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<SEC-DOCUMENT>0001047469-03-007460.txt : 20030303
<SEC-HEADER>0001047469-03-007460.hdr.sgml : 20030303
<ACCEPTANCE-DATETIME>20030303125731
ACCESSION NUMBER: 0001047469-03-007460
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 15
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030303
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09924
FILM NUMBER: 03588714
BUSINESS ADDRESS:
STREET 1: 399 PARK AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10043
BUSINESS PHONE: 2125591000
MAIL ADDRESS:
STREET 1: 399 PARK AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10043
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
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS GROUP INC
DATE OF NAME CHANGE: 19950519
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2104619z10-k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<Page>
<Table>
<S> <C>
FINANCIAL INFORMATION
THE COMPANY............................................ 2
Global Consumer..................................... 2
Global Corporate and Investment Bank................ 3
Private Client Services............................. 3
Global Investment Management........................ 3
Proprietary Investment Activities................... 4
Corporate/Other..................................... 4
International....................................... 4
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA.............................. 5
MANAGEMENT'S DISCUSSION AND
ANALYSIS............................................. 6
Results of Operations............................... 6
EVENTS IN 2002......................................... 7
Accounting Changes in 2002.......................... 8
EVENTS IN 2001......................................... 9
Accounting Changes in 2001.......................... 9
SIGNIFICANT ACCOUNTING POLICIES
AND SIGNIFICANT ESTIMATES............................ 10
FUTURE APPLICATION
OF ACCOUNTING STANDARDS.............................. 13
PENSION ASSUMPTIONS.................................... 15
BUSINESS FOCUS......................................... 16
Citigroup Net Income - Product View................. 16
Citigroup Net Income - Regional View................ 16
Selected Revenue and Expense Items.................. 17
GLOBAL CONSUMER........................................ 18
Cards............................................... 19
Consumer Finance.................................... 20
Retail Banking...................................... 21
Other Consumer...................................... 22
Global Consumer Outlook............................. 23
GLOBAL CORPORATE AND
INVESTMENT BANK...................................... 24
Capital Markets and Banking......................... 25
Transaction Services................................ 25
Other Corporate..................................... 26
Global Corporate and Investment Bank Outlook........ 26
PRIVATE CLIENT SERVICES................................ 27
Private Client Services Outlooks.................... 27
GLOBAL INVESTMENT
MANAGEMENT........................................... 28
Life Insurance and Annuities........................ 29
Private Bank........................................ 31
Asset Management.................................... 31
Global Investment Management Outlook................ 32
PROPRIETARY INVESTMENT
ACTIVITIES........................................... 33
CORPORATE/OTHER........................................ 35
FORWARD-LOOKING STATEMENTS............................. 36
MANAGING GLOBAL RISK................................... 37
Credit Risk Management Process...................... 37
Loans Outstanding................................... 38
Other Real Estate Owned
and Other Repossessed Assets...................... 38
Details of Credit Loss Experience................... 39
Cash-Basis, Renegotiated, and Past Due Loans........ 40
Foregone Interest Revenue on Loans.................. 40
Consumer Credit Risk................................ 40
Consumer Portfolio Review........................... 40
Corporate Credit Risk............................... 42
Global Corporate Portfolio Review................... 44
Loan Maturities and Sensitivity
to Changes in Interest Rates...................... 45
Market Risk Management Process...................... 45
Operational Risk Management Process................. 47
Country and Cross-Border Risk Management
Process........................................... 48
BALANCE SHEET REVIEW................................... 50
Assets.............................................. 50
Liabilities......................................... 51
LIQUIDITY AND CAPITAL RESOURCES........................ 52
Off-Balance Sheet Arrangements...................... 53
CAPITAL................................................ 55
