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<SEC-DOCUMENT>0001005477-00-002089.txt : 20000313
<SEC-HEADER>0001005477-00-002089.hdr.sgml : 20000313
ACCESSION NUMBER: 0001005477-00-002089
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 20
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000310
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CITIGROUP INC
CENTRAL INDEX KEY: 0000831001
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 521568099
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-09924
FILM NUMBER: 566799
BUSINESS ADDRESS:
STREET 1: 153 EAST 53RD
CITY: NEW YORK
STATE: NY
ZIP: 10043
BUSINESS PHONE: 2125591000
MAIL ADDRESS:
STREET 1: 250 WEST ST
STREET 2: 7TH FL
CITY: NEW YORK
STATE: NY
ZIP: 10013
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS GROUP INC
DATE OF NAME CHANGE: 19950519
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS INC
DATE OF NAME CHANGE: 19940103
FORMER COMPANY:
FORMER CONFORMED NAME: PRIMERICA CORP /NEW/
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>
FINANCIAL INFORMATION
THE COMPANY 2
Global Consumer 2
Global Corporate and Investment Bank 3
Global Investment Management
and Private Banking 4
Corporate/Other 4
Investment Activities 4
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA 5
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 6
GLOBAL CONSUMER 8
Banking/Lending 8
Citibanking North America 8
Mortgage Banking 9
Cards 10
CitiFinancial 11
Insurance 11
Travelers Life and Annuity 11
Primerica Financial Services 12
Personal Lines 13
International Consumer 14
Europe, Middle East & Africa 14
Asia Pacific 15
Latin America 15
e-Citi 16
Other Consumer 16
Consumer Portfolio Review 17
Global Consumer Outlook 18
GLOBAL CORPORATE
AND INVESTMENT BANK 20
Salomon Smith Barney 21
Global Corporate Bank 22
Emerging Markets 22
Global Relationship Banking 22
Commercial Lines 23
Commercial Portfolio Review 29
Global Corporate and
Investment Bank Outlook 29
GLOBAL INVESTMENT MANAGEMENT
AND PRIVATE BANKING 31
SSB Citi Asset Management Group 31
Citibank Private Bank 32
Global Investment Management
and Private Banking Outlook 32
CORPORATE/OTHER 33
INVESTMENT ACTIVITIES 33
FUTURE APPLICATION OF
ACCOUNTING STANDARDS 33
YEAR 2000 34
FORWARD-LOOKING STATEMENTS 34
MANAGING GLOBAL RISK 34
The Credit Process 35
The Market Risk Management Process 36
Management of Cross-Border Risk 38
LIQUIDITY AND CAPITAL RESOURCES 40
REPORT OF MANAGEMENT 44
INDEPENDENT AUDITORS' REPORT 44
CONSOLIDATED FINANCIAL STATEMENTS 45
Consolidated Statement of Income 45
Consolidated Statement of
Financial Position 46
Consolidated Statement of
Changes in Stockholders' Equity 47
Consolidated Statement of
Cash Flows 48
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 49
FINANCIAL DATA SUPPLEMENT 80
Average Balances and Interest Rates,
Taxable Equivalent Basis 80
Analysis of Changes in
Net Interest Revenue 82
Ratios 83
Foregone Interest Revenue on Loans 83
Loan Maturities and Sensitivity to
Changes in Interest Rates 83
Loans Outstanding 83
Cash-Basis, Renegotiated,
and Past Due Loans 84
Other Real Estate Owned and
Assets Pending Disposition 84
Details of Credit Loss Experience 84
Average Deposit Liabilities
in Offices Outside the U.S. 85
Maturity Profile of Time Deposits
($100,000 or more) in U.S. Offices 85
Short-Term and Other Borrowings 85
10-K CROSS-REFERENCE INDEX 93
CITIGROUP BOARD OF DIRECTORS 96
1
<PAGE>
THE COMPANY
Citigroup Inc. (together with its subsidiaries, the Company) is a diversified
holding company whose businesses provide a broad range of financial services to
consumer and corporate customers in 101 countries and territories. The Company's
activities are conducted through Global Consumer, Global Corporate and
Investment Bank, Global Investment Management and Private Banking, and
Investment Activities.
On October 8, 1998, Citicorp merged with and into a newly formed, wholly
owned subsidiary of Travelers Group Inc. (TRV) (the Merger). Following the
Merger, TRV changed its name to Citigroup Inc. (Citigroup). Under the terms of
the Merger, 1.698 billion shares (adjusted to reflect the three-for-two stock
split in May 1999) of Citigroup's common stock were issued in exchange for all
of the outstanding shares of Citicorp common stock. The merger was accounted for
under the pooling of interests method.
Upon consummation of the Merger, Citigroup became a bank holding company.
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley Act
(the GLB Act), which will become effective in most significant respects on March
11, 2000. Under the GLB Act, bank holding companies, such as Citigroup, all of
whose controlled depository institutions are "well capitalized" and "well
managed" as defined in Federal Reserve Regulation Y and which obtain
satisfactory Community Reinvestment Act ratings, will have the ability to
declare themselves to be "financial holding companies" and engage in a broader
spectrum of activities than those currently permitted, including insurance
underwriting and brokerage (including annuities), and underwriting and dealing
in securities without a revenue limit. The Company anticipates that its
declaration to become a financial holding company will become effective shortly
after the effective date of the GLB Act, and that as a result, it will be
permitted to continue to operate its insurance businesses as currently
structured and, if it so determines, to expand those businesses.
Because the GLB Act repeals Section 20 of the Glass-Steagall Act, Citigroup
will be permitted to operate without regard to revenue limits on "ineligible"
securities activities and to acquire other securities firms without regard to
such limits. Subject to certain limitations, new merchant banking rules will
permit Citigroup to make investments in companies that engage in activities that
are not financial in nature without regard to the existing 5% limit for domestic
investments and 20% limit for overseas investments.
On November 28, 1997, a newly formed, wholly owned subsidiary of TRV merged
with and into Salomon Inc (Salomon) (the Salomon Merger). Under the terms of the
Salomon Merger, approximately 282.8 million shares (adjusted to reflect the
three-for-two stock split in May 1999) of Citigroup common stock were issued in
exchange for all of the outstanding shares of Salomon common stock. Thereafter,
Smith Barney Holdings Inc. (Smith Barney), a wholly owned subsidiary of
Citigroup, was merged with and into Salomon to form Salomon Smith Barney
Holdings Inc. (Salomon Smith Barney). The Salomon Merger was accounted for under
the pooling of interests method.
The Company's Global Consumer segment includes a global, full-service
consumer franchise encompassing, among other things, branch and electronic
banking, consumer lending services, investment services, credit and charge card
services, and life, auto and homeowners insurance. The businesses included in
the Company's Global Corporate and Investment Bank segment serve corporations,
financial institutions, governments, and other participants in developed and
emerging markets throughout the world. These businesses provide, among other
things, investment banking, retail brokerage, corporate banking, cash management
products and services, and commercial insurance. Global Investment Management
and Private Banking includes asset management services provided to mutual funds,
institutional, and individual investors, and personalized wealth management
services for high net worth clients. Corporate/Other includes net corporate
treasury results, unallocated expenses and corporate administration. The
Investment Activities segment includes the Company's venture capital activities,
the realized investment gains and losses related to certain corporate- and
insurance-related investments, and the results of certain investments in
countries that refinanced debt under the 1989 Brady plan or plans of a similar
nature.
GLOBAL CONSUMER
Global Consumer delivers a wide array of banking, lending, and investment
services, including the issuance of credit and charge cards, and personal
insurance products in 52 countries and territories. Global Consumer creates
products and platforms to meet the expanding needs of the world's growing middle
class.
Citibanking North America delivers banking, lending, and investment
services to customers through 370 branches and through electronic delivery
systems. Through its Mortgage Banking unit, Global Consumer originates and
services mortgages and student loans for customers across North America.
The Cards unit offers products such as MasterCard and VISA, and Diners Club
across North America. As of December 31, 1999, the U.S. bankcards business had
41 million accounts and $74 billion of managed receivables, which represented
approximately 16% of the U.S. credit card receivables market. New accounts are
primarily acquired through direct marketing efforts, portfolio acquisitions, and
over the Internet.
The CitiFinancial unit of Global Consumer provides community-based lending
services through its branch network system. As of December 31, 1999,
CitiFinancial maintained 1,174 loan offices in 47 states and Canada, including
19 servicing centers for $.M.A.R.T. loans(R) and $.A.F.E.(R) loans sold through
the independent agents (the Primerica sales force) of Primerica Financial
Services (Primerica), a subsidiary of Citigroup. Loans to consumers include real
estate-secured loans, unsecured and partially secured personal loans, and loans
to finance consumer goods purchases.
2
<PAGE>
The Insurance units of Global Consumer through Travelers Life and Annuity
offer individual annuity, group annuity, and individual life insurance. The
individual products include fixed and variable deferred annuities, payout
annuities, and term and universal life insurance. These products are primarily
distributed through Citigroup businesses and a nationwide network of independent
agents. The group annuity products offered include institutional pension
products, including guaranteed investment contracts, payout annuities,
structured finance, and group annuities to U.S. employer-sponsored retirement
and savings plans through direct sales and various intermediaries.
The business operations of Primerica involve the sale in North America of
life insurance, and other products manufactured by its affiliates, including
Salomon Smith Barney (SSB) mutual funds, CitiFinancial mortgages and personal
loans, The Travelers Insurance Company (TIC) annuity products, and Travelers
Property Casualty Corp. (TAP) automobile and homeowners insurance. The Primerica
sales force is composed of over 100,000 independent representatives. A great
majority of the sales force is employed on a part-time basis.
Through TAP, a subsidiary in which Citigroup has an approximate 85%
interest, Global Consumer writes virtually all types of property and casualty
insurance covering personal risks. The Personal Lines unit of TAP had
approximately 5.3 million policies in force at December 31, 1999. The primary
coverages are personal automobile and homeowners insurance sold to individuals,
and are distributed through approximately 5,400 independent agencies located
throughout the United States. Personal Lines also uses alternative distribution
channels, including sponsoring organizations such as employee and affinity
groups, and joint marketing arrangements with other insurers, and are marketed
through other Citigroup businesses.
The International unit of Global Consumer provides full-service banking and
lending, including credit and charge cards, and investment services in Europe,
Middle East & Africa, Asia Pacific (including Japan and Australia), and Latin
America through more than 1,000 branches in 50 countries and territories.
Outside North America, Global Consumer has approximately 11 million credit and
charge card member accounts.
e-Citi is the business responsible for developing and implementing
Citigroup's Internet financial services products and e-commerce solutions.
e-Citi's mission is to build and deliver new forms of financial services that
meet the changing needs of customers and to facilitate all aspects of e-commerce
as it grows with the new digital economy.
GLOBAL CORPORATE AND INVESTMENT BANK
Global Corporate and Investment Bank provides corporations, governments,
institutions, and investors in 100 countries and territories with a broad range
of financial products and services, including investment advice, financial
planning and retail brokerage services, banking and financial services, and
commercial insurance products.
Global Corporate and Investment Bank, through Salomon Smith Barney,
delivers investment banking services that encompass a full range of global
capital market activities, including the underwriting and distribution of fixed
income and equity securities for United States and foreign corporations and for
state, local and other governmental and government-sponsored authorities. Global
Corporate and Investment Bank also provides capital raising, advisory, research,
and other brokerage services to its customers, acts as a market-maker, and
executes securities and commodities futures brokerage transactions on all major
United States and international exchanges on behalf of customers and for its own
account. It also executes proprietary trading strategies on its own behalf,
principally in fixed income securities and in commodities. In 1999 and 1998, SSB
restructured and significantly decreased the risk profile of the global fixed
income arbitrage groups because of lessening profit opportunities and growing
risk and volatility. On February 26, 1999, SSB and The Nikko Securities Co.
Ltd., formed a joint venture, to provide investment banking, sales and trading,
and research services for corporate and institutional clients in Japan and
overseas markets. In January 2000, SSB agreed to acquire the global investment
banking business and related assets of Schroders PLC, including all corporate
financial markets and securities activities, subject to Schroders PLC
shareholder approval, various regulatory approvals and other customary closing
conditions.
Global Corporate and Investment Bank is a major participant in foreign
exchange and in the over-the-counter (OTC) market for derivative instruments
involving a wide range of products, including interest rate, equity and currency
swaps, caps and floors, options, warrants and other derivative products. It also
creates and sells various types of structured securities.
Citibank has a long-standing presence in emerging markets, which include
all locations outside North America, Western Europe, and Japan. Citigroup's
Emerging Markets business offers a wide array of banking and financial services
products and services that help multinational and local companies fulfill their
financial goals or needs. Citigroup's Embedded Bank and Emerging Local Corporate
strategies focus on its plans to gain market share in selected emerging market
countries and to establish Citibank as a local bank as well as a leading
international bank. Citibank typically enters a country to serve global
customers, providing them with cash management, trade services, short-term
loans, and foreign-exchange services. Then, Citibank offers project finance,
fixed-income issuance and trading and, later, introduces securities custody,
loan syndications and derivatives services. Finally, as a brand image is
established and services for locally headquartered companies become significant,
consumer banking services may be offered.
3
<PAGE>
The Global Relationship Bank (GRB) provides banking and financial services
to multinational companies and their subsidiaries around the world. A dedicated
relationship team serves each parent company and its subsidiaries everywhere
they operate. Product offerings are determined by the demands of these
sophisticated customers. Core products include cash management, foreign
exchange, structured products, securities custody, trade services, and loan
products.
SSB investment bankers and GRB and Emerging Markets corporate relationship
managers also jointly market to their customers. SSB's investment banking
products are sold to corporate relationships in GRB and Emerging Markets. In
addition, Citibank's capabilities in foreign exchange, lending and liquidity,
and transaction services are sold to SSB's customers.
TAP's Commercial Lines unit offers a broad array of property and casualty
insurance and insurance-related services, which it distributes through
approximately 5,200 brokers and independent agencies located throughout the
United States. TAP is the third largest writer of commercial lines insurance in
the U.S. based on 1998 direct written premiums published by A.M. Best Company.
Commercial Lines is organized into four marketing and underwriting groups that
are designed to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
serving mid-size businesses; Select Accounts, serving small businesses; and
Specialty Accounts, providing a variety of specialty coverages. Environmental,
asbestos and other cumulative injury claims are segregated from other claims and
are handled separately by TAP's Special Liability Group, a special unit staffed
by dedicated legal, claim, finance, and engineering professionals.
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING
The Global Investment Management and Private Banking group is comprised of the
SSB Citi Asset Management Group and the Citibank Private Bank. The SSB Citi
Asset Management Group includes Salomon Brothers Asset Management, Smith Barney
Asset Management, and Citibank Global Asset Management. These businesses offer a
broad range of asset management products and services from global investment
centers around the world, including mutual funds, closed-end funds, managed
accounts, unit investment trusts, variable annuities, and personalized wealth
management services to institutional, high net worth, and retail clients.
Clients include private and public retirement plans, endowments,
foundations, banks, central banks, insurance companies, other corporations,
government agencies, and high net worth and other individuals. Client
relationships may be introduced through the cross marketing and distribution
opportunities within Citigroup, through SSB Citi Asset Management Group's own
sales force, or through independent sources.
The Citibank Private Bank provides personalized wealth management services
for high net worth clients through 100 offices in 31 countries and territories,
generating fee and interest income from investment funds management and customer
trading activity, trust and fiduciary services, custody services, and banking
and lending activities. Its Relationship Managers and Product Specialists use
their knowledge about their clients' individual needs and goals to bring them an
array of personal wealth management services.
CORPORATE/OTHER
Corporate/Other includes net corporate treasury results, and corporate staff and
other corporate expenses.
INVESTMENT ACTIVITIES
The Company's Investment Activities segment consists primarily of its venture
capital activities, the realized investment gains and losses related to certain
corporate- and insurance-related investments, and the results of certain
investments in countries that refinanced debt under the 1989 Brady Plan or plans
of a similar nature.
The periodic reports of Citicorp, Salomon Smith Barney, TAP, The Student
Loan Corporation (STU), TIC, and Travelers Life and Annuity Company (TLAC),
subsidiaries of the Company that make filings pursuant to the Securities
Exchange Act of 1934, as amended (the Exchange Act), provide additional business
and financial information concerning those companies and their consolidated
subsidiaries.
The principal executive offices of the Company are located at 153 East 53rd
Street, New York, New York 10043; telephone number 212-559-1000.
4
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA Citigroup Inc. and Subsidiaries
<TABLE>
<CAPTION>
In Millions of Dollars, Except Per Share Amounts 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 82,005 $ 76,431 $ 72,306 $ 65,101 $ 58,957
Total revenues, net of interest expense 57,237 48,936 47,782 43,765 36,567
Provisions for benefits, claims, and credit losses 11,508 11,116 9,911 9,566 7,193
Operating expenses(1) 29,781 28,551 27,121 23,475 20,460
Income from continuing operations(1) 9,994 5,807 6,705 7,073 5,610
Discontinued operations -- -- -- (334) 150
Cumulative effect of accounting changes(2) (127) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,867 $ 5,807 $ 6,705 $ 6,739 $ 5,760
===================================================================================================================================
Earnings per share(3)
Basic earnings per share:
Income from continuing operations $ 2.95 $ 1.66 $ 1.91 $ 1.98 $ 1.60
Net income 2.91 1.66 1.91 1.88 1.65
Diluted earnings per share:
Income from continuing operations 2.86 1.62 1.83 1.89 1.46
Net income 2.83 1.62 1.83 1.80 1.50
Dividends declared per common share 0.540 0.370 0.267 0.200 0.178
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31,
Total assets $ 716,937 $ 668,641 $ 697,384 $ 626,906 $ 559,146
Total deposits 261,091 228,649 199,121 184,955 167,131
Long-term debt 47,092 48,671 47,387 43,246 40,723
Mandatorily redeemable securities of subsidiary trusts 4,920 4,320 2,995 2,545 --
Redeemable preferred stock -- 140 280 420 560
Common stockholders' equity 47,761 40,395 38,498 35,213 31,000
Total stockholders' equity 49,686 42,708 41,851 38,416 35,183
===================================================================================================================================
Ratio of earnings to fixed charges and preferred stock
dividends 1.62X 1.32X 1.41X 1.48X 1.35X
Return on average common stockholders' equity(4) 22.49% 13.95% 17.49% 19.42% 18.88%
Common stockholders' equity to assets 6.66% 6.04% 5.52% 5.62% 5.54%
Total stockholders' equity to assets 6.93% 6.39% 6.00% 6.13% 6.29%
===================================================================================================================================
Income Analysis(5)
Total revenues, net of interest expense $ 57,237 $ 48,936 $ 47,782 $ 43,765 $ 36,567
Effect of credit card securitization activity 2,269 2,187 1,713 1,392 917
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenues, net of interest expense 59,506 51,123 49,495 45,157 37,484
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted operating expenses(6) 29,869 27,756 25,403 23,489 20,460
- -----------------------------------------------------------------------------------------------------------------------------------
Provisions for benefits, claims, and credit losses 11,508 11,116 9,911 9,566 7,193
Effect of credit card securitization activity 2,269 2,187 1,713 1,392 917
Acquisition-related costs -- -- -- (541) --
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted provisions for benefits, claims, and credit costs 13,777 13,303 11,624 10,417 8,110
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring-related items and merger-related costs 88 (795) (1,718) -- --
Acquisition-related costs -- -- -- (650) --
Operating loss from discontinued operations -- -- -- 123 --
Gain on sale of stock by subsidiary -- -- -- 363 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes and minority
interest 15,948 9,269 10,750 11,087 8,914
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 5,703 3,234 3,833 3,967 3,304
Minority interest, net of income taxes 251 228 212 47 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 9,994 5,807 6,705 7,073 5,610
Discontinued operations, net of tax -- -- -- (334) 150
Cumulative effect of accounting changes(2) (127) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,867 $ 5,807 $ 6,705 $ 6,739 $ 5,760
===================================================================================================================================
</TABLE>
(1) The years ended December 31, 1999, 1998 and 1997 include net
restructuring-related items (and in 1998 merger-related costs) of ($88)
million (($47) million after-tax), $795 million ($535 million after-tax)
and $1,718 million ($1,046 million after-tax), respectively. See Note 14 of
Notes to Consolidated Financial Statements.
(2) Accounting changes include the adoption of Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" of ($135) million; SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance
Risk" of $23 million; and SOP 98-5, "Reporting on the Costs of Start-Up
Activities" of ($15) million. See Note 1 of Notes to Consolidated Financial
Statements.
(3) All amounts have been adjusted to reflect stock splits.
(4) The return on average common stockholders' equity is calculated using net
income after deducting preferred stock dividend requirements.
(5) The income analysis reconciles amounts shown in the Consolidated Statement
of Income on page 45 to the basis presented in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section.
(6) Excludes restructuring-related items and merger-related costs, and in 1996,
operating loss from discontinued operations and acquisition-related costs.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Citigroup Inc. and Subsidiaries
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Focus
The table below shows the core income (loss) for each of Citigroup's businesses
for the three years ended December 31:
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Global Consumer
Citibanking North America $ 414 $ 107 $ 111
Mortgage Banking 231 212 163
Cards 1,172 808 573
CitiFinancial 392 222 174
- ----------------------------------------------------------------------------
Total Banking/Lending 2,209 1,349 1,021
- ----------------------------------------------------------------------------
Travelers Life and Annuity 623 493 421
Primerica Financial Services 452 400 335
Personal Lines 279 319 300
- ----------------------------------------------------------------------------
Total Insurance 1,354 1,212 1,056
- ----------------------------------------------------------------------------
Europe, Middle East & Africa 327 225 203
Asia Pacific 443 383 407
Latin America 228 160 243
- ----------------------------------------------------------------------------
Total International 998 768 853
- ----------------------------------------------------------------------------
e-Citi (179) (141) (78)
Other (86) (77) 8
- ----------------------------------------------------------------------------
Total Global Consumer 4,296 3,111 2,860
- ----------------------------------------------------------------------------
Global Corporate and Investment Bank
Salomon Smith Barney 2,354 408 1,438
- ----------------------------------------------------------------------------
Emerging Markets 1,190 748 917
Global Relationship Banking 686 490 711
- ----------------------------------------------------------------------------
Total Global Corporate Bank 1,876 1,238 1,628
- ----------------------------------------------------------------------------
Commercial Lines Insurance 845 723 632
- ----------------------------------------------------------------------------
Total Global Corporate and
Investment Bank 5,075 2,369 3,698
- ----------------------------------------------------------------------------
Global Investment Management and
Private Banking
SSB Citi Asset Management Group 324 256 222
Citibank Private Bank 278 251 263
- ----------------------------------------------------------------------------
Total Global Investment Management and
Private Banking 602 507 485
- ----------------------------------------------------------------------------
Corporate/Other (686) (478) (392)
Investment Activities 660 833 1,100
- ----------------------------------------------------------------------------
Core Income 9,947 6,342 7,751
Restructuring-related items and
merger-related costs, after-tax 47 (535) (1,046)
Cumulative effect of accounting changes (127) -- --
- ----------------------------------------------------------------------------
Net Income $ 9,867 $ 5,807 $ 6,705
============================================================================
Diluted earnings per share
Core income $ 2.85 $ 1.77 $ 2.12
Net income 2.83 1.62 1.83
============================================================================
(1) Reclassified to conform to the 1999 presentation, including changes in
capital and tax allocations among the segments.
Results of Operations
Citigroup reported 1999 core income of $9.947 billion or $2.85 per diluted
common share, up 57% and 61%, respectively, from $6.342 billion or $1.77 in
1998. Core income in 1999 excluded a credit of $47 million for after-tax
restructuring-related items and a charge of $127 million reflecting the
cumulative effect of adopting several new accounting standards as described in
Notes 1 and 14 of Notes to the Consolidated Financial Statements. Core income in
1998 excluded a charge of $535 million for after-tax restructuring-related items
and merger-related costs. Net income was $9.867 billion or $2.83 per diluted
share, up 70% and 75%, respectively, from $5.807 billion or $1.62 in 1998.
Citigroup's 1998 core income was down $1.409 billion or 18% from 1997. Net
income in 1998 was down $898 million or 13% from 1997. Core income return on
common equity was 22.7% compared to 14.9% for 1998 and 20.2% for 1997.
Core income growth in 1999 was led by Global Corporate and Investment Bank
which improved $2.706 billion or 114%, reflecting a rebound from global economic
turmoil in 1998 and strong 1999 growth across the franchise, and reflected
increases of $1.946 billion or 477% in Salomon Smith Barney (SSB), $442 million
or 59% in Emerging Markets, $196 million or 40% in Global Relationship Banking
(GRB), and $122 million or 17% in Commercial Lines. Global Consumer increased
$1.185 billion or 38%, led by Banking/Lending where Cards was up $364 million or
45%; Citibanking North America up $307 million or 287%; and CitiFinancial up
$170 million or 77%. Core income in the International businesses was up $230
million or 30%, reflecting increases across all regions. Insurance businesses
core income grew $142 million or 12%, led by Travelers Life and Annuity (up $130
million or 26%) and Primerica (up $52 million or 13%), partially offset by
Personal Lines (down $40 million or 13%). Global Investment Management and
Private Banking improved $95 million or 19%, while Investment Activities
decreased $173 million or 21%. Core income in 1998 was sharply impacted by the
global economic turmoil experienced during the year as income decreased $1.329
billion or 36% in Global Corporate and Investment Bank, and decreased $267
million or 24% in Investment Activities. Partially offsetting this was a $251
million or 9% increase in Global Consumer complemented by a $22 million or 5%
increase in Global Investment Management and Private Banking.
Adjusted revenues, net of interest expense of $59.5 billion in 1999 were up
$8.4 billion or 16% from 1998. Revenues in 1998 were up $1.6 billion or 3% from
1997. Global Corporate and Investment Bank revenues of $27.4 billion in 1999
were up $5.0 billion or 22%, led by an increase of $4.3 billion or 52% in SSB,
largely due to significantly improved principal transactions, up $2.7 billion,
and investment banking, up $689 million. Reflecting the 1998 economic turmoil
and strong 1999 results, Emerging Markets was up $695 million or 19%, and GRB
was up $169 million or 4%. Partially offsetting these increases was a decrease
of $216 million or 3% in Commercial Lines,
6
<PAGE>
reflecting lower production. In 1998 Global Corporate and Investment Bank
revenues of $22.4 billion were down $1.5 billion or 6%, principally reflecting a
decline in SSB of $1.9 billion or 18% to $8.3 billion, driven by a sharp drop in
principal transactions revenues due to economic turmoil. Emerging Markets
increased by 4% to $3.6 billion, and GRB was up 3% to $3.9 billion. Commercial
Lines was up 3% to $6.5 billion. Global Consumer revenues increased strongly in
almost all businesses and were up $3.4 billion or 13% in 1999 to $28.6 billion,
including acquisitions. The Global Consumer revenue growth was led by a $1.5
billion or 13% increase in Banking/Lending (Cards up $846 million or 12%), a
$976 million or 17% increase in International, and an $880 million or 11%
increase in Insurance. Revenues in Global Consumer in 1998 increased $3.1
billion or 14% to $25.2 billion, led by Cards, up $1.6 billion or 30%, primarily
reflecting the Universal Card Services (UCS) acquisition, growth in the
Insurance businesses, up $857 million or 11%, and increases in CitiFinancial, up
$268 million or 27%. Global Investment Management and Private Banking revenues
of $2.7 billion and $2.4 billion grew $305 million or 13% and $247 million or
12% in 1999 and 1998, and reflected continued growth in assets under management.
Investment Activities revenues in 1999 decreased $233 million primarily
reflecting lower realized gains from sales of investments and net asset gains,
partially offset by higher venture capital revenues, and decreased $410 million
in 1998 primarily due to lower venture capital revenues.
Net interest revenue as calculated from the Consolidated Statement of
Income was $20.1 billion in 1999, up $1.4 billion or 7% from 1998, which was up
$1.2 billion or 7% from 1997, reflecting business volume growth in most markets
and Global Consumer acquisitions. Net interest revenue, adjusted for the effect
of credit card securitization, of $24.3 billion was up $2.0 billion or 9% in
1999 and $2.4 billion or 12% in 1998. Adjusted commissions, asset management and
administration fees, and other fee revenues of $16.8 billion were up $2.7
billion or 19% in 1999 and $1.4 billion or 11% in 1998, primarily reflecting
continued growth in assets under management. Insurance premiums of $10.4 billion
in 1999 were up $591 million or 6%, and were up $855 million or 10% in 1998,
reflecting solid growth in the Global Consumer Insurance businesses, partially
offset by lower premiums in Commercial Lines. Principal transactions revenues
rebounded strongly to $5.2 billion in 1999, up from $1.8 billion in 1998 and
$4.2 billion in 1997, reflecting the difficult trading conditions in 1998.
Realized gains from sales of investments of $557 million were down from $840
million in 1998 and $995 million in 1997. Other income as shown on the
Consolidated Statement of Income of $4.1 billion increased $548 million from
1998, which was up $454 million from 1997. The 1999 improvement reflected
increased revenues related to credit card securitization activity, and higher
venture capital revenues, partially offset by lower net asset gains. Other
income, adjusted for the effect of credit card securitization activity, of $2.2
billion was up slightly from 1998, and compared to $2.5 billion in 1997.
Adjusted operating expenses in 1999 of $29.9 billion, which exclude the
restructuring-related items, and in 1998 merger-related costs, were up $2.1
billion or 8% in 1999 and grew $2.4 billion or 9% in 1998. Citigroup achieved
its target of $2 billion in annualized expense reductions for 1999. Global
Corporate and Investment Bank expenses were up 7% in 1999 and 2% in 1998,
primarily attributable to production-related compensation at SSB, partially
offset by lower year 2000 and European Economic Monetary Union (EMU) expenses in
the GRB, and Commercial Lines' benefit from an assessment change in workers
compensation. Expenses increased in Global Consumer by 7% in 1999 and 17% in
1998, reflecting acquisitions, business volume growth, and higher spending in
e-Citi. Global Consumer expense growth in 1999 was reduced by a decline in fixed
costs due to expense control initiatives. Global Investment Management and
Private Banking expenses increased 9% in 1999 and 14% in 1998 driven by
investments in technology, and sales and marketing capabilities.
Adjusted provisions for benefits, claims, and credit costs were $13.8
billion in 1999 compared with $13.3 billion and $11.6 billion in 1998 and 1997,
respectively. Policyholder benefits and claims increased 4% to $8.7 billion in
1999 and 8% to $8.4 billion in 1998. The adjusted provision for credit losses
increased 3% to $5.1 billion in 1999 and 26% to $4.9 billion in 1998.
Global Consumer adjusted provisions for benefits, claims, and credit losses
of $9.9 billion were up 8% in 1999 and 14% in 1998. Managed net credit losses in
1999 were $4.7 billion and the related loss ratio was 2.49%, compared with $4.4
billion and 2.70% in 1998 and $3.8 billion and 2.61% in 1997. The increase in
the 1998 net credit losses from 1997 primarily reflects the UCS acquisition. The
managed consumer loan delinquency ratio (90 days or more past due) was 1.91%, a
decrease from 2.12% and 2.23% at the end of 1998 and 1997.
Global Corporate and Investment Bank provisions for benefits, claims, and
credit losses decreased to $3.9 billion from $4.2 billion in 1998, which was up
from $3.7 billion in 1997. The decrease in 1999 reflected economic improvements
in Russia and Asia, partially offset by increased losses in Latin America, and a
lower provision for credit losses resulting from an improved credit outlook in
Emerging Markets. Commercial Lines prior-year loss development and
weather-related catastrophes in 1999 both improved from the prior year. The
increase in 1998 primarily reflected the turmoil in Asia and Russia. Commercial
cash-basis loans and other real estate owned (OREO) of $1.9 billion at December
31, 1999 were down from $2.1 billion a year earlier, primarily reflecting the
improved economic conditions in Asia, and compared to $1.8 billion in 1997.
Total capital (Tier 1 and Tier 2) was $61.4 billion or 12.43% of net
risk-adjusted assets, and Tier 1 capital was $47.6 billion or 9.64% at December
31, 1999. See page 40 for the components of Tier 1 and Tier 2 capital.
7
<PAGE>
GLOBAL CONSUMER
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $ 26,282 $ 23,004 $ 20,348
Effect of credit card securitization activity 2,269 2,187 1,713
- -----------------------------------------------------------------------------------
Adjusted revenues, net of
interest expense 28,551 25,191 22,061
- -----------------------------------------------------------------------------------
Total operating expenses 11,900 11,634 9,984
Restructuring-related items (87) (636) (552)
- -----------------------------------------------------------------------------------
Adjusted operating expenses 11,813 10,998 9,432
- -----------------------------------------------------------------------------------
Provisions for benefits, claims, and
credit losses 7,611 6,962 6,328
Effect of credit card securitization activity 2,269 2,187 1,713
- -----------------------------------------------------------------------------------
Adjusted provisions for benefits, claims,
and credit losses 9,880 9,149 8,041
- -----------------------------------------------------------------------------------
Core income before taxes and
minority interest 6,858 5,044 4,588
Income taxes 2,489 1,864 1,666
Minority interest, after-tax 73 69 62
- -----------------------------------------------------------------------------------
Core income 4,296 3,111 2,860
Restructuring-related items, after-tax 56 403 333
- -----------------------------------------------------------------------------------
Net income $ 4,240 $ 2,708 $ 2,527
===================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
Global Consumer--which provides banking, lending, investment and personal
insurance products and services, including credit and charge cards, to customers
around the world--reported core income of $4.296 billion in 1999, up $1.185
billion or 38% from 1998, reflecting strong growth in virtually all businesses,
particularly in Banking/Lending where Cards increased $364 million or 45%,
Citibanking grew $307 million or 287%, and CitiFinancial increased $170 million
or 77%. In the Insurance businesses, core income grew $142 million or 12% from
1998, while the International businesses grew $230 million or 30%, reflecting
increases across all regions. Core income in 1998 of $3.111 billion increased
$251 million or 9% from 1997 reflecting double-digit growth in Banking/Lending
and in the Insurance businesses, offset by a 10% decline in International due to
economic conditions in Latin America and Asia Pacific. Net income of $4.240
billion in 1999, $2.708 billion in 1998, and $2.527 billion in 1997 included
restructuring-related items of $56 million ($87 million pretax), $403 million
($636 million pretax), and $333 million ($552 million pretax), respectively.
During 1999, Global Consumer recorded restructuring-related items totaling
$87 million ($56 million after-tax), including charges of $104 million (pretax),
of which $82 million related to new initiatives primarily for the
reconfiguration of certain consumer branch operations outside the U.S.,
downsizing of certain marketing operations, and costs associated with exiting a
non-strategic business. The 1999 items also include accelerated depreciation
charges on assets associated with restructuring initiatives of $114 million
(pretax), offset by a reduction of restructuring reserves due to changes in
estimates attributable to facts and circumstances arising subsequent to the
original restructuring charge of $131 million (pretax). In 1998, Global Consumer
recorded a net restructuring charge totaling $636 million ($403 million
after-tax) for regional consolidation of call centers and other back office
functions worldwide, reduction of management layers, sales force restructuring,
integration of overlapping marketing and product management groups and exiting
several non-strategic operations. In 1997, Global Consumer recorded a
restructuring charge of $552 million ($333 million after-tax) for the
consolidation of data centers and operations processing and customer service
facilities, the reconfiguration of electronic and other distribution channels,
the outsourcing of various technological functions, and the rationalization of
administrative and management functions. See Note 14 of Notes to Consolidated
Financial Statements for a discussion of restructuring-related items.
BANKING/LENDING
Citibanking North America
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 2,109 $ 1,974 $ 1,864
Adjusted operating expenses(2) 1,338 1,672 1,568
Provision for credit losses 64 100 105
- ----------------------------------------------------------------------------
Core income before taxes 707 202 191
Income taxes 293 95 80
- ----------------------------------------------------------------------------
Core income 414 107 111
Restructuring-related items, after-tax (1) 89 124
- ----------------------------------------------------------------------------
Net income (loss) $ 415 $ 18 $ (13)
============================================================================
Average assets (in billions of dollars) $ 10 $ 10 $ 10
Return on assets 4.15% 0.18% NM
============================================================================
Excluding restructuring-related items
Return on assets 4.14% 1.07% 1.11%
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
NM Not meaningful.
8
<PAGE>
Citibanking North America--which delivers banking, lending and investment
services to customers through Citibank's branches and electronic delivery
systems--reported core income of $414 million in 1999, up $307 million or 287%
from 1998 due to expense reduction initiatives, revenue growth, and credit cost
improvements. Core income of $107 million in 1998 was down from $111 million in
1997 as business volume growth was more than offset by a higher effective tax
rate. Net income (loss) of $415 million in 1999, $18 million in 1998, and ($13)
million in 1997 included restructuring-related credits in 1999 of $1 million ($4
million pretax), and restructuring charges of $89 million ($139 million pretax)
and $124 million ($203 million pretax) in 1998 and 1997, respectively.
As shown in the following table, Citibanking grew accounts and customer
deposits in both 1999 and 1998. The decline in loans reflects a decrease in home
equity loans due to increased industry-wide mortgage refinancing activity during
1998 and the first half of 1999. See also the Mortgage Banking discussion below.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 6.3 5.8 5.6
Average customer deposits $ 42.1 $ 39.6 $ 37.1
Average loans 7.6 7.9 8.1
================================================================================
Revenues, net of interest expense, of $2.109 billion increased $135 million
or 7% in 1999 and grew $110 million or 6% in 1998, reflecting growth in customer
deposits and higher investment product fees and commissions, offset by lower
loan revenues. The 1999 increase also reflects higher spreads on customer
deposits.
Adjusted operating expenses of $1.338 billion in 1999 declined $334 million
or 20% from 1998, reflecting the impact of significant expense management
initiatives that reduced staff and other fixed expenses as well as lower
marketing program spending. Expenses grew $104 million or 7% in 1998,
principally reflecting business volume growth.
