth by
approximately 7 and 6 percentage points in the 1998 second quarter and six
months, respectively, primarily in the emerging markets.
Operating expense of $1.2 billion in the 1998 second quarter and $2.4 billion in
the six months increased 12% and 9% from 1997. Expense increased 14% and 11% in
the developed markets and 7% and 6% in the emerging markets, respectively,
reflecting account and business volume growth, increased spending on technology
initiatives primarily related to electronic banking, and advertising and
marketing. Foreign currency translation reduced Citibanking expense growth by
approximately 5 and 6 percentage points in the 1998 second quarter and six
months, respectively, primarily in the emerging markets.
Credit costs in the quarter were essentially unchanged from the year-ago
quarter, and were up $7 million from the previous quarter, reflecting
improvement in the U.S. and Europe, offset by higher net credit losses in Latin
America and Asia Pacific. The net credit loss ratio was 0.85% in the 1998 second
quarter, compared with 0.83% in the 1998 first quarter and 0.87% in the 1997
second quarter. The emerging markets net credit loss ratio was 0.88% in the 1998
second quarter, compared with 0.70% in the 1998 first quarter and 0.54% in the
1997 second quarter. Foreign currency translation reduced reported net credit
losses by approximately $10 million in the 1998 second quarter and $24 million
in the six months. The additional provision in both the 1998 second quarter and
six months, 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.
22
CARDS
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $2,121 $1,734 22 $3,816 $3,486 9
Adjusted operating expense 930 675 38 1,570 1,341 17
------------------------------- ------------------------------
OPERATING MARGIN 1,191 1,059 12 2,246 2,145 5
Credit costs 945 778 21 1,702 1,525 12
------------------------------- ------------------------------
OPERATING MARGIN LESS CREDIT COSTS 246 281 (12) 544 620 (12)
Additional provision 29 25 16 56 50 12
------------------------------- ------------------------------
INCOME BEFORE TAXES 217 256 (15) 488 570 (14)
Income taxes 71 70 1 166 164 1
------------------------------- ------------------------------
NET INCOME $ 146 $ 186 (22) $ 322 $ 406 (21)
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 36 $ 31 16 $ 33 $ 31 6
Return on assets (%) 1.63 2.41 - 1.97 2.64 -
- -----------------------------------------------------------------------------------------------------------------------------------
During the quarter, Citibank completed the previously announced acquisition of
UCS. The acquisition added $14.5 billion in managed customer receivables and 14
million accounts to U.S. bankcards, bringing the totals to $60.3 billion and 38
million, respectively, at June 30, 1998. In the quarter and six months, UCS
contributed $336 million to revenue, $227 million to expense, and $176 million
to credit costs, resulting in a net loss of approximately $44 million. These
amounts included $107 million (pretax) of UCS acquisition premium costs
(including funding costs associated with the acquisition purchase premium).
Card accounts worldwide totaled 49 million as of June 30, 1998, up from 36
million a year ago, principally reflecting the acquisition of UCS. U.S.
bankcards accounts (excluding UCS) declined by 3% from a year ago, reflecting
competitive pressures and continued risk management initiatives. Cards in the
emerging markets grew 11% from a year ago, primarily in Latin America.
Income before taxes from Cards worldwide -- bankcards, Diners Club, and private
label cards -- was $217 million and $488 million in the 1998 second quarter and
six months, down $39 million and $82 million from the year-ago periods,
reflecting improvements in U.S. bankcards, which were offset by the UCS
acquisition premium costs and lower earnings in Asia Pacific and Latin America.
Cards worldwide return on managed assets (including securitized card
receivables) was 0.81% and 1.00% in the quarter and six months, compared with
1.33% and 1.46% in the year-ago periods. Net income for the 1998 second quarter
and six months was $146 million and $322 million, compared with $186 million and
$406 million in 1997.
Adjusted revenue of $2.1 billion and $3.8 billion in the 1998 second quarter and
six months increased $387 million or 22% and $330 million or 9% from 1997,
primarily reflecting the acquisition of UCS. Excluding UCS, U.S. bankcards
revenue was up 9% and 5% in the quarter and six months, reflecting risk-based
pricing strategies and higher interchange fee revenue, and in the six months
reduced spreads. Interchange fee revenue reflected charge volume growth of 8% in
the quarter and 6% in the six months and pricing changes. Revenue in emerging
markets Cards was down 18% and 20%, respectively, resulting from lower revenue
in Asia Pacific together with reduced earnings in Credicard, a 33%-owned
Brazilian affiliate. Foreign currency translation reduced Cards revenue growth
by approximately 3 percentage points in both the 1998 second quarter and six
months, respectively.
Adjusted operating expense in the developed markets was up $260 million and $234
million in the quarter and six months, principally due to UCS and increased
marketing costs. Emerging markets expense declined 3% and 2% as the effect of
foreign currency translation more than offset account and business volume
growth, increased collection costs, and continued investment in new markets.
Foreign currency translation reduced Cards expense growth by 5 percentage points
in both the 1998 second quarter and six months.
Credit costs of $945 million increased $188 million from the preceding quarter
and $167 million from the 1997 quarter, principally reflecting the acquisition
of UCS. Credit costs in U.S. bankcards were $842 million or 5.73% ($667 million
or 5.97% excluding UCS) of average managed loans for the quarter compared to
$668 million or 5.96% in the 1998 first quarter and $683 million or 6.13% a year
ago. The 12-month-lagged loss ratio was 5.98% (excluding UCS) in the quarter,
compared with 6.03% in the 1998 first quarter and 6.51% a year ago. The percent
of gross write-offs from
23
bankruptcies in the quarter was 41.1% (40.3% excluding UCS), compared with
37.0% in the prior quarter and 40.2% in the 1997 second quarter. U.S.
bankcards managed loans delinquent 90 days or more were $942 million or 1.58%
($766 million or 1.70% excluding UCS) at quarter-end, compared with $842
million or 1.88% in the prior quarter and $843 million or 1.86% a year ago.
Credit costs in non-U.S. bankcard portfolios were $103 million or 4.42% of
average managed loans, compared with $89 million or 3.95% in the preceding
quarter and $95 million or 4.14% in the 1997 quarter. Loans delinquent 90 days
or more were $220 million or 2.30% as of June 30, 1998, compared with $216
million or 2.30% in the prior quarter and $206 million or 2.18% a year ago.
Credit costs and loans delinquent 90 days or more primarily reflect higher
amounts in Asia Pacific, partially offset by the effect of foreign currency
translation.
Cards continued to build the allowance for credit losses with charges of $29
million and $56 million in excess of net write-offs in the 1998 second
quarter and six months.
PRIVATE BANK
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $303 $279 9 $585 $550 6
Adjusted operating expense 203 184 10 399 352 13
------------------------------- ------------------------------
OPERATING MARGIN 100 95 5 186 198 (6)
Credit benefits (3) (1) NM (11) (2) NM
------------------------------- ------------------------------
INCOME BEFORE TAXES 103 96 7 197 200 (2)
Income taxes 27 17 59 48 41 17
------------------------------- ------------------------------
NET INCOME $ 76 $ 79 (4) $149 $159 (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 16 $ 17 (6) $ 16 $ 17 (6)
Return on assets (%) 1.91 1.86 - 1.88 1.89 -
- ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- ------------------------------------------------------------------------------------------------------------------------------------
Private Bank -- which provides personalized wealth management services for high
net-worth clients -- income before taxes was $103 million and $197 million in
the 1998 second quarter and six months, compared with $96 million and $200
million in 1997. Both periods reflected revenue improvements and increased
operating costs. Net income was $76 million and $149 million in the 1998 second
quarter and six months, compared to $79 million and $159 million in 1997.
Client business volumes under management at the end of the quarter reached $108
billion, up $8 billion or 8% from $100 billion a year earlier, reflecting
double-digit growth in all regions, except in Asia Pacific, where due to
economic conditions in the region, managed assets declined. The increase from
1997 primarily reflected growth in custody, trust, and fiduciary balances.
Adjusted revenue of $303 million and $585 million in the 1998 second quarter and
six months increased 9% and 6% from 1997, primarily due to growth in other fee
revenue and client-related foreign exchange. Developed markets revenue grew 12%
and 7% in the quarter and six months, reflecting increases across all regions.
Emerging markets revenue was up 4% in the quarter and 5% in the six months as
growth in Latin America was partially offset by a slight decline in Asia
Pacific.
Adjusted operating expense of $203 million and $399 million in the 1998 second
quarter and six months increased 10% and 13% from 1997, primarily reflecting an
increased sales force and product management costs. Foreign currency translation
reduced expense growth by approximately 3 percentage points in both the 1998
second quarter and six months.
Credit costs were a net benefit of $3 million in the quarter and $11 million in
the six months, as recoveries in North America and Europe were partially offset
by write-offs in Asia Pacific. Loans delinquent 90 days or more were $197
million or 1.23% of loans, compared to $186 million or 1.21% in the preceding
quarter and $187 million or 1.19% in the 1997 second quarter, reflecting
increases in Asia Pacific and improvements from a year earlier in North America.
24
GLOBAL CONSUMER BUSINESSES IN EMERGING MARKETS
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $923 $986 (6) $1,795 $1,934 (7)
Adjusted operating expense 601 581 3 1,164 1,121 4
------------------------------- ------------------------------
OPERATING MARGIN 322 405 (20) 631 813 (22)
Credit costs 133 97 37 234 189 24
------------------------------- ------------------------------
OPERATING MARGIN LESS CREDIT COSTS 189 308 (39) 397 624 (36)
Additional provision 11 7 57 22 10 NM
------------------------------- ------------------------------
INCOME BEFORE TAXES 178 301 (41) 375 614 (39)
Income taxes 32 58 (45) 67 129 (48)
------------------------------- ------------------------------
NET INCOME $146 $243 (40) $ 308 $ 485 (36)
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 42 $ 43 (2) $ 42 $ 42 -
Return on assets (%) 1.39 2.27 - 1.48 2.33 -
- -----------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- -----------------------------------------------------------------------------------------------------------------------------------
Net income in the emerging markets was $146 million and $308 million in the 1998
second quarter and six months, down from $243 million and $485 million a year
ago, reflecting economic conditions, including weakened currencies, in Asia
Pacific, and lower earnings in Latin America. In the quarter and six months,
Cards represented 27% and 24% of emerging markets net income, compared with 36%
and 37% in 1997, respectively.
Asia Pacific (excluding Japan and the Indian subcontinent, but including
Australia and New Zealand) adjusted revenue declined 12% and 14% in the 1998
second quarter and six months from the 1997 periods, reflecting economic
conditions in the region including the effect of foreign currency translation.
Adjusted revenue in Latin America was essentially unchanged from the 1997 second
quarter and six months, reflecting a decline in Credicard and reduced spreads in
certain countries, offset by business volume growth, as well as improvements in
the Private Bank. Foreign currency translation reduced revenue growth by
approximately 13 percentage points in both the second quarter and six months.
Adjusted operating expense was up 3% in the quarter and 4% in the six months,
reflecting a decline in Asia Pacific of 4% and 5%, offset by an 8% and 9%
increase in Latin America, primarily in the Citibanking business. Foreign
currency translation reduced expense growth by approximately 14 and 13
percentage points in the quarter and six months, respectively.
Credit costs in the emerging markets increased $32 million from the 1998 first
quarter, and increased $36 million from the 1997 second quarter. The net credit
loss ratio in Asia Pacific was 1.16%, up from 0.77% in the 1998 first quarter
and 0.72% a year ago. The net credit loss ratio in Latin America was 2.51%
compared to 1.99% in the 1998 first quarter and 2.30% a year ago. Emerging
markets managed loans delinquent 90 days or more were $647 million or 1.95% at
quarter-end, compared with $620 million or 1.85% at March 31, 1998 and $461
million or 1.32% a year ago. The emerging markets businesses built the allowance
for loan losses by $11 million in the quarter and $22 million in the six months.
GLOBAL CONSUMER BUSINESSES IN DEVELOPED MARKETS
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $3,121 $2,558 22 $5,756 $5,114 13
Adjusted operating expense 1,761 1,378 28 3,179 2,744 16
------------------------------- ------------------------------
OPERATING MARGIN 1,360 1,180 15 2,577 2,370 9
Credit costs 953 825 16 1,738 1,627 7
------------------------------- ------------------------------
OPERATING MARGIN LESS CREDIT COSTS 407 355 15 839 743 13
Additional provision 14 18 (22) 28 40 (30)
------------------------------- ------------------------------
INCOME BEFORE TAXES 393 337 17 811 703 15
Income taxes 162 121 34 313 252 24
------------------------------- ------------------------------
NET INCOME $ 231 $ 216 7 $ 498 $ 451 10
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 98 $ 89 10 $ 94 $ 89 6
Return on assets (%) 0.95 0.97 - 1.07 1.02 -
- -----------------------------------------------------------------------------------------------------------------------------------
25
Income before taxes in the developed markets was $393 million and $811 million
in the 1998 second quarter and six months, up $56 million and $108 million from
1997, reflecting improvements in U.S. bankcards and in Citibanking in North
America, Japan, and Europe that were partially offset by UCS acquisition premium
costs and increased spending on electronic banking initiatives. Net income for
the 1998 second quarter and six months was $231 million and $498 million,
compared with $216 million and $451 million in 1997.
Adjusted revenue was up 22% in the quarter and up 13% in the six months,
reflecting the acquisition of UCS, and other increases in U.S. bankcards and in
Citibanking businesses across all regions. Adjusted operating expense grew 28%
and 16%, reflecting UCS, spending on technology initiatives primarily related to
electronic banking, and increased advertising and marketing, together with
business volume growth.
Credit costs in the developed markets increased by $128 million from the 1997
second quarter, reflecting the addition of UCS (credit costs of $176 million),
partially offset by improvements in Citibanking, U.S. bankcards, and credit
recoveries in the Private Bank. Managed loans delinquent 90 days or more were
$2.7 billion or 2.25% ($2.5 billion or 2.39% excluding UCS) at quarter-end,
compared with $2.6 billion or 2.54% at March 31, 1998 and $2.9 billion or 2.80%
a year ago. The developed markets businesses built the allowance for loan losses
by $14 million in the quarter and $28 million in the six months.
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 on page 27 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.
26
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, JUNE 30, JUNE 30, Mar. 31, June 30, 2ND QTR. 2ND QTR. 1st Qtr. 2nd Qtr.