CONTROLS AND PROCEDURES................................ 59
GLOSSARY OF TERMS...................................... 60
REPORT OF MANAGEMENT................................... 62
INDEPENDENT AUDITORS' REPORT........................... 62
CONSOLIDATED FINANCIAL
STATEMENTS........................................... 63
Consolidated Statement of Income.................... 63
Consolidated Statement of Financial Position........ 64
Consolidated Statement of Changes
in Stockholders' Equity.......................... 65
Consolidated Statement of Cash Flows................ 66
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS................................. 67
FINANCIAL DATA SUPPLEMENT.............................. 104
Average Balances and Interest Rates,
Taxable Equivalent Basis - Assets................. 104
Average Balances and Interest Rates,
Taxable Equivalent Basis - Liabilities and
Stockholders' Equity.............................. 105
Analysis of Changes in Net Interest Revenue,
Taxable Equivalent Basis.......................... 106
Ratios.............................................. 107
Average Deposit Liabilities in Offices
Outside the U.S................................... 107
Maturity Profile of Time Deposits
($100,000 or more) in U.S. Offices................ 107
Short-Term and Other Borrowings..................... 107
10-K CROSS-REFERENCE INDEX............................. 115
CORPORATE INFORMATION.................................. 116
Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................... 116
CERTIFICATIONS......................................... 119
CITIGROUP BOARD OF DIRECTORS........................... 120
</Table>
1
<Page>
THE COMPANY
Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company) is a
diversified global financial services holding company whose businesses provide a
broad range of financial services to consumer and corporate customers with some
200 million customer accounts in over 100 countries and territories. Citigroup
was incorporated in 1988 under the laws of the State of Delaware.
The Company's activities are conducted through the Global Consumer, Global
Corporate and Investment Bank (GCIB), Private Client Services, Global Investment
Management (GIM) and Proprietary Investment Activities business segments.
The Company has completed certain strategic business acquisitions during
the past three years, details of which can be found in Note 2 to the
Consolidated Financial Statements.
The Company is a bank holding company within the meaning of the U.S. Bank
Holding Company Act of 1956 (BHC Act) registered with, and subject to
examination by, the Board of Governors of the Federal Reserve System (FRB).
Certain of the Company's subsidiaries are subject to supervision and examination
by their respective federal and state authorities. Additional information on the
Company's regulation and supervision can be found within the Regulation and
Supervision section beginning on page 108.
At December 31, 2002, the Company had approximately 131,000 full-time and
5,000 part-time employees in the United States and approximately 119,000
employees outside the United States.
The periodic reports of Citicorp, Salomon Smith Barney Holdings Inc., The
Student Loan Corporation (STU), The Travelers Insurance Company (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 399 Park
Avenue, New York, New York 10043, telephone number 212 559 1000. Additional
information about Citigroup is available on the Company's website at
http://www.citigroup.com. Citigroup's annual report on Form 10-K, its quarterly
reports on Form 10-Q and its current reports on Form 8-K and all amendments to
these reports are available free of charge through the Company's website by
clicking on the "Investor Relations" page and selecting "SEC Filings." The
Securities and Exchange Commission (SEC) website contains reports, proxy and
information statements, and other information regarding the Company at
http://www.sec.gov.
GLOBAL CONSUMER
GLOBAL CONSUMER delivers a wide array of banking, lending, insurance and
investment services through a network of local branches, offices and electronic
delivery systems, including ATMs, Automated Lending Machines (ALMs) and the
World Wide Web. The Global Consumer businesses serve individual consumers as
well as small businesses. Global Consumer includes CARDS, CONSUMER FINANCE and
RETAIL BANKING.
CARDS provides MasterCard, VISA and private label credit and charge cards.
North America Cards includes the operations of Citi Cards, the company's primary
brand in North America, as well as Diners Club N.A. and Mexico Cards.
International Cards provides credit and charge cards to customers in Western
Europe, Japan, Asia, Central and Eastern Europe, Middle East and Africa (CEEMEA)
and Latin America.