The provision for credit losses declined to $64 million in 1999 from $100
million in 1998 and $105 million in 1997. The net credit loss ratio of 1.18% in
1999 declined from 1.34% in 1998 and 1.36% in 1997. Loans delinquent 90 days or
more of $55 million or 0.75% at December 31, 1999 declined from $93 million or
1.20% at December 31, 1998 and $133 million or 1.59% at December 31, 1997. The
declines in the provision for credit losses and delinquencies reflect continued
improvement in the portfolio and a decline in loan volumes.
Mortgage Banking
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $747 $619 $590
Adjusted operating expenses(2) 320 242 233
Provision for credit losses 17 20 89
- -----------------------------------------------------------------------------
Core income before taxes and
minority interest 410 357 268
Income taxes 160 140 105
Minority interest, after-tax 19 5 --
- -----------------------------------------------------------------------------
Core income 231 212 163
Restructuring-related items, after-tax -- 6 12
- -----------------------------------------------------------------------------
Net income $231 $206 $151
=============================================================================
Average assets (in billions of dollars) $ 29 $ 25 $ 24
Return on assets 0.80% 0.82% 0.63%
=============================================================================
Excluding restructuring-related items
Return on assets 0.80% 0.85% 0.68%
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Mortgage Banking--which originates and services mortgages and student loans
for customers across North America--reported core income of $231 million in
1999, up $19 million or 9% from 1998, reflecting growth in student loans and
credit improvement in the mortgage portfolio. Core income in 1998 of $212
million increased $49 million or 30% from 1997, reflecting lower credit costs
and higher revenues resulting from increased business volumes. Net income of
$206 million in 1998 and $151 million in 1997 included restructuring-related
items of $6 million ($9 million pretax) and $12 million ($20 million pretax),
respectively.
The acquisition of the principal operating assets and certain liabilities
of Source One Mortgage Services Corporation (Source One) in April 1999 added
approximately $25 billion to the mortgage servicing/subservicing portfolio.
As shown in the following table, Mortgage Banking accounts, loans, and
mortgage originations increased in both 1999 and 1998, including the effect of
the Source One acquisition. Excluding Source One, mortgage originations declined
in 1999 reflecting the industry-wide slowdown in mortgage refinancing activity
in the second half of 1999.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 3.4 2.8 2.5
Average loans $ 27.4 $ 23.9 $ 22.3
Mortgage originations 18.3 16.4 8.2
================================================================================
9
<PAGE>
Revenues, net of interest expense, of $747 million in 1999 grew $128
million or 21% from 1998, reflecting the Source One acquisition and growth in
the student loan portfolio. Revenues in 1998 increased $29 million or 5% from
1997, reflecting growth in the student loan portfolio and increased mortgage
originations, including refinancing activity. Adjusted operating expenses
increased $78 million or 32% in 1999 and grew $9 million or 4% in 1998,
reflecting additional business volumes, including the Source One acquisition in
1999.
The provision for credit losses of $17 million in 1999 declined from $20
million in 1998 and $89 million in 1997. The 1999 net credit loss ratio of 0.16%
declined from 0.31% and 0.51% in 1998 and 1997, respectively, and the ratio of
loans delinquent 90 days or more of 2.31% declined from 2.44% at December 31,
1998 and 3.13% at December 31, 1997. The declines in the provision, the net
credit loss ratio, and the delinquency ratio reflect improvement in the mortgage
portfolio. The 1999 improvement in mortgage delinquencies was partially offset
by higher student loan delinquencies as a result of a statutory increase in the
length of time Citigroup must hold delinquent government-guaranteed student
loans prior to submitting a claim under the government guarantee.
Cards
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $ 5,729 $ 4,965 $ 3,790
Effect of credit card securitization activity 2,269 2,187 1,713
- --------------------------------------------------------------------------------
Adjusted revenues, net of interest expense 7,998 7,152 5,503
- --------------------------------------------------------------------------------
Adjusted operating expenses(2) 2,886 2,595 1,759
Adjusted provision for credit losses(3) 3,259 3,264 2,828
- --------------------------------------------------------------------------------
Core income before taxes 1,853 1,293 916
Income taxes 681 485 343
- --------------------------------------------------------------------------------
Core income 1,172 808 573
Restructuring-related items, after-tax (12) 39 36
- --------------------------------------------------------------------------------
Net income $ 1,184 $ 769 $ 537
================================================================================
Average assets (in billions of dollars)(4) $ 28 $ 28 $ 25
Return on assets 4.23% 2.75% 2.15%
================================================================================
Excluding restructuring-related items
Return on assets(5) 4.19% 2.89% 2.29%
================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
(3) Adjusted for the effect of credit card securitization activity.
(4) Adjusted for the effect of credit card securitization activity, managed
average assets were $75 billion, $64 billion, and $50 billion in 1999,
1998, and 1997, respectively.
(5) Adjusted for the effect of credit card securitization activity, the return
on managed assets, excluding restructuring-related items was 1.56% in
1999, 1.26% in 1998, and 1.15% in 1997.
Cards--U.S. bankcards, Canada bankcards, and North America Diners
Club--reported core income of $1.172 billion, up $364 million or 45% from 1998
and in 1998 was up $235 million or 41% from 1997, reflecting significant
increases in the U.S. bankcards business, despite competitive pricing pressures.
Net income of $1.184 billion in 1999, $769 million in 1998, and $537 million in
1997 included restructuring-related credits in 1999 of $12 million ($18 million
pretax), and restructuring charges of $39 million ($58 million pretax) and $36
million ($59 million pretax) in 1998 and 1997, respectively.
Universal Card Services (UCS), which was acquired in April 1998,
contributed approximately $52 million to core income in 1999 compared with a
loss of $72 million in 1998.
Risk adjusted margin is a measure of profitability that takes adjusted
revenues less managed net credit losses as a percentage of average managed
loans, consistent with the goal of matching the revenues generated by the loan
portfolio with the credit risk undertaken. As shown in the following table, U.S.
bankcards risk adjusted margin of 6.37% increased 27 basis points from 1998 and
120 basis points from 1997.
In Billions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Risk adjusted revenues(1) $ 4.4 $ 3.6 $ 2.4
Risk adjusted margin %(2) 6.37% 6.10% 5.17%
===============================================================================
(1) Adjusted revenues less managed net credit losses.
(2) Risk adjusted revenues as a percentage of average managed loans.
Adjusted revenues, net of interest expense, of $7.998 billion increased
$846 million or 12% from 1998, reflecting receivable growth, including
acquisitions, higher interchange fee revenues due to sales volume growth and
pricing changes, and risk-based pricing actions, offset by changes in portfolio
mix and lower spreads. Excluding the effect of UCS and 1999 acquisitions,
revenues increased approximately 5%. Revenues in 1998 increased $1.649 billion
or 30% primarily reflecting the acquisition of UCS.
As shown in the following table, on a managed basis, the U.S. bankcard
portfolio experienced a 15% growth in sales volumes and a 7% increase in
receivables, including the effect of portfolio acquisitions. Portfolio acqui-
sitions during 1999 added approximately 1.3 million accounts and $2.6 billion of
receivables. Accounts increased only slightly in the year reflecting management
initiatives that resulted in the closing of inactive and/or high-risk accounts.
Growth in 1998 from 1997 reflects the acquisition of UCS.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 40.6 40.5 25.8
Cards in force (in millions) 69 69 41
Total sales $ 162.3 $ 140.6 $ 106.3
End-of-period managed receivables 74.2 69.6 49.6
================================================================================
10
<PAGE>
Adjusted operating expenses of $2.886 billion increased $291 million or 11%
in 1999 and grew $836 million or 48% in 1998, reflecting acquisitions and
increased target marketing efforts in U.S. bankcards.
The adjusted provision for credit losses in 1999 was $3.259 billion
compared with $3.264 billion in 1998 and $2.828 billion in 1997. U.S. bankcards
managed net credit losses in 1999 were $3.143 billion and the related loss ratio
was 4.56%, compared with $3.123 billion and 5.33% in 1998 and $2.662 billion and
5.74% in 1997. U.S. bankcards managed loans delinquent 90 days or more were
$1.061 billion or 1.44% at December 31, 1999 compared with $1.001 billion or
1.45% at December 31, 1998 and $868 million or 1.77% at December 31, 1997. The
improvement in the 1999 net credit loss ratio reflects declining industry-wide
bankruptcy trends and credit risk management initiatives.
CitiFinancial
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $1,619 $1,275 $1,007
Adjusted operating expenses(2) 617 505 422
Provisions for benefits, claims, and credit losses 385 419 316
- ---------------------------------------------------------------------------------
Core income before taxes 617 351 269
Income taxes 225 129 95
- ---------------------------------------------------------------------------------
Core income 392 222 174
Restructuring-related items, after-tax 2 1 --
- ---------------------------------------------------------------------------------
Net income $ 390 $ 221 $ 174
=================================================================================
Average assets (in billions of dollars) $ 16 $ 12 $ 9
Return on assets 2.44% 1.84% 1.93%
=================================================================================
Excluding restructuring-related items
Return on assets 2.45% 1.85% 1.93%
=================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
CitiFinancial (formerly Consumer Finance Services) includes the consumer
lending operations (including secured and unsecured personal loans, real
estate-secured loans and consumer goods financing) of CitiFinancial Credit
Company (CCC). Also included are related credit insurance services provided
through subsidiaries.
Core income was $392 million in 1999 compared to $222 million in 1998 and
$174 million in 1997. The 77% increase in 1999 reflects strong receivables
growth in all major products, an improved credit environment, and the 1999
acquisition of certain Associates First Capital (Associates) branches. The 28%
increase in 1998 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 CitiFinancial branch system since
July 1997. Net receivables at December 31, 1999 reached a record $15.5 billion
compared to $11.9 billion at year-end 1998 and $9.8 billion at year- end 1997.
The receivables growth in 1999 was due to increased business flow at
CitiFinancial branches (including portfolio acquisitions), cross-selling of
CitiFinancial products through Primerica distribution channels, and the
Associates acquisition. Much of the growth in 1998 was in real estate-secured
loans which resulted from the continued strong performance of the $.M.A.R.T.
loan(R) program, as well as solid sales in the branch network. The internal
growth during 1999 and 1998 was led by the Primerica generated portfolio, which
grew 39% to $4.1 billion in 1999 and 31% to $2.95 billion in 1998. At December
31, 1999, CitiFinancial had 1,174 branches, up from 980 at year-end 1998. The
increase in adjusted operating expenses was primarily attributable to the
acquisitions.
The average yield on receivables was 14.45% in 1999 compared to 14.88% in
1998 and 15.24% in 1997. The decline in the average yield resulted from a shift
in the portfolio mix towards lower yielding, higher quality real estate loans,
particularly first mortgage loans. At December 31,1999, the portfolio consisted
of 58% real-estate secured loans, 34% personal loans and 8% sales finance and
other compared to 56% real-estate secured loans, 36% personal loans and 8% sales
finance and other at December 31, 1998.
The provisions for benefits, claims, and credit losses was $385 million in
1999 compared to $419 million in 1998 and $316 million in 1997, reflecting the
continued strong credit environment. The net credit loss ratio of 2.18% in 1999
was down from 2.74% in 1998 and 2.82% in 1997. Loans delinquent 90 days or more
were $203 million or 1.31% in 1999 compared to $172 million or 1.44% in 1998 and
$133 million or 1.36% in 1997.
INSURANCE
Travelers Life and Annuity
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $3,394 $3,012 $2,677
Provision for benefits and claims 1,997 1,863 1,677
Adjusted operating expenses(2) 451 396 362
- -----------------------------------------------------------------------------
Core income before taxes 946 753 638
Income taxes 323 260 217
- -----------------------------------------------------------------------------
Core income(3) 623 493 421
Restructuring-related items, after-tax -- 8 --
- -----------------------------------------------------------------------------
Net income $ 623 $ 485 $ 421
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
(3) Excludes investment gains/losses included in Investment Activities segment.
11
<PAGE>
Travelers Life and Annuity offers individual annuity, group annuity,
individual life and long-term care products marketed by The Travelers Insurance
Company (TIC) and its wholly owned subsidiary The Travelers Life and Annuity
Company (TLAC) under the Travelers name. Among the range of individual products
offered are fixed and variable deferred annuities, payout annuities and term,
universal and variable life and long-term care insurance. These products are
primarily distributed through The Copeland Companies (Copeland), an indirect
wholly owned subsidiary of TIC, Salomon Smith Barney Financial Consultants,
Primerica, Citibank, and a nationwide network of independent agents. The group
products include institutional pensions, including guaranteed investment
contracts (GICs), payout annuities, group annuities to employer-sponsored
retirement and savings plans and structured finance transactions.
Core income was $623 million in 1999 compared to $493 million in 1998 and
$421 million in 1997. The 26% improvement in 1999 was largely driven by
increases in business volumes and strong investment income. During 1999, this
business achieved double-digit growth in individual and group annuity account
balances and direct periodic life and long-term care insurance premiums
reflecting both greater popularity of these products with an aging American
population and strong momentum from cross-selling initiatives. The 17%
improvement in 1998 reflects strong double-digit business volume growth in
annuity account balances and life and long term care premiums, and an increase
in net investment income despite a decline in investment income yields during
1998, resulting primarily from participation in partnership investment interests
being negatively impacted by a downturn in market conditions. This decline in
yields was substantially offset by earnings on an increased capital base created
by business volume growth.
The successful cross-selling initiatives of Travelers Life and Annuity
products through the Primerica, Citibank, Copeland, and Salomon Smith Barney
Financial Consultants distribution channels, along with improved sales through a
nationwide network of independent agents, reflect the ongoing effort to build
market share by strengthening relationships in key distribution channels.
The following table shows net written premiums and deposits by product for
the three years ended December 31, 1999:
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Deferred annuities
Fixed $ 1,008 $ 908 $ 779
Variable 4,265 2,892 1,775
Payout annuities 448 429 310
GIC and other annuities 5,249 3,690 2,109
Individual life insurance
Direct periodic premiums and deposits 409 322 290
Single premium deposits 84 85 56
Reinsurance (71) (66) (58)
Individual long-term care insurance 240 213 184
- -------------------------------------------------------------------------------
$ 11,632 $ 8,473 $ 5,445
===============================================================================
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 premiums and deposits collected are not
included in revenues.
Significant deferred annuities sales, combined with favorable market
returns from variable annuities, drove account balances to $27.3 billion at
December 31, 1999, from $20.9 billion at year-end 1998 (up 31%) and $16.1
billion at year-end 1997. Net written premiums and deposits increased in 1999 to
$5.27 billion from $3.80 billion in 1998 (up 39%) and $2.55 billion in 1997. The
strong sales reflect the marketing initiatives at Salomon Smith Barney,
Primerica and Citibank as well as Copeland's continued success in the small
company segment of the 401(k) market and very strong agency results.
Payout and group annuity account balances and benefit reserves reached
$15.73 billion at December 31, 1999, up from $13.84 billion at year-end 1998 (up
14%), and $11.94 billion at year-end 1997. This substantial volume growth
reflects strong sales of GICs and structured finance transactions. Net written
premiums and deposits (excluding the Company's employee pension plan deposits)
in 1999 were $5.70 billion, up from $4.12 billion in 1998 (up 38%) and $2.42
billion in 1997.
Direct periodic premiums and deposits for individual life insurance were
$409 million in 1999 compared to $322 million in 1998 (up 27%) and $290 million
in 1997. Life insurance in force was $60.6 billion at December 31, 1999, up from
$55.4 billion at year-end 1998 and $51.6 billion at year-end 1997.
Net written premiums for the long-term care insurance line reached $240
million in 1999 compared to $213 million in 1998 and $184 million in 1997.
Primerica Financial Services
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $1,775 $1,654 $1,522
Provision for benefits and claims 487 484 497
Adjusted operating expenses(1) 586 546 502
- --------------------------------------------------------------------------------
Core income before taxes 702 624 523
Income taxes 250 224 188
- --------------------------------------------------------------------------------
Core income(2) 452 400 335
Restructuring-related items, after-tax -- 2 --
- --------------------------------------------------------------------------------
Net income $ 452 $ 398 $ 335
================================================================================
(1) Excludes restructuring-related items.
(2) Excludes investment gains/losses included in Investment Activities.
12
<PAGE>
Core income was $452 million in 1999 compared to $400 million in 1998 and
$335 million in 1997. The 13% increase in 1999 results reflects continued
success at cross-selling a range of products (particularly mutual funds,
variable annuities and debt consolidation loans), growth in life insurance in
force, improved investment income, and disciplined expense management. The 19%
improvement in 1998 reflects success at cross-selling, growth in life insurance
in force, favorable mortality experience and disciplined expense management.
Increases in production and cross-selling initiatives were achieved during
1999. Earned premiums net of reinsurance were $1.071 billion, $1.057 billion,
and $1.035 billion in 1999, 1998, and 1997, including $1.008 billion, $987
million, and $967 million for Primerica individual term life policies. Total
face amount of issued term life insurance was $56.2 billion in 1999 compared to
$57.4 billion in 1998 and $52.6 billion in 1997. The number of policies issued
was 209,900 in 1999, compared to 223,600 in 1998 and 228,900 in 1997. The
average face value per policy issued was $229,000 in 1999 compared to $223,000
in 1998 and $200,000 in 1997. Life insurance in force at year-end 1999 reached
$394.9 billion, up from $383.7 billion at year-end 1998 and $369.9 billion at
year-end 1997, and continued to reflect good policy persistency.
In recent years, Primerica has leveraged cross-selling through the
Financial Needs Analysis (FNA)--the diagnostic tool that enhances the ability of
the Personal Financial Analysts to address client needs--to expand its business
beyond life insurance and now offers its clients a greater array of financial
products and services, delivered personally through its sales force. More than
490,000 FNAs were submitted during 1999. In addition, Primerica has
traditionally offered mutual funds to clients as a means to invest the relative
savings realized through the purchase of term life insurance as compared to
traditional whole life insurance. Sales of mutual funds were $3.124 billion in
1999 compared to $2.942 billion in 1998 and $2.689 billion in 1997. Salomon
Smith Barney mutual funds accounted for 60% of Primerica's U.S. sales in 1999
and 1998 and 53% and 50% of Primerica's total sales in 1999 and 1998,
respectively. Variable annuity sales continued to show momentum, reaching net
written premiums and deposits of $990 million in 1999, up from $652 million in
1998 and $347 million in 1997. The growth reflects the increased emphasis placed
on cross-selling initiatives in the latter part of 1998, with the current period
sales predominately reflecting sales of Travelers Life and Annuity variable
annuity products. Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan
products underwritten by Travelers Bank & Trust, fsb and CitiFinancial was $1.92
billion in 1999, up 31% from $1.46 billion in 1998 and $1.30 billion in 1997.
The TRAVELERS SECURE(R) line of property and casualty insurance products (sales
in this program were curtailed during the latter part of 1999) showed premiums
of $225 million in 1999 compared to $213 million in 1998 and $73 million in
1997.
Personal Lines
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $4,043 $3,666 $3,276
Claims and claim adjustment expenses 2,554 2,181 1,853
Total operating expenses 1,013 930 884
- --------------------------------------------------------------------------------
Income before taxes and
minority interest 476 555 539
Income taxes 143 172 177
Minority interest, after-tax 54 64 62
- --------------------------------------------------------------------------------
Net income(1) $ 279 $ 319 $ 300
================================================================================
(1) Excludes investment gains/losses included in Investment Activities
segment.
Net income was $279 million in 1999 compared to $319 million in 1998 and
$300 million in 1997. The 1999 decrease primarily reflects higher catastrophe
losses due to Hurricane Floyd, higher loss ratios in the TRAVELERS SECURE(R)
program, a charge related to curtailing the sale of TRAVELERS SECURE(R) auto and
homeowners products, and lower prior-year favorable reserve development,
partially offset by growth in earned premiums. The 1998 increase was primarily
due to higher net investment income and increased production, partially offset
by higher catastrophe losses and a decrease in favorable prior-year reserve
development.
The following table shows net written premiums by product line for the
three years ended December 31:
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Personal automobile $2,369 $2,328 $1,950
Homeowners and other 1,436 1,162 1,124
- --------------------------------------------------------------------------------
$3,805 $3,490 $3,074
================================================================================
Personal Lines net written premiums for 1999 were $3.805 billion compared
to $3.490 billion in 1998 and $3.074 billion in 1997. The 1999 net written
premiums include an increase of $72 million due to the termination of a quota
share reinsurance arrangement. The 1997 net written premiums include an increase
of $69 million due to an adjustment associated with the quota share reinsurance
arrangement. The 1999 and 1998 increases compared to 1998 and 1997,
respectively, primarily reflected growth
13
<PAGE>
in independent agents business and growth in affinity marketing and joint
marketing arrangements. During the third quarter of 1999, TAP decided to curtail
the sale of its TRAVELERS SECURE(R) auto and homeowners products because insured
losses exceeded levels anticipated in the pricing of the products. The growth in
premiums from the independent agent distribution channel has been partially due
to pursuing transfers of books of business to the Company within certain
independent insurance agencies. Frequently, Personal Lines will pay these
agencies an incentive to cover their expenses related to the transfer and
include a competitive inducement to move the book. Many independent agencies are
consolidating their business to a smaller number of insurance carriers resulting
in transfers of business to their preferred carriers.
Catastrophe losses, net of taxes and reinsurance, were $79 million in 1999
compared to $44 million in 1998 and $10 million in 1997. Catastrophe losses in
1999 were primarily due to Hurricane Floyd in the third quarter, wind and hail
storms on the East Coast and tornadoes in the Midwest in the second quarter and
a wind and ice storm in the Midwest and Northeast in the first quarter.
Catastrophe losses in 1998 were primarily due to Hurricanes Bonnie and Georges,
severe first quarter winter storms and second and third quarter wind and hail
storms.
Statutory and generally accepted accounting principles (GAAP) combined
ratios (before allocation of corporate expenses) for Personal Lines were as
follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Statutory
Loss and LAE ratio(1) 70.0% 66.7% 63.5%
Underwriting expense ratio 26.7 27.2 28.7
Combined ratio 96.7 93.9 92.2
- -------------------------------------------------------------------------------
GAAP
Loss and LAE ratio(1) 70.3% 66.7% 63.5%
Underwriting expense ratio 26.5 26.5 28.3
Combined ratio 96.8 93.2 91.8
===============================================================================
(1) LAE represents loss adjustment expenses.
GAAP combined ratios for Personal Lines differ from statutory combined
ratios primarily due to the deferral and amortization of certain expenses for
GAAP reporting purposes only.
The 1999 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with the termination of a quota share reinsurance
arrangement. Excluding this adjustment the 1999 statutory and GAAP combined
ratios were 96.5% and 97.3%, respectively. The increase in the 1999 statutory
and GAAP combined ratios excluding this adjustment compared to the 1998
statutory and GAAP combined ratios was due to higher catastrophe losses due to
Hurricane Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, the
TRAVELERS SECURE(R) charge, and lower favorable prior-year reserve development
in the automobile bodily injury line.
The 1997 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with a change in a quota share reinsurance arrangement.
Excluding this adjustment, the 1997 statutory and GAAP combined ratios would
have been 92.1% and 92.5%, respectively. The increase in the 1998 statutory and
GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
excluding this adjustment was primarily due to higher catastrophe and other
weather-related losses and a decrease in favorable prior-year reserve
development, partially offset by a decrease in the underwriting expense ratio
due to a lower commission expense ratio associated with the alternative
distribution channels.
INTERNATIONAL CONSUMER
Europe, Middle East & Africa
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $2,335 $2,143 $2,047
Adjusted operating expenses(2) 1,501 1,473 1,440
Provisions for benefits, claims, and credit losses 312 299 282
- ---------------------------------------------------------------------------------
Core income before taxes 522 371 325
Income taxes 195 146 122
- ---------------------------------------------------------------------------------
Core income 327 225 203
Restructuring-related items, after-tax 15 125 65
- ---------------------------------------------------------------------------------
Net income $ 312 $ 100 $ 138
=================================================================================
Average assets (in billions of dollars) $ 22 $ 22 $ 22
Return on assets 1.42% 0.45% 0.63%
=================================================================================
Excluding restructuring-related items
Return on assets 1.49% 1.02% 0.92%
=================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Europe, Middle East & Africa (EMEA--including India and Pakistan)--which
provides banking, lending and investment services, including credit and charge
cards, to customers throughout the region--reported core income of $327 million
in 1999, up $102 million or 45% from 1998, reflecting growth across the region,
particularly Germany, and a $16 million ($25 million pretax) gain related to an
investment in an affiliate. Core income in 1998 was up $22 million or 11% from
1997, reflecting business volume growth. Net income of $312 million in 1999,
$100 million in 1998, and $138 million in 1997 included restructuring-related
items of $15 million ($23 million pretax), $125 million ($239 million pretax),
and $65 million ($112 million pretax), respectively.
The net effect of foreign currency translation on core income was minimal;
however, the impact on revenue growth was a reduction of approximately 3 and 2
percentage points and on expense growth was a reduction of approximately 4 and 2
percentage points in 1999 and 1998, respectively.
As shown in the following table, EMEA reported 8% account growth in 1999
and 4% in 1998 primarily reflecting loan growth, including credit cards.
However, loans and customer deposits were reduced by the effect of foreign
currency translation.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 11.1 10.2 9.8
Average customer deposits $ 17.0 $ 17.3 $ 16.8
Average loans 16.9 16.3 15.6
================================================================================
14
<PAGE>
Revenues, net of interest expense, of $2.335 billion in 1999 grew $192
million or 9% from 1998 reflecting loan growth, improved spreads, and higher
insurance and investment product fees. Revenues in 1999 also reflected the $25
million gain associated with an investment in an affiliate. Revenues in 1998
increased $96 million or 5% from 1997 reflecting growth across all countries
except India and Pakistan where revenues declined as a result of economic
conditions.
Adjusted operating expenses increased $28 million or 2% in 1999 and grew
$33 million or 2% in 1998. Excluding the effect of foreign currency translation,
expenses in 1999 and 1998 reflect higher business volumes and costs associated
with franchise growth in Central and Eastern Europe.
The provisions for benefits, claims, and credit losses in 1999 were $312
million, compared to $299 million in 1998 and $282 million in 1997. The net
credit loss ratio of 1.67% in 1999 declined from 1.70% in 1998 and 1.75% in
1997. Loans delinquent 90 days or more were $914 million or 5.33% at December
31, 1999, down from $955 million or 5.46% at December 31, 1998 and $919 million
or 5.92% at December 31, 1997.
Asia Pacific
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $2,248 $1,849 $1,878
Adjusted operating expenses(2) 1,186 976 1,025
Provisions for benefits, claims, and credit losses 353 251 198
- ---------------------------------------------------------------------------------
Core income before taxes 709 622 655
Income taxes 266 239 248
- ---------------------------------------------------------------------------------
Core income 443 383 407
Restructuring-related items, after-tax 13 64 60
- ---------------------------------------------------------------------------------
Net income $ 430 $ 319 $ 347
=================================================================================
Average assets (in billions of dollars) $ 31 $ 28 $ 27
Return on assets 1.39% 1.14% 1.29%
=================================================================================
Excluding restructuring-related items
Return on assets 1.43% 1.37% 1.51%
=================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Asia Pacific (including Japan and Australia)--which provides banking,
lending and investment services, including credit and charge cards, to customers
throughout the region--reported core income of $443 million in 1999, up from
$383 million and $407 million in 1998 and 1997, respectively, reflecting
business growth and expansion as the region rebounds from weak 1998 results. Net
income of $430 million in 1999, $319 million in 1998, and $347 million in 1997
included restructuring-related items of $13 million ($22 million pretax), $64
million ($83 million pretax), and $60 million ($97 million pretax),
respectively.
Strengthening currencies across the region resulted in net foreign currency
translation effects that increased core income by approximately $10 million in
1999 and revenue and expense growth was increased by approximately 5 and 6
percentage points, respectively. In 1998, the net effect of foreign currency
translation reduced core income by approximately $112 million and revenue and
expense growth was reduced by approximately 22 and 16 percentage points,
respectively.
As shown in the following table, Asia Pacific accounts grew 21% in both
1999 and 1998. The growth in 1999 reflects significant increases in Japan,
growth in the Cards business across the region, and economic stabilization in
most countries. The 1998 increase in accounts and customer deposits reflects the
"flight to quality" in the region.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 9.2 7.6 6.3
Average customer deposits $ 42.1 $ 36.1 $ 30.5
Average loans 23.3 20.2 20.8
================================================================================
Revenues, net of interest expense, of $2.248 billion increased $399 million
or 22% from 1998 reflecting strong performance in Japan and business volume
growth and higher spreads in most other countries. Revenues in 1998 declined $29
million from 1997 reflecting the effect of foreign currency translation and
spread compression in certain countries, offset by higher deposit volumes due to
the "flight to quality" in the region.
Adjusted operating expenses of $1.186 billion increased $210 million or 22%
from 1998 reflecting higher marketing spending across the region and costs
associated with new branches and additional product offerings, particularly in
Japan. Expenses in 1998 declined $49 million or 5% from 1997 reflecting the
effect of foreign currency translation, partially offset by costs associated
with business volume growth.
The provisions for benefits, claims, and credit losses in 1999 of $353
million increased from $251 million in 1998 and $198 million in 1997. The net
credit loss ratio was 1.28% in 1999, up from 1.12% in 1998 and 0.82% in 1997.
Loans delinquent 90 days or more were $453 million or 1.80% at December 31,
1999, compared with $498 million or 2.28% at December 31, 1998 and $259 million
or 1.34% at December 31, 1997. The increases in the provision and the net credit
loss ratio from 1998 primarily reflect increases in Taiwan and Hong Kong;
however, the delinquency ratio declined in 1999 reflecting the economic
stabilization across the region.
Latin America
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $1,983 $1,598 $1,475
Adjusted operating expenses(2) 1,193 1,068 921
Provision for credit losses 447 265 192
- -----------------------------------------------------------------------------
Core income before taxes 343 265 362
Income taxes 115 105 119
- -----------------------------------------------------------------------------
Core income 228 160 243
Restructuring-related items, after-tax 27 67 20
- -----------------------------------------------------------------------------
Net income $ 201 $ 93 $ 223
=============================================================================
Average assets (in billions of dollars) $ 14 $ 12 $ 8
Return on assets 1.44% 0.78% 2.79%
=============================================================================
Excluding restructuring-related items
Return on assets 1.63% 1.33% 3.04%
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
15
<PAGE>
Latin America--which provides banking, lending and investment services,
including credit and charge cards, to customers throughout the region--reported
core income of $228 million in 1999, up $68 million or 43% from 1998, reflecting
an increase in earnings from Credicard, a 33%-owned Brazilian Card affiliate,
and the effect of certain acquisitions, partially offset by a higher provision
for credit losses. Core income of $160 million in 1998 declined from $243
million in 1997 primarily reflecting lower earnings from Credicard. Net income
of $201 million in 1999, $93 million in 1998, and $223 million in 1997 included
restructuring-related items of $27 million ($42 million pretax), $67 million
($88 million pretax), and $20 million ($33 million pretax), respectively.
The Brazilian currency devaluation in the beginning of 1999 significantly
contributed to the 1999 foreign currency translation effects that reduced core
income by approximately $34 million. Foreign currency translation effects
reduced revenue and expense growth by approximately 10 and 7 percentage points,
respectively. The effect of foreign currency translation in 1998 reduced revenue
and expense growth by approximately 4 and 5 percentage points, respectively,
however the impact on core income was minimal.
As shown in the following table, Latin America experienced strong business
volume growth in 1999 and 1998, including the effect of acquisitions. Average
loan growth of 1% in 1999 was reduced by credit risk management initiatives.
Customer deposit growth also reflects a "flight to quality" in the region.
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Accounts (in millions) 8.8 7.3 5.4
Average customer deposits $ 13.5 $ 10.2 $ 8.2
Average loans 7.9 7.8 6.6
================================================================================
Revenues, net of interest expense, of $1.983 billion increased $385 million
or 24% from 1998 reflecting acquisitions in the region and increased earnings
from Credicard. Revenues in 1998 increased $123 million or 8% from 1997,
reflecting acquisitions in the region and business volume growth, offset by
lower earnings from Credicard.
Adjusted operating expenses of $1.193 billion increased $125 million or 12%
from 1998 reflecting acquisitions in the region. Efficiency efforts in 1999
contributed to a 3% decline in expenses excluding the effect of acquisitions and
foreign currency translation. Expenses in 1998 grew $147 million or 16% from
1997 reflecting acquisitions in the region, spending on new strategic alliances,
and increased collection efforts.
The provision for credit losses of $447 million in 1999 increased from $265
million in 1998 and $192 million in 1997. The net credit loss ratio was 5.30% in
1999, up from 3.07% in 1998 and 2.66% in 1997. Loans delinquent 90 days or more
of $320 million or 4.10% at December 31, 1999 increased from $288 million or
3.60% at December 31, 1998 and $173 million or 2.34% at December 31, 1997. The
increases in the provision and the net credit loss ratio from 1998 reflect
economic conditions in the region, particularly in Argentina and Chile, and the
effect of recent acquisitions.
e-CITI
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 233 $ 149 $ 114
Adjusted operating expenses(2) 527 378 236
Provision for credit losses 5 3 4
- ----------------------------------------------------------------------------
Loss before tax benefits (299) (232) (126)
Income tax benefits (120) (91) (48)
- ----------------------------------------------------------------------------
Loss (179) (141) (78)
Restructuring-related items, after-tax -- 2 16
- ----------------------------------------------------------------------------
Net loss $(179) $(143) $ (94)
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
e-Citi--the business responsible for developing and implementing the
Company's internet financial services products and e-commerce
solutions--reported losses before restructuring-related items of $179 million in
1999, compared to $141 million in 1998 and $78 million in 1997. Net losses of
$143 million in 1998 and $94 million in 1997 included restructuring-related
items of $2 million ($3 million pretax) and $16 million ($28 million pretax),
respectively.
Revenues, net of interest expense, were $233 million in 1999, up from $149
million in 1998 and $114 million in 1997, reflecting business volume increases
in certain electronic banking services.
Adjusted operating expenses of $527 million increased from $378 million and
$236 million in 1998 and 1997, respectively, reflecting continued investment in
Internet-based and other electronic financial services as well as other
e-commerce solutions and volume increases associated with electronic banking
services.
OTHER CONSUMER
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $ 67 $ 100 $ 108
Adjusted operating expenses(2) 195 217 80
- -----------------------------------------------------------------------------
(Loss) income before taxes (128) (117) 28
Income taxes (benefits) (42) (40) 20
- -----------------------------------------------------------------------------
(Loss) income (86) (77) 8
Restructuring-related items, after-tax 12 -- --
- -----------------------------------------------------------------------------
Net (loss) income $ (98) $ (77) $ 8
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Other Consumer--which includes certain treasury operations and global
marketing and other programs--reported losses before restructuring-related items
of $86 million in 1999, compared with $77 million in 1998, reflecting higher
costs associated with global distribution initiatives and lower treasury results
reflecting the higher interest rate environment, offset by lower marketing costs
and reduced staff levels. The loss of $77 million in 1998 as compared to income
of $8 million in 1997 reflects higher spending on global advertising, marketing,
and distribution development initiatives. The net loss of $98 million in 1999
included restructuring-related items of $12 million ($19 million pretax).
16
<PAGE>
CONSUMER PORTFOLIO REVIEW
In the consumer portfolio, credit loss experience is often expressed in terms of
annualized net credit losses as a percentage of average loans. Pricing and
credit policies reflect the loss experience of each particular product. Consumer
loans are generally written off no later than a predetermined number of days
past due on a contractual basis, or earlier in the event of bankruptcy. The
number of days is set at an appropriate level according to loan product and
country.
The table below summarizes delinquency and net credit loss experience in
both the managed and on-balance sheet loan portfolios in terms of loans 90 days
or more past due, net credit losses, and as a percentage of related loans.
Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios
<TABLE>
<CAPTION>
Total Average
Loans 90 Days or More Past Due(1) Loans
-------- ------------------------------- --------
In Millions of Dollars, Except Loan Amounts in Billions 1999 1999 1998 1997 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Citibanking North America $ 7.4 $ 55 $ 93 $ 133 $ 7.6
Ratio 0.75% 1.20% 1.59%
Mortgage Banking 30.1 696 625 715 27.4
Ratio 2.31% 2.44% 3.13%
U.S. Bankcards 73.7 1,061 1,001 868 69.0
Ratio 1.44% 1.45% 1.77%
Other Cards 2.2 30 28 32 2.4
Ratio 1.38% 1.23% 1.56%
CitiFinancial 15.5 203 172 133 13.6
Ratio 1.31% 1.44% 1.36%
Europe, Middle East & Africa 17.2 914 955 919 16.9
Ratio 5.33% 5.46% 5.92%
Asia Pacific 25.1 453 498 259 23.3
Ratio 1.80% 2.28% 1.34%
Latin America 7.8 320 288 173 7.9
Ratio 4.10% 3.60% 2.34%
Citibank Private Bank (2) 22.4 120 193 110 19.2
Ratio 0.54% 1.14% 0.72%
Other 0.8 3 2 1 0.9
- ------------------------------------------------------------------------------------------------------------------
Total managed 202.2 3,855 3,855 3,343 188.2
Ratio 1.91% 2.12% 2.23%
- ------------------------------------------------------------------------------------------------------------------
Securitized credit card receivables (49.0) (725) (658) (481) (46.9)
Loans held for sale (4.5) (32) (38) (35) (5.2)
- ------------------------------------------------------------------------------------------------------------------
Total loans $ 148.7 $ 3,098 $ 3,159 $ 2,827 $ 136.1
Ratio 2.08% 2.39% 2.36%
==================================================================================================================
<CAPTION>
Net Credit Losses(1)
-------------------------------
In Millions of Dollars, Except Loan Amounts in Billions 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Citibanking North America $ 90 $ 106 $ 109
Ratio 1.18% 1.34% 1.36%
Mortgage Banking 43 75 115
Ratio 0.16% 0.31% 0.51%
U.S. Bankcards 3,143 3,123 2,662
Ratio 4.56% 5.33% 5.74%
Other Cards 87 79 81
Ratio 3.70% 3.51% 3.88%
CitiFinancial 295 291 233
Ratio 2.18% 2.74% 2.82%
Europe, Middle East & Africa 281 277 273
Ratio 1.67% 1.70% 1.75%
Asia Pacific 298 227 171
Ratio 1.28% 1.12% 0.82%
Latin America 419 239 175
Ratio 5.30% 3.07% 2.66%
Citibank Private Bank (2) 19 5 (13)
Ratio 0.10% 0.03% NM
Other 5 3 4
- -----------------------------------------------------------------------------------------
Total managed 4,680 4,425 3,810
Ratio 2.49% 2.70% 2.61%
- -----------------------------------------------------------------------------------------
Securitized credit card receivables (2,159) (2,053) (1,587)
Loans held for sale (110) (134) (126)
- -----------------------------------------------------------------------------------------
Total loans $ 2,411 $ 2,238 $ 2,097
Ratio 1.77% 1.82% 1.79%
=========================================================================================
</TABLE>
(1) The ratios of 90 days or more past due and net credit losses are calculated
based on end-of-period and average loans, respectively, both net of
unearned income.