EXCEPT LOAN AMOUNTS IN BILLIONS 1998 1998 1998 1997 1998 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CITIBANKING $ 68.2 $1,995 $2,014 $2,094 $ 68.0 $ 144 $137 $145
Ratio 2.93% 2.97% 3.13% 0.85% 0.83% 0.87%
CARDS
U.S. Bankcards (2) 59.6 942 842 843 58.9 842 668 683
Ratio 1.58% 1.88% 1.86% 5.73% 5.96% 6.13%
Other (3) 9.6 220 216 206 9.3 103 89 95
Ratio 2.30% 2.30% 2.18% 4.42% 3.95% 4.14%
PRIVATE BANK 16.0 197 186 187 15.6 - (7) 2
Ratio 1.23% 1.21% 1.19% NM NM 0.04%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL MANAGED 153.4 3,354 3,258 3,330 151.8 1,089 887 925
RATIO 2.19% 2.37% 2.43% 2.88% 2.64% 2.73%
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIZATION ACTIVITY (4)
Securitized credit card receivables (41.3) (601) (519) (453) (36.8) (542) (430) (404)
Loans held for sale (4.7) (40) (39) (37) (4.6) (37) (31) (33)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $107.4 $2,713 $2,700 $2,840 $110.4 $ 510 $426 $488
Ratio 2.53% 2.55% 2.59% 1.86% 1.64% 1.82%
- -----------------------------------------------------------------------------------------------------------------------------------
MANAGED PORTFOLIO
DEVELOPED $120.1 $2,707 $2,638 $2,869 $118.5 $956 $790 $828
Ratio 2.25% 2.54% 2.80% 3.24% 3.09% 3.26%
EMERGING 33.3 647 620 461 33.3 133 97 97
Ratio 1.95% 1.85% 1.32% 1.61% 1.21% 1.15%
- -----------------------------------------------------------------------------------------------------------------------------------
EMERGING PORTFOLIO (5)
ASIA PACIFIC $22.0 $374 $375 $289 $22.1 $63 $42 $44
Ratio 1.70% 1.67% 1.15% 1.16% 0.77% 0.72%
LATIN AMERICA 9.9 227 202 152 9.8 61 46 46
Ratio 2.28% 2.10% 1.85% 2.51% 1.99% 2.30%
CEEMEA (6) 1.4 46 43 20 1.4 9 9 7
Ratio 3.40% 3.03% 1.43% 2.86% 2.78% 2.15%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The ratios of 90 days or more past due and net credit losses are calculated
based on end-of-period and average loans, respectively, both net of
unearned income.
(2) The U.S. bankcards managed ratios of 90 days or more past due and net
credit losses were reduced by 12 basis points and 24 basis points,
respectively, in the current quarter, due to the addition of the UCS
portfolio.
(3) Includes bankcards outside of the U.S., worldwide Diners Club, and private
label cards.
(4) See page 19 for a description of the effect of credit card
securitization activity.
(5) Includes Private Bank and excludes Japan.
(6) Central and Eastern Europe, Middle East, and Africa.
NM Not meaningful.
- -------------------------------------------------------------------------------
CONSUMER LOAN BALANCES, NET OF UNEARNED INCOME
END OF PERIOD AVERAGE
--------------------------------------------------------------------------------
JUNE 30, Mar. 31, June 30, 2ND QTR. 1st Qtr. 2nd Qtr.
IN BILLIONS OF DOLLARS 1998 1998 1997 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
MANAGED $153.4 $137.3 $137.3 $151.8 $136.5 $135.5
Securitized credit card receivables (41.3) (27.6) (24.2) (36.8) (27.4) (24.7)
Loans held for sale (4.7) (3.8) (3.6) (4.6) (3.6) (3.4)
----------------------------------- ---------------------------------
LOAN PORTFOLIO $107.4 $105.9 $109.5 $110.4 $105.5 $107.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquencies 90 days or more past due in the managed portfolio were $3.4
billion with a related delinquency ratio of 2.19% ($3.2 billion or 2.29%
excluding UCS) at June 30, 1998, compared with $3.3 billion or 2.37% at March
31, 1998 and $3.3 billion or 2.43% a year ago. Total managed net credit losses
in the 1998 second quarter were $1.1 billion and the related loss ratio was
2.88% ($913 million and 2.66% excluding UCS) compared with $887 million and
2.64% in the 1998 first quarter and $925 million and 2.73% in the 1997 second
quarter.
In Citibanking, managed loans delinquent 90 days or more were $2.0 billion with
a related ratio of 2.93% at June 30, 1998, compared with $2.0 billion or 2.97%
at March 31, 1998 and $2.1 billion or 3.13% at June 30, 1997. The decline in
delinquencies from a year ago reflects improvements in the U.S. mortgage
portfolio and the effect of foreign currency translation, partially offset by
increases in Asia Pacific and Latin America. Net credit losses in the 1998
second quarter were $144 million and the related loss ratio was 0.85%, compared
with $137 million and 0.83% in the 1998 first quarter
27
and $145 million and 0.87% in the 1997 second quarter, reflecting higher
losses in Latin America and Asia Pacific, offset by improvement in U.S.
mortgages and Europe, and the effect of foreign currency translation.
U.S. bankcards managed loans delinquent 90 days or more were $942 million or
1.58% ($766 million or 1.70% excluding UCS) at quarter-end, compared with $842
million or 1.88% at March 31, 1998 and $843 million or 1.86% a year ago. Net
credit losses were $842 million and the related loss ratio was 5.73% ($667
million and 5.97% excluding UCS) in the quarter, compared to $668 million and
5.96% in the 1998 first quarter and $683 million and 6.13% a year ago. The
12-month-lagged loss ratio was 5.98% (excluding UCS) in the quarter, compared
with 6.03% in the 1998 first quarter and 6.51% a year ago. The percent of gross
write-offs from bankruptcies in the quarter was 41.1% (40.3% excluding UCS),
compared with 37.0% in the prior quarter and 40.2% in the 1997 second quarter.
The other Cards businesses include bankcards outside the United States,
worldwide Diners Club, and private label cards. Loans delinquent 90 days or more
of $220 million at June 30, 1998 were up from $216 million at March 31, 1998 and
$206 million at June 30, 1997. Net credit losses in the 1998 second quarter of
$103 million increased from $89 million in the prior quarter and $95 million a
year ago. The increase in both delinquencies and net credit losses primarily
reflects higher amounts in Asia Pacific, partially offset by the effect of
foreign currency translation. Additionally, delinquencies reflect higher amounts
in Latin America.
Private Bank loans delinquent 90 days or more were $197 million or 1.23% of
loans at June 30, 1998, up from $186 million or 1.21% at March 31, 1998 and $187
million or 1.19% a year ago. The increase from both the 1998 first quarter and a
year ago primarily reflects an increase in nonaccrual loans in Asia Pacific. As
compared to a year ago, delinquencies also reflect improvements in North
America.
Total consumer loans on the balance sheet delinquent 90 days or more on which
interest continued to be accrued were $983 million at June 30, 1998, compared
with $988 million at March 31, 1998 and $937 million at June 30, 1997. Included
in these amounts are U.S. government-guaranteed student loans of $247 million,
$256 million, and $215 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 $736
million, $732 million, and $722 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
56.
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 June
30, 1998, interest accrual had been suspended on $1.9 billion of consumer loans,
primarily consisting of Citibanking loans, compared with $1.9 billion at March
31, 1998 and $2.0 billion at June 30, 1997. The decline from June 30, 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 $424 million at June 30,
1998, down from $475 million at March 31, 1998 and $604 million at June 30,
1997, reflecting continued improvement in the credit quality of the portfolio.
The portion of Citicorp's aggregate allowance for credit losses attributed to
the consumer portfolio was $2.9 billion as of June 30, 1998, up from $2.5
billion as of March 31, 1998 and June 30, 1997, reflecting the addition of $320
million of credit loss reserves related to the acquisition of UCS. The aggregate
allowance for credit losses reflected an additional provision of $25 million in
excess of net write-offs per quarter for each period presented. The allowance as
a percentage of loans on the balance sheet was 2.66% as of June 30, 1998,
compared with 2.36% at March 31, 1998 and 2.24% at June 30, 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 second
quarter as a result of economic conditions, particularly in Asia Pacific and
Latin America, the credit performance of the portfolios, including bankruptcies,
seasonal factors, and other changes in portfolio levels. Additionally,
delinquencies and loans on which the accrual of interest is suspended could
remain at relatively high levels.
28
GLOBAL CORPORATE BANKING
Global Corporate Banking serves corporations, financial institutions,
governments, investors, and other participants in capital markets throughout the
world.
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $2,409 $1,994 21 $4,721 $3,924 20
Adjusted operating expense 1,433 1,207 19 2,747 2,358 16
------------------------------- ------------------------------
OPERATING MARGIN 976 787 24 1,974 1,566 26
Credit costs (benefits) 41 (36) NM 85 (111) NM
------------------------------- ------------------------------
INCOME BEFORE TAXES 935 823 14 1,889 1,677 13
Income taxes 273 160 71 478 365 31
------------------------------- ------------------------------
NET INCOME $ 662 $ 663 - $1,411 $1,312 8
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 178 $ 152 17 $ 175 $ 150 17
Return on assets (%) 1.49 1.75 - 1.63 1.76 -
- -----------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- ------------------------------------------------------------------------------------------------------------------------------------
Global Corporate Banking income before taxes in the 1998 second quarter and six
months grew $112 million or 14% and $212 million or 13% from the comparable 1997
periods, while net income was essentially unchanged from the 1997 second quarter
and was up $99 million or 8% from the 1997 six months as changes in the nature
and geographic mix of pretax earnings increased the effective income tax rates
in the quarterly and six-month comparisons. Growth in average assets of 17% in
both the quarterly and six-month comparisons outpaced net income growth and
resulted in a decline in return on average assets of 26 basis points and 13
basis points in the quarterly and six-month comparisons. The Emerging Markets
business contributed 61% and 64% of Global Corporate Banking net income in the
1998 second quarter and six months, and Global Relationship Banking contributed
39% and 36% of Global Corporate Banking net income.
Adjusted revenue grew 21% and 20% (both 25% excluding the effect of foreign
currency translation) in the quarterly and six-month comparisons. The growth in
both periods reflected improved trading-related revenue, higher aggregate
realized gains from sales of investments and net asset gains, growth in
transaction banking services and corporate finance revenue, improved treasury
results and, in the six-month period, higher venture capital revenue. Growth in
these areas was partially offset by a significant second quarter 1997 dividend
from an investment of an affiliate. Adjusted operating expense increased 19% and
16% (22% and 20% excluding the effect of foreign currency translation) in the
quarterly and six-month comparisons. Revenue growth outpaced expense growth by
ratios of 1.8 to 1 and 2.0 to 1 in the quarterly and six-month comparisons,
resulting in operating margin growth of 24% and 26% (30% and 34% excluding the
effect of foreign currency translation), respectively. Credit costs rose $77
million and $196 million in the quarterly and six-month comparisons primarily
due to higher write-offs in Asia Pacific coupled with lower gains from the sale
of OREO and, in the six-month comparison, a $50 million recovery in 1997 from
the refinancing agreement concluded with Peru.
Cash-basis loans of $1.3 billion at June 30, 1998 declined $51 million from the
1998 first quarter, but increased $376 million from the year-ago quarter.
Cash-basis loans in Global Relationship Banking of $300 million declined $77
million from the 1998 first quarter and $134 million from the year-ago quarter.
Cash-basis loans in the Emerging Markets of $1.0 billion increased $26 million
from the 1998 first quarter and $510 million from a year ago. The increase from
the year-ago quarter is primarily due to the economic turmoil affecting Thailand
and Indonesia. Emerging Markets cash-basis loans included $44 million and $83
million at June 30, 1998 and March 31, 1998, respectively, of balance sheet
credit exposures related to foreign currency derivative contracts with customers
for which the recognition of revaluation gains has been suspended. The amount
included a year ago was not material. Commercial OREO of $348 million improved
$2 million and $134 million from the 1998 first quarter and the year-ago
quarter. See the tables entitled "Cash-Basis, Renegotiated, and Past Due Loans"
and "Other Real Estate Owned and Assets Pending Disposition" on page 56.
Levels of trading-related and venture capital revenue and realized gains from
sales of investments and net asset gains in Global Corporate Banking may
fluctuate in the future as a result of market and asset-specific factors. See
pages 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 comments in the Emerging Markets and Global Relationship Banking sections
that follow. Losses on commercial lending activities can vary widely with
respect to timing and amount, particularly within any
29
narrowly-defined business or loan type. Credit costs and cash-basis loans may
increase from the 1998 second 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 June 30, Six Months Ended June 30,
------------------------------- % ------------------------------- %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $ 1,127 $ 977 15 $ 2,241 $ 1,902 18
Adjusted operating expense 530 473 12 1,028 919 12
--------------- --------------- --------------- ---------------
OPERATING MARGIN 597 504 18 1,213 983 23
Credit costs (benefits) 93 24 NM 156 (12) NM
--------------- --------------- --------------- ---------------
INCOME BEFORE TAXES 504 480 5 1,057 995 6
Income taxes 101 59 71 153 125 22
--------------- --------------- --------------- ---------------
NET INCOME $ 403 $ 421 (4) $ 904 $ 870 4
- ---------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 84 $ 70 20 $ 83 $ 68 22
Return on assets (%) 1.92 2.41 - 2.20 2.58 -
- ---------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Emerging Markets operating margin in the 1998 second quarter and six months grew
$93 million or 18% and $230 million or 23% from the comparable 1997 periods as
revenue growth outpaced expense growth by ratios of 2.6 to 1 and 3.1 to 1,
respectively. However, credit costs increased $69 million and $168 million in
the quarterly and six-month comparisons, reducing income before taxes growth to
5% and 6%, respectively. Due to changes in the nature and geographic mix of
earnings, the effective income tax rate in the 1998 second quarter climbed to
20% from 12%, raising income taxes and producing a 4% decline in net income. Net
income in the six-month comparison grew 4%.
Adjusted revenue grew $150 million or 15% (23% excluding the effect of foreign
currency translation) and $339 million or 18% (27% excluding the effect of
foreign currency translation) in the quarterly and six-month comparisons.
Trading-related revenue of $259 million and $530 million in the 1998 second
quarter and six months grew $104 million and $168 million from the comparable
1997 periods, primarily due to strong foreign exchange results in Asia Pacific
attributable to unsettled financial markets in certain Asian countries. The
aggregate of realized gains from sales of investments and net asset gains
totaled $179 million and $397 million in the 1998 quarter and six months, up $45
million and $109 million from the comparable 1997 periods, and included $174
million and $363 million in the 1998 periods and $58 million in the 1997 quarter
and six months from the sale of Brady bonds. This revenue in the 1997 six months
also included $46 million related to the refinancing agreement concluded with
Peru. Transaction banking services revenue grew at double digit rates in both
the quarterly and six-month comparisons and was complemented in both comparisons
by strong treasury results. Revenue in the 1997 second quarter and six months
included a significant dividend from an investment of an affiliate.