CONSUMER FINANCE provides community-based lending services through branch
networks, regional sales offices and cross-selling initiatives with other
Citigroup businesses. The business of CitiFinancial is included in North America
Consumer Finance. As of December 31, 2002, North America Consumer Finance
maintained 2,411 offices, including 2,186 CitiFinancial offices in the U.S. and
Canada, while International Consumer Finance maintained 1,134 offices, including
884 in Japan. CONSUMER FINANCE offers real estate-secured loans, unsecured and
partially secured personal loans, auto loans and loans to finance consumer goods
purchases. In addition, CitiFinancial, through certain subsidiaries and third
parties, makes available various credit-related and other insurance products to
its U.S. customers.
RETAIL BANKING provides banking, lending, investment and insurance services
to customers through retail branches and electronic delivery systems. In North
America, RETAIL BANKING includes the operations of Citibanking North America,
Consumer Assets, Primerica Financial Services (Primerica) and Mexico Retail
Banking. Citibanking North America delivers banking, lending, investment and
insurance services through 812 branches in the U.S. and Puerto Rico and through
Citibank Online, an Internet banking site on the World Wide Web. The Consumer
Assets business originates and services mortgages and student loans for
customers across the U.S. The business operations of Primerica involve the sale,
mainly in North America, of life insurance and other products manufactured by
its affiliates, including Smith Barney mutual funds, CitiFinancial mortgages and
personal loans and the products of our LIFE INSURANCE AND ANNUITIES business
within the GIM segment. The Primerica sales force is composed of over 100,000
independent representatives. Mexico Retail Banking consists of the branch
banking operations of Banamex. International Retail Banking provides
full-service banking and investment services in Western Europe, Japan, Asia,
CEEMEA and Latin America.
2
<Page>
GLOBAL CORPORATE AND INVESTMENT BANK
GLOBAL CORPORATE AND INVESTMENT BANK provides corporations, governments,
institutions and investors in over 100 countries and territories with a broad
range of financial products and services. Global Corporate and Investment Bank
includes CAPITAL MARKETS AND BANKING and TRANSACTION SERVICES.
CAPITAL MARKETS AND BANKING offers a wide array of investment banking and
commercial banking services and products, including investment banking,
institutional brokerage, advisory services, foreign exchange, structured
products, derivatives, loans, leasing and equipment finance.
TRANSACTION SERVICES is composed of Cash, Trade and Treasury Services
(CTTS) and Global Securities Services (GSS). CTTS provides comprehensive cash
management, trade finance and e-commerce services for corporations and financial
institutions worldwide. GSS provides custody services to investors such as
insurance companies and pension funds, and clearing services to intermediaries
such as broker/dealers as well as depository and agency and trust services to
multinational corporations and governments globally.
PRIVATE CLIENT SERVICES
PRIVATE CLIENT SERVICES provides investment advice, financial planning and
brokerage services to affluent individuals, small and mid-size companies,
non-profits and large corporations primarily through a network of more than
12,600 Smith Barney Financial Consultants in more than 500 offices worldwide. In
addition, Private Client Services provides independent client-focused research
to individuals and institutions around the world.
A significant portion of Private Client Services revenue is generated from
fees earned by managing client assets as well as commissions earned as a broker
for its clients in the purchase and sale of securities. Additionally, Private
Client Services generates net interest revenue by financing customers'
securities transactions and other borrowing needs through security-based
lending. Private Client Services also receives commissions and other sales and
service revenues through the sale of proprietary and third-party mutual funds.
As part of Private Client Services, Global Equity Research produces equity
research to serve both institutional and individual investor clients. Expenses
for Global Equity Research are allocated primarily to the Global Equities
business within GCIB and Private Client Services' businesses.
GLOBAL INVESTMENT MANAGEMENT
GLOBAL INVESTMENT MANAGEMENT offers a broad range of life insurance,
annuity, asset management and personalized wealth management products and
services distributed to institutional, high-net-worth and retail clients.
Global Investment Management includes LIFE INSURANCE AND ANNUITIES, PRIVATE BANK
and ASSET MANAGEMENT.
LIFE INSURANCE AND ANNUITIES includes Travelers Life and Annuity (TLA) and
International Insurance Manufacturing (IIM). TLA offers individual annuity,
group annuity, individual life insurance and corporate owned life insurance
(COLI) products. The individual products include fixed and variable deferred
annuities, payout annuities and term, universal and variable life insurance.