(2) Citibank Private Bank results are reported as part of the Global Investment
Management and Private Banking segment.
Consumer Loan Balances, Net of Unearned Income
<TABLE>
<CAPTION>
End of Period Average
----------------------------- -----------------------------
In Billions of Dollars 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed $ 202.2 $ 181.6 $ 149.8 $ 188.2 $ 163.8 $ 145.7
Securitized credit card receivables (49.0) (44.3) (26.8) (46.9) (36.5) (25.2)
Loans held for sale (4.5) (5.0) (3.5) (5.2) (4.6) (3.6)
- ----------------------------------------------------------------------------------------------------------
On-balance sheet $ 148.7 $ 132.3 $ 119.5 $ 136.1 $ 122.7 $ 116.9
==========================================================================================================
</TABLE>
17
<PAGE>
Total delinquencies 90 days or more past due in the managed portfolio were
$3.9 billion with a related delinquency ratio of 1.91% at December 31, 1999,
compared with $3.9 billion or 2.12% at December 31, 1998 and $3.3 billion or
2.23% at December 31, 1997. Total managed net credit losses in 1999 were $4.7
billion and the related loss ratio was 2.49%, compared with $4.4 billion and
2.70% in 1998 and $3.8 billion and 2.61% in 1997. For a discussion on trends by
business, see business discussions on pages 8-16.
Citigroup's allowance for credit losses of $6.7 billion is available to
absorb all probable credit losses inherent in the portfolio. For analytical
purposes only, the portion of Citigroup's allowance for credit losses attributed
to the consumer portfolio was $3.4 billion as of December 31, 1999, up from $3.3
billion and $2.8 billion as of December 31, 1998 and 1997, respectively. The
increase in 1998 from 1997 reflects the addition of $320 million of credit loss
reserves related to the acquisition of UCS. The allowance as a percentage of
loans on the balance sheet was 2.31% as of December 31, 1999, down from 2.50% at
December 31, 1998 reflecting improved credit performance in the portfolio. The
attribution of the allowance is made for analytical purposes only and may change
from time to time.
In Millions of Dollars 1999 1998 1997
- ------------------------------------------------------------------------------
Allowance for credit losses $3,435 $3,310 $2,808
As a percentage of total consumer loans 2.31% 2.50% 2.35%
==============================================================================
GLOBAL CONSUMER OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 34.
In 2000, Citigroup will adopt the Federal Financial Institutions
Examination Council's (FFIEC) revised Uniform Retail Credit Classification and
Account Management Policy. The policy provides guidance on the reporting of
delinquent consumer loans and the timing of associated credit charge-offs for
Citigroup's financial institution subsidiaries. The revised policy is not
expected to have a material effect on financial results since Citigroup
maintains adequate reserves for probable credit losses inherent in its loan
portfolios. However, net credit losses, delinquencies and the related ratios may
increase from 1999 levels as a result of portfolio growth, global economic
conditions, and the credit performance of the portfolios, including
bankruptcies.
Banking/Lending
Citibanking North America. 1999 was a year of major transformation and success.
The business significantly changed its expense structure, reducing operating
expenses by $334 million or 20%. Citibanking invested in training and licensing
programs and implemented new compensation programs to enable and motivate
associates to sell a full range of financial products that meet clients' needs.
By the end of 1999, the majority of sales associates became licensed and
Citibanking introduced Citipro, a complimentary financial analysis to assess
clients' financial needs and recommend appropriate financial products to meet
those needs. This new sales strategy and culture has accelerated revenue growth
through increased sales of banking products and higher investment product fees.
As a result, revenues grew 11% in the second half of 1999 as compared to 3% in
the first half of 1999. Revenue growth in 2000 is expected to exceed the growth
experienced in 1999.
Mortgage Banking. In 1999 Mortgage Banking, which includes the student loan
business, expanded its product set and geographic presence through the
acquisition of Source One and distribution through Citigroup affiliates.
Continued growth is expected in 2000 through improved returns on the mortgage
servicing portfolio, expanded Internet and cross-sell opportunities, and the
introduction of new lending products. Student loan growth will be driven by
increased presence in the wholesale business and Internet lending.
Cards. The Cards business delivered outstanding performance in 1999 within a
challenging business environment, led by growth in receivables and sales volume
and improved risk adjusted margins despite competitive pressures. Additionally,
the business successfully executed two portfolio acquisitions in the year. As a
result, the business is moving into 2000 with solid momentum. While competitive
pressures will continue, the business will leverage its size in meeting the
needs of existing customers and gain wallet share by continuing to grow existing
profitable relationships and testing new value propositions and channels,
including the Internet. Further, Cards will meet its customers broader needs
through cross-selling and financial facilitation opportunities that will provide
for continued business growth. Improved credit performance significantly
contributed to earnings growth in 1999. Credit performance is not expected to
improve further in 2000 and credit costs and delinquencies may increase from
1999 levels as a result of the economic environment and continued business
growth.
18
<PAGE>
CitiFinancial. During 1999, CitiFinancial acquired operations in Florida that
had access to significant correspondent and broker networks, as well as
purchased approximately 200 branches. CitiFinancial is also pursuing other
sources of new volume through its affiliates within Citigroup. In addition, the
number of competitors in consumer finance lending has changed over the past few
years. CitiFinancial believes that the industry will continue to consolidate and
this may present an opportunity to grow via acquisitions both domestically and
internationally.
Utilizing the existing and recently acquired new channels, CitiFinancial
expects continued growth in 2000. CitiFinancial believes that its secured
lending products will produce above average returns should interest rates
continue to rise. Increases in interest rates could possibly have an adverse
effect on the economy. Credit losses are expected to increase modestly in 2000
given that they were at historical lows in 1999.
Insurance Industry
Changes in the general interest rate environment affect the return received by
the insurance subsidiaries on newly invested and reinvested funds. While a
rising interest rate environment enhances the returns available, it reduces the
market value of existing fixed maturity investments and the availability of
gains on disposition. A decline in interest rates reduces the return available
on investment of funds, but creates the opportunity for realized investment
gains on disposition of fixed maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations.
Certain social, economic, political, and litigation issues have led to an
increased number of legislative and regulatory proposals aimed at addressing the
cost and availability of certain types of insurance, as well as the claim and
coverage obligations of insurers. While most of these provisions have failed to
become law, these initiatives may continue as legislators and regulators try to
respond to the public availability, affordability, and claims concerns, and the
resulting laws, if any, could adversely affect the Company's ability to write
business with appropriate returns.
Travelers Life and Annuity should benefit from growth in the aging population
who are becoming more focused on the need to accumulate adequate savings for
retirement, to protect these savings and to plan for the transfer of wealth to
the next generation. Travelers Life and Annuity is well positioned to take
advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and retirement and estate planning products sold
through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Financial Services reform is likely to have
many effects on the life insurance industry and the results will take time to
assess; however, heightened competition is expected. Also, the annuities
business is interest sensitive, and swings in interest rates could influence
sales and retention of in force policies. In order to strengthen its competitive
position, Travelers Life and Annuity expects to maintain a current product
portfolio, further diversify its distribution channels, and retain its healthy
financial position through strong sales growth and maintenance of an efficient
cost structure.
Primerica. During the last few years Primerica has instituted programs including
sales and product training that are designed to maintain high compliance
standards, increase the number of producing agents and customer contacts and,
ultimately, increase production levels. Additionally, increased effort has been
made to provide all Primerica customers full access to all Primerica marketed
lines. Insurance in force continues to grow. A continuation of these trends
could positively influence future operations. Primerica continues to expand
cross-selling with other Company subsidiaries of products such as loans, mutual
funds, and annuity products.
Personal Lines strategy includes control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents
and continued expansion of alternative marketing channels to broaden
distribution to a wider customer base. Personal Lines is continuing its state by
state rollout of nonstandard auto insurance to broaden its product capabilities.
These growth strategies also provide opportunities to leverage the existing cost
structure and achieve economies of scale. In addition, Personal Lines continues
to take action to control its exposure to catastrophe losses, including limiting
the writing of new homeowners business in certain markets and implementing price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities.
The personal auto insurance marketplace has become more competitive in 1999
as some personal auto carriers have reduced prices in selected markets.
Additionally, auto loss costs have deteriorated slightly. These trends are
expected to continue in 2000. Personal Lines will continue to emphasize
underwriting discipline in this competitive marketplace and pursue a strategy of
flat to modest increases in auto rates. Market conditions for homeowners
insurance have remained stable with the industry experiencing modest rate
increases. Personal Lines expects homeowner rate increases to continue in 2000.
Homeowners loss cost trends have held at modest levels.
The property and casualty insurance industry in the United States continues
to consolidate. The Company's strategic objectives are to enhance its position
as a consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
In relation to the Company's objective of being a low-cost provider of
property and casualty insurance, an emphasis on claim payout and performance and
enhanced productivity efforts are expected to continue. However, some of the
insurance industry's methods have been challenged in litigation.
19
<PAGE>
International Consumer
Europe, Middle East & Africa. The newly unified Europe represents a large market
whose size and strong demographic characteristics rival that of the U.S.
Additional growth opportunity comes from the developing markets of Central and
Eastern Europe where an emerging middle class is expected to fuel the demand for
financial services. In 2000, the region will focus on the development of
Internet banking and investment products, including e-brokerage services. Not
unlike the U.S., as the social reforms take hold, an increasing recognition on
the part of consumers that they will need to fund their own retirements is
fueling a substantial investment product opportunity. Although the European
Economic Monetary Union represents great opportunity, the challenges are
substantial. A single market requires pan-European product offerings, brings
increased competition, and creates a greater ability on the part of consumers to
comparison shop across borders. Citigroup's strengths in distribution and
consistent global advertising and marketing efforts will provide a strong
platform to expand beyond the current European presence.
Asia Pacific. Asia's economic crisis has highlighted the need for a deep, rapid
restructuring of the banking industry across the region. 1999 was one of the
industry's most challenging years on record. Local banks consolidated,
competition intensified with the growing presence of foreign banks and non-bank
financial institutions, and market dynamics changed due to structural shifts,
including the rapid development of the Internet across Asia. In 1999, the
business embarked on a number of strategic cost management initiatives to
support a strengthened franchise. Both revenues and earnings experienced healthy
growth in 1999. Asia's economic recovery is expected to broaden in 2000. As a
result of the economic outlook and the business momentum built in 1999, Asia
Pacific is well positioned in 2000 for continued franchise growth.
Latin America. The region experienced deteriorating economic conditions during
1999 in many of its countries, which resulted in contracting Gross Domestic
Product, currency volatility, and a difficult credit environment. The
macroeconomic outlook is expected to remain challenging in 2000, with most
countries returning to only modest growth. The business will focus its growth on
less risky products and population segments, and continue to implement operating
expense reduction programs. Tight controls on loan underwriting and collections
implemented in 1999, coupled with a moderately improved economic climate in
2000, should result in improved credit performance.
GLOBAL CORPORATE AND INVESTMENT BANK
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $ 27,355 $ 22,360 $ 23,819
Adjusted operating expenses(2) 15,476 14,462 14,177
Provisions for benefits, claims, and credit losses 3,852 4,160 3,667
- ----------------------------------------------------------------------------------------
Core income before taxes and
minority interest 8,027 3,738 5,975
Income taxes 2,785 1,226 2,145
Minority interest, after-tax 167 143 132
- ----------------------------------------------------------------------------------------
Core income 5,075 2,369 3,698
Restructuring-related items, after-tax (121) (26) 664
- ----------------------------------------------------------------------------------------
Net income(3) $ 5,196 $ 2,395 $ 3,034
========================================================================================
</TABLE>
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
(3) The 1999 period excludes cumulative effect of accounting changes.
Citigroup's Global Corporate and Investment Bank business serves
corporations, financial institutions, governments, investors, and other
participants in capital markets throughout the world and consists of SSB,
Emerging Markets, GRB, and the Commercial Lines business of TAP. SSB is one of
the largest investment banking, underwriting and brokerage firms in the world,
with a significant presence in most major financial products. Emerging Markets
provides a wide array of banking products and services to multinational and
large and emerging local corporations in 78 emerging market countries. GRB
focuses on providing banking, capital markets, and transaction processing
services to large multinational companies in 22 developed countries and to their
subsidiaries around the world. TAP is one of the largest property and casualty
insurers in the United States offering, among other products, workers'
compensation, commercial multi-peril, commercial auto, other liability, fidelity
and surety, and property and other lines, which it distributes through
independent agents and brokers. Earnings generated from businesses outside the
U.S. represented about 35% of total Global Corporate and Investment Bank core
income in 1999.
The Global Corporate and Investment Bank reported core income of $5.075
billion in 1999, up $2.706 billion or 114%, reflecting a rebound from 1998
economic turmoil and strong 1999 growth across the franchise. The growth in core
income was led by SSB, up $1.946 billion to $2.354 billion, Emerging Markets, up
$442 million to $1.190 billion, and GRB, up $196 million to $686 million.
Excluding the 1998 severe market conditions, core income growth reflected strong
revenue momentum across SSB, revenue growth and improved credit in Emerging
Markets, and lower expenses combined with revenue growth in GRB. Commercial
Lines' core income growth reflected favorable legislation benefits and
prior-year reserve development, along with lower weather-related losses.
Net income of $5.196 billion, $2.395 billion, and $3.034 billion in 1999,
1998 and 1997, respectively, included net restructuring-related credits of $121
million ($207 million pretax) and $26 million ($62 million pretax) in 1999 and
1998, respectively, and in 1997, a charge of $664 million ($1.119 billion
20
<PAGE>
pretax). Restructuring-related items in 1999 included reductions in the
restructuring reserve of $150 million ($255 million pretax) of which $127
million ($214 million pretax) related to the 1997 reserve that resulted from
SSB's reassessment of space needs due to the Citicorp merger.
Restructuring-related items in 1998 included a reduction of the 1997
restructuring reserve of $191 million ($324 million pretax) that resulted from
SSB's favorable negotiations on a sublease on the Seven World Trade Center
location. Also included in 1998 is a restructuring charge of $165 million ($262
million pretax) related to initiatives designed to realize synergies and
operating efficiencies. Included in 1997 are charges recorded by SSB related to
the Salomon Smith Barney merger and by Emerging Markets and GRB related to
cost-management programs and customer service initiatives. See Note 14 of Notes
to Consolidated Financial Statements for further discussion of
restructuring-related items.
SALOMON SMITH BARNEY
The following data does not include the Asset Management division of Salomon
Smith Barney. The division's results are included in the SSB Citi Asset
Management Group segment.
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $ 12,680 $ 8,333 $ 10,218
Adjusted operating expenses(1) 8,973 7,702 7,895
- --------------------------------------------------------------------------------
Core income before taxes 3,707 631 2,323
Income taxes 1,353 223 885
- --------------------------------------------------------------------------------
Core income 2,354 408 1,438
Restructuring-related items, after-tax (143) (163) 496
- --------------------------------------------------------------------------------
Net income(2) $ 2,497 $ 571 $ 942
================================================================================
(1) Excludes restructuring-related items.
(2) 1999 excludes cumulative effect of accounting change.
Core income was $2.354 billion in 1999 compared to $408 million in 1998 and
$1.438 billion in 1997. Salomon Smith Barney's earnings during 1999 reflect a
rebound from 1998 economic turmoil losses and strong growth in commission income
from the Private Client group, investment banking fees and principal
transactions. During the latter part of 1998 Salomon Smith Barney's performance
was depressed by extreme economic turmoil in much of the world.
Revenues for the three years ended December 31, 1999 by category were as
follows:
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Commissions $ 3,630 $ 3,203 $ 2,956
Investment banking 2,970 2,281 2,082
Principal transactions 2,544 (115) 2,501
Asset management and administration fees(1) 1,638 1,325 998
Interest income, net(2) 1,614 1,460 1,533
Other income 284 179 148
- --------------------------------------------------------------------------------
Total revenues, net of interest expense(2) $12,680 $ 8,333 $10,218
================================================================================
(1) Excludes the revenues of SSB Asset Management, which are reported in the
SSB Citi Asset Management Group results.
(2) Net of interest expense of $9,652 million, $11,433 million, and $10,496
million in 1999, 1998, and 1997, respectively.
Revenues, net of interest expense, increased 52% in 1999 to $12.680 billion
from $8.333 billion in 1998 and $10.218 billion in 1997. The 1999 increase
compared to 1998 reflects strong growth in all businesses as well as a rebound
from the prior year's economic turmoil. The 1998 decrease compared to 1997
primarily reflects a decline in principal transaction revenues from fixed income
and global arbitrage offset, to an extent, by increases in commissions, asset
management and administration fees, and investment banking revenues.
Commissions revenue increased 13% in 1999 to $3.630 billion from $3.203
billion in 1998 and $2.956 billion in 1997. The 1999 and 1998 increases reflect
growth in sales of listed and over-the-counter (OTC) securities.
Investment banking revenues were $2.970 billion in 1999 compared to $2.281
billion in 1998 and $2.082 billion in 1997. The increases in 1999 reflect growth
in equity and high grade debt underwritings and mergers and acquisitions fees.
The increases in 1998 reflect revenue growth in unit trust, public finance and
high grade debt underwritings, and mergers and acquisitions fees. This was
offset somewhat by a decline in equity underwritings. Investment banking
revenues in 1998 were also favorably impacted by increased high yield
underwriting revenues.
Principal transactions revenues were $2.544 billion in 1999 compared to a
loss of $115 million in 1998 and $2.501 billion in 1997. The 1999 period
reflects strong growth in institutional global fixed income and global equities.
The 1998 period reflects decreases in fixed income trading results including
losses due to risk reductions in the U.S. fixed income arbitrage business. These
decreases in 1998 were partially offset by an increase in equity trading
results. In 1998 fixed income trading results were adversely impacted by
significant dislocations in the global fixed income markets, including greatly
reduced liquidity and widening credit spreads. Included in these results were
Russia-related losses.
Asset management and administration fees were $1.638 billion in 1999
compared to $1.325 billion in 1998 and $998 million in 1997. The year to year
increases reflect growth in assets under fee-based management. These fees
include results from assets managed by the Financial Consultants as well as
assets that are externally managed through the consulting group.
Total assets under fee-based management at December 31, were as follows:
In Billions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Financial Consultant managed accounts $ 27.4 $ 16.5 $ 11.6
Consulting Group externally managed assets 83.0 71.9 59.7
- --------------------------------------------------------------------------------
Total assets under
fee-based management(1) $ 110.4 $ 88.4 $ 71.3
================================================================================
(1) Excludes the assets under management of SSB Asset Management, which are
reported in the SSB Citi Asset Management Group business segment.
Interest income, net was $1.614 billion in 1999 compared to $1.460 billion
in 1998 and $1.533 billion in 1997. The increase in 1999 compared to 1998 is
primarily due to increases in margin lending to clients.
Adjusted operating expenses were $8.973 billion in 1999 compared to $7.702
billion in 1998 and $7.895 billion in 1997. Adjusted operating expenses
increased 17% in 1999 over 1998 primarily due to an increase in
production-related compensation and employee benefits expense, reflecting
increased revenues. Adjusted operating expenses were relatively unchanged in
1998 as compared to 1997. Salomon Smith Barney continues to maintain its focus
on controlling fixed expenses.
21
<PAGE>
GLOBAL CORPORATE BANK
Emerging Markets
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $4,327 $3,632 $3,483
Adjusted operating expenses(2) 2,062 2,015 1,898
Provision for credit losses 347 424 120
- -----------------------------------------------------------------------------
Core income before taxes and
minority interest 1,918 1,193 1,465
Income taxes 722 445 548
Minority interest, after-tax 6 -- --
- -----------------------------------------------------------------------------
Core income 1,190 748 917
Restructuring-related items, after-tax 10 50 32
- -----------------------------------------------------------------------------
Net income $1,180 $ 698 $ 885
=============================================================================
Average assets (in billions of dollars) $ 82 $ 78 $ 64
Return on assets 1.44% 0.89% 1.38%
=============================================================================
Excluding restructuring-related items
Return on assets 1.45% 0.96% 1.43%
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Emerging Markets core income totaled $1.190 billion in 1999, up $442
million or 59% from 1998, reflecting Russia-related losses in 1998 and strong
1999 revenue growth in Latin America, along with an improved credit outlook that
resulted in a lower provision for credit losses. In Asia (including Australia
and New Zealand but excluding Japan and the Indian subcontinent), improved net
write-offs and lower expenses offset revenue declines from lower trading
activity. Core income in 1998 of $748 million declined $169 million or 18% from
1997. Net income of $1.180 billion, $698 million and $885 million in 1999, 1998
and 1997, respectively, included restructuring-related items of $10 million ($17
million pretax), $50 million ($73 million pretax) and $32 million ($54 million
pretax), respectively.
Revenues, net of interest expense, of $4.327 billion grew $695 million or
19% compared with 1998 reflecting double-digit growth in loan product revenues,
structured products revenues and trade services and an $86 million improvement
in trading-related revenues. Revenue growth in 1999 included double-digit growth
in Latin America and CEEMEA (Central and Eastern Europe, Middle East and Africa)
that was partially offset by a decline in trading-related revenues in Asia.
Revenues of $3.632 billion in 1998 grew $149 million or 4% compared with 1997,
as double-digit growth in transaction banking revenues was partially offset by
losses attributable to the Russia related market turmoil.
Revenues attributed to the Embedded Bank and Emerging Local Corporate
strategies (Citigroup's plans to gain market share in selected emerging market
countries), together with new franchises, grew 30% in 1999 and 66% in 1998.
These revenues accounted for 7%, 7% and 4% of the Emerging Markets revenues in
1999, 1998, and 1997, respectively. Revenues in the Emerging Markets business
that were attributable to business from multinational companies managed jointly
with GRB grew 18% in 1999 and 15% in 1998. These revenues accounted for
approximately 28%, 28%, and 29% of total Emerging Markets revenues in 1999,
1998, and 1997, respectively.
Adjusted operating expenses in 1999 were well controlled, increasing $47
million or 2% to $2.062 billion as investment spending to gain market share in
selected emerging market countries and volume growth were essentially funded by
savings from the 1997 and 1998 restructuring actions and other expense
initiatives. Expenses in 1998 were $2.015 billion, up $117 million or 6%
compared to 1997, primarily due to investment spending to build the franchise,
together with volume growth.
The provision for credit losses totaled $347 million in 1999, down $77
million compared with 1998. The decrease in 1999 was primarily attributable to
lower net write-offs in Russia and Asia, partially offset by an increase in
Latin America, as well as an overall improved credit outlook that resulted in a
lower provision for credit losses. The provision for credit losses in 1998 of
$424 million was up $304 million compared with 1997. The increase in 1998 was
concentrated in Indonesia and Russia and reflected the effects of economic
turmoil experienced in those countries. Cash-basis loans at December 31, 1999,
1998, and 1997 were $1.044 billion, $1.062 billion and $649 million. The 1999
balance reflected decreases in Asia partially offset by increases in Latin
America. The increase in 1998 was concentrated in Indonesia and several other
Asian countries.
Average assets of $82 billion in 1999 rose $4 billion or 5% from 1998
reflecting growth across all regions. The growth was concentrated in the loan
portfolio and structured products. Average assets of $78 billion in 1998 rose
$14 billion or 22% from 1997 reflecting growth across all regions, primarily in
loan portfolio, trade finance, and treasury products.
Global Relationship Banking
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 4,083 $ 3,914 $ 3,815
Adjusted operating expenses(2) 3,008 3,170 2,756
Provision (benefit) for credit losses 1 (30) (84)
- ----------------------------------------------------------------------------
Core income before taxes 1,074 774 1,143
Income taxes 388 284 432
- ----------------------------------------------------------------------------
Core income 686 490 711
Restructuring-related items, after-tax 12 87 136
- ----------------------------------------------------------------------------
Net income $ 674 $ 403 $ 575
============================================================================
Average assets (in billions of dollars) $ 81 $ 92 $ 83
Return on assets 0.83% 0.44% 0.69%
============================================================================
Excluding restructuring-related items
Return on assets 0.85% 0.53% 0.86%
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
22
<PAGE>
Core income from Global Relationship Banking in North America, Europe, and
Japan was $686 million in 1999, up $196 million or 40% from 1998 primarily
reflecting current year revenue growth, prior year economic turmoil and lower
expenses. Core income in 1998 was $490 million, down $221 million or 31% from
1997. Net income of $674 million, $403 million, and $575 million in 1999, 1998
and 1997, respectively, included restructuring-related items of $12 million ($18
million pretax), $87 million ($141 million pretax) and $136 million ($227
million pretax), respectively.
Revenues, net of interest expense, in 1999 of $4.083 billion increased $169
million or 4% from 1998. Revenues in 1998 included losses attributable to global
economic turmoil as well as gains related to the disposition of real estate
investments. Excluding these items, the 1999 results reflect growth in
structured products, global equities and transaction services, partially offset
by a decline in loan portfolio revenues. Revenues in 1998 of $3.914 billion
increased $99 million or 3% from 1997 as double-digit growth in foreign exchange
and transaction services revenues was partially offset by the effect of the 1998
global economic turmoil.
Adjusted operating expenses were $3.008 billion in 1999, down $162 million
or 5% from 1998. The decline in expenses from 1998 to 1999 was primarily the
result of decreased costs related to the year 2000 and the EMU, coupled with
restructuring actions and business integration initiatives with SSB. Expenses of
$3.170 billion in 1998 were $414 million or 15% higher than 1997. The 1998
increase was primarily attributable to increased technology spending, including
year 2000 and EMU expenses, along with volume-related expense growth.
The provision for credit losses was $1 million in 1999 compared to net
benefits of $30 million and $84 million in 1998 and 1997, respectively. Net
benefits in 1998 were primarily the result of real estate recoveries partially
offset by write-offs resulting from the financial market turmoil in Russia. Net
benefits in 1997 resulted from recoveries in real estate and corporate loan
portfolios.
Cash-basis loans at December 31, 1999, 1998 and 1997 were $304 million,
$268 million and $401 million while the OREO portfolio totaled $156 million,
$235 million and $440 million, respectively. The increase in cash-basis loans in
1999 was due to an increase in North America partially offset by improvements in
the real estate portfolio. The improvements in cash-basis loans in 1998 and in
OREO in 1999 and 1998 were primarily related to the real estate portfolio.
Average assets of $81 billion in 1999 declined $11 billion or 12% from
1998, primarily reflecting the transfer of certain fixed income businesses to
SSB. Average assets of $92 billion in 1998 increased $9 billion or 11% from 1997
primarily reflecting higher lending to target market clients and higher volumes
in transaction banking services.
COMMERCIAL LINES
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $6,265 $6,481 $6,303
Claims and claim adjustment expenses 3,504 3,766 3,631
Total operating expenses 1,433 1,575 1,628
- --------------------------------------------------------------------------------
Income before taxes and
minority interest 1,328 1,140 1,044
Income taxes 322 274 280
Minority interest, after-tax 161 143 132
- --------------------------------------------------------------------------------
Net income(1)(2) $ 845 $ 723 $ 632
================================================================================
(1) Excludes investment gains/losses included in Investment Activities segment.
(2) 1999 excludes cumulative effect of accounting changes.
Net income was $845 million in 1999 compared to $723 million in 1998 and
$632 million in 1997. The 1999 increase compared to 1998 reflects a benefit
resulting from legislative actions by the states of New York and Pennsylvania
that changed the manner in which these states finance their workers'
compensation second-injury funds, and favorable prior-year reserve development.
Also contributing to the earnings improvement in 1999 were lower weather-
related losses and lower operating expenses, partially offset by lower fee
income. Operating results in 1999 reflected TAP's long-standing insistence on
maintaining discipline in the highly competitive commercial lines marketplace
and on growing business only where market conditions warrant. During 1999, the
Company began to see modest price increases on renewal business. However, these
increases varied significantly and reinforced the fact that rates in many areas
still have not improved to the point of producing acceptable returns. The 1998
increase compared to 1997 was due to increased after-tax net investment income,
expense reductions, and lower environmental and cumulative injury incurred
losses, partially offset by increased losses from catastrophes and other
weather-related events. Operating results during this period also reflected
market conditions characterized by difficult pricing and increased competition.
The impact of this trend in market conditions on 1998 and 1997 operating results
was offset by the factors previously indicated, as well as a disciplined
approach to underwriting and risk management.
Net written premiums by market for the three years ended December 31, 1999
were as follows:
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
National accounts $ 488 $ 625 $ 657
Commercial accounts 1,816 1,800 1,986
Select accounts 1,494 1,494 1,432
Specialty accounts 610 695 682
- --------------------------------------------------------------------------------
$4,408 $4,614 $4,757
================================================================================
23
<PAGE>
Commercial Lines net written premiums were $4.408 billion in 1999 compared
to $4.614 billion in 1998 and $4.757 billion in 1997. The 1997 net written
premiums reflect a $142 million adjustment ($127 million in Commercial Accounts
and $15 million in Select accounts) in the first quarter of 1997 due to a change
to conform the method of recording certain net written premiums of the domestic
property and casualty insurance subsidiaries acquired from Aetna Services Inc.
(Aetna P&C) to the method employed by Travelers Indemnity and its subsidiaries
(Travelers P&C). The trend in net written premiums for all lines continues to
reflect the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. Also contributing to
the 1999 decrease in net written premiums in National Accounts and Specialty
Accounts is the impact of additional reinsurance coverage. The slight increase
in Commercial Accounts net written premiums in 1999 reflects growth in specific
business segments and an improving rate environment. The slight increase in
Specialty Accounts net written premiums in 1998 reflects strong production in
excess and surplus lines.
Fee income was $275 million in 1999 compared to $306 million in 1998 and
$365 million in 1997. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company and the Company's
continued success in lowering workers' compensation losses of service customers.
National Accounts new business in 1999 was significantly lower than in 1998
reflecting the Company's continued disciplined approach to the highly
competitive marketplace. National Accounts business retention ratio was
moderately higher in 1999 than in 1998, primarily reflecting the loss of one
large account in 1998. National Accounts new business and business retention
ratio were virtually the same in 1998 as they were in 1997. National Accounts
experienced an increase in claim service-only business as well as favorable
results from continued product development efforts, especially in workers'
compensation cost containment programs.
In 1999, new business in Commercial Accounts was significantly lower than
in 1998, reflecting the Company's continued focus on obtaining new business
accounts only where it can maintain its selective underwriting policy. The
Commercial Accounts business retention ratio in 1999 was virtually the same as
in 1998. For 1998, new premium business in Commercial Accounts significantly
declined compared to 1997, reflecting TAP's focus on maintaining its selective
underwriting policy. The Commercial Accounts business retention ratio remained
strong in 1998 and was virtually the same as 1997, reflecting TAP's focus on
retaining profitable business.
New premium business in Select Accounts was significantly lower in 1999
compared to 1998 and continued to reflect its selective underwriting policy in
the highly competitive marketplace. New premium business in Select Accounts was
moderately lower in 1998 compared to 1997 reflecting the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. Select Accounts business retention ratio remained strong in
1999 and was virtually the same as 1998 and 1997.
Catastrophe losses, net of tax and reinsurance, were $27 million in 1999
compared to $25 million in 1998 and $5 million in 1997. The 1999 catastrophe
losses were primarily due to Hurricane Floyd in the third quarter and tornadoes
in Oklahoma in the second quarter. The 1998 catastrophe losses were primarily
due to Hurricane Georges in the third quarter and tornadoes in Nashville,
Tennessee in the second quarter. The 1997 catastrophe losses were primarily due
to tornadoes in the Midwest in the first quarter.
Statutory and GAAP combined ratios (before allocation of corporate
expenses) for Commercial Lines were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory
Loss and LAE ratio 77.9% 78.5% 78.4%
Underwriting expense ratio 30.7 29.7 30.6
Combined ratio before policyholder dividends 108.6 108.2 109.0
Combined ratio 109.7 109.1 111.0
- -------------------------------------------------------------------------------
GAAP
Loss and LAE ratio 75.2% 78.4% 78.3%
Underwriting expense ratio 29.8 31.1 30.4
Combined ratio before policyholder dividends 105.0 109.5 108.7
Combined ratio 106.1 110.4 109.9
===============================================================================
</TABLE>
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. For purposes of computing GAAP combined ratios,
fee income is allocated as a reduction of losses and loss adjustment expenses
and other underwriting expenses.
The 1999 statutory combined ratio for Commercial Lines reflected the
treatment of the commutation of an asbestos liability to an insured. Excluding
this commutation, the statutory combined ratio before policyholder dividends for
1999 would have been 106.1% compared to 108.2% in 1998. The improvement was
primarily due to favorable prior-year reserve development and lower
weather-related losses. The decrease in the 1999 GAAP combined ratio before
policyholder dividends compared to 1998 was due to favorable prior-year reserve
development, lower weather-related losses, and the benefit of the New York and
Pennsylvania legislative actions, partially offset by lower fee income.
The 1997 statutory and GAAP combined ratios for Commercial Lines included
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 1997
would have been 109.5% and 109.6%, respectively. The decrease in the 1998
statutory and GAAP combined ratios before policyholder dividends compared to the
1997 statutory and GAAP combined ratios before policyholder dividends excluding
this adjustment was due to expense reductions and lower environmental and
cumulative injury incurred losses, partially offset by higher catastrophe and
other weather-related losses and lower fee income.
24
<PAGE>
Environmental Claims
As a result of various state and federal legislative and regulatory efforts
aimed at environmental remediation, the insurance industry has been, and
continues to be, involved in litigation involving policy coverage and liability
issues. The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") enacted in 1980 and later modified, enables private parties as well
as federal and state governments to take action with respect to releases and
threatened releases of hazardous substances. This federal statute permits both
the recovery of response costs from certain liable parties and may require
liable parties to directly undertake their own remedial action. Liability under
CERCLA may be joint and several with other responsible persons. In addition to
the regulatory pressures, the Company believes that certain court decisions have
expanded insurance coverage beyond the original intent of the insurers and
insureds. These decisions often pertain to insurance policies that were issued
by TAP prior to the mid-1970s. The court decisions affecting the industry's
coverage positions continue to be inconsistent. Accordingly, the ultimate
responsibility and liability for environmental remediation costs remain
uncertain.
The Company continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. These claims
when submitted rarely indicate the monetary amount being sought by the claimant
from the insured and the Company does not keep track of the monetary amount
being sought in those few claims which indicated such a monetary amount.
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 December 31, 1999, approximately 22% of
the net environmental loss reserve (approximately $149 million) consists of case
reserves for resolved claims. The balance, approximately 78% of the net
aggregate reserve (approximately $527 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 Company's reserving methodology is preferable to one based on
"identified claims" since the resolution of environmental exposures by the
Company generally occurs by settlement on an insured-by-insured basis as opposed
to a claim-by-claim basis. Generally, the settlement between the Company and the
insured extinguishes any obligation the Company may have under any policy issued
to the insured for past, present and future environmental liabilities as well as
extinguishes any pending coverage litigation dispute with the insured. This form
of settlement is commonly referred to as a "buy-back" of policies for future
environmental liability. Additional provisions of these agreements include
appropriate indemnities and hold harmless provisions to protect the Company. The
Company's general purpose in executing such agreements is to reduce its
potential environmental exposure and eliminate both the risks presented by
coverage litigation with the insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the
exposure presented by each insured and the anticipated cost of resolution, if
any, for each insured. This analysis is completed by the Company on a quarterly
basis. In the course of its analysis, an assessment of the probable liability,
available coverage, judicial interpretations and historical value of similar
exposures is considered by the Company. In addition, due consideration is given
to the many variables presented, such as the nature of the alleged activities of
the insured at each site; the allegations of environmental damage at each site;
the number of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at a site;
the nature of government enforcement activities at each site; the ownership and
general use of each site; the overall nature of the insurance relationship
between the Company and the insured; the identification of other insurers; the
potential other coverage available, if any, including the number of years of
coverage, if any; and the applicable law in each jurisdiction. Analysis of these
and other factors, including the potential for future claims, results in the
establishment of the bulk reserve.
The duration of the Company's investigation and review of such claims and
the extent of time necessary to determine an appropriate estimate, if any, of
the value of the claim to the Company, vary significantly and are dependent upon
a number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
Superfund remediation-type environmental claims, the Company establishes a claim
file for each insured on a per site, per claimant basis. If there is more than
one claimant such as a federal and a state agency, this method will result in
two claims being set up for a policyholder at that one site. The Company adheres
to this method of calculating claim activity on all environmental-related
claims, whether such claims are tendered on primary, excess or umbrella
policies.