Adjusted revenue in Asia Pacific (comprising 13 countries and territories
excluding Japan and the Indian subcontinent, but including Australia and New
Zealand) grew 26% and 20% in the quarterly and six-month comparisons due to
improved trading-related revenue coupled with double-digit growth in transaction
banking services revenue and significantly improved treasury results. No single
country or territory in the Emerging Markets Asia Pacific business exceeded 2%
of Citicorp's adjusted revenue or average assets in the 1998 second quarter or
six months. Revenue attributed to the Embedded Bank and Emerging Local Corporate
strategies (Citicorp's plans to gain market share in selected emerging market
countries), together with new franchises, accounted for 4% of Emerging Markets
revenue in both the 1998 second quarter and six months and was up 43% and 70% in
the quarterly and six-month comparisons. About 22% and 21% of the revenue in the
Emerging Markets business in the 1998 second quarter and six months was
attributable to business from multinational companies managed jointly with
Global Relationship Banking, with that revenue having grown 17% and 23% in the
quarterly and six-month comparisons.
Adjusted operating expense increased $57 million or 12% (19% excluding the
effect of foreign currency translation) and $109 million or 12% (18% excluding
the effect of foreign currency translation) in the quarterly and six-month
comparisons. The growth reflected investment spending to build the franchise,
including costs associated with Citicorp's Embedded Bank and Emerging Local
Corporate strategies, and volume-related expense growth.
30
Credit costs rose $69 million and $168 million in the quarterly and six-month
comparisons, with Asia Pacific contributing $67 million and $125 million of the
increase, primarily from Indonesia and Thailand. Credit costs in the 1998 and
1997 six months included recoveries of $9 million from the refinancing agreement
concluded with the Ivory Coast and $50 million from the refinancing agreement
concluded with Peru, respectively.
Average assets in the 1998 second quarter and six months grew $14 billion or 20%
and $15 billion or 22% reflecting growth across all geographic segments, and was
concentrated in the loan portfolio and transaction banking products, together
with treasury initiatives.
GLOBAL RELATIONSHIP BANKING
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- % ------------------------------ %
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------------
Adjusted revenue, net of interest expense $1,282 $1,017 26 $2,480 $2,022 23
Adjusted operating expense 903 734 23 1,719 1,439 19
--------------- --------------- --------------- --------------
OPERATING MARGIN 379 283 34 761 583 31
Credit benefits (52) (60) (13) (71) (99) (28)
--------------- --------------- --------------- --------------
INCOME BEFORE TAXES 431 343 26 832 682 22
Income taxes 172 101 70 325 240 35
--------------- --------------- --------------- --------------
NET INCOME $ 259 $ 242 7 $ 507 $ 442 15
- ---------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 94 $ 82 15 $ 92 $ 82 12
Return on assets (%) 1.11 1.18 - 1.11 1.09 -
- ---------------------------------------------------------------------------------------------------------------------------------
Income before taxes from the Global Relationship Banking business in North
America, Europe, and Japan in the 1998 second quarter and six months grew $88
million or 26% and $150 million or 22% from the comparable 1997 periods.
However, increases in the effective income tax rates to 40% and 39% in the 1998
second quarter and six months from 29% and 35% in the respective 1997 periods
raised income taxes, and resulted in net income improvements of $17 million or
7% and $65 million or 15% in the quarterly and six-month comparisons.
Adjusted revenue grew $265 million or 26% and $458 million or 23% in the
quarterly and six-month comparisons. Revenue growth in the quarterly comparison
reflected a $132 million gain on the disposition of two real-estate-related
equity interests obtained in connection with loan restructurings, an $87 million
improvement in trading-related revenue, double-digit growth in corporate finance
and investment management fees, moderate growth in transaction banking services
revenue, and essentially unchanged venture capital revenue, partially offset by
a $23 million gain on the sale of a business recognized in the 1997 second
quarter. Revenue growth in the six-month comparison reflected a $169 million
improvement in venture capital revenue, a $135 million improvement in
trading-related revenue, the $132 million gain on the disposition of two
real-estate-related equity interests, double-digit growth in corporate finance
and investment management fees, and moderate growth in transaction banking
services revenue, partially offset by gains of $23 million and $32 million in
1997 from the sales of a business and an investment from the acquisition finance
portfolio.
Adjusted operating expense grew $169 million or 23% and $280 million or 19% in
the quarterly and six-month comparisons, primarily attributable to increased
spending on technology, including costs related to the Year 2000 and the
European EMU, higher incentive compensation, and volume-related expense growth.
Credit costs in the 1998 quarter and six months were net benefits of $52 million
and $71 million, down from net benefits of $60 million and $99 million in the
comparable 1997 periods. The decline in the six-month comparison is attributable
to a lower level of gains on the sale of OREO.
Average assets in the 1998 second quarter and six months grew $12
billion or 15% and $10 billion or 12% reflecting growth primarily in
trading, loan portfolio, and transaction banking products.
31
OTHER ITEMS
Three Months Ended June 30, % Six Months Ended June 30, %
------------------------------- ------------------------------
IN MILLIONS OF DOLLARS 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue, net of interest expense $ 339 $209 62 $585 $ 402 46
Operating expense 85 39 NM 191 156 22
--------------- --------------- --------------- --------------
INCOME BEFORE TAXES 254 170 49 394 246 60
Income taxes 193 265 (27) 443 469 (6)
--------------- --------------- --------------- --------------
NET INCOME (LOSS) $ 61 $(95) NM $(49) $(223) 78
- ---------------------------------------------------------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 9 $ 9 - $ 9 $ 8 13
- ---------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful, as percentage equals or exceeds 100%.
- --------------------------------------------------------------------------------
Other Items includes revenue derived from charging businesses for funds
employed, based upon a marginal cost of funds concept, unallocated corporate
costs and the offset created by attributing income taxes to core business
activities on a local tax-rate basis. Income taxes attributed to core
businesses on the basis of local tax rates resulted in effective tax rates
for the core businesses of 31% and 28% in the 1998 quarter and six months,
and 23% and 25% in the 1997 quarter and six months, primarily reflecting
changes in the nature and geographic mix of earnings. Citicorp's effective
tax rate was 37.5% in both 1998 periods and in the 1997 six months, and 37%
in the 1997 second quarter.
Revenue in the 1998 second quarter and six months included $90 million and
$109 million of gains on sales of investments held in the Corporate
portfolio, while the corresponding 1997 periods reflected investment
writedowns of $29 million and $49 million. Expense in the 1998 second quarter
and six months included a $25 million and $50 million charge associated with
performance-based stock options granted in January 1998, and increases in
certain technology expense and other unallocated corporate costs. The 1997
six months included a $72 million charge associated with performance-based
stock options which vested in that period.
INVESTMENT SERVICES
Three Months Ended June 30,
--------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
IN MILLIONS OF DOLLARS REVENUES NET INCOME Revenues Net income
- -----------------------------------------------------------------------------------------------------------------------------------
Investment banking and brokerage (1) $5,582 $538 $5,116 $404
Asset management 227 63 194 49
---------------- ----------------- ---------------- ----------------
Salomon Smith Barney $5,809 $601 $5,310 $453
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Net income in 1998 includes a $191 million after-tax credit to income
resulting from adjustment of the restructuring reserve related to the
merger with Salomon Inc.
- --------------------------------------------------------------------------
Six Months Ended June 30,
------------------------------------------------------------------
1998 1997
---------------------------------- -------------------------------
IN MILLIONS OF DOLLARS REVENUES NET INCOME Revenues Net Income
- ---------------------------------------------------------------------------------------------------------------------------------
Investment banking and brokerage (1) $11,414 $ 981 $ 9,807 $772
Asset management 452 123 380 93
---------------- ----------------- ---------------- --------------
Salomon Smith Barney $11,866 $ 1,104 $ 10,187 $865
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Net income in 1998 includes a $191 million after-tax credit to the
restructuring charge related to the merger with Salomon Inc.
- ------------------------------------------------------------------------------
Salomon Smith Barney reported earnings (before the above mentioned
restructuring credit) of $410 million for the quarter ended June 30, 1998,
compared to $453 million reported for the quarter ended June 30, 1997
reflecting lower earnings from principal transactions as a result of losses
in global arbitrage and commodities trading. Revenues, net of interest
expense were $2.742 billion in the 1998 quarter, relatively even with $2.732
billion in the 1997 quarter. Salomon Smith Barney's return on equity (before
the restructuring credit) was 18.2% in the second quarter of 1998, down from
23.2% in the second quarter of 1997 and 23.1% in the first quarter of 1998.
The pretax profit margin (before the restructuring credit) was 23.5% in the
second quarter of 1998, down from 27.1% in the second quarter of 1997.
For the six months ended June 30, 1998 Salomon Smith Barney reported earnings
(before the restructuring reserve credit) of $913 million, an increase of 6%
from the $865 million reported for the six months ended June 30, 1997. Revenues,
net
32
of interest expense, increased 8% to $5.876 billion in the 1998 period
compared to $5.440 billion in the 1997 period. Salomon Smith Barney's return on
equity (before the restructuring credit) was 20.6% in the first half of 1998,
down from 22.5% in the first half of 1997. The pretax profit margin (before the
restructuring credit) was 24.8% in the first half of 1998, down from 26.1% in
the first half of 1997.
SALOMON SMITH BARNEY REVENUES
Three Months Ended June 30,
----------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Commissions $ 784 $ 686
Investment banking 640 475
Principal transactions 315 709
Asset management and administration fees 553 399
Interest income, net (1) 401 430
Other income 49 33
--------------------- ------------------
Net revenues (1) $2,742 $2,732
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Net of interest expense of $3.067 billion and $2.578 billion for the
three-month period ended June 30, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
- -------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Commissions $1,579 $1,402
Investment banking 1,268 959
Principal transactions 1,095 1,471
Asset management and administration fees 1,051 788
Interest income, net (1) 796 752
Other income 87 68
--------------------- ------------------
Net revenues(1) $5,876 $5,440
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Net of interest expense of $5.990 billion and $4.747 billion for the
six-month period ended June 30, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
- ------------------------------------------------------------------------------
SECOND QUARTER
Commission revenues increased 14% to $784 million in the second quarter of 1998
from $686 million in the second quarter of 1997. This increase is a result of
strong activity in sales of over-the-counter and listed securities and mutual
fund commissions.
Investment banking revenues increased 35% to $640 million in the second quarter
of 1998 up from $475 million in the second quarter of 1997. The increase in
investment banking revenues reflect increases in all debt and equity
underwriting categories including equities, high yield, public finance, high
grade and unit trusts, as well as higher merger and acquisition advisory fees.
Principal transactions revenues declined sharply to $315 million, down $394
million from last year's second quarter and $464 million from the first quarter
of 1998. The drop was a result of losses principally in the U.S. fixed income
arbitrage business and from commodities trading conducted by Phibro Inc. In
early July, the decision was made to restructure and significantly reduce the
risk profile of the U.S. arbitrage group's activities because of the lessening
profit opportunities and the growing risk and volatility of the markets.
Asset management and administration fees increased 39% to $553 million in the
second quarter of 1998, up from $399 million in the second quarter of 1997. This
reflects broad growth in all recurring fee-based products. At June 30, 1998,
internally managed assets were $183.9 billion and total assets under fee-based
management were $253.2 billion compared to $150.1 billion and $203.2 billion,
respectively, at June 30, 1997.
Net interest and dividends decreased to $401 million in the second quarter of
1998, from $430 million in the second quarter of 1997 due to a decrease in the
level of net interest-earning assets, partially offset by increased margin
lending to clients.
Compensation and benefits expense, as a percentage of net revenues, for the
second quarter of 1998 was 56.3% compared to 52.8% in the second quarter of 1997
and non-compensation expense (before the restructuring credit) as a percentage
of
33
net revenues was 20.2% in the 1998 quarter compared to 20.1% in the 1997
quarter. Salomon Smith Barney continues to maintain its focus on controlling
fixed expenses.
SIX MONTHS
Commission revenues increased 13% to $1.579 billion in the 1998 period from
$1.402 billion in the 1997 period. Investment banking revenues increased 32% to
$1.268 billion in the 1998 period, up from $959 million in the 1997 period.
Principal transaction revenues declined to $1.095 billion in the 1998 period
from $1.471 billion in the 1997 period. Asset management and administration fees
increased 34% to $1.051 billion in the 1998 period, up from $788 million in the
1997 period. Net interest and dividends increased 6% to $796 million in the 1998
period, up from $752 million in the 1997 period.
Compensation and benefits expense, as a percentage of net revenues, for the six
months of 1998 was 55.6% compared to 53.7% in the first six months of 1997 and
non-compensation expense (before the restructuring credit) as a percentage of
net revenues was 19.6% in the 1998 period compared to 20.2% in the 1997 period.
ASSETS UNDER FEE-BASED MANAGEMENT
At June 30,
--------------------- ------------------
IN BILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Money market funds $ 51.1 $ 44.3
Mutual funds 57.6 43.8
Managed accounts 60.9 52.2
--------------------- ------------------
Salomon Smith Barney Asset Management 169.6 140.3
Financial Consultant managed accounts 14.3 9.8
--------------------- ------------------
Total internally managed accounts 183.9 150.1
Consulting Group externally managed assets 69.3 53.1
--------------------- ------------------
Total assets under fee-based management $253.2 $203.2
- ---------------------------------------------------------------------------------------------------------------------------------
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 June 30,
--------------------- ------------------
IN MILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Investment advisory, administration and distribution fees $214 $173
Unit Investment Trust revenues - net 7 7
Other incomes 6 14
--------------------- ------------------
Total revenues $227 $194
Operating earnings $ 63 $ 49
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------- ------------------
IN MILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Investment advisory, administration and distribution fees $416 $341
Unit Investment Trust revenues - net 20 16
Other incomes 16 23
--------------------- ------------------
Total revenues $452 $380
Operating earnings $123 $ 93
- ---------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER
The division's 29% 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.
At June 30, 1998, assets under fee-based management for Salomon Smith Barney
Asset Management consisted of 30% in money market funds, 34% in mutual funds
and 36% in accounts managed for high net worth individuals, pension funds,
corporations and other institutions. Investment advisory, administration and
distribution fees rose 24% to $214 million in the second quarter of 1998,
reflecting a 21% increase in assets under fee-based management from the
comparable period last year.
34
In the mutual fund sector, dollar inflows increased and performance continued
to show improvement. In addition, during the first half of the year, sales of
proprietary mutual funds rose 48%, and they accounted for an increasing
percentage - 28% in the second quarter of 1998 compared to 25% in the 1997
period - of Salomon Smith Barney's total mutual fund sales.
New products successfully introduced recently include the closed-end Salomon
Brothers High Income Fund II which raised $985 million. In addition, the
acquisition of the asset management business of J.P. Morgan Australia, with
$4.8 billion (U.S.) under management closed in July 1998.
SIX MONTHS
The division's 32% increase in earnings reflects continued strength in mutual
funds, managed accounts, and its share of unit trust revenues, as well as the
acquisition of $5.9 billion of Common Sense(R) Trust assets at year-end 1997.
Investment advisory, administration and distribution fees rose 22% to $416
million in the first six months of 1998, compared to $341 million in the
comparable period last year.