These products are primarily distributed through Citigroup's businesses, a
nationwide network of independent agents and unaffiliated broker/dealers. The
COLI product is a variable universal life product distributed through
independent specialty brokers. The group products include institutional pension
products, including guaranteed investment contracts, payout annuities, group
annuities to employer-sponsored retirement and savings plans, and structured
finance transactions. The IIM business provides credit, life, disability and
other insurance products, as well as annuities internationally, leveraging the
existing distribution channels of the CONSUMER FINANCE, RETAIL BANKING and ASSET
MANAGEMENT (retirement services) businesses. IIM primarily has operations in
Mexico, Western Europe, Latin America and Asia.
PRIVATE BANK provides personalized wealth management services for
high-net-worth clients through 132 offices in 36 countries and territories,
generating fee and interest income from investment funds management, client
trading activity, trust and fiduciary services, custody services, and
traditional banking and lending activities. Through its Private Bankers and
Product Specialists, PRIVATE BANK leverages its extensive experience with
clients' needs and its access to Citigroup to provide clients with comprehensive
investment and banking services.
ASSET MANAGEMENT includes the businesses of Citigroup Asset Management,
Citigroup Alternative Investments, Banamex asset management and retirement
services businesses and Citigroup's other retirement services businesses in
North America and Latin America. These businesses offer institutional,
high-net-worth and retail clients a broad range of investment alternatives from
investment centers located around the world. Products and services offered
include mutual funds, closed-end funds, separately managed accounts, unit
investment trusts, alternative investments (including hedge funds, private
equity, and credit structures), variable annuities through affiliated and
third-party insurance companies, and pension administration services.
3
<Page>
PROPRIETARY INVESTMENT ACTIVITIES
PROPRIETARY INVESTMENT ACTIVITIES is comprised of Citigroup's private
equity investments, including venture capital activities, realized investment
gains (losses) from sales on certain insurance related investments, and the
results from certain other proprietary investments, including investments in
countries that refinanced debt under the 1989 Brady Plan or plans of a similar
nature.
CORPORATE/OTHER
CORPORATE/OTHER includes net corporate treasury results, corporate
expenses, certain intersegment eliminations, the results of discontinued
operations, and the Internet-related development activities, cumulative effect
of accounting changes and taxes not allocated to the individual businesses.
INTERNATIONAL
CITIGROUP INTERNATIONAL (whose operations are fully reflected in the
product disclosures above), in partnership with our global product groups,
offers a broad range of consumer financial services, corporate and investment
banking services and investment management to some 50 million customer accounts
in more than 100 countries throughout Asia, Japan, Western Europe, Latin America
and CEEMEA.
The product mix differs in each region, depending upon local conditions and
opportunities. In Asia, Citigroup has comprehensive consumer, corporate and
investment management businesses. In China, Citibank was the first international
bank to offer banking services to Chinese citizens. Citigroup International also
offers an array of wealth management services in the region, with integrated
offerings and dedicated service centers. In 2002, these services were expanded
to include India, Indonesia, and Taiwan.
In Japan, Citigroup has a major consumer finance business and leadership
positions in investment banking, retail banking and private banking.
CitiInsurance, our global insurance company, received its license to sell life
insurance and retirement-savings products in Japan. The new company, Mitsui
Sumitomo CitiInsurance, Ltd., is the first Japanese-foreign joint venture life
insurance firm focused on variable annuities in Japan. Our corporate banking
operations in Japan are also extensive. Nikko Citigroup is the #1 underwriter of
Japanese equities and has been instrumental in introducing global securitization
standards in the country.
In Western Europe, Citigroup is a leader in serving global corporations.
Citigroup holds top tier positions in debt and equity underwriting, advisory
services, derivatives, foreign exchange, transaction services, loans and sales
and trading. Citigroup offers consumer services across the region and has a
large retail bank in Germany, where it recently introduced a new wealth
management initiative targeting high-net-worth individuals.