25
<PAGE>
In addition, the Company establishes claim files for environmental claims
brought by individual claimants who allege injury or damage as a result of the
discharge of wastes or pollutants allegedly by the policyholder. As it pertains
to such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.
As it pertains to environmental claims brought by individual claimants and
tendered on Aetna P&C policies, the Company establishes claim files on a per
insured, per site basis due to current claim system limitations. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims for the bodily injury claims and five for the property damage claims
would be established.
As of December 31, 1999, calculated as described above, the Company had
approximately 39,000 pending environmental-related claims tendered by 968 active
policyholders. Of the total pending environmental-related claims, 28,800 claims
relate to Travelers P&C policies tendered by 413 policyholders and 10,200 claims
relate to Aetna P&C policies tendered by 646 policyholders. Approximately 91 of
these Aetna P&C policyholders are also included in the 413 Travelers P&C
policyholders' count. The pending environmental-related claims represent federal
or state EPA-type claims as well as plaintiffs' claims alleging bodily injury
and property damage due to the discharge of waste or pollutants allegedly by the
policyholder.
The following table displays activity for environmental losses and loss
expenses and reserves for the years ended December 31:
Environmental Losses
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Beginning reserves
Direct $ 928 $ 1,193 $ 1,369
Ceded (96) (74) (127)
- -------------------------------------------------------------------------------
Net 832 1,119 1,242
Incurred losses and loss expenses
Direct 139 123 79
Ceded (82) (73) (14)
Losses paid
Direct 266 388 271
Ceded (53) (51) (67)
Other(1)
Direct -- -- 16
Ceded -- -- --
- -------------------------------------------------------------------------------
Ending reserves
Direct 801 928 1,193
Ceded (125) (96) (74)
- -------------------------------------------------------------------------------
Net $ 676 $ 832 $ 1,119
===============================================================================
(1) Represents reallocation of general liability reserves to environmental
reserves.
Over the past two years the Company has experienced a substantial reduction
in the number of policyholders with pending coverage litigation disputes
pertaining to environmental claims as well as a continued reduction in the
number of policyholders with active environmental claims.
As of December 31, 1999, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 270, approximately
33% less than the number pending as of December 31,1998 and approximately 50%
less than the number pending as of December 31, 1997. As of December 31, 1999
the Company, for approximately $1.57 billion (before reinsurance), has resolved
the environmental liabilities presented by 4,953 of the 5,921 policyholders who
have tendered environmental claims to the Company. This resolution comprises 84%
of the policyholders who have tendered such claims. The Company generally has
been successful in resolving its coverage litigation disputes and continues to
reduce its potential exposure through favorable settlements with certain
insureds. Generally the settlement dollars paid in disputed coverage claims are
a percentage of the total coverage sought by such insureds.
The Company has direct environmental reserves (before reinsurance) of
approximately $801 million, $530 million of which relates to 968 policyholders
with unresolved environmental claims (the remaining 16% of the 5,921
policyholders who have tendered environmental claims); policyholders that may
tender an environmental claim in the future; and for the anticipated cost of
coverage litigation disputes pertaining to such environmental claims. Based upon
the Company's reserving methodology and the experience of its historical
resolution of environmental exposures, it believes that the environmental
reserve is appropriate.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to 1980. The Company continues to receive asbestos
claims alleging insureds' liability from claimants' asbestos-related injuries.
These claims, when submitted, rarely indicate the monetary amount being sought
by the claimant from the insured and the Company does not keep track of the
monetary amount being sought in those few claims that indicated such a monetary
amount. Originally the cases involved mainly plant workers and traditional
asbestos manufacturers and distributors. However, in the mid-1980s, a new group
of plaintiffs, whose
26
<PAGE>
exposure to asbestos was less direct and whose injuries were often speculative,
began to file lawsuits in increasing numbers against the traditional defendants
as well as peripheral defendants who had produced products that may have
contained small amounts of some form of encapsulated asbestos. These claims
continue to arise and on an individual basis generally involve smaller companies
with smaller limits of potential coverage. Also, there has emerged a group of
non-product claims by plaintiffs, mostly independent labor union workers, mainly
against companies, alleging exposure to asbestos while working at these
companies' premises. The Company continues to receive this type of asbestos
claim.
Various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, including whether such
claims qualify as products or non-products claims, the Company evaluates those
issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by the Company on behalf of its
insureds have also precluded the Company from deriving any meaningful data by
which it can predict whether its defense and indemnity payments for asbestos
claims (on average or in the aggregate) will remain the same or change in the
future. Based upon the Company's experience with asbestos claims, the duration
period of an asbestos claim from the date of submission to resolution is
approximately two years.
At December 31, 1999, approximately 11% of the net aggregate reserve
(approximately $94 million) is for pending asbestos claims. The balance,
approximately 89% (approximately $733 million) of the net asbestos reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims.
In general, the Company posts case reserves for pending asbestos claims
within approximately 30 business days of receipt of such claims. The following
table displays activity for asbestos losses and loss expenses and reserves for
the years ended December 31:
Asbestos Losses
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves
Direct $ 1,252 $ 1,363 $ 1,443
Ceded (266) (249) (370)
- -------------------------------------------------------------------------------
Net 986 1,114 1,073
Incurred losses and loss expenses
Direct 128 135 87
Ceded (71) (69) (18)
Losses paid
Direct 330 246 174
Ceded (114) (52) (140)
Other(1)
Direct -- -- 7
Ceded -- -- (1)
- -------------------------------------------------------------------------------
Ending reserves
Direct 1,050 1,252 1,363
Ceded (223) (266) (249)
- -------------------------------------------------------------------------------
Net $ 827 $ 986 $ 1,114
===============================================================================
</TABLE>
(1) Represents reallocation of reserves.
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.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance; and applicable coverage defenses, if
27
<PAGE>
any. Once the gross ultimate exposure for indemnity and allocated claim
adjustment expense is determined for a policyholder by policy year, a ceded
projection is calculated based on any applicable facultative and treaty
reinsurance, and past ceded experience.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1999 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, as well as changes in
legislation applicable to such claims. 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
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.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, an assessment of a claimant's damages must be made, and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
To the extent disputes exist between the Company and a policyholder
regarding the coverage available for CIOTA claims, the Company resolves the
disputes, where feasible, through settlements with the policyholder or through
coverage litigation. Generally, the terms of a settlement agreement set forth
the nature of the Company's participation in resolving CIOTA claims, the scope
of coverage to be provided by the Company and contain the appropriate
indemnities and hold harmless provisions to protect the Company. These
settlements generally eliminate uncertainties for the Company regarding the
risks extinguished, including the risk that losses would be greater than
anticipated due to evolving theories of tort liability or unfavorable coverage
determinations. The Company's approach also has the effect of determining losses
at a date earlier than would have occurred in the absence of such settlement
agreements. On the other hand, in cases where future developments are favorable
to insurers, this approach could have the effect of resolving claims for amounts
in excess of those that would ultimately have been paid had the claims not been
settled in this manner. No inference should be drawn that because of the
Company's method of dealing with CIOTA claims, its reserves for such claims are
more conservatively stated than those of other insurers.
At December 31, 1999, approximately 21% of the net aggregate reserve
(approximately $179 million) is for pending CIOTA claims. The balance,
approximately 79% (approximately $692 million) of the net CIOTA reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims. In general, the Company posts case reserves for
pending CIOTA claims within approximately 30 business days of receipt of such
claims.
The following table displays activity for CIOTA losses and loss expenses
and reserves for the years ended December 31:
CIOTA Losses
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Beginning reserves
Direct $ 1,346 $ 1,520 $ 1,560
Ceded (392) (432) (446)
- -------------------------------------------------------------------------------
Net 954 1,088 1,114
Incurred losses and loss expenses
Direct (36) (31) 32
Ceded 28 29 (6)
Losses paid
Direct 126 143 72
Ceded (51) (11) (20)
- -------------------------------------------------------------------------------
Ending reserves
Direct 1,184 1,346 1,520
Ceded (313) (392) (432)
- -------------------------------------------------------------------------------
Net $ 871 $ 954 $ 1,088
===============================================================================
28
<PAGE>
COMMERCIAL PORTFOLIO REVIEW
Commercial loans are identified as impaired and placed on a nonaccrual basis
when it is determined that the payment of interest or principal is doubtful of
collection or when interest or principal is past due for 90 days or more, except
when the loan is well secured and in the process of collection. Impaired
commercial loans are written down to the extent that principal is judged to be
uncollectible. Impaired collateral-dependent loans are written down to the lower
of cost or collateral value. The following table summarizes commercial
cash-basis loans and net credit losses (recoveries).
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Commercial cash-basis loans at year-end
Emerging Markets $ 1,044 $ 1,062 $ 649
Global Relationship Banking 304 268 401
- -------------------------------------------------------------------------------
Total Global Corporate Bank 1,348 1,330 1,050
Insurance and Investment Activities 55 265 14
- -------------------------------------------------------------------------------
Total commercial cash-basis loans $ 1,403 $ 1,595 $ 1,064
===============================================================================
Net credit losses (recoveries)
Emerging Markets $ 406 $ 446 $ 120
Global Relationship Banking 1 (30) (84)
- -------------------------------------------------------------------------------
Total Global Corporate Bank 407 416 36
Investment Activities -- (10) (64)
- -------------------------------------------------------------------------------
Total net credit losses (recoveries) $ 407 $ 406 $ (28)
===============================================================================
The 1999 decrease in Insurance cash-basis loans reflected a transfer to
OREO during the year. The increase in 1998 Insurance cash-basis loans was
primarily due to a limited number of commercial real estate loans. Net
recoveries in Investment Activities in 1997 included $50 million from the
refinancing agreement concluded with Peru. For a further discussion of trends by
business, see the business discussions on pages 22-23.
Citigroup's allowance for credit losses of $6.7 billion is available to
absorb all probable credit losses inherent in the portfolio. For analytical
purposes only, the portion of Citigroup's allowance for credit losses attributed
to the commercial portfolio was $3.2 billion at December 31, 1999 compared to
$3.3 billion at both December 31, 1998 and 1997. The decline in the allowance in
1999 primarily reflected an improved credit outlook in Emerging Markets.
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Commercial allowance for credit losses $3,244 $3,307 $3,329
As a percentage of total commercial loans 3.40% 3.69% 4.21%
===============================================================================
GLOBAL CORPORATE AND INVESTMENT BANK OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 34.
The businesses of Global Corporate and Investment Bank are significantly
affected by the levels of activity in the global capital markets which, in turn,
are influenced by macro-economic and political policies and developments, among
other factors, in the 100 countries in which the businesses operate. Global
economic events can have both positive and negative effects on the revenue
performance of the businesses and can negatively affect credit performance. In
particular, levels of principal transactions, realized gains from sales of
investments, and gains from asset sales may fluctuate in the future as a result
of market and asset-specific factors.
Losses on commercial lending activities and the level of cash-basis loans
can vary widely with respect to timing and amount, particularly within any
narrowly defined business or loan type.
A variety of factors continue to affect the property and casualty insurance
market, including the competitive pressures affecting pricing and profitability,
inflation in the cost of medical care, and litigation.
Salomon Smith Barney and Global Corporate Bank. In 1998, the global capital
markets experienced economic turmoil not seen in at least a decade, as currency
crises sparked economic turmoil that began in Asia Pacific and spread to Russia
and, in early 1999, to Latin America. In response to the turmoil, the businesses
undertook a number of initiatives to mitigate the negative effects of global
instability. These initiatives include significantly reducing the risk profile,
particularly in SSB's global arbitrage operation where, at December 31, 1999,
assets were down over 95% from their peak in 1998. Risk management is a priority
with the goal of deriving a higher percentage of earnings from controllable
business operations.
Investments are expected to continue in 2000 to expand CitiDirect, which
gives clients Internet-based access to cash management and trade capabilities,
and CitiFX Interactive, an online tool for foreign exchange services. Further
increases in the Financial Consultants sales force are planned, as well as
expanding the integration of Internet services with personal advice through the
Salomon Smith Barney Access web site.
In January 2000, SSB agreed to acquire the global investment banking
business and related assets of Schroders PLC, including all corporate financial
markets and securities activities, subject to Schroders PLC shareholder
approval, various regulatory approvals, and other customary closing conditions.
The announced acquisition, when completed, is expected to enhance the investment
banking and equities platforms in Europe.
29
<PAGE>
Commercial Lines. In 1999, Commercial Lines began to see higher rates on renewal
business. This is an improvement over the past few years where the trend in
market conditions, characterized by difficult pricing and increased competition,
was evidenced by pricing declines in all markets.
In National Accounts, where programs include risk service, such as claims
settlement, loss control and risk management information services, which is
generally offered in connection with a large deductible or self-insured program,
and risk transfer, which is typically provided through a guaranteed cost or
retrospectively rated insurance policy, pricing declines have continued. This
business continues to reflect the negative impact of price declines as evidenced
by the decrease in premium and fee levels and, more importantly, in the
narrowing of profit margins earned on this business. Although National Accounts
believes that pricing will continue to be very competitive in 2000, recent data
has suggested that the pricing environment may be stabilizing. However, National
Accounts will continue to reject business that is not expected to produce
acceptable returns, which is reflected in a decline in anticipated business
volumes.
Commercial Accounts began to see modest price increases on renewal business
during 1999. However, these increases varied significantly by region and
industry, reinforcing the fact that rates in many areas and business segments
still have not improved to the point of producing acceptable returns. In this
environment, Commercial Accounts continues to reject unprofitable business, as
reflected in the decline in new business.
For Select Accounts, the highly competitive marketplace and soft
underwriting cycle continue to pressure the pricing of guaranteed cost products.
Premiums on this business continue to reflect price declines, and have not kept
pace with loss cost inflation in recent years. The impact of this negative trend
in market conditions and resultant price declines has been partially offset by a
continued disciplined approach to underwriting and risk management by the
Company. The Company's focus is to retain existing profitable business and
obtain new accounts only where it can maintain its selective underwriting
policy. The Company continues to adhere to strict guidelines to maintain high
quality underwriting and to focus on its core product lines and markets, with
particular emphasis on both product and industry specialization. In the last six
months of 1999, Select Accounts began to see small price increases on renewal
business. However, as noted above in Commercial Accounts, these increases varied
significantly by region and industry.
Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards,
to continue using reinsurance judiciously, and to increase its efforts to
cross-sell its expanding array of specialty products to existing customers of
National Accounts, Commercial Accounts, Select Accounts, Personal Lines and
various other Citigroup units where it believes it has the greatest sales and
profit opportunities.
The highly competitive marketplace and the Company's selective underwriting
criteria continued to have an adverse impact on premium and fee levels during
1999. However the Company did begin to achieve modest price increases, primarily
in the middle market. Although the increases vary significantly by region and
industry, the Company believes that pricing environment is stabilizing.
In December 1998, TAP announced a global strategic relationship with
Winterthur International, called Travelers/Winterthur International, which
markets a variety of commercial lines products to multinational corporations.
The Company expects that Travelers/Winterthur International will allow it to
participate in business requiring international underwriting and insurance
services.
The property and casualty insurance industry in the United States continues
to consolidate. The Company's strategic objectives are to enhance its position
as a consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
In relation to the Company's objective of being a low-cost provider of
property and casualty insurance, an emphasis on claim payout and performance and
enhanced productivity efforts are expected to continue. However, some of the
insurance industry's methods have been challenged in litigation.
Changes in the general interest rate environment affect the return received
by the insurance subsidiaries on newly invested and reinvested funds. While a
rising interest rate environment enhances the returns available, it reduces the
market value of existing fixed maturity investments and the availability of
gains on disposition. A decline in interest rates reduces the return available
on investment of funds, but also creates the opportunity for realized investment
gains on disposition of fixed maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic, political and litigation issues have led to an
increased number of legislative and regulatory proposals aimed at addressing the
cost and availability of certain types of insurance as well as the claim and
coverage obligations of insurers. While most of these provisions have failed to
become law, these initiatives may continue as legislators and regulators try to
respond to public availability, affordability and claim concerns and the
resulting laws, if any, could adversely affect the Company's ability to write
business with appropriate returns.
30
<PAGE>
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 2,686 $ 2,381 $ 2,134
Adjusted operating expenses(2) 1,693 1,549 1,357
Provision (benefit) for credit losses 12 5 (13)
- ----------------------------------------------------------------------------
Core income before taxes 981 827 790
Income taxes 379 320 305
- ----------------------------------------------------------------------------
Core income 602 507 485
Restructuring-related items, after-tax (2) 53 18
- ----------------------------------------------------------------------------
Net income $ 604 $ 454 $ 467
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
The Global Investment Management and Private Banking group is comprised of
the SSB Citi Asset Management Group and the Citibank Private Bank. These
companies offer a broad range of asset management products and services from
global investment centers around the world, including mutual funds, closed-end
funds, managed accounts, unit investment trusts, variable annuities, and
personalized wealth management services to institutional, high net worth, and
retail clients.
Global Investment Management and Private Banking core income in 1999 of
$602 million, up $95 million or 19% from 1998, reflected improving revenue
momentum, which outpaced moderate increases in expenses and the provision for
credit losses. Revenue growth was primed by the continued growth in managed
assets in most sectors, while expense increases were driven by investments in
technology, and sales and marketing capabilities. Core income of $507 million in
1998 was up $22 million or 5% from $485 million in 1997, reflecting the above,
partially offset by lower earnings in Asia Pacific in the Citibank Private Bank.
Net income of $604 million in 1999, $454 million in 1998, and $467 million in
1997 included a restructuring-related credit of $2 million ($4 million pretax),
and restructuring-related charges of $53 million ($87 million pretax) and $18
million ($28 million pretax), respectively.
SSB CITI ASSET MANAGEMENT GROUP
In Millions of Dollars 1999 1998(1) 1997(1)
- -----------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,485 $ 1,259 $ 1,065
Adjusted operating expenses(2) 950 835 696
- -----------------------------------------------------------------------------
Core income before taxes 535 424 369
Income taxes 211 168 147
- -----------------------------------------------------------------------------
Core income 324 256 222
Restructuring-related items, after-tax (1) 10 --
- -----------------------------------------------------------------------------
Net income $ 325 $ 246 $ 222
=============================================================================
Assets under management
(in billions of dollars)(3) $ 364 $ 327 $ 261
=============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
(3) Includes $31 billion, $34 billion, and $28 billion in 1999, 1998, and 1997,
respectively, for Citibank Private Bank clients.
SSB Citi Asset Management Group is comprised of the substantial resources
that are available through its three primary asset management business
platforms: Salomon Brothers Asset Management, Smith Barney Asset Management, and
Citibank Global Asset Management. These businesses offer institutional, high net
worth, and retail clients a broad range of investment disciplines from global
investment centers around the world. Products and services offered include
mutual funds, closed-end funds, separately managed accounts, unit investment
trusts, and variable annuities (through affiliated and third party insurance
companies).
Core income of $324 million and $256 million in 1999 and 1998 was up $68
million or 27% and $34 million or 15% from 1998 and 1997, respectively,
primarily reflecting an increase in assets under management and a corresponding
increase in revenues. Net income of $325 million in 1999 and $246 million in
1998 included a restructuring-related credit of $1 million ($2 million pretax)
and a restructuring-related charge of $10 million ($17 million pretax),
respectively.
Aggregate assets under management totaled $364 billion as of December 31,
1999, up 11% from $327 billion in 1998, and included $156 billion in equity,
$112 billion in fixed income, and $96 billion in liquidity products.
Approximately $269 billion is managed in the United States, $58 billion in
Europe, $23 billion in Japan, $8 billion in Latin America, $5 billion in
Australia, and $1 billion in Asia Pacific.
Cross-selling efforts helped fuel a 12% increase in institutional client
assets to $155 billion, with the Corporate Bank channel generating $8 billion in
sales. Sales of proprietary mutual funds represented 34% of SSB's retail channel
mutual fund sales for the year versus 31% in 1998. Sales of Smith Barney Private
Client separately managed accounts were up 117% from the prior year. SSB Citi
Asset Management Group sold $3.0 billion of mutual and money funds through the
Citibank consumer bank in Europe during 1999. In Japan, 1999 sales through both
the Citibank consumer bank and non-proprietary channels generated $2.0 billion
in mutual and money funds.
Revenues, net of interest expense, increased $226 million or 18% to $1.485
billion in 1999, compared to $1.259 billion in 1998, up $194 million or 18% from
1997. The increase in both years was predominantly in advisory fee revenues and
reflected the broad growth in assets under management. Revenue growth in 1999
also benefited from higher levels of investment gains, unit investment trust
revenue, and the full year's impact of the JP Morgan Australia business
acquisition in 1998. Assets under management grew at a faster pace than revenue
in 1998 as a result of a larger proportion of the growth occurring in lower
yielding liquidity funds.
Adjusted operating expenses of $950 million in 1999 were up $115 million or
14% from $835 million in 1998, which was up $139 million or 20% from 1997. The
increases in both years primarily reflected higher costs associated with
building the business' global sales and marketing capabilities, and continued
investments in research, quantitative, and technology expertise. This investment
management build-out is now more than 75% complete. Expenses also increased from
the JP Morgan acquisition, and in 1998, from incremental technology spending
related to year 2000 and EMU.
31
<PAGE>
CITIBANK PRIVATE BANK
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,201 $ 1,122 $ 1,069
Adjusted operating expenses(2) 743 714 661
Provision (benefit) for credit losses 12 5 (13)
- ----------------------------------------------------------------------------
Core income before taxes 446 403 421
Income taxes 168 152 158
- ----------------------------------------------------------------------------
Core income 278 251 263
Restructuring-related items, after-tax (1) 43 18
- ----------------------------------------------------------------------------
Net income $ 279 $ 208 $ 245
============================================================================
Average assets (in billions of dollars) $ 20 $ 17 $ 17
Return on assets 1.40% 1.22% 1.44%
============================================================================
Excluding restructuring-related items
Return on assets 1.39% 1.48% 1.55%
============================================================================
Client business volumes under
management (in billions of dollars) $ 140 $ 116 $ 101
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items.
Citibank Private Bank--which provides personalized wealth management
services for high net worth clients around the world--reported core income in
1999 of $278 million, up $27 million or 11% from 1998, reflecting improving
revenue momentum, which outpaced moderate increases in expenses and the
provision for credit losses. Core income of $251 million in 1998 was down $12
million or 5% from $263 million in 1997, primarily reflecting lower earnings in
Asia Pacific. Net income of $279 million in 1999, $208 million in 1998, and $245
million in 1997 included a restructuring-related credit of $1 million ($2
million pretax), and restructuring-related charges of $43 million ($70 million
pretax) and $18 million ($28 million pretax), respectively.
Client business volumes under management, which include loans, deposits,
and other client assets under management and custody, were $140 billion at the
end of the year, up from $116 billion in 1998 and $101 billion in 1997,
reflecting growth in all regions. Business volumes grew in all product lines,
led by the custody and lending businesses.
Revenues in 1999 were $1.201 billion, up $79 million or 7% from 1998,
reflecting particularly strong growth in the U.S. and Japan. This growth was
driven by strong lending and asset management activity, partially offset by
lower fees from customer trading-related activities. Revenues for 1998 were
$1.122 billion, up $53 million or 5% from 1997, primarily reflecting growth in
customer-related fee revenues.
Adjusted operating expenses of $743 million in 1999 were up $29 million or
4% from 1998, reflecting increased spending related to growth in the sales force
and technology platform development, partially offset by lower employee-related
costs associated with restructuring initiatives. Expenses of $714 million in
1998 were up $53 million or 8% from 1997, reflecting an increased sales force
and higher product management costs.
The provision (benefit) for credit losses for 1999 was $12 million,
compared with $5 million in 1998 and ($13) million in 1997. Net credit losses in
1999 remained at a nominal level of 0.10% of average loans outstanding. Loans 90
days or more past due at year-end were $120 million or 0.54% of total loans
outstanding, compared with 1.14% at the end of 1998 and 0.72% at the end of
1997. The increase in the provision in 1998 reflected both the high level of
credit recoveries in 1997 and the worsening credit picture in 1998 related to
the global economic turmoil in Asia Pacific.
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 34.
The market for investment management and private banking services is
extremely attractive because the "wealth" segment has been growing faster than
the overall market, and the prospects for the overall market continue to be
positive over the longer term. While competition for this attractive and dynamic
market segment is increasing, the global market is highly fragmented with no
dominant competitors. This presents Global Investment Management and Private
Banking with an extremely attractive business opportunity because it is one of
the few providers that can claim to offer a full range of services on a global
basis.
32
<PAGE>
CORPORATE/OTHER
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ (176) $ (132) $ (252)
Adjusted operating expenses(2) 823 697 397
Provisions for benefits, claims,
and credit losses 33 (1) (7)
- ----------------------------------------------------------------------------
Loss before tax benefits (1,032) (828) (642)
Tax benefits (346) (350) (250)
- ----------------------------------------------------------------------------
Loss (686) (478) (392)
Restructuring-related items and
merger-related costs, after-tax 20 105 31
- ----------------------------------------------------------------------------
Net loss $ (706) $ (583) $ (423)
============================================================================
(1) Reclassified to conform to the 1999 presentation.
(2) Excludes restructuring-related items and merger-related costs.
Corporate/Other includes net corporate treasury results and corporate staff
and other corporate expenses.
Revenues in 1999 included higher corporate treasury costs and in 1998
included income from the disposition of a real estate development property.
Expenses in 1999 included certain technology costs associated with year 2000
remediation, partially offset by decreases in corporate staff expenses as a
result of headcount reductions in 1999. Expenses in 1998 included a $100 million
contribution of appreciated venture capital securities to the Company's
Foundation, which had minimal impact on Citigroup's earnings after related tax
benefits and investment gains. Performance-based options granted in 1998 to a
group of key Citicorp employees vested in 1999 as certain pre-determined price
levels were met. All expenses related to these options have been recognized.
1999, 1998 and 1997 expenses included $108 million, $70 million and $72 million,
respectively, associated with performance-based stock options granted in 1998
and prior years.
The 1999 after-tax restructuring-related items of $20 million primarily
included accelerated depreciation charges on the planned disposition of certain
premises and equipment assets, in excess of the normal scheduled depreciation on
those assets. The 1998 amounts included $69 million of restructuring-related
items ($40 million after-tax) to streamline and integrate corporate staff
functions, as well as $65 million (before and after-tax) of one-time expenses
associated with merging Citigroup's predecessor organizations. The 1997 charge
related to the reorganization of various Citicorp corporate support functions.
See Note 14 of Notes to the Consolidated Financial Statements for additional
information on restructuring-related items and merger-related costs.
INVESTMENT ACTIVITIES
In Millions of Dollars 1999 1998(1) 1997(1)
- ----------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,090 $ 1,323 $ 1,733
Total operating expenses 64 50 40
Benefit for credit losses -- (10) (64)
- ----------------------------------------------------------------------------
Income before taxes and minority interest 1,026 1,283 1,757
Income taxes 355 434 639
Minority interest, after-tax 11 16 18
- ----------------------------------------------------------------------------
Net income $ 660 $ 833 $ 1,100
============================================================================
(1) Reclassified to conform to the 1999 presentation.
Investment Activities comprises Citigroup's venture capital activities,
realized investment gains (losses) related to certain corporate and insurance
related investments, and the results of certain investments in countries that
refinanced debt under the 1989 Brady Plan or plans of a similar nature.
Revenues in 1999 of $1.090 billion declined $233 million or 18% from 1998,
primarily reflecting declines in realized gains from sales of Brady bonds and
insurance-related investments, partially offset by an increase in venture
capital results and realized investment gains on certain corporate-related
investments. Revenues in 1998 of $1.323 billion declined $410 million or 24%
from 1997 primarily reflecting a decrease in venture capital revenues and lower
realized gains from sales of investments. Revenues in 1999, 1998, and 1997
included net gains (write-downs) of ($14) million, $29 million, and ($39)
million related to investments in Latin America.
Credit benefits in 1997 included $50 million from the refinancing agreement
concluded with Peru.
Levels of venture capital revenues and realized gains from sales of
investments may fluctuate in the future as a result of market and asset-specific
factors. This statement is a forward-looking statement within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 34.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
33
<PAGE>
YEAR 2000
Reflecting the work done around the world to complete Citigroup's year 2000
program, the Company's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. The Company
is not aware of any significant year 2000 problems encountered internally or
with the third parties with which it interfaces, including customers and
counterparties, the global financial market infrastructure, and the utility
infrastructure on which all corporations rely.
Based on operations since January 1, 2000, Citigroup does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized, including any potential impact of claims for coverage from
property casualty insurance customers, and no assurances can be given that year
2000 problems or claims will not emerge.
The pretax cost associated with the required systems modifications and
conversions totaled approximately $970 million, including approximately $310
million in 1999. Citigroup had previously estimated the cost at approximately
$950 million. The cost was funded from a combination of a reprioritization of
technology development initiatives and incremental costs and was expensed as
incurred.
The Company's expectations with respect to remediation of and claims from
customers with respect to year 2000 issues constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" below.
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. Many of these statements appear under the heading "Global
Consumer Outlook," "Global Corporate and Investment Bank Outlook," and "Global
Investment Management and Private Banking Outlook." 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," and similar expressions or future or conditional verbs such as
"will," "should," "would," and "could." These forward-looking statements involve
risks and uncertainties including, but not limited to global economic
conditions, portfolio growth, the credit performance of the portfolios, and
seasonal factors; changes in general economic conditions including the
performance of global financial markets, prevailing inflation and interest
rates, realized gains from sales of investments, gains from asset sales, and
losses on commercial lending activities; results of various Investment
Activities; the effects of competitors' pricing policies, of changes in laws and
regulations on competition and of demographic changes on target market
populations' savings and financial planning needs; the resolution of legal
proceedings and related matters; the actual amount of liabilities associated
with certain environmental and asbestos-related insurance claims; the actual
costs associated with year 2000-related claims; and the Company's success in
managing the costs associated with the expansion of existing distribution
channels and developing new ones, and in realizing increased revenues from such
distribution channels, including cross-selling initiatives and electronic
commerce-based efforts.
MANAGING GLOBAL RISK
Risk management is the cornerstone of Citigroup's business. Risks arise from
lending, underwriting, trading, insurance and other activities routinely
undertaken around the world. Outlined below is the process that management
employs to provide oversight and direction of risk taking, followed by
discussions of the credit and market risk management processes in place across
the Company.
The Windows on Risk Committee is the most senior corporate forum for
reviewing the corporation's risk tolerance and practices. It provides top-down
examination and review of material corporate-wide risks. The Committee is
chaired by Citigroup's Senior Risk Manager and includes the Chairmen of
Citigroup and other senior officers in the Company.
The Windows on Risk process has three major components: an assessment of
the global external environment, drawing on our own knowledge and frequently on
the knowledge of outside experts; an assessment of the Company's exposures in
terms of the various risk windows, with special focus on potentially material
risks to Citigroup; and decisions on desired exposure levels and determination
of follow-up actions required to adjust exposure.
The review of the external environment encompasses the outlook for major
country and regional economies; significant consumer markets and global
industries; potential near-term critical economic and political events; and the
implications of potential unfavorable developments as they relate to specific
businesses.
The review of the risk profile covers the following 18 windows:
o Risk ratings, including trends in client creditworthiness together with a
comparison of risk against return;
o Industry concentrations, globally and within regions;
o Limits assigned to relationship concentrations and consumer programs;
o Product concentrations in consumer managed receivables, by product and by
region;
o Global real estate limits and exposure, including commercial and consumer
portfolios;
o Country risk, encompassing political and cross-border risk;
o Counterparty risk, evaluating presettlement risk on foreign exchange,
derivative products, and securities trades;
o Dependency, linking and evaluating specific industry and consumer product
exposure to external environmental factors;
o Distribution and underwriting risk, capturing the risk that arises when
Citigroup commits to purchase an instrument from an issuer for subsequent
sale;
o Audit and Risk Review, evaluating and measuring defects in our business
processes;
o Price risk, evaluating the earnings risk resulting from changing levels and
implied volatilities of interest rates, foreign exchange rates, and
commodity and security prices;
o Liquidity risk, evaluating funding exposure;
o Commodities risk, evaluating earnings risk resulting from changing levels
and volatilities of commodity prices;
o Life Insurance, evaluating the risks that result from the underwriting,
sale, and reinsurance of life insurance policies;
34
<PAGE>
o Property & Casualty, evaluating the risks that result from the
underwriting, sale, and reinsurance of commercial, personal, and
performance bonds insurance policies;
o Equity and subordinated debt investment risk, monitored against portfolio
limits;
o Legal, evaluating vulnerability and business implications of legal issues;
and
o Technology, assessing vulnerability to the electronic environment.
The review is intended to provide Citigroup with a view of the environment
in which it operates and of the risk inherent in its businesses. Based on this
review, the Windows on Risk Committee formulates recommendations and assigns
responsibility for recommended actions.
The following sections summarize the processes that were in place during
1999 for managing credit and market risks within Citigroup's major businesses.
As Citigroup's businesses become more closely integrated, it is expected that
these management processes will also be more closely integrated within the
overall framework provided by Windows on Risk.
THE CREDIT PROCESS
Within Citicorp, line management conducts the day-to-day credit process in
accordance with core policies established by the Credit Policy Committee which
are guided by the overall risk appetite and portfolio targets set by senior
management. Line management initiates and approves all extensions of credit and
is responsible for credit quality. Line managers must also establish
supplementary credit policies specific to each business, deploy the credit
talent needed, and monitor portfolio and process quality. The managers are
required to identify problem credits or programs as they develop, and to correct
deficiencies as needed through remedial management. Audit and Risk Review
conducts independent periodic examinations of both portfolio quality and the
credit process at the individual business level.
Citicorp's credit policies are organized around two basic
approaches--Credit Programs and Credit Transactions. Credit Programs, used
primarily for the Consumer businesses, focus on the decision to extend credit to
sets of customers with similar characteristics and/or product needs. Approvals
under this approach cover the expected level of aggregate exposure, the terms,
risk acceptance criteria, operating systems, and reporting mechanisms. This is a
cost-effective way of handling high-volume, small-dollar amount transactions.
Credit Programs are reviewed annually, with approvals tiered on the basis of
projected outstandings as well as the maturity and performance of the product.
Citicorp's Credit Transaction approach focuses on the decision to extend
credit to an individual customer or customer relationship. It starts with target
market definition and risk acceptance criteria, and requires detailed customized
financial analysis. Approval requirements for each decision are tiered based on
the transaction amount, the customer's aggregate facilities, credit risk
ratings, and the banking business serving the customer.
Credit Programs and Credit Transactions are approved by three line credit
officers, with one designated as responsible to ensure that all aspects of the
credit process are properly coordinated and executed. As the size or risk
increases, the three approvals may include one or two Senior Credit or
Securities Officers. These include over 500 of Citicorp's most experienced
lenders and underwriters appointed by the Credit Policy Committee, with their
designation reviewed annually. In addition, approvals from underwriting,
product, industry, or functional specialists may be required. At certain higher
levels of risk, Credit Policy Committee members as well as senior management
review individual credit decisions.
Within Salomon Smith Barney, the office of the Chief Credit Officer,
through established credit policies and control procedures, assesses, approves,
monitors, and coordinates the extension of credit. The office evaluates the
risk/return trade-offs as well as current and potential credit exposures to a
counterparty, or to groups of counterparties, that are related because of
industry, geographic, or economic characteristics. At Phibro Inc., a
wholly-owned subsidiary, the credit department determines the credit limits for
counterparties in its commodities-related activities.
Both Citicorp and Salomon Smith Barney manage credit exposure on derivative
and foreign exchange instruments as part of the overall extension of credit to
individual customer relationships, subject to the same credit approvals, limits,
and monitoring procedures used for other activities. The extension of credit in
a derivative or foreign exchange contract is the loss that could result if the
counterparty were to default. The current replacement cost of a derivative or
foreign exchange contract is equal to the amount, if any, of Citigroup's
unrealized gain on the contract. In the aggregate, for all contracts, this
represents a balance sheet exposure of $31.6 billion at December 31, 1999, which
is reflected in Trading Account Assets. See Note 7 of Notes to Consolidated
Financial Statements for additional details on the combined Citigroup exposures.
A substantial portion of the total balance sheet exposure is to counterparties
considered by Citigroup to be investment grade and under three years tenor. In
managing the credit risk associated with derivative and foreign exchange
contracts, the amount at risk is measured as the sum of the current replacement
cost (the balance sheet credit exposure) plus the potential increase in the
replacement cost over the remaining life of the instrument should market rates
change. The potential increase in replacement cost of a contract is estimated
based on a statistical simulation of values that would result from changing
market rates.
In the course of its insurance activities, TAP reinsures a portion of the
risks it underwrites in an effort to control its exposure to losses, stabilize
earnings and protect capital resources. TAP cedes to reinsurers a portion of
these risks and pays premiums based upon the risk and exposure of the policies
subject to such reinsurance. Reinsurance involves credit risk and is subject to
aggregate loss limits. Although the reinsurer is liable to TAP to the extent of
the reinsurance ceded, TAP remains primarily liable as the direct insurer on all
risks reinsured. TAP also holds collateral, including escrow funds and letters
of credit, under certain reinsurance agreements. TAP monitors the financial
condition of reinsurers on an ongoing basis, and reviews its reinsurance
arrangements periodically. Reinsurers are selected based on their financial
condition, business practices and the price of their product offerings. For
additional information concerning reinsurance, see Note 13 of Notes to
Consolidated Financial Statements.
35
<PAGE>
THE MARKET RISK MANAGEMENT PROCESS
Market risk encompasses liquidity risk and price risk, both of which arise in
the normal course of business of a global financial intermediary. Liquidity risk
is the risk that some entity, in some location and in some currency, may be
unable to meet a financial commitment to a customer, creditor, or investor when
due. Price risk is the risk to earnings that arises from changes in interest
rates, foreign exchange rates, equity and commodity prices, and in their implied
volatilities.