CONSUMER FINANCE SERVICES
Three Months Ended June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- -------------------------------------------------------------------------------------------------------------------
REVENUES NET INCOME Revenues Net income
-------------------------------------------------------------------
Consumer Finance Services $514 $ 68 $380 $52
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- -------------------------------------------------------------------------------------------------------------------
REVENUES NET INCOME Revenues Net income
-------------------------------------------------------------------
Consumer Finance Services $999 $128 $757 $101
- -------------------------------------------------------------------------------------------------------------------
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.
SECOND QUARTER
Earnings in the second quarter of 1998 were $68 million compared to $52 million
in the second quarter of 1997. This segment's performance reflects continued
internal receivables growth in all major products, an improved charge-off rate
and the integration of Security Pacific Financial Services (Security Pacific)
into the Commercial Credit Company branch system since July 1997.
Net receivables owned reached a record $12.1 billion, up 34% from the prior year
period and up $1.032 billion or 9% 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 as well
as strong sales in the branch network. On a managed basis, including securitized
assets, receivables totaled $12.3 billion, an increase of $1.1 billion from
year-end 1997.
During the second quarter of 1998, the average yield on owned receivables was
14.15%, down from 14.42% in the second quarter of 1997, reflecting the shift in
the portfolio mix toward lower-risk real estate loans, which have lower margins.
At June 30, 1998, the owned portfolio consisted of 47% real estate-secured
loans, 34% personal loans, 12% credit cards and 7% sales finance and other.
The charge-off rate on owned receivables of 2.72% in the second quarter of 1998
continued to improve from 2.95% in the second quarter of 1997 and from 2.81% in
the first quarter of 1998. Delinquencies over 60 days on owned receivables were
1.71% at June 30, 1998, up from 1.54% at June 30 1997, which did not include
Security Pacific, and down from 1.77% at March 31, 1998.
35
As of, or for the
Three Months Ended June 30,
-----------------------------------------
1998 1997
-------------------------------------------------------------------------------------------------------------------
Allowance for credit losses as a % of net outstandings 2.90% 2.94%
Charge-off rate for the period 2.72% 2.95%
60 + days past due on a contractual basis as a % of gross consumer
finance receivables at quarter end 1.71% 1.54%
-------------------------------------------------------------------------------------------------------------------
SIX MONTHS
During the first six months of 1998, the average yield on owned receivables was
14.17%, down from 14.53% in the first six months of 1997. The charge-off rate on
owned receivables of 2.77% in the first six months of 1998 was improved from the
2.93% rate in the first six months of 1997.
LIFE INSURANCE SERVICES
Three Months Ended June 30,
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
IN MILLIONS OF DOLLARS REVENUES NET INCOME Revenues Net income
- ---------------------------------------------------------------------------------------------------------------
Travelers Life and Annuity (1) $ 800 $152 $ 666 $115
Primerica Financial Services (2) 421 104 375 81
-----------------------------------------------------------------
Total Life Insurance Services $1,221 $256 $1,041 $196
- ---------------------------------------------------------------------------------------------------------------
(1) Net income includes $22 million and $10 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million of reported investment portfolio losses in
1997.
- -------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
IN MILLIONS OF DOLLARS REVENUES NET INCOME Revenues Net income
- ----------------------------------------------------------------------------------------------------------------
Travelers Life and Annuity (1) $1,572 $320 $1,284 $220
Primerica Financial Services 822 199 750 160
---------------------------------------------------------------------
Total Life Insurance Services $2,394 $519 $2,034 $380
- ----------------------------------------------------------------------------------------------------------------
(1) Net income includes $72 million and $15 million of reported investment
portfolio gains in 1998 and 1997, respectively.
- -----------------------------------------------------------------------------
TRAVELERS LIFE AND ANNUITY
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) under the Travelers name.
Among the range of products offered are fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Salomon Smith Barney Financial Consultants and a nationwide
network of independent agents. The majority of the annuity business and a
substantial portion of the life business written by Travelers Life and Annuity
is accounted for as investment contracts, with the result that the premium
deposits collected are not included in revenues.
SECOND QUARTER
Earnings before portfolio gains increased 24% to $130 million in the second
quarter of 1998, from $105 million in the comparable 1997 period. These record
earnings were largely driven by double-digit growth in business volume in all
product lines and strong investment income. The substantial increase in
investment income for the quarter resulted primarily from participation in
partnership investment interests.
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 $18.151 billion at June 30, 1998, up 23% or
$3.434 billion from a year ago. Net written premium and deposits for the quarter
were up 23% to $774.3 million, of which more than 75% was generated by
cross-selling through Salomon Smith Barney Financial Consultants and Copeland.
Net written premium and deposits through Salomon Smith Barney rose 18% to $269
million, while
36
Copeland's net written premium and deposits increased 21% to $315
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. New annuity products have also been introduced to the Primerica
Financial Services distribution network, and there has been a launch of a pilot
program through Citibank's branch network.
Payout and group annuity account balances and benefit reserves reached $12.673
billion at June 30, 1998, up 10% from a year ago. The revitalization of this
business is reflected in the 63% increase in net written premiums and deposits
(excluding the Company's employee pension plan deposits) in the second quarter
of 1998 to $1.028 billion, up from $632.0 million in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the second
quarter of 1998 were $82.7 million, up 22% from $68.0 million in the second
quarter of 1997. Single deposits rose nearly 50% to $20.5 million. Sales by
Salomon Smith Barney in the second quarter of 1998 increased to over 30% of new
periodic premium and single deposits. Life insurance in force was $53.2 billion
at June 30, 1998, up $2.5 billion from a year ago.
Earned premiums for the growing long-term care insurance product line increased
25% to $48.7 million in the second quarter of 1998 from $39.1 million in the
second quarter of 1997. Sales through Salomon Smith Barney and other Citigroup
subsidiaries represented over 25% of total sales for the quarter.
SIX MONTHS
Deferred annuities, net written premium and deposits for the first six
months of 1998 were up 33% to $1.594 billion from $1.202 billion in the
first six months of 1997.
Group annuity net written premiums and deposits (excluding the Company's
employee pension plan deposits) in the first six months of 1998 were $1.883
billion, up from $1.279 billion in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the first
six months of 1998 were $167.9 million, up 22% from $137.8 million in the first
six months of 1997. Single deposits were $44.3 million compared to $25.6 million
in the 1997 period.
Earned premiums for the growing long-term care insurance product line
increased 27% to $94.3 million in the first six months of 1998 from $74.0
million in the first six months of 1997.
PRIMERICA FINANCIAL SERVICES
SECOND QUARTER
Earnings before portfolio gains for the second quarter of 1998 increased 26%
to $104 million from $82 million in the second 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 $377.5 billion at June 30, 1998, up
3% from June 30, 1997, reflecting good policy persistency and stable sales
growth. New term life insurance sales during the second quarter of 1998 were
$15.8 billion in face value, up from $14.1 billion in the second quarter of
1997. Although the number of policies issued declined quarter-over-quarter,
the average face amount per policy issued during the second quarter of 1998
continued to rise, reaching $224,975.
Cross-selling ventures demonstrated continued success. During the second
quarter of 1998, earnings related to the distribution of non-life insurance
products accounted for $23.0 million, or 22%, of PFS's operating earnings, an
increase of 73% from the prior year quarter.
37
Sales of mutual funds (at net asset value) were $833.2 million for the second
quarter of 1998, a 24% increase over second quarter 1997 sales of $669.4
million despite some softness in the Canadian mutual fund market. During the
second quarter 1998, Salomon Smith Barney funds accounted for 56% of PFS's
U.S. sales and 48% of total sales.
Cash advanced on $.M.A.R.T. loan-Registered Trademark- and
$.A.F.E.-Registered Trademark- loan products underwritten by Commercial
Credit was up almost 25% to $421.2 million in the second quarter of 1998. The
TRAVELERS SECURE-Registered Trademark- line of property and casualty
insurance products showed strong growth, with premiums up 267% to $55.8
million and the number of policies sold in the second quarter of 1998 up 80%
to almost 40,000. Since the beginning of 1998 the number of agents licensed
to sell auto and homeowners insurance jumped almost 30% to over 11,100
individuals. Variable annuity sales also climbed, reaching net written
premiums and deposits of $175.2 million in the second quarter of 1998.
One of the primary factors in PFS's cross-selling success, the FINANCIAL
NEEDS ANALYSIS (FNA), continues to help the company's Personal Financial
Analysts define and address their client's needs. More than 271,000 FNA'S
were submitted since the beginning of 1998, indicating the potential that
more than one-half million people will have an analysis performed for them
before year-end 1998.
SIX MONTHS
New term life insurance sales during the first six months of 1998 were
$28.8 billion in face value, up from $26.1 billion in the first six months
of 1997.
During the first six months of 1998, earnings related to the distribution of
non-life insurance products accounted for $42.6 million, or 21%, of PFS's
operating earnings, an increase of 55% from the prior year period.
Sales of mutual funds (at net asset value) were $1.602 billion for the first
six months of 1998, a 15% increase over the first six months of 1997 sales
of $1.391 billion.
Cash advanced on $.M.A.R.T. loan-Registered Trademark- and
$.A.F.E.-Registered Trademark- loan products was up 20% to $753.7 million in
the first six months of 1998. The TRAVELERS SECURE-Registered Trademark- line
of property and casualty insurance products showed strong growth, with
premiums up almost four-fold to $93.8 million. Variable annuity sales also
climbed, reaching net written premiums and deposits of $301.5 million in the
first six months of 1998.
PROPERTY & CASUALTY INSURANCE SERVICES
Three Months Ended June 30,
-----------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ------------------------------------------------------------------------------------------------------------------
NET Net
INCOME income
REVENUES (LOSS) Revenues (loss)
- ------------------------------------------------------------------------------------------------------------------
Commercial (1) (2) $1,620 $235 $1,612 $209
Personal (1) (3) 910 107 815 97
Financing costs and other (1) 2 (29) 4 (30)
Minority interest - (52) - (49)
-----------------------------------------------------------------
Total Property & Casualty Insurance Services $2,532 $261 $2,431 $227
- ------------------------------------------------------------------------------------------------------------------
(1) Before minority interest.
(2) Net income includes $7 million of reported investment portfolio gains in
1998.
(3) Net income includes $4 million of reported investment portfolio losses in
1997.
- -------------------------------------------------------------------------------
Six Months Ended June 30,
------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ------------------------------------------------------------------------------------------------------------------
NET Net
INCOME income
REVENUES (LOSS) Revenues (loss)
- ------------------------------------------------------------------------------------------------------------------
Commercial (1) (2) $3,317 $495 $3,236 $410
Personal (1) (3) 1,803 223 1,620 202
Financing costs and other (1) 6 (58) 6 (63)
Minority interest - (110) - (98)
------------------------------------------------------------------
Total Property & Casualty Insurance Services $5,126 $550 $4,862 $451
- ------------------------------------------------------------------------------------------------------------------
(1) Before minority interest.
(2) Net income includes $42 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 $7 million of reported investment portfolio losses in 1997.
- -----------------------------------------------------------------------------
38
SECOND QUARTER
Earnings before portfolio gains and minority interest increased 9% to $306
million in the second quarter of 1998 from $280 million in the second quarter of
1997. This increase in earnings was primarily the result of increased after-tax
net investment income and continued productivity improvements and expense
savings, partially offset by increased catastrophe losses.
COMMERCIAL LINES
Earnings before portfolio gains increased 9% to $228 million in the second
quarter of 1998 from $209 million in the second quarter of 1997, primarily
reflecting strong net investment income and continued expense savings, partially
offset by increased losses from catastrophes and other weather-related events.
Catastrophe losses in the second quarter of 1998 were $10.4 million after taxes
and reinsurance, primarily due to tornadoes in Nashville, Tennessee, compared to
insignificant losses in the prior year period.
Commercial Lines net written premiums for the second quarter of 1998 totaled
$1.121 billion, compared to $1.141 billion in the second quarter of 1997. The
decrease was driven by lower premiums from involuntary workers' compensation
pools. Also, net written premium levels continue to be unfavorably impacted by
the difficult pricing environment and reflect the Company's disciplined approach
to underwriting and risk management.
Fee income for the second quarter of 1998 was $76.9 million, a $14.5 million
decrease from the second 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, the Company's
continued success in lowering workers' compensation losses of service customers
and a slight increase in demand in the marketplace for guaranteed cost products.
National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the alternative market
business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans, self-insurance pools throughout
the United States and to niche voluntary markets. National Accounts net written
premiums of $121.6 million for the second quarter of 1998 decreased $28.1
million from the second 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 and the Company's continued
disciplined approach to underwriting and risk management. National Accounts new
business and the business retention ratio were significantly lower in the second
quarter of 1998 than in the second quarter of 1997, reflecting the addition of
one large account in the second quarter of 1997 and the loss of one large
account in the second quarter of 1998.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $440.8 million
in the second quarter of 1998 compared to $453.0 million in the second quarter
of 1997. The decrease in net written premiums reflected continued pricing
declines due to the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management, partially offset by
growth through programs designed to leverage underwriting experience in specific
industries. Commercial Accounts new business in the second quarter of 1998 was
significantly lower than in the second quarter of 1997. Commercial Accounts
business retention ratio was moderately lower in the second quarter of 1998 than
in the second quarter of 1997. New business and business retention ratios
reflected the Company's focus on maintaining its selective underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $393.7 million in the second quarter
of 1998 compared to $369.6 million in the second quarter of 1997. The increase
in Select Accounts net written premiums was due to a decrease in ceded premiums,
partially offset by the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. New premium
business in Select Accounts was virtually the same in the second quarter of 1998
and 1997. Select Accounts business retention ratio remained strong in the second
quarter of 1998 and was virtually the same as the second quarter of 1997.
39
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 $164.7 million in the second quarter of 1998 compared to
$168.4 million in the second 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 second quarter of 1998 was 109.8% compared to 109.7% in the second
quarter of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the second quarter of 1998 was 109.9% compared to 110.0% in
the second quarter of 1997. Although the combined ratios remained relatively
flat, the loss and loss adjustment expense ratio component increased in the
second quarter of 1998 compared to the second quarter of 1997 due to higher
catastrophe and other weather-related property losses and lower fee income, and
was offset by a decrease in the underwriting expense ratio component due to
continued expense savings.
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.
SIX MONTHS
Commercial Lines net written premiums for the first six months of 1998 totaled
$2.333 billion, compared to $2.479 billion in the first six months of 1997. The
first six months of 1997 net written premiums included an adjustment of $142
million due to a change to conform the Aetna P&C method with The Travelers
Indemnity Company and its subsidiaries (Travelers P&C) method of recording
certain net written premiums.
Fee income for the first six months of 1998 was $158.9 million, a $29.5 million
decrease from the first six months of 1997.
National Accounts net written premiums of $308.2 million for the first six
months of 1998 decreased $63.1 million from the first six months of 1997.
National Accounts new business in the first six months of 1998 was significantly
lower compared to the first six months of 1997. National Accounts business
retention ratio was moderately lower in the first six months of 1998 compared to
the first six months of 1997. New business and business retention ratios reflect
the addition of one large account in the second quarter of 1997 and the loss of
one large account in the second quarter of 1998. Excluding the above, National
Accounts experienced an increase in claim service-only business as well as
favorable results from continued product development efforts, especially in
workers' compensation managed care programs.