In CEEMEA, Citigroup has extensive corporate businesses and expanding
consumer operations as well. Bank Handlowy is the leading financial services
company in Poland, and CitiInsurance opened a new insurance company in the
country. Citigroup launched retail banking in Russia with the opening of its
first consumer branch in Moscow. In the United Arab Emirates, Citigroup recently
introduced wealth management services targeting high-net-worth individuals. In
Hungary, Citibank was the first financial institution in the local market to
offer offshore equity funds to retail customers. Citigroup is also a major
provider of financial services to the corporate sector, offering important
funding to governments and companies.
Citigroup is a leading bank in Latin America, providing debt and equity
underwriting, advisory services, derivatives, foreign exchange, transaction
services, loans and sales and trading to the corporate sector. It also operates
consumer businesses across the region. In 2002, CitiInsurance launched a new
insurance company in Brazil.
4
<Page>
CITIGROUP INC. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<Table>
<Caption>
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE(1) $ 71,308 $ 67,367 $ 63,572 $ 54,809 $ 44,964
Operating expenses 37,298 36,528 35,809 31,049 28,852
Benefits, claims and credit losses(1) 13,473 10,320 8,466 7,513 6,841
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES,
MINORITY INTEREST AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 20,537 20,519 19,297 16,247 9,271
Income taxes 6,998 7,203 7,027 6,027 3,420
Minority interest, after-tax 91 87 39 27 5
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 13,448 13,229 12,231 10,193 5,846
INCOME FROM DISCONTINUED OPERATIONS(2) 1,875 1,055 1,288 1,177 1,104
CUMULATIVE EFFECT OF ACCOUNTING CHANGES(3) (47) (158) - (127) -
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 15,276 $ 14,126 $ 13,519 $ 11,243 $ 6,950
=================================================================================================================
EARNINGS PER SHARE(4)
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 2.63 $ 2.61 $2.43 $ 2.02 $ 1.13
Net income 2.99 2.79 2.69 2.23 1.35
DILUTED EARNINGS PER SHARE:
Income from continuing operations 2.59 2.55 2.37 1.96 1.10
Net income 2.94 2.72 2.62 2.17 1.31
Dividends declared per common share(4)(5) $ 0.70 $ 0.60 $0.52 $ 0.41 $ 0.28
=================================================================================================================
AT DECEMBER 31,
Total assets $ 1,097,190 $ 1,051,450 $ 902,210 $ 795,584 $ 740,336
Total deposits 430,895 374,525 300,586 261,573 229,413
Long-term debt 126,927 121,631 111,778 88,481 86,250
Mandatorily redeemable securities of subsidiary
trusts 6,152 7,125 4,920 4,920 4,320
Common stockholders' equity 85,318 79,722 64,461 56,395 48,761
Total stockholders' equity 86,718 81,247 66,206 58,290 51,035
=================================================================================================================
Ratio of earnings to fixed charges
and preferred stock dividends 1.94x 1.63x 1.52x 1.55x 1.29x
Return on average common stockholders' equity(6) 18.6% 19.7% 22.4% 21.5% 14.4%
Common stockholders' equity to assets 7.78% 7.58% 7.14% 7.09% 6.59%
Total stockholders' equity to assets 7.90% 7.73% 7.34% 7.33% 6.89%
=================================================================================================================
</Table>
(1) Revenues, Net of Interest Expense, and Benefits, Claims, and Credit Losses
in the table above are disclosed on an owned basis (under Generally
Accepted Accounting Principles (GAAP)). If this table were prepared on a
managed basis, which includes certain effects of securitization activities
including receivables held for securitization and receivables sold with
servicing retained, there would be no impact to net income, but revenues,
net of interest expense, and benefits, claims, and credit losses would each
have been increased by $4.123 billion, $3.568 billion, $2.459 billion,
$2.707 billion and $2.364 billion in 2002, 2001, 2000, 1999 and 1998,
respectively. Although a managed basis presentation is not in conformity
with GAAP, it provides a representation of performance and key indicators
of the credit-card business that is consistent with the view the Company
uses to manage the business.