Citigroup's business and corporate oversight groups have well-defined
market risk management responsibilities. Within each business, a process is in
place to control market risk exposure. The risk management process includes the
establishment of appropriate market controls, policies and procedures,
appropriate senior management risk oversight with thorough risk analysis and
reporting, and independent risk management with capabilities to evaluate and
monitor risk limits. Management of this process begins with the professionals
nearest to Citigroup's customers, products, and markets, and extends up to the
senior executives who manage these businesses and to the country level. Market
risk management is an evolutionary process that integrates changes in markets,
products, and technologies into policies and practices. Periodic reviews are
conducted by Audit Risk and Review to ensure compliance with institutional
policies and procedures for the assessment, management, and control of market
risk.
Across Citigroup, price risk is measured using various tools, including
Earnings-at-Risk (EAR) and sensitivity analysis, which are applied to interest
rate risk in the non-trading portfolios and Value-at-Risk (VAR), stress and
scenario analysis which are applied to the trading portfolios.
Non-Trading Portfolios
Business units manage the potential earnings effect of interest rate movements
by managing the asset and liability mix, either directly or through the use of
derivative financial products. 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. Additional
information about non-trading derivatives is located in Note 22 of Notes to
Consolidated Financial Statements. Citigroup does not utilize instruments with
leverage features in connection with its risk management activities.
Price risk in the non-trading portfolios is measured using Earnings-at-Risk
within Citicorp (excluding CitiFinancial Credit Company). All other non-trading
portfolios measure price risk using sensitivity analysis.
At Citicorp, Earnings-at-Risk measures the discounted pretax earnings
impact over a specified time horizon of a specified shift in the interest rate
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. As part of the annual planning process, limits are set for
Earnings-at-Risk on a business, country and total Citicorp basis, with exposures
reviewed on a regular basis by the Finance and Capital Committee in relation to
limits and the current interest rate environment.
Citicorp's primary non-trading price risk exposure is to movements in U.S.
dollar interest rates. As of December 31, 1999, 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 45 basis points. Citicorp also has
Earnings-at-Risk in various other currencies; however, there are no significant
risk concentrations in any individual non-U.S. dollar currency. As of December
31, 1999, the rate shifts applied to these currencies for purposes of
calculating Earnings-at-Risk over a one-to four-week defeasance period ranged
from 20 to 1,781 basis points, depending on the currency.
The following table illustrates that, as of December 31, 1999, a 45 basis
point increase in the U.S. dollar yield curve would have a potential negative
impact on Citicorp's pretax earnings of approximately $166 million for 2000, and
approximately $177 million for the total five-year period 2000-2004. 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 $119
million for 2000, and approximately $278 million for the five-year period
2000-2004.
Citicorp Earnings-at-Risk (impact on pretax earnings)
Assuming a U.S. Assuming a Non-U.S.
Dollar Rate Move of Dollar Rate Move of(1)
-------------------- ---------------------
Two Standard Two Standard
Deviations Deviations(2)
In Millions of -------------------- ---------------------
Dollars at December 31, 1999 Increase Decrease Increase Decrease
- ----------------------------------------------------------------------------
Overnight to three months $ (70) $ 75 $ (18) $ 18
Four to six months (44) 50 (30) 30
Seven to twelve months (52) 53 (71) 72
- ----------------------------------------------------------------------------
Total overnight
to twelve months (166) 178 (119) 120
- ----------------------------------------------------------------------------
Year two (67) 66 (125) 126
Year three (19) 13 (34) 34
Year four 23 (28) (15) 16
Year five 57 (70) (12) 12
Effect of discounting (5) 10 27 (27)
- ----------------------------------------------------------------------------
Total $(177) $ 169 $(278) $ 281
============================================================================
(1) Primarily results from Earnings-at-risk in Singapore dollar, Hong Kong
dollar and Thai baht.
(2) Total assumes a two standard deviation increase or decrease for every
currency, not taking into account any covariance between currencies.
The table above also illustrates that Citicorp's risk profile in the one-to
three-year time horizon was directionally similar, but generally tends to
reverse in subsequent periods. This reflects the fact that the majority of the
36
<PAGE>
derivative instruments utilized to modify repricing characteristics as described
above will mature within three years. Additional detail regarding these
derivative instruments may be found in Note 22 of Notes to Consolidated
Financial Statements.
The following table summarizes Citicorp's worldwide Earnings-at-Risk over
the next 12 months from changes in interest rates and illustrates that
Citicorp's pretax earnings in its non-trading activities over the next 12 months
would be reduced by an increase in interest rates and would benefit from a
decrease in interest rates.
Citicorp Twelve Month Earnings-at-Risk
(impact on pretax earnings)
<TABLE>
<CAPTION>
U.S. Dollar Non-U.S. Dollar
---------------------------- -----------------------------
In Millions of
Dollars at December 31, 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assuming a
two standard
deviation rate
Increase $(166) $(148) $(180) $(119) $ (93) $ (25)
Decrease 178 156 211 120 93 25
==============================================================================================
</TABLE>
Interest rate swaps and similar instruments effectively modify the
repricing characteristics of certain consumer and commercial loan portfolios,
deposits, and long-term debt. Excluding the effects of these instruments,
Citicorp's Earnings-at-Risk over the next twelve months in its non-trading
activities would be as follows:
Citicorp Twelve Month Earnings-at-Risk
(excluding effect of derivatives)
U.S. Dollar Non-U.S. Dollar
---------------------- ----------------------
In Millions of
Dollars at December 31, 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------
Assuming a
two standard
deviation rate
Increase $ (30) $ 10 $ 64 $(120) $ (94) $ (26)
Decrease 42 (3) (44) 121 94 27
===============================================================================
During 1999, Citicorp's 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 $73 million to $166 million
in the aggregate at each month end, compared with a range from $65 million to
$173 million during 1998 and a range from $142 million to $209 million during
1997. The U.S. dollar Earnings-at-Risk experienced during 1999 was comparable to
1998 and relatively lower than 1997 primarily due to a reduction in the level of
received fixed swaps. A two standard deviation increase in non-U.S. dollar
interest rates for the following twelve months would have had a potential
negative impact ranging from approximately $95 million to $121 million in the
aggregate at each month end during 1999, compared with a range from $53 million
to $98 million during 1998 and a range from $15 million to $33 million during
1997. The higher non-U.S. dollar Earnings-at-Risk primarily reflected the higher
interest rate volatility seen across the Asia Pacific region.
Other Non-Trading Portfolios
The table below reflects the estimated decrease in the fair value of financial
instruments held in other non-trading portfolios, as a result of a 100 basis
point increase in interest rates (including the effect of derivatives).
In Millions of Dollars at December 31, 1999(1) 1998(1)
- -----------------------------------------------------------------------------
Assets
Investments $2,594 $2,841
Net consumer finance receivables 184 256
- -----------------------------------------------------------------------------
Liabilities
Long-term debt $ 493 $ 497
Contractholder funds 427 415
Redeemable securities of subsidiary trusts 314 127
=============================================================================
(1) Includes CitiFinancial Credit Company.
A significant portion of the liabilities, e.g. insurance policy and claims
reserves, are not financial instruments and are excluded from the above
sensitivity analysis. Corresponding changes in fair value of these accounts,
based on the present value of estimated cash flows, would materially mitigate
the impact of the net decrease in values implied above. The analysis also
excludes all financial instruments, including long-term debt, identified with
trading activities. The analysis reflects the estimated gross change in value
resulting from a change in interest rates only and is not comparable to the
Earnings-at-Risk used for the Citicorp non-trading portfolios or the
Value-at-Risk used for the trading portfolios, described on page 38.
37
<PAGE>
Trading Portfolios
A tool for measuring the price risk of trading activities is the Value-at-Risk
method, which estimates the potential pretax loss in market value that could
occur over a one day holding period, at a 99% confidence level. 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. In addition to Value-at-Risk, stress and scenario
analysis are also applied to the trading portfolios.
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. For Citicorp's major trading centers, the aggregate pretax Value-at-Risk
in the trading portfolios was $24 million at December 31, 1999. Daily exposures
at Citicorp averaged $18 million in 1999 and ranged from $14 million to $24
million. At Salomon Smith Barney the aggregate pretax Value-at-Risk in the
trading portfolios was $23 million at December 31, 1999. Quarterly exposures at
Salomon Smith Barney averaged $39 million in 1999 and ranged from $17 million to
$72 million.
The following table summarizes Value-at-Risk in the trading portfolios as of
December 31, 1999 and 1998 along with the averages.
<TABLE>
<CAPTION>
Citicorp Salomon Smith Barney
---------------------------------------- ----------------------------------------
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
In Millions of Dollars 1999 Average 1998 Average 1999 Average 1998 Average
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate $ 15 $ 13 $ 13 $ 16 $ 20 $ 37 $ 75 $ 67
Foreign exchange 17 9 7 8 -- 5 3 17
Equity 11 9 5 7 6 5 15 9
All other (primarily commodity) 2 1 1 1 8 10 11 11
Covariance adjustment (21) (14) (11) (14) (11) (18) (33) (34)
- ----------------------------------------------------------------------------------------------------------------------
Total $ 24 $ 18 $ 15 $ 18 $ 23 $ 39 $ 71 $ 70
======================================================================================================================
</TABLE>
The table below provides the range of Value-at-Risk in the trading portfolios
that was experienced during 1999 and 1998.
<TABLE>
<CAPTION>
Citicorp Salomon Smith Barney
--------------------------- ---------------------------
1999 1998 1999 1998
-----------------------------------------------------------
In Millions of Dollars Low High Low High Low High Low High
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate 9 18 10 25 17 71 62 75
Foreign exchange 5 17 3 16 -- 13 3 26
Equity 5 16 4 13 1 16 5 15
All other (primarily commodity) 1 3 1 5 5 16 9 12
===============================================================================================
</TABLE>
MANAGEMENT OF CROSS-BORDER RISK
Cross-border risk is the risk that Citigroup 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 moratoria, and restrictions
on the remittance of funds. Citigroup manages cross-border risk as a part of the
Windows on Risk process described on page 34.
Except as described below for cross-border resale agreements and the
netting of certain long and short securities positions, the following table
presents total cross-border outstandings and commitments on a regulatory basis
in accordance with Federal Financial Institutions Examination Council ("FFIEC")
guidelines. In regulatory reports under FFIEC guidelines, cross-border resale
agreements are presented based on the domicile of the issuer of the securities
that are held as collateral. However, for purposes of the following table,
cross-border resale agreements are presented based on the domicile of the
counterparty because the counterparty has the legal obligation for repayment.
Similarly, under FFIEC guidelines, long securities positions are required to be
reported on a gross basis. However, for purposes of the following table, certain
long and short securities positions are presented on a net basis consistent with
internal cross-border risk management policies, reflecting a reduction of risk
from offsetting positions.
38
<PAGE>
Cross-Border Outstandings and Commitments
Total cross-border outstandings include cross-border claims on third parties as
well as investments in and funding of local franchises. Countries with FFIEC
outstandings greater than 0.75% of Citigroup assets at December 31, 1999 or 1998
include:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998(1)
-------------------------------------------------------------------------------- ---------------------
Cross-Border Claims on Third Parties Investments
-------------------------------------------- in and
Trading and Cross-Border Funding Total Cross- Total Cross-
Short-Term Resale of Local Border Commit- Border Commit-
In Billions of Dollars Claims(2) Agreements All Other Total Franchises Outstandings ments(3) Outstandings ments(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United Kingdom $ 5.1 $12.2 $ 2.2 $19.5 $ -- $19.5 $15.5 $10.4 $ 8.9
Germany 7.4 3.0 0.5 10.9 -- 10.9 3.7 16.0 1.4
Japan 2.6 4.9 2.3 9.8 -- 9.8 0.1 9.1 0.1
France 5.5 1.7 0.6 7.8 0.1 7.9 2.2 7.7 1.1
Italy 5.9 0.9 0.3 7.1 -- 7.1 0.4 6.7 0.3
Mexico 1.9 0.1 1.8 3.8 0.6 4.4 0.1 4.3 0.2
Brazil 1.1 -- 1.7 2.8 1.0 3.8 0.1 3.9 0.1
Spain 1.2 0.4 0.1 1.7 1.5 3.2 0.6 3.2 0.4
Sweden 1.5 0.2 0.4 2.1 0.1 2.2 0.9 3.4 0.9
================================================================================================================================
</TABLE>
(1) Reclassified to conform to the current year's presentation.
(2) Trading and short-term claims include cross-border debt and equity
securities held in the trading account, trade finance receivables, net
revaluation gains on foreign exchange and derivative contracts, and other
claims with a maturity of less than one year.
(3) Commitments (not included in total cross-border outstandings) include
legally binding cross-border letters of credit and other commitments and
contingencies as defined by the FFIEC.
Total cross-border outstandings under FFIEC guidelines, including
cross-border resale agreements based on the domicile of the issuer of the
securities that are held as collateral, and long securities positions reported
on a gross basis, at December 31, 1999, 1998, and 1997 were (in billions) the
United Kingdom ($8.7, $7.9, and $6.5), Germany ($14.9, $17.4, and $15.1), Japan
($10.5, $14.4, and $12.7), France ($7.7, $8.7, and $9.5), Italy ($10.2, $8.7,
and $15.9), Mexico ($5.1, $5.9, and $6.4), Brazil ($4.9, $4.5, and $7.3), Spain
($3.8, $3.8, and $6.0), and Sweden ($2.3, $3.7, and $5.9), respectively.
Cross-border commitments (in billions) at December 31, 1997 were $7.8 for
the United Kingdom, $1.7 for Germany, $1.1 for Japan, $0.6 for France, $0.5 for
Italy, $0.6 for Mexico, $0.1 for Brazil, $0.4 for Spain, and $0.7 for Sweden.
The sector percentage allocation for bank, public, and private cross-border
claims on third parties under FFIEC guidelines at December 31, 1999 was United
Kingdom (23%, 12%, and 65%), Germany (25%, 51%, and 24%), Japan (8%, 41%, and
51%), France (36%, 26%, and 38%), Italy (9%, 81%, and 10%), Mexico (1%, 57%, and
42%), Brazil (16%, 45%, and 39%), Spain (24%, 46%, and 30%), and Sweden (24%,
39%, and 37%), respectively.
39
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Citigroup services its obligations primarily with dividends and 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 basis consistent with its
capitalization and ratings.
Citigroup, Citicorp, TAP, and The Travelers Insurance Company (TIC) issue
commercial paper directly to investors. CCC, which had previously issued
commercial paper, became an indirect subsidiary of Citicorp on August 4, 1999
and, thereafter, ceased such issuance. Citigroup and Citicorp, both of which are
bank holding companies, maintain combined liquidity reserves of cash,
securities, and unused bank lines of credit at least equal to their combined
outstanding commercial paper. TAP and TIC each maintains unused credit
availability under their bank lines of credit at least equal to the amount of
outstanding commercial paper.
Borrowings under bank lines of credit may be at interest rates based on
LIBOR, CD rates, the prime rate, or bids submitted by the banks. Each company
pays its banks commitment fees for its lines of credit.
Citicorp, Salomon Smith Barney, and some of their nonbank subsidiaries have
credit facilities with Citicorp's subsidiary banks, including Citibank, N.A.
Borrowings under these facilities must be secured in accordance with Section 23A
of the Federal Reserve Act.
Citigroup Inc. (Citigroup)
Citigroup and TIC have an agreement with a syndicate of banks to provide $1.0
billion of revolving credit, to be allocated to either of Citigroup or TIC. The
participation of TIC in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that expires
in June 2001. At December 31, 1999, all of the facility was allocated to
Citigroup. Under this facility, the Company is required to maintain a certain
level of consolidated stockholders' equity (as defined in the agreement). The
Company exceeded this requirement by approximately $30.6 billion at December 31,
1999. Citigroup also has $300 million in 364-day facilities which expire in the
third quarter of 2000. At December 31, 1999 there were no borrowings outstanding
under either of these facilities.
Citigroup is subject to risk-based capital guidelines issued by the Board
of Governors of the Federal Reserve System (FRB). These guidelines are used to
evaluate capital adequacy based primarily on the perceived credit risk
associated with balance sheet assets, as well as certain off-balance sheet
exposures such as unused loan commitments, letters of credit, and derivative and
foreign exchange contracts. The risk-based capital guidelines are supplemented
by a leverage ratio requirement.
Citigroup Ratios
At Year-End 1999 1998
- -------------------------------------------------------------------------------
Tier 1 capital 9.64% 8.68%
Total capital (Tier 1 and Tier 2) 12.43 11.43
Leverage(1) 6.80 6.03
Common stockholders' equity 6.66 6.04
===============================================================================
(1) Tier 1 capital divided by adjusted average assets.
Citigroup maintained a strong capital position during 1999. Total capital
(Tier 1 and Tier 2) amounted to $61.4 billion at December 31, 1999, representing
12.43% of net risk-adjusted assets. This compares to $55.0 billion and 11.43% at
December 31, 1998. Tier 1 capital of $47.6 billion at December 31, 1999
represented 9.64% of net risk-adjusted assets, compared to $41.8 billion and
8.68% at December 31, 1998. Citigroup's leverage ratio was 6.80% at December 31,
1999 compared to 6.03% at December 31, 1998. See Note 17 of Notes to
Consolidated Financial Statements.
Components of Capital Under Regulatory Guidelines
In Millions of Dollars at Year-End 1999 1998
- -------------------------------------------------------------------------------
Tier 1 Capital
Common stockholders' equity $ 47,761 $ 40,395
Perpetual preferred stock 1,925 2,313
Mandatorily redeemable securities of
subsidiary trusts 4,920 4,320
Minority interest(1) 1,501 1,602
Less: Net unrealized gains on securities
available for sale(2) (2,545) (1,359)
Intangible assets:
Goodwill (4,209) (3,764)
Other intangible assets (1,655) (1,620)
50% investment in certain subsidiaries(3) (107) (110)
- -------------------------------------------------------------------------------
Total Tier 1 capital 47,591 41,777
- -------------------------------------------------------------------------------
Tier 2 Capital
Allowance for credit losses(4) 6,178 6,024
Qualifying debt(5) 6,728 7,296
Unrealized marketable equity securities gains(2) 990 21
Less: 50% investment in certain subsidiaries(3) (107) (110)
- -------------------------------------------------------------------------------
Total Tier 2 capital 13,789 13,231
- -------------------------------------------------------------------------------
Total capital (Tier 1 and Tier 2) $ 61,380 $ 55,008
===============================================================================
Net risk-adjusted assets(6) $ 493,672 $ 481,208
===============================================================================
(1) Primarily related to Travelers Property Casualty Corp.
(2) Tier 1 capital excludes unrealized gains and losses on debt securities
available for sale in accordance with regulatory risk-based capital
guidelines. The federal bank regulatory agencies permit institutions to
include in Tier 2 capital up to 45% of pretax net unrealized holding gains
on available-for-sale equity securities with readily determinable fair
values.
(3) Represents investment in certain overseas insurance activities and
unconsolidated banking and finance subsidiaries.
(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 $32.8 billion for interest rate, commodity
and equity derivative contracts and foreign exchange contracts, as of
December 31, 1999, compared to $37.3 billion as of December 31, 1998.
Market risk-equivalent assets included in net risk-adjusted assets amounted
to $43.1 billion and $51.5 billion at December 31, 1999 and 1998,
respectively. 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.
40
<PAGE>
Common stockholders' equity increased a net $7.4 billion during the year to
$47.8 billion at December 31, 1999, representing 6.66% of assets, compared to
$40.4 billion and 6.04% at year-end 1998. The increase in common stockholders'
equity during the year principally reflected net income of $9.9 billion and $3.4
billion related to the issuance of shares pursuant to employee benefit plans,
change in unrealized gains on investment securities and conversion of redeemable
preferred stock and other activity, partially offset by treasury stock acquired
of $3.9 billion and dividends declared on common and preferred stock of $2.0
billion. The increase in the common stockholders' equity ratio during the year
reflected the above items, partially offset by the increase in total assets.
During 1999, preferred stock redemptions included $200 million Series J
perpetual preferred stock, $63 million Series O perpetual preferred stock, and
$125 million Series S perpetual preferred stock. In October 1999, the remaining
140,000 shares ($140 million redemption value) of Citigroup's Series I
Cumulative Convertible Preferred Stock was converted into 9.4 million shares of
common stock. On February 15, 2000, Citigroup redeemed its Series T perpetual
preferred stock for $150 million.
All of the mandatorily redeemable securities of subsidiary trusts (trust
securities) outstanding at December 31, 1999 and 1998 qualify as Tier 1 capital.
The amount outstanding at year-end 1999 includes $2.3 billion of
parent-obligated securities and $2.62 billion of subsidiary-obligated
securities. The increase in trust securities outstanding during 1999 of $600
million represents parent company-obligated securities.
Citigroup'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
December 31, 1999, all of Citigroup's subsidiary depository institutions were
"well capitalized" under the federal bank regulatory agencies' definitions.
From time-to-time, the FRB and the Federal Financial Institutions
Examination Council propose amendments to, and issue interpretations of,
risk-based capital guidelines and reporting instructions. Such proposals or
interpretations could, if implemented in the future, affect reported capital
ratios and net risk-adjusted assets.
Citicorp
Management of liquidity at Citicorp is the responsibility of the Corporate
Treasurer. The Country Corporate Officer and the Country Treasurer ensure that
all funding obligations in each country are met when due. The Country Treasurer
is appointed by the Corporate Treasurer.
The in-country forum for liquidity issues is the Asset/Liability Management
Committee (ALCO), which includes senior executives within each country. The ALCO
reviews the current and prospective funding requirements for all businesses and
legal entities within the country, as well as the capital position and balance
sheet. All businesses within the country are represented on the committee with
the focal point being the Country Treasurer.
Each Country Treasurer must prepare a liquidity plan at least annually that
is approved by the Country Corporate Officer, the Regional Treasurer, and the
Corporate Treasurer. The liquidity profile is monitored on an on-going basis and
reported monthly. Limits are established on the extent to which businesses in a
country can take liquidity risk. The size of the limit depends on the depth of
the market, experience level of local management, the stability of the
liabilities, and liquidity of the assets.
Regional Treasurers generally have responsibility for monitoring liquidity
risk across a number of countries within a defined geography. They are also
available for consultation and special approvals, especially in unusual or
volatile market conditions.
Citicorp's assets and liabilities are diversified across many currencies,
geographic areas, and businesses. Particular attention is paid to those
businesses which for tax, sovereign risk, or regulatory reasons cannot be freely
and readily funded in the international markets.
A diversity of funding sources, currencies, and maturities is used to gain
a broad access to the investor base. Citicorp's deposits, which represent 67%
and 64% of total funding at December 31, 1999 and 1998, respectively, are
broadly diversified by both geography and customer segments.
Stockholder's equity, which grew $1.4 billion during the year to $26.0
billion at year-end 1999, continues to be an important component of the overall
funding structure. In addition, long-term debt is issued by Citicorp and its
subsidiaries. Total Citicorp long-term debt outstanding at year-end 1999 was
$26.4 billion, compared with $26.8 billion at year-end 1998. Asset
securitization programs remain an important source of liquidity. Loans
securitized during 1999 included $7.6 billion of U.S. credit cards, $7.8 billion
of U.S. consumer mortgages, and $0.4 billion of non-U.S. consumer loans. As
credit card securitization transactions amortize, newly originated receivables
are recorded on Citicorp's balance sheet and become available for asset
securitization. In 1999, the scheduled amortization of certain credit card
securitization transactions made available $4.0 billion of new receivables. In
addition, $6.4 billion of credit card securitization transactions are scheduled
to amortize during 2000.
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 banking subsidiaries may extend credit, pay
41
<PAGE>
dividends or otherwise supply funds to Citicorp. The approval of the Office of
the Comptroller of the Currency is required if total dividends declared by a
national bank in any calendar year exceed net profits (as defined) for that year
combined with its retained net profits for the preceding two years. In addition,
dividends for such a bank may not be paid in excess of the bank's undivided
profits. State-chartered bank subsidiaries are subject to dividend limitations
imposed by applicable state law.
Citicorp's national and state-chartered bank subsidiaries can declare
dividends to their respective parent companies in 2000, without regulatory
approval, of approximately $3.6 billion, adjusted by the effect of their net
income (loss) for 2000 up to the date of any such dividend declaration. 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 its bank subsidiaries can distribute
dividends to Citicorp of approximately $3.0 billion of the available $3.6
billion, adjusted by the effect of their net income (loss) up to the date of any
such dividend declaration.
Citicorp also receives dividends from its nonbank subsidiaries. These
nonbank subsidiaries are generally not subject to regulatory restrictions on
their payment of dividends except that the approval of the Office of Thrift
Supervision (OTS) may be required if total dividends declared by a savings
association in any calendar year exceed amounts specified by that agency's
regulations.
Citicorp is subject to risk-based capital and leverage guidelines issued by
the FRB.
Citicorp Ratios
At Year-End 1999 1998(1)
- -----------------------------------------------------------------------------
Tier 1 capital 8.11% 8.59%
Total capital (Tier 1 and Tier 2) 12.10 12.40
Leverage(2) 6.83 6.88
Common stockholder's equity 6.70 6.94
=============================================================================
(1) Restated to include CitiFinancial Credit Company.
(2) Tier 1 capital divided by adjusted average assets.
Citicorp maintained a strong capital position during 1999. Total capital
(Tier 1 and Tier 2) amounted to $37.4 billion at December 31, 1999, representing
12.10% of net risk-adjusted assets. This compares with $35.6 billion and 12.40%
at December 31, 1998. Tier 1 capital of $25.0 billion at year-end 1999
represented 8.11% of net risk-adjusted assets, compared with $24.7 billion and
8.59% at year-end 1998. The Tier 1 capital ratio at year-end 1999 was within
Citicorp's target range of 8.00% to 8.30%. See Note 17 of Notes to Consolidated
Financial Statements.
CitiFinancial Credit Company (CCC)
At December 31, 1999, CCC had committed and available revolving credit
facilities of $3.4 billion, consisting of five-year facilities which expire in
2002. At December 31, 1999, there were no borrowings outstanding under these
facilities. In connection with the August 4,1999 reorganization of CCC as a
subsidiary of Citicorp, Citicorp guaranteed various debt obligations of CCC,
including those arising under these facilities. Under this facility, Citicorp is
required to maintain a certain level of consolidated stockholder's equity (as
defined in the agreement). At December 31, 1999, this requirement was exceeded
by approximately $10.3 billion.
Travelers Property Casualty Corp. (TAP)
TAP has a five-year revolving credit facility in the amount of $250 million with
a syndicate of banks that expires in December 2001. Under this facility TAP is
required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1999, this requirement was exceeded
by approximately $4.8 billion. At December 31, 1999, 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 $1.2 billion in 2000 without
prior approval of the Connecticut Insurance Department.
Salomon Smith Barney Holdings Inc. (Salomon Smith Barney)
Salomon Smith Barney's total assets were $224 billion at December 31,1999,
compared to $212 billion at year-end 1998. Due to the nature of Salomon Smith
Barney's trading activities it is not uncommon for asset levels to fluctuate
from period to period. Approximately 35% of these assets represent trading
securities, commodities, and derivatives used for proprietary trading and to
facilitate customer transactions, and approximately 49% of these assets were
related to collateralized financing transactions where securities are bought,
borrowed, sold, and lent in generally offsetting amounts. A significant portion
of the remainder of the assets represented receivables from brokers, dealers,
clearing organizations, and customers that relate to securities transactions in
the process of being settled. The carrying values of the majority of Salomon
Smith Barney's securities inventories are adjusted daily to reflect current
prices. See Notes 1, 5, 6, 7, 8, and 22 of Notes to the Consolidated Financial
Statements for a further description of these assets.
Salomon Smith Barney's assets are financed through a number of sources
including long and short-term unsecured borrowings, the financing transactions
described above, and payables to brokers, dealers, and customers. 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 funds its operations through the use of secured and
unsecured short-term borrowings, long-term borrowings and TruPS.(R) Secured
short-term financing, including repurchase agreements and secured
42
<PAGE>
loans, is Salomon Smith Barney's principal funding source. Unsecured short-term
borrowings provide a source of short-term liquidity and are also utilized as an
alternative to secured financing when they represent a cheaper funding source.
Sources of short-term unsecured borrowings include commercial paper, unsecured
bank borrowings and letters of credit, deposit liabilities, promissory notes,
and corporate loans.
At December 31, 1999, Salomon Smith Barney had a $1.5 billion revolving
credit agreement with a bank syndicate that extends through May 2001, and a $3.5
billion, 364-day revolving credit agreement that extends through May 2000.
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 agreement). At December 31, 1999, this requirement was
exceeded by approximately $3.5 billion. At December 31, 1999, there were no
borrowings outstanding under either facility. Salomon Smith Barney also has
substantial borrowing arrangements consisting of facilities that it has been
advised are available, but where no contractual lending obligation exists. These
arrangements are reviewed on an ongoing basis to ensure flexibility in meeting
short-term requirements.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Long-term debt totaled $18.0 billion at December 31, 1999 and
$19.1 billion at December 31,1998. Salomon Smith Barney utilizes interest rate
swaps to convert the majority of its fixed rate long-term debt used to fund
inventory-related working capital requirements into variable rate obligations.
Long-term debt issuances denominated in currencies other than the U.S. dollar
that are not used to finance assets in the same currency are effectively
converted to U.S. dollar obligations through the use of cross-currency swaps and
forward currency contracts. The average remaining maturity of Salomon Smith
Barney's long-term debt was 3.25 years at December 31, 1999 and 4.0 years at
December 31, 1998. See Note 11 of Notes to the Consolidated Financial Statements
for additional information regarding debt and an analysis of the impact of
interest rate swaps on debt.
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
financial instruments, commodities and contractual commitments, customer
balances, the amount of reverse repurchase transactions outstanding, and
securities borrowed transactions. As Salomon Smith Barney's 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 access to unsecured
financing was temporarily impaired. Salomon Smith Barney's liquidity management
process includes a contingency funding plan designed to ensure adequate
liquidity even if access to unsecured 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 that is utilized to determine the ability to withstand varying
levels of stress, which could impact Salomon Smith Barney's liquidation horizons
and required margins. In addition, Salomon Smith Barney monitors its leverage
and capital ratios on a daily basis.
The Travelers Insurance Company (TIC)
At December 31, 1999, TIC had $27.0 billion of life and annuity product deposit
funds and reserves. Of that total, $13.8 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $13.2 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 are $2.1 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $4.9 billion of the life
insurance and individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 4.6%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$6.2 billion of liabilities are surrenderable without charge. More than 12.7% 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.
Scheduled maturities of guaranteed investment contracts (GICs) in 2000,
2001, 2002, 2003, and thereafter are $2.75 billion, $864.2 million, $667.4
million, $491.1 million, and $1.92 billion, respectively. At December 31, 1999,
the interest rates credited on GICs had a weighted average rate of 5.77%.
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 $679 million of statutory surplus
is available in 2000 for such dividends without Department approval.
Insurance Industry--Risk Based Capital
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for life insurance companies and for property and
casualty insurance companies. The RBC requirements are to be used as minimum
capital requirements by the NAIC and states to identify companies that merit
further regulatory action. The formulas have not been designed to differentiate
among adequately capitalized companies that operate with levels of capital
higher than RBC requirements. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December 31, 1999 and
1998, all of the Company's life and property & casualty companies had adjusted
capital in excess of amounts requiring any regulatory action.
43
<PAGE>
REPORT OF MANAGEMENT
The management of Citigroup is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this annual report. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances. Where amounts must be based on estimates and judgments,
they represent the best estimates and judgments of management. The financial
information appearing throughout this annual report is consistent with that in
the financial statements.
The management of Citigroup is also responsible for maintaining effective
internal control over financial reporting . Management establishes an
environment that fosters strong controls, and it designs business processes to
identify and respond to risk. Management maintains a comprehensive system of
controls intended to ensure that transactions are executed in accordance with
management's authorization, assets are safeguarded, and financial records are
reliable. Management also takes steps to see that information and communication
flows are effective and to monitor performance, including performance of
internal control procedures.
Citigroup's accounting policies and internal control are under the general
oversight of the Board of Directors, acting through the Audit Committee of the
Board. The Committee is composed entirely of directors who are not officers or
employees of Citigroup. The Committee reviews reports by internal audit covering
its extensive program of audits and business risk reviews worldwide. In
addition, KPMG LLP, independent auditors, are engaged to audit Citigroup's
financial statements.
KPMG LLP obtains and maintains an understanding of Citigroup's internal
control and procedures for financial reporting and conducts such tests and other
auditing procedures as it considers necessary in the circumstances to express
the opinion in its report that follows. KPMG LLP has free access to the Audit
Committee, with no members of management present, to discuss its audit and its
findings as to the integrity of Citigroup's financial reporting and the
effectiveness of internal control.
Management recognizes that there are inherent limitations in the
effectiveness of any system of internal control, and accordingly, even effective
internal control can provide only reasonable assurance with respect to financial
statement preparation. However, management believes that Citigroup maintained
effective internal control over financial reporting as of December 31, 1999.
/s/ John S. Reed /s/ Sandford I. Weill
John S. Reed Sanford I. Weill
Chairman and Co-Chief Chairman and Co-Chief
Executive Officer Executive Officer
/s/ Heidi G. Miller
Heidi G. Miller
Chief Financial Officer
INDEPENDENT AUDITOR'S REPORT
[LOGO]
KPMG
The Board of Directors and Stockholders
Citigroup Inc.:
We have audited the accompanying consolidated statement of financial position of
Citigroup Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citigroup
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1999
the Company changed its methods of accounting for insurance-related assessments,
accounting for insurance and reinsurance contracts that do not transfer
insurance risk, and accounting for the costs of start-up activities.