Commercial Accounts net written premiums were $903.4 million in the first six
months of 1998 compared to $1.014 billion in the first six months of 1997. The
1997 net written premiums included an adjustment of $127.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. Excluding this adjustment, net written
premiums increased slightly reflecting lower ceded premiums, partially offset by
pricing declines due to the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. For the
first six months of 1998, new premium business in Commercial Accounts
significantly declined compared to the first six months of 1997, reflecting the
Company's focus on obtaining new business accounts where it can maintain its
selective underwriting policy. The Commercial Accounts business retention ratio
in the first six months of 1998 remained substantially the same compared to the
first six months of 1997. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts net written premiums were $772.3 million in the first six months
of 1998 compared to $733.3 million in the first six months of 1997. The 1997 net
written premiums included an adjustment of $15.0 million due to the change to
conform the Aetna P&C method with the Travelers P&C method of recording certain
net written premiums. New premium business in Select Accounts was moderately
higher in the first six months of 1998 compared to the first six months of 1997,
reflecting the broader industry and product line expertise of the Company.
Select Accounts business retention ratio remained strong in the first half of
1998 and was virtually the same as that in the first half of 1997.
40
Specialty Accounts net written premiums were $348.7 million in the first
six months of 1998 compared to $361.0 million in the first six months of
1997.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first six months of 1998 was 108.2% compared to 109.3% in the first
six months of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the first six months of 1998 was 108.9% compared to 108.5%
in the first six months of 1997.
The 1997 first six months 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 six months of 1997 would have been 110.1% and 110.3%,
respectively. The decrease in the first six months of 1998 statutory and GAAP
combined ratios compared to the first six months of 1997 statutory and GAAP
combined ratios, excluding this adjustment, was due to continued productivity
improvements and favorable loss experience, partially offset by higher
catastrophe and other weather-related losses and lower fee income.
PERSONAL LINES
SECOND QUARTER
Earnings before portfolio gains/losses were $107 million in the second quarter
of 1998, compared to $101 million in the second quarter of 1997. The 1998
results were driven by strong net investment income and an increase in
production and were partially offset by higher catastrophe losses and an
increase in investments in service centers and market expansions. Catastrophe
losses, after taxes and reinsurance, were $13.1 million in the second quarter of
1998 compared to $4.5 million in the 1997 quarter. The 1998 catastrophe losses
were due to tornadoes and wind and hail storms in the Southeast and Midwest.
Net written premiums in the second quarter of 1998 grew 17% over the prior
year to $873.9 million. This increase reflects growth in target markets
served by independent agents and growth in affinity group marketing, joint
marketing arrangements and the TRAVELERS SECURE-Registered Trademark-
program. Business retention continued to be strong.
The statutory combined ratio for Personal Lines in the second quarter of 1998
was 92.9% compared to 92.8% in the 1997 second quarter. The GAAP combined ratio
for Personal Lines in the second quarter of 1998 was 91.5% compared to 92.1% in
the 1997 second quarter. Although the combined ratios remained relatively flat,
the loss and loss adjustment expense ratio component increased in the second
quarter of 1998 compared to the second quarter of 1997 due to the higher level
of catastrophe losses and a decrease in favorable prior year reserve development
in the automobile bodily injury line, and was offset by a decrease in the
underwriting expense ratio component due to benefits from productivity
improvements as premium levels increase.
GAAP combined ratios differ from statutory combined ratios for Personal Lines
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
SIX MONTHS
Total net written premiums in the first six months of 1998 grew 16% over the
prior year to $1.680 billion, excluding a one-time adjustment in 1997 of $68.7
million due to a change in the quota share reinsurance arrangement.
The statutory combined ratio for Personal Lines in the first six months of 1998
was 93.1% compared to 91.5% in the 1997 first six months. The GAAP combined
ratio for Personal Lines in the first six months of 1998 was 91.9% compared to
90.4% in the first six months of 1997.
The 1997 first six months statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with a change in the quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for the first six months of 1997 would have been 91.3% and 91.7%, respectively.
The increase in the first six months of 1998 statutory and GAAP combined ratios
compared to the first six months of 1997 statutory and GAAP combined ratios,
41
excluding this adjustment, was due to higher catastrophe losses and a
decrease in favorable prior year reserve development in the automobile bodily
injury line, partially offset by productivity improvements.
FINANCING COSTS AND OTHER
The primary component of net income (loss) in the second quarter of 1998 and
1997 was interest expense of $26 million after-tax and $53 million after-tax,
compared to $52 million after-tax in the first six months of 1997, reflecting
financing costs associated with the 1996 acquisition of Travelers Casualty and
Surety Company (formerly The Aetna Casualty and Surety Company) and The Standard
Fire Insurance Company (collectively, Aetna P&C).
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At June 30, 1998, approximately 19% of the
net aggregate reserve (i.e., approximately $191 million) consists of case
reserve for resolved claims. The balance, approximately 81% of the net aggregate
reserve (i.e., approximately $819 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 table below displays activity for environmental losses and loss
expenses and reserves for the six months ended June 30, 1998 and 1997.
ENVIRONMENTAL LOSSES
Six Months Ended June 30,
------------------------------------------
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 54 38
Ceded (27) (2)
Losses paid:
Direct 189 100
Ceded (53) (45)
Ending reserves:
Direct 1,058 1,307
Ceded (48) (84)
------------------------------------------
Net $1,010 $1,223
- --------------------------------------------------------------------------------------
ASBESTOS CLAIMS
At June 30, 1998, approximately 29% of the net aggregate reserve (i.e.,
approximately $314 million) is for pending asbestos claims. The balance,
approximately 71% (i.e., approximately $771 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 six months ended June 30, 1998 and 1997. In general, the
Company posts case reserves for pending asbestos claims within approximately
30 business days of receipt of such claims.
42
LOSSES
Six Months Ended June 30,
----------------------------------------
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 62 37
Ceded (28) (14)
Losses paid:
Direct 98 89
Ceded (35) (58)
Ending reserves:
Direct 1,327 1,391
Ceded (242) (326)
----------------------------------------
Net $1,085 $1,065
- -------------------------------------------------------------------------------------------
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 June 30, 1998 are
the Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, the conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and their
impact on the future development of asbestos and environmental claims. Such
development will be affected by future court decisions and interpretations and
changes in Superfund and other legislation. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to potentially harmful products or
substances. Such potentially harmful products or substances include, but are not
limited to, lead paint, pesticides, pharmaceutical products, silicone-based
personal products, solvents and other deleterious substances.
At June 30, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $189 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $866 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 six months ended June 30, 1998 and 1997. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
43
CIOTA LOSSES
Six Months Ended June 30,
-----------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ----------------------------------------------------------------------------------------------
Beginning reserves:
Direct $1,520 $1,560
Ceded (432) (446)
-----------------------------------------
Net 1,088 1,114
Incurred losses and loss expenses:
Direct (18) 12
Ceded 15 -
Losses paid:
Direct 35 36
Ceded (5) (15)
Ending reserves:
Direct 1,467 1,536
Ceded (412) (431)
-----------------------------------------
Net $1,055 $1,105
- ----------------------------------------------------------------------------------------------
CORPORATE AND OTHER
Three Months Ended June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- -------------------------------------------------------------------------------------------------------
NET INCOME Net income
REVENUES (EXPENSE) Revenues (expense)
-------------------------------------------------------------------
Total Corporate and Other $20 $(46) $22 $(47)
- -------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------
IN MILLIONS OF DOLLARS 1998 1997
- -------------------------------------------------------------------------------------------------------
NET INCOME Net income
REVENUES (EXPENSE) Revenues (expense)
-------------------------------------------------------------------
Total Corporate and Other $79 $(68) $44 $(99)
- -------------------------------------------------------------------------------------------------------
Net treasury and corporate staff expenses for the second quarter of 1998 were
approximately even with the prior year period. Net treasury and corporate staff
expenses for the first six months of 1998 were up from the prior year period.
The decline in total operating expense for the segment reflects income from the
disposition of a real estate development property in the first quarter of 1998.
44
RISK MANAGEMENT
MANAGING GLOBAL RISK AT CITICORP
MANAGEMENT OF PRICE RISK AT CITICORP
Price risk is the risk to earnings from changes in interest rates, foreign
exchange rates, commodity and equity prices, and in their implied volatilities.
This exposure arises in the normal course of business of a global financial
intermediary.
Citicorp has established procedures for managing price risk which are described
in the 1997 Supplemental Financial Statements. These procedures include limits
set annually for each major category of risk; these limits are monitored and
managed by the businesses, and reviewed monthly at the corporate level.
Price risk is measured using various tools, including the Earnings-at-Risk
method, which is applied to interest rate risk of the non-trading portfolios,
and the Value-at-Risk method, which is applied to the trading portfolios.
See Note 1 of Notes to the 1997 Supplemental Consolidated Financial Statements
regarding the future application of Statement of financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
PRICE RISK IN NON-TRADING PORTFOLIOS
Earnings-at-Risk measures the potential pretax earnings impact over a specified
time horizon of a specified parallel shift in the yield curve for the
appropriate currency. The yield curve shift is statistically derived as a two
standard deviation change in a short-term interest rate over the period required
to defease the position (usually four weeks). Earnings-at-Risk is calculated
separately for each currency, and reflects the repricing gaps in the position,
as well as option positions, both explicit and embedded.
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 June 30, 1998, the rate shift over a four week
defeasance period applied to the U.S. dollar yield curve for purposes of
calculating Earnings-at-Risk was 55 basis points. As of June 30, 1998, the rate
shifts applied to non-U.S. currencies for purposes of calculating
Earnings-at-Risk over a one to eight week defeasance period ranged from 18 to
727 basis points, depending on the currency.
The table on the following page illustrates that as of June 30, 1998, a 55 basis
point increase in the U.S. dollar yield curve would have a potential negative
impact on Citicorp's pretax earnings of approximately $173 million in the next
twelve months, and approximately $61 million for the five year period 1998-2003.
A two standard deviation increase in non-U.S. dollar interest rates would have a
potential negative impact on Citicorp's pretax earnings of approximately $81
million in the next twelve months, and approximately $171 million for the five
year period 1998-2003.
45
EARNINGS-AT-RISK
Assuming a U.S. Dollar Assuming a Non-U.S. Dollar
Rate Move of Rate Move of
---------------------------------------------------------------
IMPACT ON PRETAX EARNINGS Two Standard Deviations Two Standard Deviations (1)
IN MILLIONS OF DOLLARS AT JUNE 30, 1998 Increase Decrease Increase (2) Decrease (2)
- --------------------------------------------------------------------------------------------------------------
Overnight to Three Months ($76) $83 ($ 18) $ 18
Four to Six Months (42) 54 (26) 26
Seven to Twelve Months (55) 69 (37) 37
---------------------------------------------------------------
TOTAL OVERNIGHT TO TWELVE MONTHS (173) 206 (81) 81
Year Two (44) 48 (66) 66
Year Three 8 (10) (15) 15
Year Four 51 (54) (10) 10
Year Five 129 (147) (25) 25
Effect of Discounting (32) 35 26 (26)
---------------------------------------------------------------
TOTAL ($61) $78 ($171) $171
- --------------------------------------------------------------------------------------------------------------
(1) Total assumes a two standard deviation increase or decrease for every
currency, not taking into account any covariance between currencies.
(2) Primarily results from Earnings-at-Risk in Thai baht, Singapore dollar, and
Hong Kong dollar.
- --------------------------------------------------------------------------------
The table below summarizes Citicorp's twelve month Earnings-at-Risk over recent
periods.
TWELVE MONTH EARNINGS-AT-RISK (IMPACT ON PRETAX EARNINGS)
U.S. DOLLAR NON-U.S. DOLLAR
-------------------------------------------------------------------
JUNE 30. Dec. 31, June 30, JUNE 30, Dec. 31, June 30,
IN MILLIONS OF DOLLARS 1998 1997 1997 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------
Assuming a Two Standard Deviation Rate:
Increase ($173) ($180) ($205) ($81) ($25) ($19)
Decrease 206 211 235 81 25 19
- --------------------------------------------------------------------------------------------------------------------
The tables above illustrate that Citicorp's pretax earnings in its non-trading
activities over the subsequent 12 months would be reduced by an increase in
interest rates and would benefit from a decrease in interest rates. For the U.S.
dollar portfolio this primarily reflects the utilization of receive-fixed
interest rate swaps and similar instruments to effectively modify the repricing
characteristics of certain consumer and commercial loan portfolios, deposits,
and long-term debt. Correspondingly, derivatives are not used extensively to
modify the repricing characteristics of the non-U.S. dollar portfolio. Excluding
the effects of these instruments, Citicorp's twelve month Earnings-at-Risk over
recent periods would be as shown below:
TWELVE MONTH EARNINGS-AT-RISK (EXCLUDING EFFECTS OF DERIVATIVES)
U.S. DOLLAR
-----------------------------------------
IMPACT ON PRETAX EARNINGS JUNE 30, Dec. 31, June 30,
IN MILLIONS OF DOLLARS 1998 (1) 1997 (1) 1997
- ---------------------------------------------------------------------------------------------------
Assuming a Two Standard Deviation Rate:
Increase $18 $64 $88
Decrease 6 (44) (65)
- ---------------------------------------------------------------------------------------------------
(1) Excluding the effects of derivatives, Citicorp's non-U.S. dollar
Earnings-at-Risk would have had a negative impact of $91 million and $26
million assuming a two standard deviation increase in rates and a positive
impact of $91 million and $27 million assuming a two standard deviation
decrease in rates at June 30, 1998 and December 31, 1997 respectively.
- ---------------------------------------------------------------------------------------------------
The first table above also illustrates that the risk profile in the one-to-two
year time horizon was directionally similar, but generally tends to reverse in
subsequent periods. This reflects the fact that the majority of the derivative
instruments utilized to modify repricing characteristics as described above will
mature within three years. Additional detail regarding these derivative
instruments may be found on page 55.
During the 1998 six months, the U.S. dollar Earnings-at-Risk for the following
12 months assuming a two standard deviation increase in rates would have had a
potential negative impact ranging from approximately $65 million to $173 million
in the aggregate at each month end, compared with a range from $142 million to
$209 million during 1997. The relatively lower U.S. dollar Earnings-at-Risk
experienced during the 1998 six months was primarily due to the reduction in the
level of received-fixed swaps, offset slightly by the acquisition of UCS. A two
standard deviation increase in non-U.S. dollar interest rates for the following
twelve months would have had a potential negative impact ranging from
46
approximately $53 million to $85 million in the aggregate at each month-end
during the 1998 six months, compared with a range from $15 million to $33
million during 1997. The higher non-U.S. dollar Earnings-at-Risk experienced
during the 1998 six months primarily reflected the higher interest rate
volatility seen across the Asia Pacific region.