(2) On August 20, 2002, Citigroup completed the distribution to its
stockholders of a majority portion of its remaining ownership interest in
Travelers Property Casualty Corp. (TPC). Following the distribution,
Citigroup began accounting for TPC as discontinued operations. See Note 4
to the Consolidated Financial Statements.
(3) Accounting changes of ($47) million in 2002 resulted from the adoption of
the remaining provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
Accounting changes of ($42) million and ($116) million in 2001 resulted
from the adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) and the adoption of Emerging Issues
Task Force (EITF) Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" (EITF 99-20), respectively. Accounting changes of ($135)
million, $23 million and ($15) million in 1999 resulted from the adoption
of Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," the adoption of SOP 98-7,
"Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk," and the adoption of SOP 98-5,
"Reporting on the Costs of Start-Up Activities," respectively. See Note 1
to the Consolidated Financial Statements.
(4) All amounts have been adjusted to reflect stock splits.
(5) 1998 amounts represent Travelers' historical dividends per common share.
(6) The return on average common stockholders' equity is calculated using net
income after deducting preferred stock dividends.
5
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The strength and diversity of Citigroup's global franchise served the Company
well in 2002. Despite several significant challenges including continued
weakness in global markets, record bankruptcies in the developed world,
political and economic upheaval in a number of countries in which we operate
and intense scrutiny of our business practices, we delivered record results.
INCOME FROM CONTINUING OPERATIONS
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
1998 $ 5.8
1999 $10.2
2000 $12.2
2001 $13.2
2002 $13.4
2002 INCOME FROM CONTINUING OPERATIONS BY SEGMENT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Global Investment Management 13%
Private Client Services 5%
Global Corporate and Investment Bank 22%
Global Consumer 60%
* Excludes Proprietary Investment Activities and Corporate/Other
NET REVENUE AND OPERATING EXPENSE
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
1998 1999 2000 2001 2002
----- ----- ----- ----- -----
Net revenue $45.0 $54.8 $63.6 $67.4 $71.3
Operating expense $28.9 $31.0 $35.8 $36.5 $37.3
DILUTED EARNINGS PER SHARE--
INCOME FROM CONTINUING OPERATIONS
[EDGAR REPRESENTATION OF GRAPHIC DATA]
1998 $1.10
1999 $1.96
2000 $2.37
2001 $2.55
2002 $2.59
2002 INCOME FROM CONTINUING OPERATIONS BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
CEEMEA 6%
Asia 10%
Japan 8%
Western Europe 7%
Mexico 9%
North America 60%
* Excludes Proprietary Activities, Corporate/Other and Latin America
6
<Page>
TOTAL CAPITAL (TIER 1 AND TIER 2)
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
1998 1999 2000 2001 2002
----- ----- ----- ----- -----
Tier 1 and Tier 2 $61.5 $65.9 $73.0 $75.8 $78.3
Tier 1 $47.3 $51.6 $54.5 $58.4 $59.0
- - Net income of $15.28 billion, up 8%
- - Income from Continuing Operations of $13.45 billion, up 2%
- - Revenue growth of 6%
- - Operating expense growth held to 2%
- - Record income in 6 of 9 businesses
- - Total stockholders' equity, including trust preferred securities, totaled
$93 billion
- - Return on common equity of 18.6%
- - Diluted earnings per share from Continuing Operations of $2.59
- - Diversified earnings by product and by region
- - Strong regulatory capital ratios
EVENTS IN 2002
DISCONTINUED OPERATIONS
Travelers Property Casualty Corp. (TPC) (an indirect wholly owned subsidiary of
Citigroup on December 31, 2001) sold 231 million shares of its class A common
stock representing approximately 23.1% of its outstanding equity securities in
an initial public offering (the IPO) on March 27, 2002. In 2002, Citigroup
recognized an after-tax gain of $1.158 billion as a result of the IPO. In
connection with the IPO, Citigroup entered into an agreement with TPC that
provides that, in any fiscal year in which TPC records asbestos-related income
statement charges in excess of $150 million, net of any reinsurance, Citigroup
will pay to TPC the amount of any such excess up to a cumulative aggregate of
$520 million after-tax. A portion of the gross IPO gain was deferred to offset
any payments arising in connection with this agreement. In the 2002 fourth
quarter, $159 million was paid pursuant to this agreement. Notice was received
in January 2003 requesting the remaining $361 million.