/s/ KPMG LLP
New York, New York
January 18, 2000
44
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME Citigroup Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
In Millions, Except Per Share Amounts 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Loan interest, including fees $ 23,172 $ 22,928 $ 20,765
Other interest and dividends 21,728 23,311 21,336
Insurance premiums 10,441 9,850 8,995
Commissions and fees 12,723 11,918 11,211
Principal transactions 5,160 1,780 4,231
Asset management and administration fees 4,164 2,292 1,715
Realized gains from sales of investments 557 840 995
Other income 4,060 3,512 3,058
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 82,005 76,431 72,306
Interest expense 24,768 27,495 24,524
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense 57,237 48,936 47,782
- ---------------------------------------------------------------------------------------------------------------------------
Provisions for benefits, claims, and credit losses
Policyholder benefits and claims 8,671 8,365 7,714
Provision for credit losses 2,837 2,751 2,197
- ---------------------------------------------------------------------------------------------------------------------------
Total provisions for benefits, claims, and credit losses 11,508 11,116 9,911
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses
Non-insurance compensation and benefits 14,536 13,336 12,942
Insurance underwriting, acquisition, and operating 3,289 3,274 3,236
Restructuring-related items and merger-related costs (88) 795 1,718
Other operating expenses 12,044 11,146 9,225
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 29,781 28,551 27,121
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest and cumulative effect of accounting changes 15,948 9,269 10,750
Provision for income taxes 5,703 3,234 3,833
Minority interest, net of income taxes 251 228 212
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 9,994 5,807 6,705
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting changes (127) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 9,867 $ 5,807 $ 6,705
===========================================================================================================================
Basic earnings per share
Income before cumulative effect of accounting changes $ 2.95 $ 1.66 $ 1.91
Cumulative effect of accounting changes (0.04) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2.91 $ 1.66 $ 1.91
===========================================================================================================================
Weighted average common shares outstanding 3,333.9 3,363.6 3,371.9
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Income before cumulative effect of accounting changes $ 2.86 $ 1.62 $ 1.83
Cumulative effect of accounting changes (0.03) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2.83 $ 1.62 $ 1.83
===========================================================================================================================
Adjusted weighted average common shares outstanding 3,443.5 3,472.8 3,536.6
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION Citigroup Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31,
----------------------
In Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents (including segregated cash and other deposits) $ 14,158 $ 13,837
Deposits at interest with banks 13,429 11,643
Investments 113,126 105,176
Federal funds sold and securities borrowed or purchased under agreements to resell 112,655 94,831
Brokerage receivables 22,973 21,413
Trading account assets 109,155 119,845
Loans, net
Consumer 148,715 132,255
Commercial 95,491 89,703
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 244,206 221,958
Allowance for credit losses (6,679) (6,617)
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net 237,527 215,341
Reinsurance recoverables 9,704 9,492
Separate and variable accounts 23,118 15,820
Other assets 61,092 61,243
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 716,937 $ 668,641
=========================================================================================================================
Liabilities
Non-interest-bearing deposits in U.S. offices $ 19,492 $ 17,058
Interest-bearing deposits in U.S. offices 48,584 44,169
Non-interest-bearing deposits in offices outside the U.S. 12,021 10,856
Interest-bearing deposits in offices outside the U.S. 180,994 156,566
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 261,091 228,649
Federal funds purchased and securities loaned or sold under agreements to repurchase 92,591 81,025
Brokerage payables 15,744 21,055
Trading account liabilities 91,104 94,584
Contractholder funds and separate and variable accounts 41,335 33,037
Insurance policy and claims reserves 43,822 43,990
Investment banking and brokerage borrowings 13,719 14,040
Short-term borrowings 17,086 16,112
Long-term debt 47,092 48,671
Other liabilities 38,747 40,450
Citigroup or subsidiary obligated mandatorily redeemable securities of
subsidiary trusts holding solely junior subordinated debt securities of--Parent 2,300 1,700
--Subsidiary 2,620 2,620
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 1,925 2,313
Common stock ($.01 par value; authorized shares: 6.0 billion),
issued shares: 1999--3,612,385,458 shares and 1998--3,603,106,368 shares 36 36
Additional paid-in capital 10,036 8,893
Retained earnings 43,865 35,971
Treasury stock, at cost: 1999--244,860,127 shares and 1998--216,143,199 shares (7,627) (4,789)
Accumulated other changes in equity from nonowner sources 1,907 781
Unearned compensation (456) (497)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 49,686 42,708
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 716,937 $ 668,641
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
46
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Citigroup Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Amounts
--------------------------------------
In Millions of Dollars Except Shares in Thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 2,313 $ 3,353 $ 3,203
Issuance of preferred stock -- -- 1,000
Redemption or retirement of preferred stock (388) (1,040) (850)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,925 2,313 3,353
- -----------------------------------------------------------------------------------------------------------------------
Common stock and additional paid-in capital
Balance, beginning of year 8,929 12,496 14,940
Conversion of redeemable preferred stock to common stock 140 293 140
Exercise of common stock warrants -- 131 14
Employee benefit plans 1,028 531 756
Retirement of treasury stock -- (4,497) (3,347)
Other (25) (25) (7)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 10,072 8,929 12,496
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 35,971 32,002 26,989
Net income 9,867 5,807 6,705
Common dividends (1,824) (1,622) (1,409)
Preferred dividends (149) (216) (283)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 43,865 35,971 32,002
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (4,789) (6,595) (7,073)
Issuance of shares pursuant to employee benefit plans and other 1,063 408 578
Treasury stock acquired (3,906) (3,085) (3,447)
Retirement of treasury stock -- 4,497 3,347
Other 5 (14) --
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year (7,627) (4,789) (6,595)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year 781 1,057 662
Net change in unrealized gains and losses on investment securities, net of tax 1,186 (333) 547
Foreign currency translations adjustment, net of tax (60) 57 (152)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,907 781 1,057
- -----------------------------------------------------------------------------------------------------------------------
Unearned compensation
Balance, beginning of year (497) (462) (305)
Net issuance of restricted stock (380) (420) (467)
Restricted stock amortization 421 385 310
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year (456) (497) (462)
- -----------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 47,761 40,395 38,498
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 49,686 $ 42,708 $ 41,851
=======================================================================================================================
Summary of changes in equity from nonowner sources
Net income $ 9,867 $ 5,807 $ 6,705
Other changes in equity from nonowner sources, net of tax 1,126 (276) 395
- -----------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 10,993 $ 5,531 $ 7,100
=======================================================================================================================
<CAPTION>
Year Ended December 31,
-------------------------------------
Shares
-------------------------------------
In Millions of Dollars Except Shares in Thousands 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year 8,475 14,831 20,231
Issuance of preferred stock -- -- 4,000
Redemption or retirement of preferred stock (1,525) (6,356) (9,400)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year 6,950 8,475 14,831
- ---------------------------------------------------------------------------------------------------------------------
Common stock and additional paid-in capital
Balance, beginning of year 3,603,106 3,769,020 3,994,712
Conversion of redeemable preferred stock to common stock 9,367 19,781 9,367
Exercise of common stock warrants -- 15,195 1,670
Employee benefit plans -- 33 --
Retirement of treasury stock -- (200,888) (236,754)
Other (88) (35) 25
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,612,385 3,603,106 3,769,020
- ---------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year
Net income
Common dividends
Preferred dividends
- --------------------------------------------------------------------------------
Balance, end of year
- --------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (216,143) (349,136) (546,116)
Issuance of shares pursuant to employee benefit plans and other 57,888 27,047 75,035
Treasury stock acquired (86,770) (94,246) (114,809)
Retirement of treasury stock -- 200,888 236,754
Other 165 (696) --
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year (244,860) (216,143) (349,136)
- ---------------------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year
Net change in unrealized gains and losses on investment securities, net of tax
Foreign currency translations adjustment, net of tax
- --------------------------------------------------------------------------------
Balance, end of year
- --------------------------------------------------------------------------------
Unearned compensation
Balance, beginning of year
Net issuance of restricted stock
Restricted stock amortization
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year
- ---------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 3,367,525 3,386,963 3,419,884
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity
=====================================================================================================================
Summary of changes in equity from nonowner sources
Net income
Other changes in equity from nonowner sources, net of tax
- ---------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS Citigroup Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
In Millions of Dollars 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 9,867 $ 5,807 $ 6,705
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 1,613 1,509 1,424
Additions to deferred policy acquisition costs (1,961) (1,784) (1,685)
Depreciation and amortization 1,714 1,470 1,218
Deferred tax provision (benefit) 485 (194) (1,430)
Provision for credit losses 2,837 2,751 2,197
Change in trading account assets 10,690 60,243 (22,730)
Change in trading account liabilities (3,480) (32,568) 13,008
Change in Federal funds sold and securities purchased under agreements to resell (17,824) 25,136 (10,849)
Change in Federal funds purchased and securities sold under agreements to repurchase 11,566 (51,078) 18,536
Change in brokerage receivables net of brokerage payables (6,871) 2,506 (1,291)
Change in insurance policy and claims reserves (168) 208 381
Net gain on sale of securities (557) (840) (995)
Venture capital activity (863) (698) (475)
Restructuring-related items and merger-related costs (88) 795 1,718
Cumulative effect of accounting changes, net of tax 127 -- --
Other, net 2,067 (8,977) 2,021
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustments (713) (1,521) 1,048
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,154 4,286 7,753
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Change in deposits at interest with banks (1,786) 1,406 (1,401)
Change in loans (112,500) (165,237) (117,921)
Proceeds from sales of loans 87,391 146,477 104,119
Purchases of investments (90,007) (88,229) (78,594)
Proceeds from sales of investments 48,612 45,717 46,927
Proceeds from maturities of investments 35,126 33,819 23,026
Other investments, primarily short-term, net (1,009) (427) (501)
Capital expenditures on premises and equipment (1,572) (1,805) (1,533)
Proceeds from sales of premises and equipment, subsidiaries and
affiliates, and other real estate owned 1,885 764 1,164
Business acquisitions (2,150) (3,890) (1,618)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (36,010) (31,405) (26,332)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (1,973) (1,846) (1,692)
Issuance of common stock 758 418 434
Issuance of preferred stock -- -- 1,000
Issuance of mandatorily redeemable securities of subsidiary trusts 600 1,325 450
Redemption of preferred stock (388) (1,040) (850)
Treasury stock acquired (3,906) (3,085) (3,447)
Stock tendered for payment of withholding taxes (496) (520) (384)
Issuance of long-term debt 8,644 14,295 15,333
Payments and redemptions of long-term debt (9,819) (12,307) (10,713)
Change in deposits 32,442 29,528 14,166
Change in short-term borrowings including investment banking and
brokerage borrowings 699 (304) 6,636
Contractholder fund deposits 5,933 4,422 3,544
Contractholder fund withdrawals (5,028) (2,579) (2,757)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,466 28,307 21,720
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (289) 31 (688)
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 321 1,219 2,453
Cash and cash equivalents at beginning of period 13,837 12,618 10,165
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,158 $ 13,837 $ 12,618
============================================================================================================================
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes $ 3,673 $ 2,860 $ 3,917
Cash paid during the period for interest 23,613 26,292 23,016
Non-cash investing activities--transfers to other real estate owned 468 350 395
============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Citigroup Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of Citigroup and its subsidiaries (the Company). Twenty-to-fifty
percent-owned affiliates, other than investments of designated venture capital
subsidiaries, are accounted for under the equity method, and the pro rata share
of their income (loss) is included in other income. Income from investments in
less than twenty percent-owned companies is generally recognized when dividends
are received. Gains and losses on disposition of branches, subsidiaries,
affiliates, and other investments and charges for management's estimate of
impairment in their value that is other than temporary, such that recovery of
the carrying amount is deemed unlikely, are included in other income. Goodwill
and other intangible assets are amortized over their estimated useful lives,
subject to periodic review for impairment that is other than temporary. If it is
determined that enterprise level goodwill is unlikely to be recovered,
impairment is measured on a discounted cash flow basis. Minority interest
principally represents the interest in Travelers Property Casualty Corp. (TAP)
not held by the Company, and is included in other liabilities. The Company
recognizes a gain or loss in the consolidated statement of income when a
subsidiary issues its own stock to a third party at a price higher or lower than
the Company's proportionate carrying amount.
Foreign currency translation. Assets and liabilities denominated in non-U.S.
dollar currencies are translated into U.S. dollar equivalents using year-end
spot foreign exchange rates. Revenues and expenses are translated monthly at
amounts which approximate weighted average exchange rates, with resulting gains
and losses included in income. The effects of translating operations with a
functional currency other than the U.S. dollar are included in stockholders'
equity along with related hedge and tax effects. The effects of translating
operations with the U.S. dollar as the functional currency, including those in
highly inflationary environments, are included in other income along with
related hedge effects. Hedges of foreign currency exposures include forward
currency contracts and designated issues of non-U.S. dollar debt.
Risks and uncertainties. The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents include cash on hand and due from banks, cash
segregated under federal and brokerage regulations, cash deposited with clearing
organizations and short-term highly liquid investments with maturities of three
months or less when purchased, other than those held for sale in the ordinary
course of business. Cash flows from risk management activities are classified in
the same category as the related assets and liabilities.
Investments include fixed maturity and equity securities. Fixed maturities
includes bonds, notes and redeemable preferred stocks, as well as certain
loan-backed and structured securities subject to prepayment risk. Equity
securities include common and non-redeemable preferred stocks. Fixed maturities
classified as "held to maturity" represent securities that the Company has both
the ability and the intent to hold until maturity and are carried at amortized
cost. Fixed maturity securities classified as "available for sale" and
marketable equity securities are carried at fair values, based primarily on
quoted market prices or if quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit quality and
maturity of the investment, with unrealized gains and losses and related hedge
effects reported in a separate component of stockholders' equity, net of
applicable income taxes. Declines in fair value that are determined to be other
than temporary are charged to earnings. Accrual of income is suspended on fixed
maturities that are in default, or on which it is likely that future interest
payments will not be made as scheduled. Fixed maturities subject to prepayment
risk are accounted for using the retrospective method, where the principal
amortization and effective yield are recalculated each period based on actual
historical and projected future cash flows. Realized gains and losses on sales
of investments are included in earnings on a specific identified cost basis.
Citigroup's venture capital subsidiaries include subsidiaries registered as
Small Business Investment Companies and other subsidiaries that engage
exclusively in venture capital activities. Venture capital investments are
carried at fair value, with changes in fair value recognized in other income.
The fair values of publicly-traded securities held by these subsidiaries are
generally based upon quoted market prices. In certain situations, including
thinly-traded securities, large-block holdings, restricted shares or other
special situations, the quoted market price is adjusted to produce an estimate
of the attainable fair value for the securities. For securities held by these
subsidiaries that are not publicly traded, estimates of fair value are made
based upon review of the investee's financial results, condition, and prospects,
together with comparisons to similar companies for which quoted market prices
are available.
49
<PAGE>
Securities borrowed and securities loaned are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company receives
cash collateral in an amount in excess of the market value of securities loaned.
The Company monitors the market value of securities borrowed and loaned on a
daily basis with additional collateral obtained as necessary.
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts at which the securities will be
subsequently reacquired or resold, including accrued interest, as specified in
the respective agreements. The Company's policy is to take possession of
securities purchased under agreements to resell. The market value of securities
to be repurchased and resold is monitored, and additional collateral is obtained
where appropriate to protect against credit exposure.
Trading account assets and liabilities include securities, commodities and
derivatives and are recorded at either market value or, when market prices are
not readily available, fair value, which is determined under an alternative
approach, such as matrix or model pricing. Obligations to deliver securities
sold but not yet purchased are also valued at market and included in trading
account liabilities. The determination of market or fair value considers various
factors, including: closing exchange or over-the-counter market price
quotations; time value and volatility factors underlying options, warrants and
derivatives; price activity for equivalent or synthetic instruments;
counterparty credit quality; the potential impact on market prices or fair value
of liquidating the Company's positions in an orderly manner over a reasonable
period of time under current market conditions; and derivatives transaction
maintenance costs during that period. Interest expense on trading account
liabilities is reported as a reduction of interest revenues.
Commodities include physical quantities of commodities involving future
settlement or delivery, and related gains or losses are reported as principal
transactions.
Derivatives used for trading purposes include interest rate, currency,
equity, credit, and commodity swap agreements, options, caps and floors,
warrants, and financial and commodity futures and forward contracts. The fair
values (unrealized gains and losses) associated with derivatives are reported
net by counterparty, provided a legally enforceable master netting agreement
exists, and are netted across products and against cash collateral when such
provisions are stated in the master netting agreement. Derivatives in a net
receivable position, as well as options owned and warrants held, are reported as
trading account assets. Similarly, derivatives in a net payable position, as
well as options written and warrants issued, are reported as trading account
liabilities. Revenues generated from derivative instruments used for trading
purposes are reported as principal transactions and include realized gains and
losses as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
Commissions, underwriting and principal transactions revenues and related
expenses are recognized in income on a trade date basis.
Consumer loans includes loans managed by the Global Consumer business and the
Citibank Private Bank. Consumer loans are generally written off not later than a
predetermined number of days past due, or earlier in the event of bankruptcy.
The number of days is set at an appropriate level by loan product and by
country. The policy for suspending accruals of interest on consumer loans varies
depending on the terms, security and loan loss experience characteristics of
each product, and in consideration of write-off criteria in place.
Commercial loans represent loans managed by the Global Corporate and Investment
Bank. Commercial loans are identified as impaired and placed on a cash
(nonaccrual) basis when it is determined that the payment of interest or
principal is doubtful of collection, or when interest or principal is past due
for 90 days or more, except when the loan is well secured and in the process of
collection. Any interest accrued is reversed and charged against current
earnings, and interest is thereafter included in earnings only to the extent
actually received in cash. When there is doubt regarding the ultimate
collectibility of principal, all cash receipts are thereafter applied to reduce
the recorded investment in the loan. Impaired commercial loans are written down
to the extent that principal is judged to be uncollectible. Impaired
collateral-dependent loans where repayment is expected to be provided solely by
the underlying collateral and there are no other available and reliable sources
of repayment are written down to the lower of cost or collateral value.
Cash-basis loans are returned to an accrual status when all contractual
principal and interest amounts are reasonably assured of repayment and there is
a sustained period of repayment performance in accordance with the contractual
terms.
Lease financing transactions. Loans include the Company's share of aggregate
rentals on lease financing transactions and residual values net of related
unearned income. Lease financing transactions substantially represent direct
financing leases and also include leveraged leases. Unearned income is amortized
under a method which substantially results in an approximate level rate of
return when related to the unrecovered lease investment. Gains and losses from
sales of residual values of leased equipment are included in other income.
50
<PAGE>
Loans held for sale. Credit card receivables and mortgage loans originated for
sale are classified as loans held for sale, which are accounted for at the lower
of cost or market value in other assets with net credit losses charged to other
income.
Allowance for credit losses represents management's estimate of probable losses
inherent in the portfolio. This evaluation includes an assessment of the ability
of borrowers with foreign currency obligations to obtain the foreign exchange
necessary for orderly debt servicing. Attribution of the allowance is made for
analytical purposes only, and the entire allowance is available to absorb
probable credit losses inherent in the portfolio. Additions to the allowance are
made by means of the provision for credit losses. Credit losses are deducted
from the allowance, and subsequent recoveries are added. Securities received in
exchange for loan claims in debt restructurings are initially recorded at fair
value, with any gain or loss reflected as a recovery or charge-off to the
allowance, and are subsequently accounted for as securities available for sale.
Larger-balance, non-homogenous exposures representing significant
individual credit exposures are evaluated based upon the borrower's overall
financial condition, resources, and payment record; the prospects for support
from any financially responsible guarantors; and, if appropriate, the realizable
value of any collateral. The allowance for loan losses attributed to these loans
is established via a process which begins with estimates of probable loss
inherent in the portfolio based upon various statistical analyses. These
analyses consider historical and projected default rates and loss severities;
internal risk ratings; geographic, industry, and other environmental factors;
and model imprecision. Management also considers overall portfolio indicators
including trends in internally risk rated exposures, classified exposures,
cash-basis loans, and historical and forecasted write-offs; a review of
industry, geographic, and portfolio concentrations, including current
developments within those segments; and the current business strategy and credit
process including credit limit setting and compliance, credit approvals, loan
underwriting criteria, and loan workout procedures. Within the allowance for
credit losses, a valuation allowance is maintained for larger-balance,
non-homogenous loans that have been individually determined to be impaired. This
estimate considers all available evidence including, as appropriate, the present
value of the expected future cash flows discounted at the loan's contractual
effective rate, the secondary market value of the loan, the fair value of
collateral, and environmental factors.
Each portfolio of smaller balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
collectively evaluated for impairment. The allowance for loan losses attributed
to these loans is established via a process which begins with estimates of
probable losses inherent in the portfolio, based upon various statistical
analyses. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current aging of the portfolio,
together with analyses which reflect current trends and conditions. Management
also considers overall portfolio indicators including historical credit losses,
delinquent, non-performing and classified loans, and trends in volumes and terms
of loans; an evaluation of overall credit quality and the credit process,
including lending policies and procedures; consideration of economic,
geographical, product, and other environmental factors; and model imprecision.
Other real estate owned. Upon repossession, loans are adjusted if necessary to
the estimated fair value of the underlying collateral and transferred to Other
Real Estate Owned, which is reported in other assets net of a valuation
allowance for selling costs and net declines in value as appropriate.
Risk management activities--derivatives used for non-trading purposes. The
Company manages its exposures to market rate movements outside of its trading
activities by modifying the asset and liability mix, either directly or through
the use of derivative financial products including interest rate swaps, futures,
forwards, and purchased option positions such as interest rate caps, floors, and
collars. These end-user derivative contracts include qualifying hedges and
qualifying positions that modify the interest rate characteristics of specified
financial instruments. Derivative instruments not qualifying as end-user
positions are treated as trading positions and carried at fair value.
To qualify as a hedge, the swap, futures, forward, or purchased option
position must be designated as a hedge and be effective in reducing the market
risk of an existing asset, liability, firm commitment, or identified anticipated
transaction which is probable to occur. To qualify as a position modifying the
interest rate characteristics of an instrument, there must be a documented and
approved objective to synthetically alter the market risk characteristics of an
existing asset, liability, firm commitment or identified anticipated transaction
which is probable to occur, and the swap, forward or purchased option position
must be designated as such a position and effective in accomplishing the
underlying objective.
51
<PAGE>
The foregoing criteria are applied on a decentralized basis, consistent
with the level at which market risk is managed, but are subject to various
limits and controls. The underlying asset, liability, firm commitment or
anticipated transaction may be an individual item or a portfolio of similar
items.
The effectiveness of these contracts is evaluated on an initial and ongoing
basis using quantitative measures of correlation. If a contract is found to be
ineffective, it no longer qualifies as an end-user position and any excess gains
and losses attributable to such ineffectiveness as well as subsequent changes in
fair value are recognized in earnings.
End-user contracts are primarily employed in association with on-balance
sheet instruments accounted for at amortized cost, including loans, deposits,
and long-term debt, and with credit card securitizations. These qualifying
end-user contracts are accounted for consistent with the risk management
strategy as follows. Amounts payable and receivable on interest rate swaps and
options are accrued according to the contractual terms and included currently in
the related revenue and expense category as an element of the yield on the
associated instrument (including the amortization of option premiums). Amounts
paid or received over the life of futures contracts are deferred until the
contract is closed; accumulated deferred amounts on futures contracts and
amounts paid or received at settlement of forward contracts are accounted for as
elements of the carrying value of the associated instrument, affecting the
resulting yield.
End-user contracts related to instruments that are carried at fair value
are also carried at fair value, with amounts payable and receivable accounted
for as an element of the yield on the associated instrument. When related to
securities available for sale, fair value adjustments are reported in
stockholders' equity, net of tax.
If an end-user derivative contract is terminated, any resulting gain or
loss is deferred and amortized over the original term of the agreement provided
that the effectiveness criteria have been met. If the underlying designated
items are no longer held, or if an anticipated transaction is no longer likely
to occur, any previously unrecognized gain or loss on the derivative contract is
recognized in earnings and the contract is accounted for at fair value with
subsequent changes recognized in earnings.
Foreign exchange contracts which qualify under applicable accounting
guidelines as hedges of foreign currency exposures, including net capital
investments outside the U.S., are revalued at the spot rate with any forward
premium or discount recognized over the life of the contract in net interest
revenue. Gains and losses on foreign exchange contracts which qualify as a hedge
of a firm commitment are deferred and recognized as part of the measurement of
the related transaction, unless deferral of a loss would lead to recognizing
losses on the transaction in later periods.
Insurance premiums from long-duration contracts, principally life insurance, are
earned when due. Premiums from short-duration insurance contracts are earned
over the related contract period. Short-duration contracts include primarily
property and casualty, credit life and accident and health policies, including
estimated ultimate premiums on retrospectively rated policies. Benefits and
expenses are associated with premiums by means of the provision for future
policy benefits, unearned premiums and the deferral and amortization of policy
acquisition costs. Receivables related to retrospectively rated policies on
property-casualty business are reported in other assets.
Value of insurance in force, included in other assets, represents the
actuarially determined present value of anticipated profits to be realized from
life and accident and health business on insurance in force at the date of the
Company's acquisition of its insurance subsidiaries using the same assumptions
that were used for computing related liabilities where appropriate. The value of
insurance in force acquired prior to December 31, 1993 is amortized over the
premium paying periods in relation to anticipated premiums. The value of
insurance in force relating to the 1993 acquisition of The Travelers Corporation
(old Travelers) was the actuarially determined present value of the projected
future profits discounted at interest rates ranging from 14% to 18% for the
business acquired. The value of insurance in force is amortized over the
contract period using current interest crediting rates to accrete interest and
using amortization methods based on the specified products. Traditional life
insurance is amortized over the period of anticipated premiums; universal life
in relation to estimated gross profits; and annuity contracts employing a level
yield method. The value of insurance in force is reviewed periodically for
recoverability to determine if any adjustment is required.
Deferred policy acquisition costs, included in other assets, for the life
business represent the costs of acquiring new business, principally commissions,
certain underwriting and agency expenses and the cost of issuing policies.
Deferred policy acquisition costs for traditional life business are amortized
over the premium-paying periods of the related policies, in proportion to the
ratio of the annual premium revenue to the total anticipated premium revenue.
Deferred policy acquisition costs of other business lines are generally
amortized over the life of the insurance contract or at a constant rate based
upon the present value of estimated gross profits expected to be realized. For
certain property and casualty lines, acquisition costs (primarily commissions
and premium taxes) have been deferred to the extent recoverable from future
earned premiums and are amortized ratably over the terms of the related
policies. Deferred policy acquisition costs are reviewed to determine if they
are recoverable from future income, including investment income, and, if not
recoverable, are charged to expense. All other acquisition expenses are charged
to operations as incurred.
Separate and variable accounts primarily represent funds for which investment
income and investment gains and losses accrue directly to, and investment risk
is borne by, the contractholders. Each account has specific investment
objectives. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company. The
assets of these accounts are generally carried at market value. Amounts assessed
to the contractholders for management services are included in revenues.
Deposits, net investment income and realized investment gains and losses for
these accounts are excluded from revenues, and related liability increases are
excluded from benefits and expenses.
52
<PAGE>
Insurance policy and claims reserves represent liabilities for future insurance
policy benefits. Insurance reserves for traditional life insurance, annuities,
and accident and health policies have been computed based upon mortality,
morbidity, persistency and interest rate assumptions (ranging from 2.5% to
10.0%) applicable to these coverages, including adverse deviation. These
assumptions consider Company experience and industry standards and may be
revised if it is determined that future experience will differ substantially
from that previously assumed. Property-casualty reserves include (1) unearned
premiums representing the unexpired portion of policy premiums, and (2)
estimated provisions for both reported and unreported claims incurred and
related expenses. The reserves are adjusted regularly based on experience.
In determining insurance policy and claims reserves, the Company performs a
continuing review of its overall position, its reserving techniques and its
reinsurance. Reserves for property-casualty insurance losses represent the
estimated ultimate cost of all incurred claims and claim adjustment expenses.
Since the reserves are based on estimates, the ultimate liability may be more or
less than such reserves. The effects of changes in such estimated reserves are
included in the results of operations in the period in which the estimates are
changed. Such changes may be material to the results of operations and could
occur in a future period.
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain individual annuity contracts. Such receipts are
considered deposits on investment contracts that do not have substantial
mortality or morbidity risk. Account balances are increased by deposits received
and interest credited and are reduced by withdrawals, mortality charges and
administrative expenses charged to the contractholders. Calculations of
contractholder account balances for investment contracts reflect lapse,
withdrawal and interest rate assumptions (ranging from 3.8% to 8.6%) based on
contract provisions, the Company's experience and industry standards.
Contractholder funds also include other funds that policyholders leave on
deposit with the Company.
Employee benefits expense includes prior and current service costs of pension
and other postretirement benefit plans, which are accrued on a current basis,
contributions and unrestricted awards under other employee plans, the
amortization of restricted stock awards, and costs of other employee benefits.
There are no charges to earnings upon the grant or exercise of fixed stock
options or the subscription for or purchase of stock under stock purchase
agreements. Compensation expense related to performance-based stock options is
recorded over the period to the estimated vesting dates. Upon issuance of
previously unissued shares under employee plans, proceeds received in excess of
par value are credited to additional paid-in capital. Upon issuance of treasury
shares, the difference between the proceeds received and the average cost of
treasury shares is recorded in additional paid-in capital.
Income taxes. Deferred taxes are recorded for the future tax consequences of
events that have been recognized in the financial statements or tax returns,
based upon enacted tax laws and rates. Deferred tax assets are recognized
subject to management's judgment that realization is more likely than not. The
Company and its wholly owned domestic non-life insurance subsidiaries file a
consolidated federal income tax return. The major life insurance subsidiaries
are included in their own consolidated federal income tax return.
Earnings per common share is computed after recognition of preferred stock
dividend requirements. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period, excluding restricted stock. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and has been computed after
giving consideration to the weighted average dilutive effect of the Company's
convertible securities, common stock warrants, stock options and the shares
issued under the Company's Capital Accumulation Plan and other restricted stock
plans.
The Board of Directors on April 19, 1999 declared a three-for-two split in
Citigroup's common stock, which was paid in the form of a 50% stock dividend on
May 28, 1999. Prior year information has been restated to reflect the stock
split.
Accounting Changes
Insurance-related assessments. During the first quarter of 1999, the Company
adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when an
asset may be recognized for the recovery of such assessments through premium tax
offsets or policy surcharges. The initial adoption resulted in a cumulative
catch-up adjustment recorded as a charge to earnings of $135 million after-tax
and minority interest.
Deposit Accounting. During the first quarter of 1999, the Company adopted SOP
98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk." SOP 98-7 provides guidance on how to
account for insurance and reinsurance contracts that do not transfer insurance
risk and applies to all entities and all such contracts, except for
long-duration life and health insurance contracts. The method used to account
for such contracts is referred to as deposit accounting. The initial adoption
resulted in a cumulative catch-up adjustment recorded as a credit to earnings of
$23 million after-tax and minority interest.
Start-up costs. During the first quarter of 1999, the Company adopted SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
initial adoption resulted in a cumulative catch-up adjustment recorded as a
charge to earnings of $15 million after-tax.
53
<PAGE>
Asset management fees. For periods prior to 1999, asset management and
administration fees earned by Citicorp subsidiaries are classified as
commissions and fees in the consolidated statement of income.
Future Application of Accounting Standards
Derivatives and hedge accounting. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," which delayed the effective date of SFAS No. 133 to January
1, 2001 for calendar year companies such as the Company. The new standard will
significantly change the accounting treatment of end-user derivative and foreign
exchange contracts used by the Company and its customers. Depending on the
underlying risk management strategy, these accounting changes could affect
reported earnings, assets, liabilities, and stockholders' equity. As a result,
the Company and the customers to which it provides derivatives and foreign
exchange products will have to reconsider their risk management strategies,
since the new standard will not reflect the results of many of those strategies
in the same manner as current accounting practice. The Company continues to
evaluate the potential impact of implementing the new accounting standard, which
will depend, among other things, on the possibility of additional amendments and
interpretations of the standard prior to the effective date.
2. BUSINESS COMBINATIONS
Merger with Citicorp
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers Group, Inc. (TRV) (the Merger). Following the Merger,
TRV changed its name to Citigroup Inc. (Citigroup). Under the terms of the
Merger, 1.698 billion shares (adjusted to reflect the three-for-two stock split
in May 1999) of Citigroup common stock were issued in exchange for all of the
outstanding shares of Citicorp common stock. The Merger was accounted for under
the pooling of interests method. Certain reclassifications and adjustments have
been recorded to conform the accounting policies and presentations of Citicorp
and Travelers.
Acquisition of Universal Card Services
On April 2, 1998, Citicorp completed its acquisition of Universal Card Services
from AT&T for $3.5 billion in cash. This purchase added $15 billion in customer
receivables and 13.5 million accounts. In addition, Citicorp entered into a
ten-year cobranding and joint marketing agreement with AT&T.
Merger with Salomon
On November 28, 1997, a newly formed, wholly owned subsidiary of TRV merged with
and into Salomon (the Salomon Merger). Under the terms of the Salomon Merger,
approximately 282.8 million shares (adjusted to reflect the three-for-two stock
split in May 1999) of Citigroup common stock were issued in exchange for all of
the outstanding shares of Salomon common stock. Thereafter, Smith Barney
Holdings Inc. (Smith Barney) was merged with and into Salomon to form Salomon
Smith Barney Holdings Inc. (Salomon Smith Barney). The Salomon Merger was
accounted for under the pooling of interests method.
3. BUSINESS SEGMENT INFORMATION
Citigroup is a diversified holding company whose businesses provide a broad
range of financial services to consumer and corporate customers around the
world. The Company's activities are conducted through Global Consumer, Global
Corporate and Investment Bank, Global Investment Management and Private Banking,
and Investment Activities.
The Global Consumer segment includes a global, full-service consumer
franchise encompassing, among other things, branch and electronic banking,
consumer lending services, investment services, credit and charge card services,
and life, auto and homeowners insurance. The businesses included in the
Company's Global Corporate and Investment Bank segment provide corporations,
governments, institutions, and investors in 100 countries and territories with a
broad range of financial products and services, including investment advice,
financial planning and retail brokerage services, banking and financial
services, and commercial insurance products. The Global Investment Management
and Private Banking segment offers a broad range of asset management products
and services from global investment centers around the world, including mutual
funds, closed-end funds, managed accounts, unit investment trusts, variable
annuities, and personalized wealth management services to institutional, high
net worth, and retail clients. The Investment Activities segment includes the
Company's venture capital activities, the realized investment gains and losses
related to certain corporate- and insurance-related investments, and the results
of certain investments in countries that refinanced debt under the 1989 Brady
Plan or plans of a similar nature. Corporate/Other includes net corporate
treasury results, and corporate staff and other corporate expenses.
54
<PAGE>
The following table presents certain information regarding these industry
segments:
<TABLE>
<CAPTION>
Total Revenues, Net Provision for
of Interest Expense(1) Income Taxes
In Millions of Dollars, Except --------------------------------- ------------------------------
Identifiable Assets in Billions 1999 1998(3) 1997(3) 1999 1998(3) 1997(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer(4) $ 26,282 $ 23,004 $ 20,348 $ 2,458 $ 1,631 $ 1,447
Global Corporate and
Investment Bank(4) 27,355 22,360 23,819 2,871 1,262 1,690
Global Investment Management
and Private Banking 2,686 2,381 2,134 379 286 295
Corporate/Other (176) (132) (252) (360) (379) (238)
Investment Activities 1,090 1,323 1,733 355 434 639
- ------------------------------------------------------------------------------------------------------
Total $ 57,237 $ 48,936 $ 47,782 $ 5,703 $ 3,234 $ 3,833
======================================================================================================
<CAPTION>
Identifiable
Net Income (loss)(2) Assets at Year-End
In Millions of Dollars, Except ------------------------------ -------------------
Identifiable Assets in Billions 1999 1998(3) 1997(3) 1999 1998(3) 1997(3)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer(4) $ 4,240 $ 2,708 $ 2,527 $237 $217 $186
Global Corporate and
Investment Bank(4) 5,069 2,395 3,034 429 415 478
Global Investment Management
and Private Banking 604 454 467 26 20 18
Corporate/Other (706) (583) (423) 14 9 6
Investment Activities 660 833 1,100 11 8 9
- ----------------------------------------------------------------------------------------
Total $ 9,867 $ 5,807 $ 6,705 $717 $669 $697
========================================================================================
</TABLE>
(1) Includes total revenues, net of interest expense in the United States of
$41.5 billion, $37.3 billion, and $34.4 billion in 1999, 1998, and 1997,
respectively. Total revenues, net of interest expense attributable to
individual foreign countries are not material to the total.
(2) For the 1999 period, Global Consumer, Global Corporate and Investment Bank,
Global Investment Management and Private Banking, and Corporate/Other
results reflect after-tax restructuring charges (credits) of $56 million,
($121) million, ($2) million, and $20 million, respectively. For the 1998
period, Global Consumer, Global Corporate and Investment Bank, Global
Investment Management and Private Banking, and Corporate/Other results
reflect after-tax restructuring-related charges (credits) and
merger-related costs of $403 million, ($26) million, $53 million, and $105
million, respectively. For the 1997 period, Global Consumer, Global
Corporate and Investment Bank, Global Investment Management and Private
Banking, and Corporate/Other results reflect after-tax
restructuring-related charges of $333 million, $664 million, $18 million,
and $31 million, respectively.
(3) Reclassified to conform to the 1999 presentation, including changes in
capital and tax allocations among the segments.
(4) Includes provisions for benefits, claims, and credit losses in the Global
Consumer results of $7.6 billion, $7.0 billion, and $6.3 billion, and in
the Global Corporate and Investment Bank results of $3.9 billion, $4.2
billion, and $3.7 billion for 1999, 1998, and 1997, respectively.
4. INVESTMENTS
In Millions of Dollars at Year-End 1999 1998
- --------------------------------------------------------------------------------
Fixed maturities, primarily available for sale at fair value $ 95,849 $ 91,547
Equity securities, primarily at fair value 7,795 4,574
Venture capital, at fair value 4,160 3,297
Short-term and other 5,322 5,758
- --------------------------------------------------------------------------------
$113,126 $105,176
================================================================================
The amortized cost and fair value of investments in fixed maturities and equity
securities at December 31, were as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In Millions of Dollars at Year-End Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities held to maturity,
principally mortgage-backed securities $ 33 $ 3 $ -- $ 36
- ---------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale
Mortgage-backed securities, principally obligations of
U.S. Federal agencies $14,165 $ 55 $ 485 $13,735
U.S. Treasury and Federal agency 7,082 36 120 6,998
State and municipal 13,733 255 499 13,489
Foreign government 25,565 522 326 25,761
U.S. corporate 24,386 200 698 23,888
Other debt securities(1) 9,083 3,015 153 11,945
- ---------------------------------------------------------------------------------------------------------
$94,014 $4,083 $ 2,281 $95,816
=========================================================================================================
Equity securities(1)(2) $ 5,594 $2,404 $ 203 $ 7,795
- ---------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale include:
Government of Brazil Brady Bonds $ 688 $ 302 $ -- $ 990
Government of Venezuela Brady Bonds 422 -- 91 331
=========================================================================================================
<CAPTION>
1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In Millions of Dollars at Year-End Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities held to maturity,
principally mortgage-backed securities $ 30 $ 6 $ -- $ 36
- ---------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale
Mortgage-backed securities, principally obligations of
U.S. Federal agencies $12,646 $ 350 $ 14 $12,982
U.S. Treasury and Federal agency 5,250 455 4 5,701
State and municipal 13,714 799 227 14,286
Foreign government 26,444 424 600 26,268
U.S. corporate 23,424 1,213 302 24,335
Other debt securities(1) 7,669 354 78 7,945
- ---------------------------------------------------------------------------------------------------------
$89,147 $3,595 $ 1,225 $91,517
=========================================================================================================
Equity securities(1)(2) $ 4,528 $ 311 $ 265 $ 4,574
- ---------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale include:
Government of Brazil Brady Bonds $ 660 $ 26 $ -- $ 686
Government of Venezuela Brady Bonds 478 -- 174 304
=========================================================================================================
</TABLE>
(1) Investments in convertible debt and common stock of Nikko Securities, Inc.,
are included in other debt securities and equity securities, respectively.
(2) Includes non-marketable equity securities carried at cost which are
reported in both the amortized cost and fair value columns.
55
<PAGE>
The accompanying table shows components of interest and dividends on
investments, realized gains and losses from sales of investments, and net gains
on investments held by venture capital subsidiaries.
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Taxable interest $6,770 $6,000 $5,486
Interest exempt from U.S. federal income tax 684 636 496
Dividends 250 159 144
- --------------------------------------------------------------------------------
Gross realized investments gains(1) $1,273 $1,507 $1,414
Gross realized investments losses(1) 716 667 419
- --------------------------------------------------------------------------------
Net realized and unrealized venture capital gains $ 816 $ 487 $ 749
which included:
Gross unrealized gains 999 709 612
Gross unrealized losses 587 412 82
================================================================================
(1) Includes net realized gains related to insurance subsidiaries sale of OREO
and mortgage loans of $215 million, $67 million, and $86 million in 1999,
1998, and 1997, respectively.
The following table presents the amortized cost, fair value, and average
yield on amortized cost of fixed maturity securities by contractual maturity
dates as of December 31, 1999:
Amortized Fair
In Millions of Dollars Cost Value Yield
- ------------------------------------------------------------------------------
U.S. treasury and federal agency(1)
Due within 1 year $ 2,980 $ 2,981 5.23%
After 1 but within 5 years 1,460 1,437 5.55
After 5 but within 10 years 2,167 2,142 6.65
After 10 years(2) 11,422 11,126 6.90
- ------------------------------------------------------------------------------
Total $18,029 $17,686 6.48
==============================================================================
State and municipal
Due within 1 year $ 80 $ 79 5.00%
After 1 but within 5 years 886 904 5.76
After 5 but within 10 years 2,831 2,859 5.33
After 10 years(2) 9,936 9,647 5.62
- ------------------------------------------------------------------------------
Total $13,733 $13,489 5.56
==============================================================================
All other(3)
Due within 1 year $13,923 $12,774 7.30%
After 1 but within 5 years 23,940 28,012 9.86
After 5 but within 10 years 11,730 11,423 7.58
After 10 years(2) 12,692 12,468 7.66
- ------------------------------------------------------------------------------
Total $62,285 $64,677 8.41
==============================================================================
(1) Includes mortgage-backed securities of U.S. federal agencies.