PRICE RISK IN TRADING PORTFOLIOS
The price risk of trading activities is measured using the Value-at-Risk method,
which estimates, at a 99% confidence level, the largest potential loss in pretax
market value that could occur over a one day holding period. The Value-at-Risk
method incorporates the market factors to which the market value of the trading
position is exposed (interest rates, foreign exchange rates, equity and
commodity prices, and their implied volatilities), the sensitivity of the
position to changes in those market factors, and the volatilities and
correlation of those factors. The Value-at-Risk measurement includes the foreign
exchange risks that arise in traditional banking businesses as well as in
explicit trading positions.
The aggregate pretax Value-at-Risk in the trading portfolios was $16 million at
June 30, 1998, and daily exposures averaged $19 million in the 1998 second
quarter for Citicorp's major trading centers and ranged from $14 million to $22
million. The level of exposure taken depends on the market environment and
expectations of future price and market movements, and will vary from period to
period. The trading-related revenue for the 1998 second quarter was $730
million, compared with $728 million for the 1998 first quarter and $347 million
for the 1997 fourth quarter.
The table below summarizes Citicorp's Value-at-Risk in its trading portfolio as
of June 30, 1998.
VALUE-AT-RISK
1998 SECOND
QUARTER
IN MILLIONS OF DOLLARS JUNE 30, DAILY Dec. 31,
1998 AVERAGE 1997
- ---------------------------------------------------------------------------------------------------------
Interest Rate $14 $17 $23
Foreign Exchange 6 7 8
All Other (primarily Equity and Commodity) 8 7 8
Covariance Adjustment (12) (12) (14)
------------------------------------------
TOTAL $16 $19 $25
- ---------------------------------------------------------------------------------------------------------
MANAGEMENT OF CROSS-BORDER RISK
Cross-border risk is the risk that Citicorp will be unable to obtain payment
from customers on their contractual obligations as a result of actions taken by
foreign governments such as exchange controls, debt moratorium, and restrictions
on the remittance of funds. Citicorp manages cross-border risk as part of the
Windows on Risk process described in the 1997 Supplemental Financial Statements.
The table on page 48 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.
47
CITICORP CROSS-BORDER OUTSTANDINGS AND COMMITMENTS
JUNE 30, 1998
-------------------------------------------------------------------
CROSS-BORDER CLAIMS ON THIRD PARTIES
----------------------------------------------------------
INVESTMENTS
TRADING IN AND
AND SHORT- FUNDING OF
IN BILLIONS OF ------------------------------------------ TERM LOCAL
DOLLARS BANKS PUBLIC PRIVATE TOTAL CLAIMS (1) FRANCHISES
- --------------------------------------------------------------------------------------
United Kingdom $ 1.2 $ 0.2 $ 2.7 $ 4.1 $ 2.9 $ -
Germany 1.0 1.3 0.5 2.8 2.6 1.3
Italy 0.5 0.1 0.4 1.0 0.5 2.6
France 1.9 0.5 0.8 3.2 2.7 0.3
Japan 2.3 0.3 0.8 3.4 2.5 -
Switzerland 1.7 - 1.5 3.2 2.7 -
Spain 0.2 - 0.3 0.5 0.4 1.8
Netherlands 0.6 0.2 1.1 1.9 1.5 0.2
Belgium 0.5 0.2 0.6 1.3 1.2 0.5
Sweden 0.8 0.3 0.5 1.6 1.1 0.1
Canada 0.9 0.1 0.4 1.4 0.8 -
Finland 0.3 0.1 0.4 0.8 0.5 -
Other (23
countries
in 1998) 1.4 0.4 2.2 4.0 2.5 0.5
- --------------------------------------------------------------------------------------
EUROPE, CANADA,
AND JAPAN 13.3 3.7 12.2 29.2 21.9 7.3
- --------------------------------------------------------------------------------------
Brazil 0.4 1.0 1.2 2.6 1.5 1.8
Mexico 0.2 1.9 0.8 2.9 1.3 0.5
Argentina 0.2 0.2 1.0 1.4 0.7 0.9
Chile - 0.2 0.4 0.6 0.2 0.4
Venezuela 0.1 0.7 0.2 1.0 0.4 -
Colombia 0.2 0.1 0.2 0.5 0.3 0.4
Peru 0.1 0.1 0.2 0.4 0.3 -
Uruguay - 0.3 0.1 0.4 0.1 -
Other (20
countries
in 1998) 0.1 0.1 1.2 1.4 1.1 0.3
- --------------------------------------------------------------------------------------
LATIN AMERICA 1.3 4.6 5.3 11.2 5.9 4.3
- --------------------------------------------------------------------------------------
South Korea 0.6 0.3 0.7 1.6 1.2 0.9
Saudi Arabia 0.6 - 0.2 0.8 0.3 -
Malaysia 0.1 - 0.2 0.3 0.2 0.3
Singapore 0.3 - 0.3 0.6 0.4 -
Taiwan 0.1 - 0.3 0.4 0.3 0.1
Indonesia - - 0.5 0.5 0.4 -
Hong Kong 0.1 - 0.2 0.3 0.2 -
Kuwait 0.2 - - 0.2 0.2 -
India - - 0.2 0.2 0.1 -
China - - 0.1 0.1 0.1 0.1
Pakistan 0.1 - - 0.1 0.1 0.1
Philippines - - 0.2 0.2 0.2 -
Thailand - - 0.2 0.2 0.2 -
Bahrain 0.1 - - 0.1 0.1 -
Other (11
countries
in 1998) - 0.1 - 0.1 0.1 -
- --------------------------------------------------------------------------------------
ASIA/MIDDLE EAST 2.2 0.4 3.1 5.7 4.1 1.5
- --------------------------------------------------------------------------------------
Australia 0.3 - 0.4 0.7 0.5 0.9
New Zealand - - 0.2 0.2 0.1 0.5
All Other - 0.7 0.1 0.8 0.3 0.5
- --------------------------------------------------------------------------------------
TOTAL OTHER 0.3 0.7 0.7 1.7 0.9 1.9
- --------------------------------------------------------------------------------------
TOTAL CITICORP $17.1 $9.4 $21.3 $47.8 $32.8 $15.0
- --------------------------------------------------------------------------------------
JUNE 30, 1998 December 31, 1997
- --------------------------------------------------------- --------------------------------
TOTAL TOTAL
IN BILLIONS OF CROSS-BORDER CROSS-BORDER
DOLLARS OUTSTANDINGS COMMITMENTS (2) OUTSTANDINGS COMMITMENTS (2)
- --------------------------------------------------------------------------------------------
United Kingdom $ 4.1 (3) $ 9.2 $ 4.5 (3) $ 7.8
Germany 4.1 (3) 1.6 4.7 (3) 1.7
Italy 3.6 (3) 0.5 3.4 (3) 0.5
France 3.5 (3) 1.0 3.1 (3) 0.6
Japan 3.4 (3) 0.7 3.2 (3) 1.1
Switzerland 3.2 (4) 1.2 2.7 (4) 1.1
Spain 2.3 0.2 2.3 (4) 0.4
Netherlands 2.1 0.8 2.2 0.8
Belgium 1.8 0.2 0.9 0.2
Sweden 1.7 0.8 1.1 0.7
Canada 1.4 1.3 1.6 1.8
Finland 0.8 0.5 0.7 0.4
Other (23
countries
in 1998) 4.5 1.9 4.0 1.6
- --------------------------------------------------------------------------------------------
EUROPE, CANADA,
AND JAPAN 36.5 19.9 34.4 18.7
- --------------------------------------------------------------------------------------------
Brazil 4.4 (3) 0.1 4.4 (3) 0.1
Mexico 3.4 (3) 0.3 3.0 (4) 0.6
Argentina 2.3 0.3 2.2 0.1
Chile 1.0 0.4 1.0 -
Venezuela 1.0 0.1 1.0 -
Colombia 0.9 0.1 0.9 0.1
Peru 0.4 0.2 0.4 0.1
Uruguay 0.4 - 0.3 -
Other (20
countries
in 1998) 1.7 0.4 1.1 0.6
- --------------------------------------------------------------------------------------------
LATIN AMERICA 15.5 1.9 14.3 1.6
- --------------------------------------------------------------------------------------------
South Korea 2.5 (4) 0.5 2.6 (4) 0.2
Saudi Arabia 0.8 0.5 0.8 0.3
Malaysia 0.6 0.1 0.7 0.1
Singapore 0.6 0.4 0.5 0.3
Taiwan 0.5 0.6 0.4 0.5
Indonesia 0.5 0.1 0.6 0.2
Hong Kong 0.3 0.3 0.7 0.3
Kuwait 0.2 - 0.2 -
India 0.2 0.4 0.2 0.3
China 0.2 0.4 0.6 0.4
Pakistan 0.2 - 0.2 -
Philippines 0.2 0.1 0.2 0.1
Thailand 0.2 0.1 0.3 0.1
Bahrain 0.1 0.1 0.3 0.1
Other (11
countries
in 1998) 0.1 0.3 0.3 0.4
- --------------------------------------------------------------------------------------------
ASIA/MIDDLE EAST 7.2 3.9 8.6 3.3
- --------------------------------------------------------------------------------------------
Australia 1.6 0.1 0.7 0.4
New Zealand 0.7 - 0.7 -
All Other 1.3 0.5 1.5 0.4
- --------------------------------------------------------------------------------------------
TOTAL OTHER 3.6 0.6 2.9 0.8
- --------------------------------------------------------------------------------------------
TOTAL CITICORP $62.8 $26.3 $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.
- --------------------------------------------------------------------------------
48
Details of Citicorp's investments in and funding of local franchises for
selected Asian countries included in the table on page 48 at June 30, 1998
were as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
LOCAL COUNTRY ASSETS (1) LOCAL COUNTRY LIABILITIES (2)
- --------------------------------------------------------------------------------------- -----------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS ON LOSSES ON INVESTMENTS
DERIVATIVE DERIVATIVE IN AND
IN BILLIONS OF AND FOREIGN LOCAL AND FOREIGN ALL OTHER FUNDING OF
DOLLARS AT CONSUMER COMMERCIAL EXCHANGE ALL OTHER COUNTRY EXCHANGE LOCAL COUNTRY LOCAL
JUNE 30, 1998 LOANS LOANS CONTRACTS ASSETS (3) ADJUSTMENTS (4) ASSETS CONTRACTS LIABILITIES (5) FRANCHISES
- ----------------------------------------------------------------------------------------------------------------------------------
South Korea $1.0 $1.8 $0.4 $2.0 ($0.5) $4.7 $0.4 $3.4 $0.9
Malaysia 1.3 0.8 0.2 1.0 (0.4) 2.9 0.1 2.5 0.3
Indonesia 0.1 0.4 0.1 0.7 (0.3) 1.0 0.1 0.9 -
Philippines 0.3 0.9 - 1.6 (0.5) 2.3 - 2.3 -
Thailand 1.0 0.9 0.2 0.7 (0.2) 2.6 0.2 2.4 -
- ----------------------------------------------------------------------------------------------------------------------------------
(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, $2.2
billion in Philippines, and $2.7 billion in Thailand.
(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, $2.2 billion
in Philippines, and $3.0 billion in Thailand.
(3) Includes deposits at interest with banks, securities, customers' acceptance
liability, and other monetary assets.
(4) Adjustments include externally guaranteed outstandings, locally booked
claims on nonresidents, and certain other claims as defined by the FFIEC.
(5) Primarily deposits, purchased funds and other borrowings, and acceptances
outstanding.
- --------------------------------------------------------------------------------
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 August 6, 1998, $700 million was
allocated to Citigroup and $300 million was allocated to CCC. Under this
facility, Citigroup is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At June 30, 1998, this
requirement was exceeded by approximately $11.4 billion. At June 30, 1998, there
were no borrowings outstanding under this facility.
As of August 6, 1998, Citigroup had unused credit availability of $700 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.
49
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 $216.0
billion represented 65% of total funding at June 30, 1998, compared with $199.1
billion (64% of total funding) at December 31, 1997, and are broadly diversified
by both geography and customer segment. Stockholders' equity, which was $21.6
billion at June 30, 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 June 30, 1998 and December 31, 1997 was $19.0
billion.
Asset securitization programs remain an important source of liquidity. Total
consumer loans securitized during the quarter were $11.5 billion, including $8.6
billion of U.S. credit cards and $2.6 billion of U.S. mortgages. Total consumer
loans securitized during the 1998 six months were $15.7 billion, including $11.1
billion of U.S. credit cards and $4.3 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 June 30, 1998, the scheduled amortization of
certain credit card securitization transactions made available $2.5 billion of
new receivables ($4.3 billion for the six months). In addition, $3.5 billion and
$3.8 billion of credit card securitization transactions are scheduled to
amortize during the remainder of 1998 and in 1999, respectively.
Citicorp is a legal entity separate and distinct from Citibank, N.A. and its
other subsidiaries and affiliates. There are various legal limitations on the
extent to which Citicorp's subsidiaries may extend credit, pay dividends, or
otherwise supply funds to Citicorp. As of June 30, 1998, under their applicable
dividend limitations, Citicorp's national and state-chartered bank subsidiaries
could have declared dividends to their respective parent companies without
regulatory approval of approximately $3.1 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 June 30, 1998, its bank subsidiaries could have distributed
dividends to Citicorp, directly or through their parent holding company, of
approximately $2.7 billion of the available $3.1 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
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, Mar. 31, Dec. 31,
1998 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Tier 1 capital 8.23% 8.19% 8.27%
Total capital (Tier 1 and Tier 2) 11.98 12.06 12.25
Leverage (1) 6.68 6.77 6.95
Common stockholders' equity 6.13 5.96 6.15
- ---------------------------------------------------------------------------------------------------------------
(1) Tier 1 capital divided by adjusted average assets.
- -------------------------------------------------------------------------------
Citicorp continued to maintain a strong capital position during the 1998 second
quarter. Total capital (Tier 1 and Tier 2) amounted to $31.6 billion at June 30,
1998, representing 11.98% of net risk-adjusted assets. This compares with $31.1
billion and 12.06% at March 31, 1998 and $31.0 billion and 12.25% at December
31, 1997. Tier 1 capital of $21.7 billion at June 30, 1998 represented 8.23% of
net risk-adjusted assets, compared with $21.1 billion and 8.19% at March 31,
1998 and $20.9 billion and 8.27% at December 31, 1997. The Tier 1 capital ratio
at June 30, 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 $372 million of free capital during the
1998 six months, compared with $741 million for the 1997 six months. 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.
50
FREE CAPITAL
Six Months Ended June 30,
----------------------------
IN MILLIONS OF DOLLARS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL GENERATED:
Net income $2,168 $2,025
Issuances/other (1) (309) 599
Cash dividends declared (580) (556)
----------------------------
TOTAL TIER 1 CAPITAL GENERATED 1,279 2,068
Capital utilized for growth in net risk-adjusted assets (907) (1,327)
----------------------------
FREE CAPITAL GENERATED $ 372 $ 741
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes issuance of common stock under various employee benefit plans
and the dividend reinvestment plan. During 1998, Citicorp redeemed $325
million of Noncumulative Preferred Stock, Series 16, and $303 million of
Adjustable Rate Preferred Stock, Second and Third Series, and issued an
additional $225 million of mandatorily redeemable preferred securities
of subsidiary trusts. 1997 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 27.0 million equivalent shares of Citigroup common stock under
the repurchase program in the six months of 1998 and 1997, using capital of $483
million ($48.91 average cost per share) and $1.2 billion ($45.46 average cost
per share), respectively. During the second quarter, no shares were repurchased
due to the suspension of the stock repurchase program in connection with the
announced agreement to merge with Travelers Group. Citicorp's stock repurchase
program was terminated immediately prior to consummation of the Merger with
Travelers Group. Total repurchases since the program was inaugurated on June 20,
1995 were 205.0 million equivalent Citigroup shares for an outlay of $7.3
billion.
Common stockholders' equity increased a net $574 million during the second
quarter of 1998 to $20.3 billion at June 30, 1998, representing 6.13% of assets,
compared with 5.96% at March 31, 1998 and 6.15% at December 31, 1997. The
increase in common stockholders' equity during the quarter principally reflected
net income and the issuance of stock under various employee benefit plans,
partially offset by a decrease in net unrealized gains on securities available
for sale and dividends declared on common and preferred stock.
During the second quarter of 1998, Citicorp redeemed $325 million of its 8%
Noncumulative Preferred Stock, Series 16 and issued an additional $225 million
of mandatorily redeemable preferred securities of subsidiary trusts (commonly
known as "trust preferred securities"). For the six months ended June 30, 1998,
interest expense on the trust preferred securities amounted to $30 million,
compared with $28 million for the 1997 six month period. During the first
quarter of 1998, Citicorp redeemed $303 million of Adjustable Rate Preferred
Stock, Second and Third Series.
In July 1998, Citicorp announced that in August 1998 it will redeem for cash all
outstanding shares of its Graduated Rate Cumulative Preferred Stock, Series 8A,
and that in September 1998 it will redeem for cash all outstanding shares of its
7.5% Noncumulative Preferred Stock, Series 17.
51
COMPONENTS OF CAPITAL UNDER REGULATORY GUIDELINES
JUNE 30, March 31, Dec. 31,
IN MILLIONS OF DOLLARS 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
Common stockholders' equity $ 20,278 $ 19,704 $ 19,123
Perpetual preferred stock 1,275 1,600 1,903
Mandatorily redeemable preferred securities of subsidiary trusts 975 750 750
Minority interest 107 104 104
Less: Net unrealized gains -- securities available for sale (1) (308) (661) (535)
Intangible assets (2) (507) (296) (304)
50% investment in certain subsidiaries (3) (98) (98) (115)
----------------------------------------
TOTAL TIER 1 CAPITAL 21,722 21,103 20,926
----------------------------------------
TIER 2 CAPITAL
Allowance for credit losses (4) 3,337 3,254 3,198
Qualifying debt (5) 6,669 6,802 6,977
Less: 50% investment in certain subsidiaries (3) (97) (97) (115)
----------------------------------------
TOTAL TIER 2 CAPITAL 9,909 9,959 10,060
----------------------------------------
TOTAL CAPITAL (TIER 1 AND TIER 2) $ 31,631 $ 31,062 $ 30,986
- -----------------------------------------------------------------------------------------------------------------------------------
NET RISK-ADJUSTED ASSETS (6) $263,925 $257,545 $252,999
- ------------------------------------------------------------------------------------------------------------------------------------
(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. The
increase during the 1998 second quarter was primarily attributable to
the acquisition of a global trust and agency services business.
(3) Represents investment in certain overseas insurance activities.
(4) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is
deducted from risk-adjusted assets.
(5) Includes qualifying senior and subordinated debt in an amount not exceeding
50% of Tier 1 capital, and subordinated capital notes subject to certain
limitations.
(6) Includes risk-weighted credit equivalent amounts net of applicable
bilateral netting agreements of $14.1 billion for interest rate, commodity
and equity derivative contracts and foreign exchange contracts, as of
June 30, 1998, compared with $13.6 billion as of March 31, 1998 and $13.7
billion as of December 31, 1997. Net risk-adjusted assets also includes the
effect of other off-balance sheet exposures such as unused loan commitments
and letters of credit and reflects deductions for intangible assets and
any excess allowance for credit losses.
- --------------------------------------------------------------------------------
On January 1, 1998, Citicorp adopted the U.S. bank regulatory agencies amendment
to their risk-based capital guidelines to incorporate market risk in the
measurement of net risk-adjusted assets. The adoption of the market risk
guidelines did not have a significant impact on net risk-adjusted assets.
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. During the 1998
second quarter, settlements of forward purchase agreements resulted in Citicorp
receiving approximately 3.5 million equivalent shares of Citigroup common stock.
In connection with the announced agreement to merge with Travelers Group,
Citicorp has terminated these agreements in accordance with their contractual
terms.
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 June 30, 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. Currently CCC has unused credit
availability of $3.700 billion under five-year revolving credit facilities,
including the $300 million referred to on page 49, and $1.350 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.
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 June 30, 1998, CCC would have been able to remit $672 million to
its parent under its most restrictive covenants.
52
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 June 30, 1998, this
requirement was exceeded by approximately $3.8 billion. At June 30, 1998, there
were no borrowings outstanding under this facility.
TAP's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $805 million in 1998 without
prior approval of the Connecticut Insurance Department. TAP has received $220
million of dividends from its insurance subsidiaries during the first six months
of 1998.
SALOMON SMITH BARNEY
Salomon Smith Barney's total assets were $304 billion at June 30, 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 realized gains
from sales of investments. 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.
Salomon Smith Barney has a $1.5 billion revolving credit agreement with a bank
syndicate that extends through May 2001, and a $3.5 billion 364-day revolving
credit facility that extends through May 1999. Salomon Smith Barney may borrow
under its revolving credit facilities at various interest rate options (LIBOR,
CD or base rate) and compensates the banks for the facilities through commitment
fees. Under these facilities Salomon Smith Barney is required to maintain a
certain level of consolidated adjusted net worth (as defined in the agreements).
At June 30, 1998, this requirement was exceeded by approximately $3.4 billion.
At June 30, 1998, there were no outstanding borrowings under either facility.
Salomon Smith Barney also has substantial borrowing arrangements consisting of
facilities that it has been advised are available, but where no contractual
lending obligation exists. These arrangements are reviewed on an ongoing basis
to ensure flexibility in meeting short-term requirements.
Unsecured term debt is a significant component of the Salomon Smith Barney's
long-term capital. Term debt totaled $21.0 billion at June 30, 1998, compared
with $19.1 billion at December 31, 1997.
Salomon Smith Barney's borrowing relationships are with a broad range of banks,
financial institutions and other firms from which it draws funds. The volume of
borrowings generally fluctuates in response to changes in the level of
securities inventories, customer balances, the amount of reverse repurchase
transactions outstanding (i.e., purchases of securities under agreements to
resell the same security) and securities borrowed transactions. As these
activities increase, borrowings generally increase to fund the additional
activities. Availability of financing can vary depending upon market conditions,
credit ratings and the overall availability of credit to the securities
industry. Salomon Smith Barney seeks to expand and diversify its funding mix as
well as its creditor sources. Concentration levels for these sources,
particularly for short-term lenders, are closely monitored both in terms of
single investor limits and daily maturities.
Salomon Smith Barney monitors liquidity by tracking asset levels, collateral and
funding availability to maintain flexibility to meet its financial commitments.
As a policy, Salomon Smith Barney attempts to maintain sufficient capital and
funding sources in order to have the capacity to finance itself on a fully
collateralized basis in the event that its access to uncollateralized financing
is temporarily impaired. Its liquidity management process includes a contingency
funding
53
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 $7.4 billion at June 30, 1998, the largest high yield exposure to one
counterparty was $649 million.
THE TRAVELERS INSURANCE COMPANY (TIC)
At June 30, 1998, TIC had $25.0 billion of life and annuity product deposit
funds and reserves. Of that total, $13.2 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.8 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal is $2.2 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 4.7%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.5 billion of liabilities is surrenderable without charge. More than 14% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
TIC issues commercial paper to investors and maintains unused committed
revolving credit facilities at least equal to the amount of commercial paper
outstanding. TIC may borrow under this revolving credit facility at various rate
options (LIBOR, CD or base rate) and compensates the banks for the facility
through commitment fees.
TIC is subject to various regulatory restrictions that limit the maximum amount
of dividends available to its parent without prior approval of the Connecticut
Insurance Department. A maximum of $551 million of statutory surplus is
available in 1998 for such dividends without the prior approval of the
Connecticut Insurance Department, of which $110 million has been paid during the
first six months 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.
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.
54
- --------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The tables below provide data on the notional principal amounts and maturities
of end-user (non-trading) derivatives, along with additional data on end-user
interest rate swaps and net purchased option positions at the end of the second
quarter of 1998.
END-USER DERIVATIVE INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
- ---------------------------------------------------------------------- ---------------------------------------------------------
PERCENTAGE OF JUNE 30, 1998
NOTIONAL PRINCIPAL AMOUNTS (1) AMOUNT MATURING
- -----------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
JUNE 30, Dec. 31, Within 1 to 2 to 3 to 4 to After
IN BILLIONS OF DOLLARS 1998 1997 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE PRODUCTS
Futures contracts $ 39.4 $ 29.3 63% 31% 6% -% -% -%
Forward contracts 6.3 6.9 98 - - - 1 1
Swap agreements 119.9 122.8 33 17 12 8 8 22
Option contracts 13.6 20.1 59 22 1 4 - 14
FOREIGN EXCHANGE PRODUCTS
Futures and forward contracts 60.7 67.2 94 4 - 1 1 -
Cross-currency swaps 5.7 4.8 8 15 10 21 33 13
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes third-party and intercompany contracts.
- -------------------------------------------------------------------
END-USER INTEREST RATE SWAPS AND NET PURCHASED OPTIONS AS OF JUNE 30, 1998
REMAINING CONTRACTS OUTSTANDING AT JUNE 30,--NOTIONAL PRINCIPAL AMOUNTS
------------------------------------------------------------------------
IN BILLIONS OF DOLLARS 1998 1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------------------------------------------------------------
RECEIVE FIXED SWAPS $86.6 $67.7 $53.0 $39.8 $31.3 $22.5
Weighted-average fixed rate 6.6% 6.6% 6.6% 6.6% 6.7% 6.9%
PAY FIXED SWAPS 15.6 8.8 6.5 5.5 4.6 3.8
Weighted-average fixed rate 6.4% 6.5% 6.5% 6.6% 6.8% 7.0%
BASIS SWAPS 17.7 3.9 0.3 0.2 0.2 0.2
PURCHASED CAPS (INCLUDING COLLARS) 6.6 2.7 - - - -
Weighted-average cap rate purchased 6.4% 6.7% - - - -
PURCHASED FLOORS 1.5 0.1 0.1 0.1 0.1 0.1
Weighted-average floor rate purchased 5.5% 5.8% 5.8% 5.8% 5.8% 5.8%
WRITTEN FLOORS RELATED TO PURCHASED CAPS (COLLARS) 1.6 0.3 - - - -
Weighted-average floor rate written 5.6% 5.3% - - - -
WRITTEN CAPS RELATED TO OTHER PURCHASED CAPS (1) 3.9 2.5 2.5 2.3 1.8 1.8
Weighted-average cap rate written 8.3% 9.8% 9.8% 9.8% 10.6% 10.6%
- -----------------------------------------------------------------------------------------------------------------------------------
THREE-MONTH FORWARD LIBOR RATES (2) 5.7% 5.7% 5.8% 5.9% 5.9% 6.0%
- -----------------------------------------------------------------------------------------------------------------------------------
(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
June 30, 1998, provided for reference.
- -----------------------------------------------------------------------------
55
CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS (1)
JUNE 30, Dec. 31, June 30,
IN MILLIONS OF DOLLARS 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL CASH-BASIS LOANS
Collateral dependent (at lower of cost or collateral value) (2) $193 $258 $274
Other (3) 1,100 806 643
----------------------------------------
TOTAL $1,293 $1,064 $917
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL CASH-BASIS LOANS
In U.S. offices $216 $296 $302
In offices outside the U.S. (3) 1,077 768 615
----------------------------------------
TOTAL $1,293 $1,064 $917
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL RENEGOTIATED LOANS
In U.S. offices $ - $ 20 $243
In offices outside the U.S. 45 39 52
----------------------------------------
TOTAL $ 45 $ 59 $295
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER LOANS ON WHICH ACCRUAL OF INTEREST HAD BEEN SUSPENDED
In U.S. offices $ 810 $ 967 $1,047
In offices outside the U.S. 1,176 993 1,058
----------------------------------------
TOTAL $1,986 $1,960 $2,105
- -----------------------------------------------------------------------------------------------------------------------------------
ACCRUING LOANS 90 OR MORE DAYS DELINQUENT (4)
In U.S. offices $ 538 $ 606 $555
In offices outside the U.S. 470 467 427
----------------------------------------
TOTAL $1,008 $1,073 $982
- -----------------------------------------------------------------------------------------------------------------------------------
(1) For a discussion of risks in the consumer loan portfolio and of commercial
cash-basis loans, see pages 26 and 29, respectively.
(2) A cash-basis loan is defined as collateral dependent when repayment is
expected to be provided solely by the underlying collateral and there are
no other available and reliable sources of repayment, in which case the
loans are written down to the lower of cost or collateral value.
(3) Includes foreign currency derivative contracts with a balance sheet credit
exposure of $44 million and $59 million at June 30, 1998 and December 31,
1997, respectively, for which the recognition of revaluation gains has been
suspended.
(4) Includes Consumer loans of $983 million, $1.0 billion, and $937 million at
June 30, 1998, December 31, 1997, and June 30, 1997, of which $247 million,
$240 million, and $215 million, respectively, are government-guaranteed
student loans.
- --------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED (OREO) AND ASSETS PENDING DISPOSITION (1)
JUNE 30, Dec. 31, June 30,
IN MILLIONS OF DOLLARS 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer OREO $199 $275 $371
Commercial OREO 348 461 482
----------------------------------------
TOTAL $547 $736 $853
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS PENDING DISPOSITION (2) $104 $96 $72
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Carried at lower of cost or collateral value.
(2) Represents consumer residential mortgage loans that have a high probability
of foreclosure.