(2) Investments with no stated maturities are included as contractual
maturities of greater than 10 years. Actual maturities may differ due to
call or prepayment rights.
(3) Includes foreign government, U.S. corporate, mortgage-backed securities
issued by U.S. corporations, and other debt securities. Yields reflect the
impact of local interest rates prevailing in countries outside the U.S.
5. FEDERAL FUNDS, SECURITIES BORROWED, LOANED, AND SUBJECT TO REPURCHASE
AGREEMENTS
Federal funds sold and securities borrowed or purchased under agreements to
resell, at their respective carrying values, consisted of the following at
December 31:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Federal funds sold and resale agreements $76,675 $45,439
Deposits paid for securities borrowed 35,980 49,392
- --------------------------------------------------------------------------------
$112,655 $94,831
================================================================================
Federal funds purchased and securities loaned or sold under agreements to
repurchase, at their respective carrying values, consisted of the following at
December 31:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Federal funds purchased and repurchase agreements $81,375 $71,399
Deposits received for securities loaned 11,216 9,626
- --------------------------------------------------------------------------------
$92,591 $81,025
================================================================================
The resale and repurchase agreements represent collateralized financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are collateralized principally by government and
government agency securities and generally have terms ranging from overnight to
up to a year. It is the Company's policy to take possession of the underlying
collateral, monitor its market value relative to the amounts due under the
agreements, and, when necessary, require prompt transfer of additional
collateral or reduction in the loan balance in order to maintain contractual
margin protection. In the event of counterparty default, the financing agreement
provides the Company with the right to liquidate the collateral held. Resale
agreements and repurchase agreements are reported net by counterparty, when
applicable, pursuant to FASB Interpretation 41, "Offsetting of Amounts Related
to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the
impact of FIN 41, resale agreements totaled $122.4 billion and $100.2 billion at
December 31, 1999 and 1998, respectively.
Deposits paid for securities borrowed (securities borrowed) and deposits
received for securities loaned (securities loaned) are recorded at the amount of
cash advanced or received and are collateralized principally by government and
government agency securities, corporate debt and equity securities. Securities
borrowed transactions require the Company to deposit cash with the lender. With
respect to securities loaned, the Company receives cash collateral in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and securities loaned daily,
and additional collateral is obtained as necessary. Securities borrowed and
securities loaned are reported net by counterparty, when applicable, pursuant to
FIN 41. Excluding the impact of FIN 41, securities borrowed totaled $36.0
billion and $50.2 billion at December 31, 1999 and 1998, respectively.
56
<PAGE>
6. BROKERAGE RECEIVABLES AND BROKERAGE PAYABLES
The Company has receivables and payables for financial instruments purchased
from and sold to brokers and dealers and customers. The Company is exposed to
risk of loss from the inability of brokers and dealers or customers to pay for
purchases or to deliver the financial instrument sold, in which case the Company
would have to sell or purchase the financial instruments at prevailing market
prices. Credit risk is reduced to the extent that an exchange or clearing
organization acts as a counterparty to the transaction.
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in compliance
with regulatory and internal guidelines. Margin levels are monitored daily, and
customers deposit additional collateral as required. Where customers cannot meet
collateral requirements, the Company will liquidate sufficient underlying
financial instruments to bring the customer into compliance with the required
margin level.
Exposure to credit risk is impacted by market volatility, which may impair
the ability of clients to satisfy their obligations to the Company. Credit
limits are established and closely monitored for customers and brokers and
dealers engaged in forward and futures and other transactions deemed to be
credit-sensitive.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Receivables from customers $20,451 $14,075
Receivables from brokers,
dealers and clearing organizations 2,522 7,338
- --------------------------------------------------------------------------------
Total brokerage receivables $22,973 $21,413
================================================================================
Payables to customers $12,323 $13,153
Payables to brokers,
dealers, and clearing organizations 3,421 7,902
- --------------------------------------------------------------------------------
Total brokerage payables $15,744 $21,055
================================================================================
7. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities at market value consisted of the
following at December 31:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Trading Account Assets
U.S. Treasury and Federal agency securities $ 25,865 $ 24,729
State and municipal securities 2,121 3,165
Foreign government securities 9,243 21,240
Corporate and other debt securities 13,858 12,595
Derivative and other
contractual commitments(1) 31,646 37,431
Equity securities 11,910 7,291
Mortgage loans and
collateralized mortgage securities 5,663 6,082
Other 8,849 7,312
- --------------------------------------------------------------------------------
$109,155 $119,845
================================================================================
Trading Account Liabilities
Securities sold, not yet purchased $ 52,051 $ 53,228
Derivative and other contractual commitments(1) 39,053 41,356
- --------------------------------------------------------------------------------
$ 91,104 $ 94,584
================================================================================
(1) Net of master netting agreements and securitization.
The average fair value of derivative and other contractual commitments in
trading account assets during 1999 and 1998 was $36.8 billion and $39.6 billion,
respectively. The average fair value of derivative and other contractual
commitments in trading account liabilities during 1999 and 1998 was $38.9
billion and $39.4 billion, respectively. See Note 22 for a discussion of trading
securities, commodities, derivatives and related risks.
8. PRINCIPAL TRANSACTIONS REVENUES
Principal transactions revenues, consisting of realized and unrealized gains and
losses from trading activities, were as follows for the years ended December 31:
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Salomon Smith Barney(1)
Fixed income(2) $1,378 $(869) $1,882
Equities(3) 954 536 397
Commodities(4) 192 205 218
Other 38 15 7
- --------------------------------------------------------------------------------
2,562 (113) 2,504
- --------------------------------------------------------------------------------
Global Corporate Bank
Foreign exchange(5) 1,025 1,187 876
Derivatives(6) 771 379 259
Fixed income(7) 43 (57) 124
Other 165 (1) 153
- --------------------------------------------------------------------------------
2,004 1,508 1,412
- --------------------------------------------------------------------------------
Global Consumer and other 594 385 315
- --------------------------------------------------------------------------------
Total principal transactions revenues $5,160 $1,780 $4,231
================================================================================
(1) Includes SSB Asset Management principal transactions revenues.
(2) Includes revenues from government securities and corporate debt, municipal
securities, preferred stock, mortgage securities, and other debt
instruments. Also includes spot and forward trading of currencies and
exchange-traded and over-the-counter (OTC) currency options, options on
fixed income securities, interest rate swaps, currency swaps, swap options,
caps and floors, financial futures, OTC options, forward contracts on fixed
income securities, and revenues related to fixed income securities utilized
in arbitrage strategies.
(3) Includes revenues from common and convertible preferred stock, convertible
corporate debt, equity-linked notes, and exchange-traded and OTC equity
options and warrants. Also includes revenues on equity securities and
related derivatives utilized in arbitrage strategies.
(4) Includes revenues from the results of Phibro Inc. (Phibro), which trades
crude oil, refined oil products, natural gas, electricity, metals, and
other commodities.
(5) Includes revenues from foreign exchange spot, forward, and option
contracts.
(6) Includes revenues from interest rate and currency swaps, options, financial
futures, and equity and commodity contracts.
(7) Includes revenues from government and corporate debt, mortgage assets, and
other debt instruments.
57
<PAGE>
9. LOANS
In Millions of Dollars at Year-End 1999 1998
- -------------------------------------------------------------------------------
Consumer
In U.S. offices
Mortgage and real estate(1)(2) $ 37,261 $ 29,962
Installment, revolving credit, and other 51,570 47,869
- -------------------------------------------------------------------------------
88,831 77,831
- -------------------------------------------------------------------------------
In offices outside the U.S.
Mortgage and real estate(1)(3) 21,529 19,456
Installment, revolving credit, and other 39,306 36,048
Lease financing 475 484
- -------------------------------------------------------------------------------
61,310 55,988
- -------------------------------------------------------------------------------
150,141 133,819
Unearned income (1,426) (1,564)
- -------------------------------------------------------------------------------
Consumer loans, net of unearned income $ 148,715 $ 132,255
===============================================================================
Commercial
In U.S. offices
Commercial and industrial(4) $ 13,697 $ 12,452
Mortgage and real estate(1) 3,659 5,344
Lease financing 3,392 2,951
- -------------------------------------------------------------------------------
20,748 20,747
- -------------------------------------------------------------------------------
In offices outside the U.S.
Commercial and industrial(4) 60,652 55,828
Mortgage and real estate(1) 1,728 1,792
Loans to financial institutions 7,692 8,008
Governments and official institutions 3,250 2,132
Lease financing 1,648 1,386
- -------------------------------------------------------------------------------
74,970 69,146
- -------------------------------------------------------------------------------
95,718 89,893
Unearned income (227) (190)
- -------------------------------------------------------------------------------
Commercial loans, net of unearned income $ 95,491 $ 89,703
===============================================================================
(1) Loans secured primarily by real estate.
(2) Includes $3.4 billion in 1999 and $3.3 billion in 1998 of commercial real
estate loans related to community banking and private banking activities.
(3) Includes $2.9 billion in 1999 and $2.4 billion in 1998 of loans secured by
commercial real estate.
(4) Includes loans not otherwise separately categorized.
The following table presents information about impaired loans. Impaired
loans are those on which Citigroup believes it is not probable that it will be
able to collect all amounts due according to the contractual terms of the loan,
excluding smaller-balance homogeneous loans that are evaluated collectively for
impairment, and are carried on a cash basis. Valuation allowances for these
loans are estimated considering all available evidence including, as
appropriate, the present value of the expected cash flows discounted at the
loan's contractual effective rate, the secondary market value of the loan, the
fair value of collateral, and environmental factors. Amounts for 1998 have been
adjusted to a basis consistent with 1999.
In Millions of Dollars at Year-End 1999 1998
- --------------------------------------------------------------------------------
Impaired commercial loans $1,326 $1,536
Other impaired loans(1) 185 218
- --------------------------------------------------------------------------------
Total impaired loans(2) $1,511 $1,754
================================================================================
Impaired loans with valuation allowances $1,156 $1,210
Total valuation allowances(3) 344 360
================================================================================
During the year(4):
Average balance of impaired loans $1,689 $1,498
Interest income recognized on impaired loans 75 68
================================================================================
(1) Primarily commercial real estate loans related to community and private
banking activities.
(2) At year-end 1999, approximately 23% of these loans were measured for
impairment using the fair value of the collateral, with the remaining 77%
measured using the present value of the expected future cash flows,
discounted at the loan's effective interest rate, compared with
approximately 31% and 69%, respectively, at year-end 1998.
(3) Included in the allowance for credit losses.
(4) For the year ended December 31, 1997, the average balance of impaired loans
was $1.2 billion and interest income recognized on impaired loans was $62
million.
10. ALLOWANCE FOR CREDIT LOSSES
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Allowance for credit losses
at beginning of year $6,617 $6,137 $5,743
Additions
Consumer provision for credit losses 2,489 2,367 2,225
Commercial provision for credit losses 348 384 (28)
- -------------------------------------------------------------------------------
Total provision for credit losses 2,837 2,751 2,197
- -------------------------------------------------------------------------------
Deductions
Consumer credit losses 2,950 2,735 2,604
Consumer credit recoveries (539) (497) (507)
- -------------------------------------------------------------------------------
Net consumer credit losses 2,411 2,238 2,097
- -------------------------------------------------------------------------------
Commercial credit losses 524 576 191
Commercial credit recoveries (117) (170) (219)
- -------------------------------------------------------------------------------
Net commercial credit losses (recoveries) 407 406 (28)
- -------------------------------------------------------------------------------
Other--net(1) 43 373 266
- -------------------------------------------------------------------------------
Allowance for credit losses at end of year $6,679 $6,617 $6,137
===============================================================================
(1) In 1999, primarily includes the addition of allowance for credit losses
related to acquisitions and foreign currency translation effects. In 1998,
reflects the addition of $320 million of credit loss reserves related to
the acquisition of the Universal Card portfolio. In 1997, $373 million was
restored to the allowance for credit losses that had previously been
attributed to credit card securitization transactions where the exposure to
credit losses was contractually limited to the cash flows from the
securitized receivables, $50 million attributable to standby letters of
credit and guarantees was reclassified to other liabilities, and $50
million attributable to derivative and foreign exchange contracts was
reclassified as a deduction from trading account assets.
58
<PAGE>
11. DEBT
Investment Banking and Brokerage Borrowings
Investment banking and brokerage borrowings and the corresponding weighted
average interest rates at December 31 are as follows:
1999 1998
----------------- ------------------
Weighted Weighted
Average Average
Interest Interest
In Millions of Dollars Balance Rate Balance Rate
- -------------------------------------------------------------------------------
Commercial paper $12,578 6.0% $10,493 5.3%
Bank borrowings 536 5.8% 556 5.1%
Other 605 2,991
- -------------------------------------------------------------------------------
$13,719 $14,040
===============================================================================
Investment banking and brokerage borrowings are short-term in nature and
include commercial paper, bank borrowings and other borrowings used to finance
SSB's operations, including the securities settlement process. Outstanding bank
borrowings include both U.S. dollar and non-U.S. dollar denominated loans. The
non-U.S. dollar loans are denominated in multiple currencies including the
Japanese yen, British pound, and European Monetary Unit. All commercial paper
outstanding at December 31, 1999 and 1998 was U.S. dollar denominated.
At December 31, 1999, Salomon Smith Barney Holdings Inc. (Salomon Smith
Barney) had a $1.5 billion revolving credit agreement with a bank syndicate that
extends through May 2001, and a $3.5 billion, 364-day revolving credit agreement
that extends through May 2000. 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 SSB is required to maintain a certain level of
consolidated adjusted net worth (as defined in the agreements). At December 31,
1999, this requirement was exceeded by approximately $3.5 billion. At December
31, 1999, there were no borrowings outstanding 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.
Short-Term Borrowings
At December 31, short-term borrowings consisted of commercial paper and other
borrowings with weighted average interest rates as follows:
1999 1998
----------------- ------------------
Weighted Weighted
In Millions of Dollars Balance Average Balance Average
- -------------------------------------------------------------------------------
Commercial paper
Citigroup $ -- --% $ 991 5.40%
Citicorp 5,027 6.12 3,040 5.36
- -------------------------------------------------------------------------------
5,027 4,031
Other borrowings 12,059 8.28 12,081 12.14
- -------------------------------------------------------------------------------
$17,086 $16,112
===============================================================================
Citigroup, Citicorp, TAP, and TIC issue commercial paper directly to
investors. CitiFinancial Credit Company (CCC), which had previously issued
commercial paper, became an indirect subsidiary of Citicorp on August 4,1999
and, thereafter, ceased such issuance. Citigroup and Citicorp, both of which are
bank holding companies, maintain combined liquidity reserves of cash,
securities, and unused bank lines of credit at least equal to their combined
outstanding commercial paper. TAP and TIC each maintains unused credit
availability under their bank lines of credit at least equal to the amount of
outstanding commercial paper.
Borrowings under bank lines of credit may be at interest rates based on
LIBOR, CD rates, the prime rate or bids submitted by the banks. Each company
pays its banks commitment fees for its lines of credit.
Citicorp, Salomon Smith Barney, and some of their nonbank subsidiaries have
credit facilities with Citicorp's subsidiary banks, including Citibank, N.A.
Borrowings under these facilities must be secured in accordance with Section 23A
of the Federal Reserve Act.
Citigroup and TIC have an agreement with a syndicate of banks to provide
$1.0 billion of revolving credit, to be allocated to Citigroup and TIC. The
participation of TIC in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that expires
in June 2001. At December 31, 1999, all of the facility was allocated to
Citigroup. Under this facility the Company is required to maintain a certain
level of consolidated stockholders' equity (as defined in the agreement). The
Company exceeded this requirement by approximately $30.6 billion at December 31,
1999. Citigroup also has $300 million in 364-day facilities that expire in the
third quarter of 2000. At December 31, 1999, there were no borrowings
outstanding under either of these facilities.
At December 31, 1999, CCC had committed and available revolving credit
facilities of $3.4 billion, consisting of five-year facilities which expire in
2002. At December 31, 1999, there were no borrowings outstanding under these
facilities. In connection with the August 4,1999 reorganization of CCC as a
subsidiary of Citicorp, Citicorp guaranteed various debt obligations of CCC,
including those arising under these facilities. Under this facility Citicorp is
required to maintain a certain level of consolidated stockholder's equity (as
defined in the agreement). At December 31, 1999, this requirement was exceeded
by approximately $10.3 billion.
TAP has a five-year revolving credit facility in the amount of $250 million
with a syndicate of banks that expires in December 2001. Under this facility TAP
is required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1999, this requirement was exceeded
by approximately $4.8 billion. At December 31, 1999, there were no borrowings
outstanding under this facility.
59
<PAGE>
Long-Term Debt
At December 31, long-term debt was as follows:
Weighted
Average
In Millions of Dollars Coupon Maturities 1999 1998
- --------------------------------------------------------------------------------
Citigroup Inc.
Senior Notes(1) 6.52% 2000-2028 $ 4,181 $ 2,422
Salomon Smith Barney
Holdings Inc.
Senior Notes 6.02% 2000-2026 17,970 19,092
Citicorp
Senior Notes 7.39% 2000-2025 16,708 17,515
Subordinated Notes 6.92% 2000-2035 7,360 8,359
Travelers Property
Casualty Corp.
Senior Notes 6.99% 2001-2026 850 1,250
The Travelers Insurance
Group Inc.(2) 23 33
- --------------------------------------------------------------------------------
Senior Notes 39,709 40,279
Subordinated Notes 7,360 8,359
Other 23 33
- --------------------------------------------------------------------------------
Total $47,092 $48,671
================================================================================
(1) Also includes $250 million of notes maturing in 2098.
(2) Principally 12% GNMA/FNMA-collateralized obligations.
The Company issues both U.S. dollar and non-U.S. dollar denominated fixed
and variable rate debt. The Company utilizes derivative contracts, primarily
interest rate swaps, to effectively convert a portion of its fixed rate debt to
variable rate debt. The maturity structure of the derivatives generally
corresponds with the maturity structure of the debt being hedged. At December
31, 1999, the Company entered into interest rate swaps to convert $21.1 billion
of its $29.9 billion of fixed rate debt to variable rate obligations. At
December 31, 1999, the Company's overall weighted average interest rate for
long-term debt was 6.71% on a contractual basis and 6.51% including the effects
of derivative contracts. In addition, the Company utilizes other derivative
contracts to manage the foreign exchange impact of certain debt issuances.
Aggregate annual maturities on long-term debt obligations (based on final
maturity dates) are as follows:
<TABLE>
<CAPTION>
In Millions of Dollars 2000 2001 2002 2003 2004 Thereafter
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Citigroup Inc. $ 650 $ -- $ 300 $ -- $ 750 $ 2,481
Salomon Smith Barney Holdings Inc. 3,508 2,731 3,571 3,334 1,635 3,191
Citicorp 3,849 3,350 3,516 2,572 1,519 9,262
Travelers Property Casualty Corp. -- 500 -- -- -- 350
The Travelers Insurance Group Inc. -- -- -- -- -- 23
- --------------------------------------------------------------------------------------------
$8,007 $6,581 $7,387 $5,906 $3,904 $15,307
============================================================================================
</TABLE>
12. INSURANCE POLICY AND CLAIMS RESERVES
At December 31, insurance policy and claims reserves consisted of the following:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Benefit and loss reserves:
Property-casualty(1) $28,055 $28,624
Accident and health 920 803
Life and annuity 9,400 9,398
Unearned premiums 4,949 4,702
Policy and contract claims 498 463
- --------------------------------------------------------------------------------
$43,822 $43,990
================================================================================
(1) Included at December 31, 1999 and 1998 are $1.5 billion and $1.3 billion,
respectively, of reserves related to workers' compensation that have been
discounted using an interest rate of 5%.
60
<PAGE>
The following table is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment expenses for
the years ended December 31:
<TABLE>
<CAPTION>
In Millions of Dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $28,624 $29,343 $29,967
Less reinsurance recoverables on
unpaid losses 7,861 7,937 8,151
- ------------------------------------------------------------------------------------------------------
Net balance at beginning of year 20,763 21,406 21,816
- ------------------------------------------------------------------------------------------------------
Provision for claims and claim adjustment
expenses for claims arising in current year 6,194 6,057 5,730
Estimated claims and claim adjustment
expenses for claims arising in prior years (242) (323) (492)
- ------------------------------------------------------------------------------------------------------
Total increases 5,952 5,734 5,238
- ------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense payments for claims arising in:
Current year 2,573 2,352 1,944
Prior years 4,159 4,025 3,704
- ------------------------------------------------------------------------------------------------------
Total payments 6,732 6,377 5,648
- ------------------------------------------------------------------------------------------------------
Net balance at end of year 19,983 20,763 21,406
Plus reinsurance recoverables on
unpaid losses 8,072 7,861 7,937
- ------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $28,055 $28,624 $29,343
======================================================================================================
</TABLE>
The decreases in the claims and claim adjustment expense reserves in 1999
and 1998, from 1998 and 1997, respectively, were primarily attributable to net
payments of $504 million and $663 million, respectively, for environmental and
cumulative injury claims.
In 1999, estimated claims and claim adjustment expenses for claims arising
in prior years included approximately $205 million primarily relating to net
favorable development in certain Personal Lines coverages, predominantly
automobile coverages, and in certain Commercial Lines coverages, predominantly
in the general liability and commercial multi-peril lines of business. In
addition, in 1999 Commercial Lines experienced favorable loss development on
loss sensitive policies in the workers' compensation line; however, since the
business to which it relates is subject to premium adjustments, there was no
impact on results of operations.
In 1998, estimated claims and claim adjustment expenses for claims arising
in prior years included approximately $176 million primarily relating to net
favorable developments in certain Personal Lines coverages, predominantly
automobile coverages. In addition, in 1998 Commercial Lines experienced
favorable prior-year loss development on loss sensitive policies in the workers'
compensation line; however, since the business to which it relates is subject to
premium adjustments, there was no impact on results of operations.
In 1997, estimated claims and claim adjustment expenses for claims arising
in prior years included $154 million of net favorable development in certain
Personal Lines coverages and Commercial Lines coverages, predominantly
automobile coverages. In addition, in 1997 Commercial Lines experienced $122
million of favorable prior-year loss development in the workers' compensation
line; however, since the business to which it relates is subject to premium
adjustments, there was no impact on results of operations. Also in 1997, the
Company adopted newly prescribed statutory allocations of certain claim
adjustment expenses. The new allocations resulted in favorable prior-year loss
development of $216 million offset by an increase in the current accident year
provision of the same amount.
The property-casualty claims and claim adjustment expense reserves include
$1.503 billion and $1.818 billion for asbestos and environmental-related claims
net of reinsurance at December 31,1999 and 1998, respectively.
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.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance and past ceded experience.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1999 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
impacted by future court decisions and interpretations as well as changes in
legislation applicable to such claims. 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.
The Company has a geographic exposure to catastrophe losses in certain
areas of the country. Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, severe winter weather, explosions and
fires, and the incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in the area affected by the event and the
severity of the event. Most catastrophes are restricted to small geographic
areas; however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Company generally seeks to reduce its
exposure to catastrophes through individual risk selection and the purchase of
catastrophe reinsurance.
61
<PAGE>
13. REINSURANCE
The Company's insurance operations participate in reinsurance in order to limit
losses, minimize exposure to large risks, provide additional capacity for future
growth and effect business-sharing arrangements. Life reinsurance is
accomplished through various plans of reinsurance, primarily coinsurance,
modified coinsurance and yearly renewable term. Property-casualty reinsurance is
placed on both a quota-share and excess of loss basis. The property-casualty
insurance subsidiaries also participate as a servicing carrier for, and a member
of, several pools and associations. Reinsurance ceded arrangements do not
discharge the insurance subsidiaries as the primary insurer, except for cases
involving a novation.
Reinsurance amounts included in the Consolidated Statement of Income for
the years ended December 31 were as follows:
Gross Net
In Millions of Dollars Amount Ceded Amount
- --------------------------------------------------------------------------------
1999
Premiums
Property-casualty insurance $ 9,795 $ (1,620) $ 8,175
Life insurance 2,190 (314) 1,876
Accident and health insurance 444 (54) 390
- --------------------------------------------------------------------------------
$ 12,429 $ (1,988) $10,441
================================================================================
Claims incurred $ 9,510 $ (1,815) $ 7,695
================================================================================
1998
Premiums
Property-casualty insurance $ 9,579 $ (1,689) $ 7,890
Life insurance 1,915 (304) 1,611
Accident and health insurance 410 (61) 349
- --------------------------------------------------------------------------------
$ 11,904 $ (2,054) $ 9,850
================================================================================
Claims incurred $ 9,024 $ (1,560) $ 7,464
================================================================================
1997
Premiums
Property-casualty insurance $ 9,045 $ (1,751) $ 7,294
Life insurance 1,669 (279) 1,390
Accident and health insurance 373 (62) 311
- --------------------------------------------------------------------------------
$ 11,087 $ (2,092) $ 8,995
================================================================================
Claims incurred $ 8,226 $ (1,357) $ 6,869
================================================================================
Reinsurance recoverables, net of valuation allowance, at December 31
include amounts recoverable on unpaid and paid losses and were as follows:
In Millions of Dollars 1999 1998
- --------------------------------------------------------------------------------
Life business $1,228 $1,303
Property-casualty business:
Pools and associations 2,781 3,070
Other reinsurance 5,695 5,119
- --------------------------------------------------------------------------------
Total $9,704 $9,492
================================================================================
14. RESTRUCTURING-RELATED ITEMS AND MERGER-RELATED COSTS
In Millions of Dollars 1999 1998 1997
- --------------------------------------------------------------------------------
Restructuring charges $ 131 $ 1,122 $1,718
Changes in estimates (401) (392) --
Merger-related costs -- 65 --
Accelerated depreciation 182 -- --
- --------------------------------------------------------------------------------
Total $ (88) $ 795 $1,718
================================================================================
During 1999, Citigroup recorded restructuring charges of $131 million,
including additional severance charges of $49 million as a result of the
continuing implementation of 1998 restructuring initiatives, as well as $82
million of exit costs associated with new initiatives in the Global Consumer
business primarily related to the reconfiguration of certain branch operations
outside the U.S., the downsizing of certain marketing operations, and the exit
of a non-strategic business. These initiatives will be fully implemented during
2000. The charge included $62 million related to employee severance, $14 million
related to exiting leasehold and other contractual obligations, and $6 million
related to the write-down to estimated salvage value of assets available for
immediate disposal. The $62 million portion of the charge related to employee
severance reflects the costs of eliminating approximately 750 positions.
In 1998, Citigroup recorded a restructuring charge of $1.122 billion,
reflecting exit costs associated with business improvement and integration
initiatives to be implemented over a 12 to 18 month period. The charge included
$760 million related to employee severance for the elimination of approximately
11,900 positions, after considering attrition and redeployment within the
Company. Approximately 4,200 of these positions related to the United States.
The overall workforce reduction, net of anticipated rehires to fill relocated
positions, is expected to be approximately 10,400 positions worldwide. The
charge also included $327 million related to exiting leasehold and other
contractual obligations, and $35 million related to the write-down to estimated
salvage value of assets that were available for immediate disposal. Also
recorded in the 1998 fourth quarter were $65 million of merger-related costs
which included the direct and incremental costs of administratively closing the
Citicorp merger.
The implementation of these restructuring initiatives also caused certain
related premises and equipment assets to become redundant. The remaining
depreciable lives of these assets were shortened, and accelerated depreciation
charges of $182 million (in addition to normal scheduled depreciation on those
assets) were recognized over the shortened lives in 1999.
Of the $1.122 billion charge, $642 million in the Global Consumer business
included regional consolidation of call centers and other back office functions
worldwide, reduction of management layers, sales force restructuring,
integration of overlapping marketing and product management groups, and exiting
several non-strategic operations; $324 million in the Global Corporate and
Investment Bank business included rationalization of operations in countries
with multiple operations, consolidation of Citibank and Salomon Smith Barney
locations, integration of trading platforms, and exiting non-strategic
businesses; $87 million in the Global Investment Management and Private Banking
business included elimination of redundancies; and the remaining $69 million
included
62
<PAGE>
streamlining and integration of Corporate and other staff functions.
Approximately $507 million of the $1.122 billion charge related to operations in
the United States.
In 1997, Citigroup recorded restructuring charges of $1.718 billion, con
sisting of an $880 million restructuring charge related to cost-management
programs and customer service initiatives to improve operational efficiency and
productivity in the Citicorp businesses, and an $838 million charge related to
the Salomon Merger. The Citicorp charge included $487 million for severance
benefits (associated with approximately 9,000 positions expected to be reduced),
$245 million related to write-downs of equipment and premises which management
committed to dispose of, and $148 million of lease termination and other exit
costs. The Salomon Smith Barney charge included $161 million for severance
benefits (associated with approximately 1,900 positions expected to be reduced),
$663 million of costs associated with the planned abandonment of certain
facilities, premises, and other assets, principally those related to the Seven
World Trade Center lease, and $14 million of other costs related directly to the
Salomon Merger.
The status of the 1999, 1998, and 1997 restructuring initiatives is
summarized in the following table:
Restructuring Reserve Activity
Restructuring Initiatives
--------------------------------------------
1999 1998 1997 1997
In Millions of Dollars Citigroup Citigroup SSB Citicorp
- -------------------------------------------------------------------------------
Original charges $82 $1,122 $838 $880
Additional charges -- 49 -- --
--------------------------------------------
82 1,171 838 880
--------------------------------------------
Utilization(1)
1999 (31) (744) (99) (165)
1998 -- (69) (158) (357)
1997 -- -- (13) (284)
--------------------------------------------
(31) (813) (270) (806)
--------------------------------------------
Changes in estimates
1999 -- (151) (214) (36)
1998 -- -- (354) (38)
--------------------------------------------
-- (151) (568) (74)
- -------------------------------------------------------------------------------
Reserve balance at
December 31, 1999 $51 $ 207 $ -- $ --
===============================================================================
(1) Utilization amounts include translation effects on the restructuring
reserve.
The 1999 restructuring reserve utilization included $6 million related to
the write-down to estimated salvage value of assets available for immediate
disposal and $25 million that is legally obligated. At December 31, 1999,
approximately 60 gross staff positions have been eliminated under these
programs.
The 1998 restructuring reserve utilization included $35 million of non-cash
charges for equipment and premises write-downs as well as $743 million of
severance and other exit costs, occurring primarily in 1999 (of which $382
million related to employee severance and $146 million related to leasehold and
other exit costs have been paid in cash and $215 million is legally obligated),
together with translation effects. Through December 31, 1999, approximately
5,900 gross staff positions have been eliminated under these programs, occurring
primarily in 1999.
The utilization of 1997 restructuring reserves included $314 million of
non-cash charges for equipment and premises write-downs as well as $751 million
of severance and other exit costs (of which $499 million related to employee
severance and $184 million related to leasehold and other exit costs have been
paid in cash and $68 million is legally obligated), together with translation
effects. Approximately 7,300 gross staff positions have been eliminated under
these programs, including 1,700 positions in 1999, 4,950 positions in 1998, and
650 positions in 1997.
Changes in estimates are attributable to facts and circumstances arising
subsequent to an original restructuring charge. During 1999, changes in
estimates resulted in a $151 million reduction in the reserve for 1998
restructuring initiatives, attributable to lower than anticipated costs of
implementing certain projects and a reduction in the scope of certain
initiatives. Changes in estimates related to the 1997 restructuring initiatives
included $568 million of reductions related to the Salomon Smith Barney reserve,
primarily related to the Seven World Trade Center lease, and $74 million related
to the Citicorp reserve. Adjustments related to the Seven World Trade Center
lease during 1999 were attributable to the reassessment of space needed due to
the Citicorp merger, which indicated the need for increased occupancy and the
utilization of space previously considered excessive; adjustments during 1998
resulted from negotiations on a sublease which indicated that excess space could
be disposed of on terms more favorable than had been originally estimated. Other
changes in estimates are attributable to lower severance costs due to higher
than anticipated levels of attrition and redeployment within the Company, and
other unforeseen changes including those resulting from the Citicorp merger.
15. INCOME TAXES
In Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------
Current
Federal $2,911 $2,081 $3,259
Foreign 1,961 1,022 1,539
State 346 325 465
- -------------------------------------------------------------------------------
5,218 3,428 5,263
- -------------------------------------------------------------------------------
Deferred
Federal 599 (149) (1,095)
Foreign (213) 104 (109)
State 99 (149) (226)
- -------------------------------------------------------------------------------
485 (194) (1,430)
- -------------------------------------------------------------------------------
Provision for income tax
before minority interest(1) 5,703 3,234 3,833
Provision for income tax on cumulative
effect of accounting changes (84) -- --
Income tax expense (benefit) reported in
stockholders' equity related to:
Foreign currency translation (3) 11 26
Securities available for sale 556 (175) 370
Employee stock plans (1,008) (701) (728)
Other (1) (1) 9
- -------------------------------------------------------------------------------
Income taxes before minority interest $5,163 $2,368 $3,510
===============================================================================
(1) Includes the effect of securities transactions resulting in a provision of
$195 million in 1999, $270 million in 1998, and $376 million in 1997.
63
<PAGE>
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate applicable to income (before minority
interest and cumulative effect of accounting changes) for the years ended
December 31 was as follows:
1999 1998 1997
- ------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Limited taxability of investment income (1.5) (2.4) (1.7)
State income taxes, net of federal benefit 1.8 1.2 1.4
Other, net 0.5 1.1 1.0
- ------------------------------------------------------------------------------
Effective income tax rate 35.8% 34.9% 35.7%
==============================================================================
Deferred income taxes at December 31 related to the following:
In Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets
Credit loss deduction $2,312 $2,327
Differences in computing policy reserves 1,988 2,066
Unremitted foreign earnings 1,512 1,257
Deferred compensation 1,264 1,222
Employee benefits 645 865
Interest-related items 349 412
Foreign and state loss carryforwards 311 256
Other deferred tax assets 1,061 1,094
- -------------------------------------------------------------------------------
Gross deferred tax assets 9,442 9,499
Valuation allowance 314 394
- -------------------------------------------------------------------------------
Deferred tax assets after valuation allowance 9,128 9,105
- -------------------------------------------------------------------------------
Deferred tax liabilities
Investments (2,017) (1,244)
Deferred policy acquisition costs and value of
insurance in force (960) (858)
Leases (784) (648)
Investment management contracts (201) (218)
Other deferred tax liabilities (1,202) (1,116)
- -------------------------------------------------------------------------------
Gross deferred tax liabilities (5,164) (4,084)
- -------------------------------------------------------------------------------
Net deferred tax asset $3,964 $5,021
===============================================================================
Foreign pretax earnings approximated $4.7 billion in 1999, $2.4 billion in
1998, and $4.8 billion in 1997. As a U.S. corporation, Citigroup is subject to
U.S. taxation currently on all foreign pretax earnings earned by a foreign
branch. Pretax earnings of a foreign subsidiary or affiliate are taxed when
effectively repatriated. In addition, certain of Citigroup's U.S. income is
subject to foreign income tax where the payor of such income is domiciled
outside the United States. The Company provides income taxes on the
undistributed earnings of non-U.S. subsidiaries except to the extent that such
earnings are indefinitely invested outside the United States. At December 31,
1999, $1.3 billion of accumulated undistributed earnings of non-U.S.
subsidiaries was indefinitely invested. At the existing U.S. federal income tax
rate, additional taxes of $399 million would have to be provided if such
earnings were remitted.
Income taxes are not provided for on the Company's life insurance
subsidiaries' "policyholders' surplus account" because under current U.S. tax
rules such taxes will become payable only to the extent such amounts are
distributed as a dividend or exceed limits prescribed by federal law.
Distributions are not contemplated from this account, which aggregated $982
million (subject to a tax effect of $344 million) at December 31, 1999.
The 1999 net change in the valuation allowance related to deferred tax
assets was a decrease of $80 million primarily relating to the utilization of
tax carryforwards in foreign jurisdictions. The valuation allowance of $314
million includes $100 million to cover any capital losses on investments that
may exceed the capital gains able to be generated in the life insurance group's
consolidated federal income tax return based upon management's best estimate of
the character of the reversing temporary differences. Reversal of the valuation
allowance is contingent upon the recognition of future capital gains or a change
in circumstances which causes the recognition of the benefits to become more
likely than not. The initial recognition of any benefit produced by the reversal
of this portion of the valuation allowance will be recognized by reducing
goodwill. The remaining valuation allowance of $214 million at December 31, 1999
is primarily reserved for specific state and local, and foreign tax
carryforwards or tax law restrictions on benefit recognition in the U.S. federal
tax return and in the above jurisdictions.
Management believes that the realization of the recognized net deferred tax
asset of $3.964 billion is more likely than not based on existing carryback
ability and expectations as to future taxable income. The Company has reported
pretax financial statement income of approximately $12 billion, on average, over
the last three years and has generated federal taxable income exceeding $8
billion, on average, each year during this same period.
16. MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
The Company formed statutory business trusts under the laws of the state of
Delaware, which exist for the exclusive purposes of (i) issuing Trust Securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the Trust securities in junior subordinated
deferrable interest debentures (subordinated debentures) of its parent; and
(iii) engaging in only those activities necessary or incidental thereto. These
subordinated debentures and the related income effects are eliminated in the
consolidated financial statements. Distributions on the mandatorily redeemable
securities of subsidiary trusts below have been classified as interest expense
in the Consolidated Statement of Income.