- --------------------------------------------------------------------------------
56
DETAILS OF CREDIT LOSS EXPERIENCE
2ND QTR. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
IN MILLIONS OF DOLLARS 1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ALLOWANCE FOR CREDIT LOSSES AT BEGINNING OF PERIOD $6,259 $6,237 $6,225 $6,147 $6,118
--------------------------------------------------------------------
Provision for credit losses 656 595 557 559 588
--------------------------------------------------------------------
GROSS CREDIT LOSSES
CONSUMER
In U.S. offices 468 410 423 448 452
In offices outside the U.S. 246 207 209 219 221
COMMERCIAL
In U.S. offices 3 9 11 11 9
In offices outside the U.S. 81 76 56 42 29
--------------------------------------------------------------------
798 702 699 720 711
--------------------------------------------------------------------
CREDIT RECOVERIES
CONSUMER
In U.S. offices 64 60 71 83 62
In offices outside the U.S. 61 53 60 59 59
COMMERCIAL
In U.S. offices 51 11 27 20 31
In offices outside the U.S. 4 18 11 24 8
--------------------------------------------------------------------
180 142 169 186 160
--------------------------------------------------------------------
NET CREDIT LOSSES
In U.S. offices 356 348 336 356 368
In offices outside the U.S. 262 212 194 178 183
--------------------------------------------------------------------
618 560 530 534 551
--------------------------------------------------------------------
OTHER-NET (1) 332 (13) (15) 53 (8)
--------------------------------------------------------------------
AGGREGATE ALLOWANCE FOR CREDIT LOSSES AT END OF PERIOD 6,629 6,259 6,237 6,225 6,147
Reserves for securitization activities 61 70 85 89 91
--------------------------------------------------------------------
TOTAL CREDIT LOSS RESERVES $6,690 $6,329 $6,322 $6,314 $6,238
- -----------------------------------------------------------------------------------------------------------------------------------
Net consumer credit losses $ 589 $ 504 $ 501 $ 525 $ 552
As a percentage of average consumer loans 1.93% 1.75% 1.68% 1.77% 1.91%
Net commercial credit losses (recoveries) $29 $56 $29 $9 ($1)
As a percentage of average commercial loans 0.14% 0.28% 0.15% 0.05% NM
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The 1998 second quarter reflects the addition of $320 million of credit
loss reserves related to the acquisition of UCS. The remaining amounts
primarily includes the effects of foreign currency translation effects.
NM Not meaningful, as net recoveries result in a negative percentage.
- --------------------------------------------------------------------------------
57
CITICORP AVERAGE BALANCES AND INTEREST RATES (TAXABLE EQUIVALENT BASIS) -- QUARTERLY (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE VOLUME INTEREST REVENUE/EXPENSE % AVERAGE RATE
-------------------------------------------------------------------------------------
1st 2nd
2ND QTR. 1st Qtr. 2nd Qtr. 2ND QTR. 1st Qtr. 2nd Qtr. 2ND QTR. Qtr. Qtr.
IN MILLIONS OF DOLLARS 1998 1998 1997 1998 1998 1997 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS (NET OF UNEARNED INCOME) (3)
Consumer Loans
In U.S. Offices $ 59,896 $ 55,955 $ 55,556 $1,517 $1,413 $1,444 10.16 10.24 10.43
In Offices Outside the U.S. (4) 50,547 49,532 51,876 1,553 1,496 1,604 12.32 12.25 12.40
---------------------------------------------------------------
Total Consumer Loans 110,443 105,487 107,432 3,070 2,909 3,048 11.15 11.18 11.38
---------------------------------------------------------------
Commercial Loans
In U.S. Offices
Commercial and Industrial 11,327 11,316 10,460 230 228 221 8.14 8.17 8.47
Mortgage and Real Estate 3,088 2,777 2,882 67 62 68 8.70 9.05 9.46
Loans to Financial Institutions 279 358 616 9 11 13 12.94 12.46 8.46
Lease Financing 2,928 3,007 3,049 47 50 54 6.44 6.74 7.10
In Offices Outside the U.S. (4) 63,205 59,583 49,391 1,674 1,584 1,314 10.62 10.78 10.67
---------------------------------------------------------------
Total Commercial Loans 80,827 77,041 66,398 2,027 1,935 1,670 10.06 10.19 10.09
---------------------------------------------------------------
Total Loans 191,270 182,528 173,830 5,097 4,844 4,718 10.69 10.76 10.89
---------------------------------------------------------------
FEDERAL FUNDS SOLD AND RESALE AGREEMENTS
In U.S. Offices 6,673 8,655 7,534 59 93 99 3.55 4.36 5.27
In Offices Outside the U.S. (4) 5,869 6,214 5,025 128 149 104 8.75 9.72 8.30
---------------------------------------------------------------
Total 12,542 14,869 12,559 187 242 203 5.98 6.60 6.48
---------------------------------------------------------------
SECURITIES, At Fair Value
In U.S. Offices
Taxable 10,371 8,689 11,087 106 93 141 4.10 4.34 5.10
Exempt from U.S. Income Tax 2,828 2,646 2,676 42 44 43 5.96 6.74 6.45
In Offices Outside the U.S. (4) 23,164 22,400 20,538 510 451 424 8.83 8.17 8.28
---------------------------------------------------------------
Total 36,363 33,735 34,301 658 588 608 7.26 7.07 7.11
---------------------------------------------------------------
TRADING ACCOUNT ASSETS (5)
In U.S. Offices 5,452 6,585 4,768 84 100 70 6.18 6.16 5.89
In Offices Outside the U.S. (4) 11,487 9,900 10,075 242 155 203 8.45 6.35 8.08
---------------------------------------------------------------
Total 16,939 16,485 14,843 326 255 273 7.72 6.27 7.38
---------------------------------------------------------------
LOANS HELD FOR SALE, In U.S. Offices 4,525 3,615 3,414 137 109 107 12.14 12.23 12.57
DEPOSITS AT INTEREST WITH BANKS (4) 14,404 13,957 13,669 267 282 245 7.43 8.19 7.19
---------------------------------------------------------------
Total Interest-Earning Assets 276,043 265,189 252,616 $6,672 $6,320 $6,154 9.69 9.67 9.77
--------------------------------------------------
Non-Interest-Earning Assets (5) 50,511 47,726 40,464
-----------------------------------
TOTAL ASSETS $326,554 $312,915 $293,080
- -----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS
In U.S. Offices
Savings Deposits $ 31,094 $ 30,068 $ 26,820 $ 229 $ 224 $ 197 2.95 3.02 2.95
Other Time Deposits 10,698 11,191 12,677 121 129 147 4.54 4.67 4.65
In Offices Outside the U.S. (4) 146,711 136,661 128,899 2,433 2,269 2,077 6.65 6.73 6.46
---------------------------------------------------------------
Total 188,503 177,920 168,396 2,783 2,622 2,421 5.92 5.98 5.77
---------------------------------------------------------------
TRADING ACCOUNT LIABILITIES (5)
In U.S. Offices 3,698 4,391 2,348 48 60 34 5.21 5.54 5.81
In Offices Outside the U.S. (4) 2,578 2,149 2,491 37 32 42 5.76 6.04 6.76
---------------------------------------------------------------
Total 6,276 6,540 4,839 85 92 76 5.43 5.71 6.30
---------------------------------------------------------------
PURCHASED FUNDS AND OTHER BORROWINGS
In U.S. Offices 12,708 11,971 16,193 165 150 252 5.21 5.08 6.24
In Offices Outside the U.S. (4) 9,056 8,253 7,687 309 279 175 13.69 13.71 9.13
---------------------------------------------------------------
Total 21,764 20,224 23,880 474 429 427 8.74 8.60 7.17
---------------------------------------------------------------
LONG-TERM DEBT
In U.S. Offices 17,773 15,328 14,780 245 236 226 5.53 6.24 6.13
In Offices Outside the U.S. (4) 3,218 3,997 4,920 76 85 128 9.47 8.62 10.44
---------------------------------------------------------------
Total 20,991 19,325 19,700 321 321 354 6.13 6.74 7.21
---------------------------------------------------------------
Total Interest-Bearing Liabilities 237,534 224,009 216,815 $3,663 $3,464 $3,278 6.19 6.27 6.06
--------------------------------------------------
Demand Deposits in U.S. Offices 10,031 11,511 10,751
Other Non-Interest-Bearing Liabilities (5) 57,485 56,384 44,678
Total Stockholders' Equity 21,504 21,011 20,836
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $326,554 $312,915 $293,080
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST-EARNING ASSETS
In U.S. Offices (6) $107,392 $103,634 $102,512 $1,281 $1,235 $1,257 4.78 4.83 4.92
In Offices Outside the U.S. (6) 168,651 161,555 150,104 1,728 1,621 1,619 4.11 4.07 4.33
---------------------------------------------------------------
TOTAL $276,043 $265,189 $252,616 $3,009 $2,856 $2,876 4.37 4.37 4.57
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
58
CITICORP AVERAGE BALANCES AND INTEREST RATES (TAXABLE EQUIVALENT BASIS) -- SIX MONTHS (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST
AVERAGE VOLUME REVENUE/EXPENSE % AVERAGE RATE
-------------------------------------------------------------------
6 MONTHS 6 Months 6 MONTHS 6 Months 6 MONTHS 6 Months
IN MILLIONS OF DOLLARS 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS (NET OF UNEARNED INCOME) (3)
Consumer Loans
In U.S. Offices $ 57,925 $ 55,393 $ 2,930 $ 2,851 10.20 10.38
In Offices Outside the U.S. (4) 50,040 51,542 3,049 3,181 12.29 12.45
---------------------------------------------
Total Consumer Loans 107,965 106,935 5,979 6,032 11.17 11.38
---------------------------------------------
Commercial Loans
In U.S. Offices
Commercial and Industrial 11,321 9,859 458 423 8.16 8.65
Mortgage and Real Estate 2,933 2,927 129 127 8.87 8.75
Loans to Financial Institutions 319 613 20 27 12.64 8.88
Lease Financing 2,967 3,006 97 98 6.59 6.57
In Offices Outside the U.S. (4) 61,394 47,762 3,258 2,566 10.70 10.83
---------------------------------------------
Total Commercial Loans 78,934 64,167 3,962 3,241 10.12 10.19
---------------------------------------------
Total Loans 186,899 171,102 9,941 9,273 10.73 10.93
---------------------------------------------
FEDERAL FUNDS SOLD AND RESALE AGREEMENTS
In U.S. Offices 7,664 7,681 152 199 4.00 5.22
In Offices Outside the U.S. (4) 6,042 5,218 277 216 9.25 8.35
---------------------------------------------
Total 13,706 12,899 429 415 6.31 6.49
---------------------------------------------
SECURITIES, At Fair Value
In U.S. Offices
Taxable 9,530 9,821 199 243 4.21 4.99
Exempt from U.S. Income Tax 2,737 2,594 86 84 6.34 6.53
In Offices Outside the U.S. (4) 22,782 19,602 961 813 8.51 8.36
---------------------------------------------
Total 35,049 32,017 1,246 1,140 7.17 7.18
---------------------------------------------
TRADING ACCOUNT ASSETS (5)
In U.S. Offices 6,019 4,852 184 140 6.16 5.82
In Offices Outside the U.S. (4) 10,693 9,743 397 377 7.49 7.80
---------------------------------------------
Total 16,712 14,595 581 517 7.01 7.14
---------------------------------------------
LOANS HELD FOR SALE, In U.S. Offices 4,070 3,269 246 212 12.19 13.08
DEPOSITS AT INTEREST WITH BANKS (4) 14,180 13,517 549 469 7.81 7.00
---------------------------------------------
Total Interest-Earning Assets 270,616 247,399 $12,992 $12,026 9.68 9.80
--------------------------------------------
Non-Interest-Earning Assets (5) 49,119 41,650
-----------------------
TOTAL ASSETS $319,735 $289,049
- -----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS
In U.S. Offices
Savings Deposits $ 30,581 $ 26,811 $ 453 $ 388 2.99 2.92
Other Time Deposits 10,945 12,589 250 286 4.61 4.58
In Offices Outside the U.S. (4) 141,686 125,618 4,702 3,976 6.69 6.38
---------------------------------------------
Total 183,212 165,018 5,405 4,650 5.95 5.68
---------------------------------------------
TRADING ACCOUNT LIABILITIES (5)
In U.S. Offices 4,044 2,189 108 61 5.39 5.62
In Offices Outside the U.S. (4) 2,364 2,470 69 88 5.89 7.18
---------------------------------------------
Total 6,408 4,659 177 149 5.57 6.45
---------------------------------------------
PURCHASED FUNDS AND OTHER BORROWINGS
In U.S. Offices 12,340 15,153 315 462 5.15 6.15
In Offices Outside the U.S. (4) 8,654 7,367 588 403 13.70 11.03
---------------------------------------------
Total 20,994 22,520 903 865 8.67 7.75
---------------------------------------------
LONG-TERM DEBT
In U.S. Offices 16,550 14,809 481 441 5.86 6.01
In Offices Outside the U.S. (4) 3,608 4,633 161 226 9.00 9.84
---------------------------------------------
Total 20,158 19,442 642 667 6.42 6.92
---------------------------------------------
Total Interest-Bearing Liabilities 230,772 211,639 $7,127 $6,331 6.23 6.03
--------------------------------------------
Demand Deposits in U.S. Offices 10,771 10,776
Other Non-Interest-Bearing Liabilities (5) 56,934 45,843
Total Stockholders' Equity 21,258 20,791
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $319,735 $289,049
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST-EARNING ASSETS
In U.S. Offices (6) $105,513 $100,280 $2,516 $2,489 4.81 5.01
In Offices Outside the U.S. (6) 165,103 147,119 3,349 3,206 4.09 4.39
---------------------------------------------
TOTAL $270,616 $247,399 $5,865 $5,695 4.37 4.64
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
59
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 48 for a listing of Citicorp's cross-border outstandings
and commitments at June 30, 1998 and December 31, 1997.
JUNE 30, 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)
- ---------------- ------- ------- --------- ------ ------ ------ ------- ------------ ----------- --------- ------------- ----------
Japan $2.7 $8.0 $2.4 $13.1 $9.7 $2.5 $ - $2.7 $15.8 (3) $0.7 $12.7 (3) $1.1
Germany 2.1 11.1 1.5 14.7 11.6 2.6 - 0.2 14.9 (3) 1.6 15.1 (3) 1.7
Italy 0.9 8.6 0.7 10.2 9.2 0.5 - 2.0 12.2 (3) 0.5 15.9 (3) 0.5
France 2.6 6.5 2.6 11.7 8.3 2.7 - 0.4 12.1 (3) 1.0 9.5 (3) 0.6
United Kingdom 1.8 0.2 4.6 6.6 0.7 2.9 0.1 - 6.6 (4) 9.2 6.5 (4) 7.8
Sweden 1.3 4.1 1.0 6.4 4.4 1.1 - 0.1 6.5 (4) 0.8 5.9 (4) 0.7
Brazil 0.5 1.8 2.3 4.6 1.9 1.5 - 1.8 6.4 (4) 0.1 7.3 (3) 0.1
Mexico 0.2 4.4 1.0 5.6 2.5 1.3 0.1 0.5 6.1 (4) 0.3 6.4 (4) 0.6
Spain 0.6 2.6 0.4 3.6 3.0 0.4 - 1.8 5.4 0.2 6.0 (4) 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
(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).
60