64
<PAGE>
The following tables summarize the financial structure of each of the Company's
subsidiary trusts at December 31, 1999:
<TABLE>
<CAPTION>
Common
Trust Securities Shares
with Distributions Issuance Securities Liquidation Coupon Issued
Guaranteed by Date Issued Value Rate to Parent
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in Millions
Citigroup:
Citigroup Capital I Oct. 1996 16,000,000 $ 400 8.00% 494,880
Citigroup Capital II Dec. 1996 400,000 400 7.75% 12,372
Citigroup Capital III Dec. 1996 200,000 200 7.625% 6,186
Citigroup Capital IV Jan. 1998 8,000,000 200 6.85% 247,440
Citigroup Capital V Nov. 1998 20,000,000 500 7.00% 618,557
Citigroup Capital VI Mar. 1999 24,000,000 600 6.875% 742,269
------
Total Parent Obligated $2,300
- --------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Travelers P&C Capital I April 1996 32,000,000 $ 800 8.08% 989,720
Travelers P&C Capital II May 1996 4,000,000 100 8.00% 123,720
Salomon Inc Financing Trust I July 1996 13,800,000 345 9.25% 426,800
Salomon Smith Barney Holdings Inc. Capital I Jan. 1998 16,000,000 400 7.20% 494,880
Citicorp Capital I Dec. 1996 300,000 300 7.933% 9,000
Citicorp Capital II Jan. 1997 450,000 450 8.015% 13,500
Citicorp Capital III June 1998 9,000,000 225 7.10% 270,000
------
Total Subsidiary Obligated $2,620
==========================================================================================================================
<CAPTION>
Junior Subordinated Debentures Owned by Trust
---------------------------------------------
Trust Securities Redeemable
with Distributions by Issuer
Guaranteed by Amount Maturity Beginning
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in Millions
Citigroup:
Citigroup Capital I $412 Sept. 30, 2036 Oct. 7, 2001
Citigroup Capital II 412 Dec. 1, 2036 Dec. 1, 2006
Citigroup Capital III 206 Dec. 1, 2036 Not redeemable
Citigroup Capital IV 206 Jan. 22, 2038 Jan. 22, 2003
Citigroup Capital V 515 Nov. 15, 2028 Nov. 15, 2003
Citigroup Capital VI 619 Mar. 15, 2029 Mar. 15, 2004
Total Parent Obligated
- ---------------------------------------------------------------------------------------------------------
Subsidiaries:
Travelers P&C Capital I 825 April 30, 2036 April 30, 2001
Travelers P&C Capital II 103 May 15, 2036 May 15, 2001
Salomon Inc Financing Trust I 356 June 30, 2026 June 30, 2001
Salomon Smith Barney Holdings Inc. Capital I 412 Jan. 28, 2038 Jan. 28, 2003
Citicorp Capital I 309 Feb. 15, 2027 Feb. 15, 2007
Citicorp Capital II 464 Feb. 15, 2027 Feb. 15, 2007
Citicorp Capital III 232 Aug. 15, 2028 Aug. 15, 2003
Total Subsidiary Obligated
=========================================================================================================
</TABLE>
In each case, the coupon rate on the debentures is the same as that on the
trust securities. Distributions on the trust securities and interest on the
debentures are payable quarterly, except for Citigroup Capital II and III and
Citicorp Capital I and II, on which distributions are payable semiannually.
SI Financing Trust I, a wholly owned subsidiary of Salomon Smith Barney,
issued TRUPS(R) units to the public. Each TRUPS(R) unit includes a security of
SI Financing Trust I, and a purchase contract that requires the holder to
purchase, in 2021 (or earlier if Salomon Smith Barney elects to accelerate the
contract), one depositary share representing a one-twentieth interest in a share
of the Company's 9.50% Cumulative Preferred Stock, Series L. Salomon Smith
Barney is obligated under the terms of each purchase contract to pay contract
fees of 0.25% per annum.
17. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable Preferred Stock
At December 31, 1998 there were 140,000 shares of Series I cumulative
Convertible Preferred Stock (Series I Preferred) with a carrying value of $140
million included in other liabilities. Each share of Series I Preferred had a
redemption value of $1,000 and was convertible into 66.9079 shares of Citigroup
common stock. In October 1999, all of the outstanding shares of the Series I
Preferred were converted into 9.4 million shares of common stock.
Perpetual Preferred Stock
The following table sets forth the Company's perpetual preferred stock
outstanding at December 31:
<TABLE>
<CAPTION>
Redeemable, in Redemption Carrying Value (In Millions)
whole or in part Price Number of ---------------------------
Rate on or after(1) Per Share (2) Shares 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series F(3) 6.365% June 16, 2007 $250 1,600,000 $ 400 $ 400
Series G(3) 6.213% July 11, 2007 $250 800,000 200 200
Series H(3) 6.231% September 8, 2007 $250 800,000 200 200
Series J(4) 8.08% March 31, 1998 $500 400,000 -- 200
Series K(4) 8.40% March 31, 2001 $500 500,000 250 250
Series M(3) 5.864% October 8, 2007 $250 800,000 200 200
Series O(5) Graduated August 15, 2004 $100 625,000 -- 63
Series Q(6) Adjustable May 31, 1999 $250 700,000 175 175
Series R(6) Adjustable August 31, 1999 $250 400,000 100 100
Series S(6) 8.30% November 15, 1999 $250 500,000 -- 125
Series T(6) 8.50% February 15, 2000 $250 600,000 150 150
Series U(6) 7.75% May 15, 2000 $250 500,000 125 125
Series V(6) Fixed/Adjustable February 15, 2006 $500 250,000 125 125
- -------------------------------------------------------------------------------------------------------------------------
$1,925 $2,313
=========================================================================================================================
</TABLE>
(1) Under various circumstances, the Company may redeem certain series of
preferred stock at times other than described above.
(2) Liquidation preference per share equals redemption price per share.
(3) Issued as depositary shares, each representing a one-fifth interest in the
corresponding series of preferred stock.
(4) Issued as depositary shares, each representing a one-twentieth interest in
the corresponding series of preferred stock.
(5) Also redeemable on any of the dividend repricing dates through August 15,
2004.
(6) Issued as depositary shares, each representing a one-tenth interest in the
corresponding series of preferred stock.
65
<PAGE>
All dividends on the Company's perpetual preferred stock are payable
quarterly and are cumulative. Only the holders of Series J and K Preferred Stock
have voting rights. Holders of Series J and K Preferred Stock are entitled to
three votes per share when voting together as a class with the Citigroup common
stock on all matters submitted to a vote of the Company's stockholders.
Dividends on Series Q and R Preferred Stock are payable at rates determined
quarterly by formulas based on interest rates of certain U.S. Treasury
obligations, subject to certain minimum and maximum rates as specified in the
certificates of designation. The weighted-average dividend rate on the Series Q
and R Preferred Stock was 4.76% for 1999.
Dividends on the Series V Preferred Stock are payable at 5.86% through
February 15, 2006, and thereafter at rates determined quarterly by a formula
based on certain interest rate indices, subject to a minimum rate of 6% and a
maximum rate of 12%. The rate of dividends on the Series V Preferred Stock is
subject to adjustment based upon the applicable percentage of the dividends
received deduction.
Citigroup redeemed Series J Preferred Stock in February 1999, Series O
Preferred Stock in August 1999, and Series S Preferred Stock in November 1999.
During the first quarter of 2000, Citigroup redeemed Series T Preferred
Stock.
Regulatory capital
Citigroup and Citicorp are subject to risk-based capital and leverage guidelines
issued by the Board of Governors of the Federal Reserve System (FRB), and their
U.S. insured depository institution subsidiaries, including Citibank, N.A., are
subject to similar guidelines issued by their respective primary regulators.
These guidelines are used to evaluate capital adequacy and include the required
minimums shown in the following table.
To be "well capitalized" under federal bank regulatory agency definitions,
a depository institution must have a Tier 1 ratio of at least 6%, a combined
Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5%,
and not be subject to a directive, order, or written agreement to meet and
maintain specific capital levels. The regulatory agencies are required by law to
take specific prompt actions with respect to institutions that do not meet
minimum capital standards. As of December 31, 1999 and 1998, all of Citigroup's
U.S. insured subsidiary depository institutions were "well capitalized." At
December 31, 1999, regulatory capital as set forth in guidelines issued by the
U.S. federal bank regulators is as follows:
<TABLE>
<CAPTION>
Minimum Citibank,
In Millions of Dollars Requirement Citigroup Citicorp N.A.
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $47,591 $25,034 $20,389
Total capital(1) 61,380 37,351 30,414
Tier 1 capital ratio 4.00% 9.64% 8.11% 8.25%
Total capital ratio(1) 8.00% 12.43% 12.10% 12.31%
Leverage ratio(2) 3.00%+ 6.80% 6.83% 6.53%
========================================================================================
</TABLE>
(1) Total capital includes Tier 1 and Tier 2.
(2) Tier 1 capital divided by adjusted average assets.
There are various legal limitations on the extent to which Citigroup's
banking subsidiaries may pay dividends to their parents. Citigroup's national
and state-chartered bank subsidiaries can declare dividends to their respective
parent companies in 2000, without regulatory approval, of approximately $3.6
billion, adjusted by the effect of their net income (loss) for 2000 up to the
date of any such dividend declaration. 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, Citigroup estimates that its
bank subsidiaries can distribute dividends to Citigroup of approximately $3.0
billion of the available $3.6 billion, adjusted by the effect of their net
income (loss) up to the date of any such dividend declaration.
The property-casualty insurance subsidiaries' statutory capital and surplus
at December 31, 1999 and 1998 was $7.758 billion and $7.161 billion,
respectively. The life insurance subsidiaries' statutory capital and surplus at
December 31, 1999 and 1998 was $5.836 billion and $5.681 billion, respectively.
Statutory capital and surplus are subject to certain restrictions imposed by
state insurance departments as to the transfer of funds and payment of
dividends. The property-casualty insurance subsidiaries' net income for the
years ended December 31, 1999, 1998, and 1997 was $1.500 billion, $1.426
billion, and $1.158 billion, respectively. The life insurance subsidiaries' net
income for the years ended December 31, 1999 and 1998 was $988 million and $829
million, respectively, and for the year ended December 31, 1997 (which excluded
Citicorp Life Insurance Company) was $636 million. Statutory capital and surplus
and statutory net income are determined in accordance with statutory accounting
practices.
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 $679 million of statutory surplus
is available in 2000 for such dividends without the prior approval of the
Connecticut Insurance Department.
66
<PAGE>
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 $1.2 billion in 2000 without
prior approval of the Connecticut Insurance Department.
Certain of the Company's U.S. and non-U.S. broker-dealer subsidiaries are
subject to various securities and commodities regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. The principal regulated subsidiaries, their net
capital requirement or equivalent and excess over the minimum requirement as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Excess over
Net Capital minimum
Subsidiary Jurisdiction or equivalent requirement
- ---------------------------------------------------------------------------------------------------------------------------
In Millions of Dollars
<S> <C> <C> <C>
Salomon Smith Barney Inc. U.S. Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1) $3,204 $2,732
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority 3,675 963
===========================================================================================================================
</TABLE>
18. CHANGES IN EQUITY FROM NONOWNER SOURCES
Changes in each component of "Accumulated Other Changes in Equity from Nonowner
Sources" for the three-year period ended December 31, 1999 are as follows:
Accumulated
Net Other
Unrealized Foreign Changes in
Gains on Currency Equity from
Investment Translation Nonowner
In Millions of Dollars Securities Adjustment Sources
- -------------------------------------------------------------------------------
Balance, Jan. 1, 1997 $1,145 $(483) $ 662
Unrealized gains on investment
securities, net of tax of $746 1,166 1,166
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($376) (619) (619)
Foreign currency translation
adjustment, net of tax of $26 (152) (152)
- -------------------------------------------------------------------------------
Current period change 547 (152) 395
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1997 1,692 (635) 1,057
Unrealized gains on investment
securities, net of tax of $95 237 237
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($270) (570) (570)
Foreign currency translation
adjustment, net of tax of $11 57 57
- -------------------------------------------------------------------------------
Current period change (333) 57 (276)
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1998 1,359 (578) 781
Unrealized gains on investment
securities, net of tax of $751 1,548 1,548
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($195) (362) (362)
Foreign currency translation
adjustment, net of tax of ($3) (60) (60)
- -------------------------------------------------------------------------------
Current period change 1,186 (60) 1,126
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1999 $2,545 $(638) $1,907
===============================================================================
19. EARNINGS PER SHARE
Earnings per share has been computed in accordance with the provisions of SFAS
No. 128. Shares have been adjusted to give effect to the three-for-two stock
split in Citigroup's common stock in May 1999. The following is a reconciliation
of the income and share data used in the basic and diluted earnings per share
computations for the years ended December 31:
In Millions, Except Per Share Amounts 1999 1998 1997
- -------------------------------------------------------------------------------
Income before cumulative effect
of accounting changes $ 9,994 $ 5,807 $ 6,705
Cumulative effect of accounting changes (127) -- --
Preferred dividends (149) (216) (279)
- -------------------------------------------------------------------------------
Income available to common stockholders
for basic EPS 9,718 5,591 6,426
Effect of dilutive securities 10 24 36
- -------------------------------------------------------------------------------
Income available to common stockholders
for diluted EPS $ 9,728 $ 5,615 $ 6,462
===============================================================================
Weighted average common shares
outstanding applicable to basic EPS 3,333.9 3,363.6 3,371.9
- -------------------------------------------------------------------------------
Effect of dilutive securities:
Options 75.6 60.3 78.6
Restricted stock 26.1 27.8 37.8
Convertible securities 7.9 17.7 37.8
Warrants -- 3.4 10.5
- -------------------------------------------------------------------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 3,443.5 3,472.8 3,536.6
===============================================================================
Basic earnings per share
Income before cumulative effect
of accounting changes $ 2.95 $ 1.66 $ 1.91
Cumulative effect of accounting changes (0.04) -- --
- -------------------------------------------------------------------------------
Net income $ 2.91 $ 1.66 $ 1.91
===============================================================================
Diluted earnings per share
Income before cumulative effect
of accounting changes $ 2.86 $ 1.62 $ 1.83
Cumulative effect of accounting changes (0.03) -- --
- -------------------------------------------------------------------------------
Net income $ 2.83 $ 1.62 $ 1.83
===============================================================================
67
<PAGE>
During 1999, 1998, and 1997, weighted average options of 19.5 million
shares, 28.7 million shares and 12.8 million shares with weighted average
exercise prices of $48.71 per share, $41.71 per share, and $30.53 per share,
respectively, were excluded from the computation of diluted EPS because the
options' exercise price was greater than the average market price of the
Company's common stock.
20. INCENTIVE PLANS
The Company has adopted a number of compensation plans to attract, retain and
motivate officers and employees, to compensate them for their contributions to
the growth and profits of the Company, and to encourage employee stock
ownership. At December 31, 1999, approximately 290 million shares were available
for grant under Citigroup's stock option and restricted stock plans.
Stock Option Plans
The Company has a number of stock option plans that provide for the granting of
stock options to officers and employees. Options are granted at the fair market
value of Citigroup common stock at the time of grant for a period of ten years.
Generally, options granted under Travelers predecessor plans and options granted
since the date of the merger vest over a five-year period. Generally, 50% of the
options granted under Citicorp predecessor plans prior to the merger are
exercisable beginning on the third anniversary and 50% beginning on the fourth
anniversary of the date of grant. Certain of the plans also permit an employee
exercising an option to be granted new options (reload options) in an amount
equal to the number of common shares used to satisfy the exercise price and the
withholding taxes due upon exercise. The reload options are granted for the
remaining term of the related original option and vest after six months.
To further encourage employee stock ownership the Company's eligible
employees participate in either the WealthBuilder or CitiBuilder stock option
programs. Options granted under the WealthBuilder program vest over a five-year
period whereas options granted under the CitiBuilder program vest after five
years. These options do not have a reload feature.
Options granted in 1995 and 1996 included five-year performance-based stock
options granted to key Citicorp employees. Performance-based options granted in
1995 and 1996 were at prices ranging from equivalent Citigroup stock prices of
$17.30 to $18.70, equal to Citicorp market prices on the respective dates of
grant, and expire in 2000 and 2001. One-half of these options vested in 1996
when Citicorp's stock price reached an equivalent Citigroup stock price of
$26.67 per share, and the balance vested in 1997 when Citicorp's stock price
reached an equivalent Citigroup stock price of $30.67 per share.
During 1998, a group of key Citicorp employees was granted 9,510,000
performance-based stock options at an equivalent Citigroup strike price of
$32.17. These performance-based options vested in 1999 when Citigroup's stock
price reached $53.33 per share.
Vesting and expense related to performance-based options are summarized in
the following table (all options are equivalent Citigroup options).
1999 1998 1997
- --------------------------------------------------------------------------------
Options vested during the year 9,007,500 -- 8,976,563
After-tax expense recognized for
all grants (in millions of dollars) $68 $43 $45
Options unvested at year-end -- 9,075,000 --
================================================================================
The cost of performance-based options is measured as the difference between
the exercise price and market price required for vesting. This expense is
recognized over the period to the estimated vesting dates and in full for
options that have vested, by a charge to expense with an offsetting increase in
common stockholders' equity. All of the expense related to these grants has been
recognized.
Information with respect to stock option activity under Citigroup stock
option plans for the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ --------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 307,044,077 $26.97 202,813,920 $18.65 217,266,464 $11.59
Granted-original 18,071,698 43.45 146,281,370(1) 32.60 52,479,821 29.28
Granted-reload 29,514,592 50.15 30,072,696 41.36 50,937,393 27.41
Forfeited (12,870,793) 25.97 (12,982,605) 23.83 (4,968,905) 18.32
Exercised (69,095,811) 24.89 (59,141,304) 20.20 (112,900,853) 13.98
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 272,663,763 $31.14 307,044,077 $26.97 202,813,920 $18.65
- ------------------------------------------------------------------------------------------------------------------------------
Exercisable at year end 82,354,408 72,836,012 66,947,117
==============================================================================================================================
</TABLE>
(1) Original grants in 1998 included approximately 97 million options granted
in November 1998 to retain key employees and to encourage stock ownership
in the newly merged Citigroup.
68
<PAGE>
The following table summarizes the information about stock options outstanding
under Citigroup stock option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding Remaining Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.53--$ 9.99 17,483,787 3.2 years $ 6.59 15,323,385 $ 6.42
$10.00--$19.99 36,346,861 5.0 years 14.12 22,009,355 14.62
$20.00--$29.99 35,485,328 7.0 years 27.94 5,209,680 26.83
$30.00--$39.99 128,005,297 8.3 years 31.90 22,578,954 31.98
$40.00--$49.99 36,237,894 7.4 years 44.85 10,697,729 46.02
$50.00--$58.00 19,104,596 5.0 years 53.01 6,535,305 50.18
- ---------------------------------------------------------------------------------------------------------------------
272,663,763 7.0 years $31.14 82,354,408 $25.53
=====================================================================================================================
</TABLE>
The Restricted Stock Plans
The Company through its Capital Accumulation Plan and other restricted stock
programs, issues shares of Citigroup common stock in the form of restricted
stock to participating officers and employees. The restricted stock generally
vests after a two or three-year period. Except under limited circumstances,
during this period the stock cannot be sold or transferred by the participant,
who is required to render service during the restricted period. Participants may
elect to receive part of their awards in restricted stock and part in stock
options. Unearned compensation expense associated with the restricted stock
grants represents the market value of Citigroup common stock at the date of
grant and is recognized as a charge to income ratably over the vesting period.
Information with respect to restricted stock awards is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Shares awarded 10,933,324 15,667,010 21,513,404
Weighted average fair market value
per share $38.02 $33.41 $23.19
After-tax compensation cost charged to
earnings (in millions of dollars) $269 $243 $188
================================================================================
In 1998 certain employees of SSB received Deferred Stock Awards (DSA's). A
DSA award is an unfunded promise to deliver shares at the end of a three-year
deferral period. It is comprised of a basic award representing a portion of the
participant's prior year incentive award, and an additional premium award
amounting to 33% of the basic award which vests one-third per year over a
three-year period. The entire award is forfeited if the participant leaves SSB
to join a competitor within three years after the award date. Participants may
elect to receive a portion of their award in the form of stock options. The
basic portion of the award is expensed in the bonus year that it was earned. The
expense associated with the additional 33% premium award is amortized over the
appropriate vesting period. After-tax expense of approximately $150 million was
recognized during 1998 for 1998 awards that were granted in January of 1999.
Savings Incentive Plan
Prior to 1999, eligible Citicorp employees received awards equal to 3% of their
covered salary. Employees had the option of receiving their award in cash or
deferring some or all of it in various investment funds. The Company granted an
additional award equal to the amount elected to be deferred by the employee. The
after-tax expense associated with the plan amounted to $68 million in 1998 and
$63 million in 1997.
During 1999, the CitiBuilder 401(k) plan replaced the Savings Incentive
Plan. Under the CitiBuilder 401(k) plan, eligible employees receive awards up to
3% of their total compensation deferred into the Citigroup common stock fund.
The after-tax expense associated with this plan amounted to $31 million in 1999.
Stock Purchase Plan
The 1997 offering under the Stock Purchase Plan allowed eligible employees of
Citicorp to enter into fixed subscription agreements to purchase shares at the
market value on the date of the agreements. Such shares could be purchased from
time to time through the expiration date. Shares of Citigroup's common stock
delivered under the Stock Purchase Plan were sourced from treasury shares.
Following is the share activity under the 1997 fixed-price offering for the
purchase of shares at the equivalent Citigroup price of $30.20 per share. The
1997 offering expired on June 30, 1999.
1999 1998 1997
- --------------------------------------------------------------------------------
Outstanding subscribed shares
at beginning of year 11,317,659 15,284,070 --
Subscriptions entered into -- -- 16,758,687
Shares purchased 10,324,229 2,585,958 952,560
Canceled or terminated 993,430 1,380,453 522,057
- --------------------------------------------------------------------------------
Outstanding subscribed shares
at end of year -- 11,317,659 15,284,070
================================================================================
69
<PAGE>
Pro Forma Impact of SFAS No. 123
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans under which there is generally no charge to earnings for
employee stock option awards (other than performance-based options) and the
dilutive effect of outstanding options is reflected as additional share dilution
in the computation of earnings per share.
Alternatively, Financial Accounting Standards Board (FASB) rules would
permit a method under which a compensation cost for all stock awards would be
calculated and recognized over the service period (generally equal to the
vesting period). This compensation cost would be determined in a manner
prescribed by the FASB using option pricing models, intended to estimate the
fair value of the awards at the grant date. Earnings per share dilution would be
recognized as well.
Under both methods, an offsetting increase to stockholders' equity is
recorded equal to the amount of compensation expense charged.
Had the Company applied SFAS No. 123 in accounting for the Company's stock
option plans, net income and net income per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
In Millions of Dollars, Except Per Share Amounts 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation expense
related to stock
option plans As reported $ 108 $ 70 $ 72
Pro forma 756 486 329
- ---------------------------------------------------------------------------------------
Net income As reported $9,867 $5,807 $6,705
Pro forma 9,437 5,522 6,516
- ---------------------------------------------------------------------------------------
Basic earnings per share As reported $ 2.91 $ 1.66 $ 1.91
Pro forma 2.78 1.57 1.85
- ---------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 2.83 $ 1.62 $ 1.83
Pro forma 2.71 1.54 1.77
=======================================================================================
</TABLE>
The pro forma adjustments relate to stock options granted from 1995 through
1999, for which a fair value on the date of grant was determined using a
Black-Scholes option pricing model. No effect has been given to options granted
prior to 1995. The pro forma information above reflects the compensation expense
that would have been recognized under SFAS No. 123 for both Travelers and
Citicorp. The fair values of stock-based awards are based on assumptions that
were determined at the grant date.
SFAS No. 123 requires that reload options be treated as separate grants
from the related original grants. Under the Company's reload program, upon
exercise of an option, employees generally tender previously owned shares to pay
the exercise price and related tax withholding, and receive a reload option
covering the same number of shares tendered for such purposes. New reload
options are only granted if the Company's stock price has increased at least 20%
over the exercise price of the option being reloaded, and vest at the end of a
six-month period. Reload options are intended to encourage employees to exercise
options at an earlier date and to retain the shares so acquired, in furtherance
of the Company's long-standing policy of encouraging increased employee stock
ownership. The result of this program is that employees generally will exercise
options as soon as they are able and, therefore, these options have shorter
expected lives. Shorter option lives result in lower valuations using a
Black-Scholes option model. However, such values are expensed more quickly due
to the shorter vesting period of reload options. In addition, since reload
options are treated as separate grants, the existence of the reload feature
results in a greater number of options being valued.
Shares received through option exercises under the reload program are
subject to restrictions on sale. Discounts (as measured by the estimated cost of
protection) have been applied to the fair value of options granted to reflect
these sale restrictions.
Additional valuation and related assumption information for Citigroup
option plans, Travelers option plans (including options granted after the merger
date), and Citicorp option plans prior to the merger date are presented below.
<TABLE>
<CAPTION>
Citigroup
Option Plans Travelers Options Plans Citicorp Option Plans
------------ ----------------------- ---------------------
For options granted during 1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average fair value
Option $10.65 $7.21 $4.29 $8.59 $8.40
1998 performance option -- -- -- 6.41 --
1997 stock purchase offering -- -- -- -- $4.47
Weighted average expected life
Original grants 3 years 3 years 3 years 6 years 6 years
Reload grants 1 year 1 year 1 year -- --
1997 stock purchase offering -- -- -- -- 2 years
Valuation assumptions
Expected volatility 46.1% 37.0% 32.3% 25% 25%
Risk-free interest rate 5.17% 4.72% 5.75% 5.51% 6.30%
Expected annual dividends per share $0.63 $0.43 $0.31 $0.78 $0.73
Expected annual forfeitures 5% 5% 5% 5% 5%
====================================================================================================
</TABLE>
70
<PAGE>
21. RETIREMENT BENEFITS
The Company has several non-contributory defined benefit pension plans covering
substantially all U.S. employees and has various defined benefit pension
termination indemnity plans covering employees outside the United States. During
the 1999 first quarter, the U.S. defined benefit plan was amended to convert the
benefit formula for certain employees of Citicorp to a cash balance formula
effective January 1, 2000. Employees satisfying certain age and service
requirements remain covered by the prior final pay formula. The Company also
offers postretirement health care and life insurance benefits to certain
eligible U.S. retired employees, as well as to certain eligible employees
outside the United States. The following tables summarize the components of net
benefit expense recognized in the consolidated statement of income and the
funded status and amounts recognized in the consolidated balance sheet for the
Company's U.S. plans and significant plans outside the U.S.
Net Benefit Expense
<TABLE>
<CAPTION>
Postretirement
Pension Plans Benefit Plans(1)
-------------------------------------------------------- ------------------------
U.S. Plans Plans Outside U.S. U.S. Plans
-------------------------- ------------------------ ------------------------
In Millions of Dollars 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Benefits earned during the year $228 $232 $197 $80 $76 $59 $ 7 $13 $12
Interest cost on benefit obligation 456 443 412 94 88 76 58 62 63
Expected return on plan assets (645) (557) (496) (87) (84) (65) (16) (14) (11)
Amortization of unrecognized:
Net transition (asset) obligation (17) (18) (21) 4 3 6 -- -- --
Prior service cost (6) 18 14 -- -- -- (4) -- (2)
Net actuarial loss (gain) 9 5 4 6 3 2 2 (6) (5)
Curtailment (gain) loss -- (15) -- -- 2 -- (29) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net benefit expense $25 $108 $110 $97 $88 $78 $18 $55 $57
===============================================================================================================================
</TABLE>
(1) For plans outside the U.S., net postretirement benefit expense totaled $13
million in 1999, $10 million in 1998, and $8 million in 1997.
71
<PAGE>
Prepaid Benefit Cost (Benefit Liability)
<TABLE>
<CAPTION>
Postretirement
Pension Plans Benefit Plans(3)
--------------------------------------------- ---------------
U.S. Plans(1) Plans Outside U.S.(2) U.S. Plans
------------------- ------------------- ---------------
In Millions of Dollars at Year-End 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 7,027 $ 6,248 $ 1,574 $ 1,281 $ 952 $ 915
Benefits earned during the year 228 232 80 76 7 13
Interest cost on benefit obligation 456 443 94 88 58 62
Plan amendments (236) 31 10 3 -- 3
Actuarial (gain) loss (1,070) 385 (14) 127 (110) 22
Benefits paid (299) (287) (96) (71) (61) (63)
Acquisitions -- -- 4 27 -- --
Expenses (9) (10) -- -- -- --
Curtailment -- (15) -- (7) (32) --
Settlements -- -- (5) -- -- --
Foreign exchange impact -- -- (121) 50 -- --
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 6,097 $ 7,027 $ 1,526 $ 1,574 $ 814 $ 952
=========================================================================================================================
Change in plan assets
Plan assets at fair value at beginning of year $ 7,404 $ 6,675 $ 1,210 $ 940 $ 191 $ 163
Actual return on plan assets 866 1,004 189 119 26 28
Company contributions 21 22 76 153 62 63
Employee contributions -- -- 4 5 -- --
Acquisitions -- -- -- 24 -- --
Settlements -- -- (5) -- -- --
Benefits paid (299) (287) (74) (58) (62) (63)
Expenses (9) (10) -- -- -- --
Foreign exchange impact -- -- (82) 27 -- --
- -------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value at end of year $ 7,983 $ 7,404 $ 1,318 $ 1,210 $ 217 $ 191
=========================================================================================================================
Reconciliation of prepaid (accrued) benefit cost
and total amount recognized
Funded status of the plan $ 1,886 $ 377 $ (208) $ (364) $(597) $(761)
Unrecognized:
Net transition obligation (asset) 1 (16) 18 20 -- --
Prior service cost (124) 105 17 2 (10) (11)
Net actuarial (gain) loss (1,454) (153) (21) 107 (181) (59)
- -------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 309 $ 313 $ (194) $ (235) $(788) $(831)
=========================================================================================================================
Amounts recognized in the statement of financial
position consist of
Prepaid benefit cost $ 684 $ 646 $ 107 $ 76 $ -- $ --
Accrued benefit liability (416) (406) (320) (338) (788) (831)
Intangible asset 41 73 19 27 -- --
- -------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 309 $ 313 $ (194) $ (235) $(788) $(831)
=========================================================================================================================
</TABLE>
(1) For unfunded U.S. plans, the aggregate benefit obligation was $454 million
and $512 million, and the aggregate accumulated benefit obligation was $387
million and $393 million at December 31, 1999 and 1998, respectively.
(2) For plans outside the U.S., the aggregate benefit obligation was $524
million and $1.176 billion, and the fair value of plan assets was $145
million and $732 million at December 31, 1999 and 1998, respectively, for
plans whose benefit obligation exceeds plan assets. The aggregate
accumulated benefit obligation was $309 million and $308 million, and the
fair value of plan assets was $46 million and $3 million at December 31,
1999 and 1998, respectively, for plans whose accumulated benefit obligation
exceeds plan assets.
(3) For plans outside the U.S., the accumulated postretirement benefit
obligation was $82 million and $96 million and the postretirement benefit
liability was $20 million and $33 million at December 31, 1999 and 1998,
respectively.
72
<PAGE>
The expected long-term rates of return on assets used in determining the
Company's pension and postretirement expense are shown below.
1999 1998 1997
- -------------------------------------------------------------------------------
Rate of return on assets
U.S. plans 9.5% 9.0% to 9.5% 9.0%
Plans outside the U.S.(1) 3.5% to 12.5% 4.0% to 12.0% 4.5% to 13.0%
===============================================================================
(1) Excluding highly inflationary countries.
The principal assumptions used in determining pension and postretirement
benefit obligations for the Company's plans are shown in the following table.
At Year-End 1999 1998
- -------------------------------------------------------------------------------
Discount rate
U.S. plans 8.0% 6.75%
Plans outside the U.S.(1) 3.0% to 12.0% 3.0% to 12.0%
Future compensation increase rate
U.S. plans 4.5% 4.5%
Plans outside the U.S.(1) 2.5% to 12.0% 1.5% to 10.0%
Health care cost increase rate--U.S. plans
Following year 6.0% to 8.0% 7.0% to 11%
Decreasing to the year 2001 5.0% 5.0% to 5.5%
===============================================================================
(1) Excluding highly inflationary countries.
As an indicator of sensitivity, increasing the assumed health care cost
trend rate by 1% in each year would have increased the accumulated
postretirement benefit obligation as of December 31, 1999 by $27 million and the
aggregate of the benefits earned and interest components of 1999 net
postretirement benefit expense by $3 million. Decreasing the assumed health care
cost trend rate by 1% in each year would have decreased the accumulated
postretirement benefit obligation as of December 31, 1999 by $26 million and the
aggregate of the benefits earned and interest components of 1999 net
postretirement benefit expense by $3 million.
22. TRADING SECURITIES, COMMODITIES, DERIVATIVES, AND RELATED RISKS
Derivative and Foreign Exchange Contracts
<TABLE>
<CAPTION>
Notional Balance Sheet
Principal Amounts Credit Exposure(1)(2)
---------------------- ----------------------------
In Billions of Dollars at Year-End 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate products
Futures contracts $ 631.6 $ 998.1 $ -- $ --
Forward contracts 701.8 698.8 0.9 0.8
Swap agreements 3,401.2 3,181.4 8.9 15.6
Options 616.4 674.2 0.4 0.6
Foreign exchange products
Futures contracts 4.1 5.1 -- --
Forward contracts 1,401.1 1,644.0 7.4 9.1
Cross-currency swaps 166.6 132.4 2.9 2.0
Options 225.3 440.6 1.1 2.4
Equity products 144.2 163.5 9.3 6.1
Commodity products 34.9 20.0 0.4 0.6
Credit derivative products 46.0 28.7 0.3 0.2
- -----------------------------------------------------------------------------------------------
$ 31.6 $ 37.4
===============================================================================================
</TABLE>
(1) There is no balance sheet credit exposure for futures contracts because
they settle daily in cash, and none for written options because they
represent obligations (rather than assets) of Citigroup.
(2) The balance sheet credit exposure reflects $65.4 billion and $90.0 billion
of master netting agreements in effect at December 31, 1999 and December
31, 1998, respectively. Master netting agreements mitigate credit risk by
permitting the offset of amounts due from and to individual counterparties
in the event of counterparty default. In addition, Citibank has securitized
and sold net receivables, and the associated credit risk related to certain
derivative and foreign exchange contracts via Markets Assets Trust, which
amounted to $2.2 billion and $2.7 billion at December 31, 1999 and December
31, 1998, respectively.
Citigroup enters into derivative and foreign exchange futures, forwards,
options, and swaps, which enable customers to transfer, modify, or reduce their
interest rate, foreign exchange, and other market risks, and also trades these
products for its own account. In addition, Citigroup uses derivatives and other
instruments, primarily interest rate products, as an end-user in connection with
its risk management activities. Derivatives are used to manage interest rate
risk relating to specific groups of on-balance sheet assets and liabilities,
including investments, commercial and consumer loans, deposit liabilities,
long-term debt, and other interest-sensitive assets and liabilities, as well as
credit card securitizations, redemptions and sales. In addition, foreign
exchange contracts are used to hedge non-U.S. dollar denominated debt, net
capital exposures, and foreign exchange transactions. Through the effective use
of derivatives, Citigroup has been able to modify the volatility of its revenue
from asset and liability positions. Derivative instruments with leverage
features are not utilized in connection with risk management activities. The
preceding table presents the aggregate notional principal amounts of Citigroup's
outstanding derivative and foreign exchange contracts at December 31, 1999 and
1998, along with the related balance sheet credit exposure. The table includes
all contracts with third parties, including both trading and end-user positions.
73
<PAGE>
Futures and forward contracts are commitments to buy or sell at a future
date a financial instrument, commodity, or currency at a contracted price, and
may be settled in cash or through delivery. Swap contracts are commitments to
settle in cash at a future date or dates which may range from a few days to a
number of years, based on differentials between specified financial indices, as
applied to a notional principal amount. Option contracts give the purchaser, for
a fee, the right, but not the obligation, to buy or sell within a limited time,
a financial instrument or currency at a contracted price that may also be
settled in cash, based on differentials between specified indices.
Citigroup also sells various financial instruments that have not been
purchased (short sales). In order to sell securities short, the securities are
borrowed or received as collateral in conjunction with short-term financing
agreements and, at a later date, must be delivered (i.e. replaced) with like or
substantially the same financial instruments or commodities to the parties from
which they were originally borrowed.
Derivatives and short sales may expose Citigroup to market risk or credit
risk in excess of the amounts recorded on the balance sheet. Market risk on a
derivative, short sale, or foreign exchange product is the exposure created by
potential fluctuations in interest rates, foreign exchange rates, and other
values, and is a function of the type of product, the volume of transactions,
the tenor and terms of the agreement, and the underlying volatility. Credit risk
is the exposure to loss in the event of nonperformance by the other party to the
transaction and if the value of collateral held, if any, was not adequate to
cover such losses. The recognition in earnings of unrealized gains on these
transactions is subject to management's assessment as to collectibility.
Liquidity risk is the potential exposure that arises when the size of the
derivative position may not be able to be rapidly adjusted in times of high
volatility and financial stress at a reasonable cost.
End-User Interest Rate, Foreign Exchange, and Credit Derivative Contracts
<TABLE>
<CAPTION>
Notional Principal Amounts Percentage of 1999 Amount Maturing
-------------------------- ---------------------------------------------------------
Dec. 31, Dec. 31, Within 1 to 2 to 3 to 4 to After
In Billions of Dollars 1999 1998 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate products
Futures contracts $ 7.1 $ 28.6 100% --% --% --% --% --%
Forward contracts 3.3 6.5 100 -- -- -- -- --
Swap agreements 104.7 113.7 28 16 9 14 10 23
Option contracts 7.1 9.9 34 10 31 3 -- 2