On August 20, 2002, Citigroup completed the distribution to its
stockholders of a majority portion of its remaining ownership interest in TPC
(the distribution). This non-cash distribution was tax-free to Citigroup, its
stockholders and TPC. The distribution was treated as a dividend to stockholders
for accounting purposes that reduced Citigroup's Additional Paid-In Capital by
approximately $7.0 billion. Following the distribution, Citigroup remains a
holder of approximately 9.9% of TPC's outstanding equity securities which are
carried at fair value in the Proprietary Investment Activities segment and
classified as available-for-sale within Investments on the Consolidated
Statement of Financial Position.
Following the August 20, 2002 distribution, the results of TPC were
reported in the Company's Statements of Income and Cash Flows separately as
discontinued operations for all periods presented. In accordance with generally
accepted accounting principles (GAAP), the Consolidated Statement of Financial
Position has not been restated. TPC represented the primary vehicle by which
Citigroup engaged in the property and casualty insurance business.
TPC's results primarily consist of the results of its Personal Lines and
Commercial Lines businesses. The Personal Lines business of TPC primarily
provides coverage on personal automobile and homeowners insurance sold to
individuals, which is distributed through approximately 7,600 independent
agencies located throughout the United States. TPC's Commercial Lines business
offers a broad array of property and casualty insurance and insurance-related
services, which it distributes through approximately 6,300 brokers and
independent agencies located throughout the United States. TPC is the
third-largest writer of commercial lines insurance in the U.S. based on 2001
direct written premiums published by A.M. Best Company.
SETTLEMENT-IN-PRINCIPLE AND CHARGE FOR REGULATORY AND LEGAL MATTERS
During the 2002 fourth quarter, the Company reached a
settlement-in-principle with the SEC, the National Association of Securities
Dealers, the New York Stock Exchange and the Attorney General of New York of all
issues raised in their research, initial public offerings allocation and
spinning-related inquiries.
The Company established a reserve for the cost of this settlement and
toward estimated costs of the private litigation related to the matters that
were the subject of the settlement as well as the regulatory inquiries and
private litigation related to Enron. The reserve for these matters resulted in
an after-tax charge of approximately $1.3 billion ($0.25 per diluted share). The
Company believes that it has substantial defenses to the pending private
litigations which are at a very early stage. Given the uncertainties of the
timing and outcome of this type of litigation, the large number of cases, the
novel issues, the substantial time before these cases will be resolved, and the
multiple defendants in many of them, this reserve is difficult to determine and
of necessity subject to future revision. This paragraph contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements" on page 36.
ACQUISITION OF GOLDEN STATE BANCORP
On November 6, 2002, Citigroup completed its acquisition of 100% of Golden
State Bancorp (GSB) in a transaction in which Citigroup paid approximately $2.3
billion in cash and issued 79.5 million Citigroup common shares. The total
transaction value of approximately $5.8 billion was based on the average price
of Citigroup shares, as adjusted for the effect of the TPC distribution, for the
two trading days before and after May 21, 2002, the date the terms of the
acquisition were agreed to and announced. The results of GSB are included from
November 2002 forward.
SALE OF 399 PARK AVENUE
During 2002, the Company sold its 399 Park Avenue, New York City
headquarters building. The Company is currently the lessee of approximately 40%
of the building with terms averaging 15 years. The sale for $1.06 billion
resulted in a pretax gain of $830 million, with $527 million ($323 million
after-tax) recognized in 2002 representing the gain on the portion of the
building the Company does not occupy, and the remainder to be recognized over
the term of Citigroup's lease agreements.
7
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IMPACT FROM ARGENTINA'S ECONOMIC CHANGES
Throughout 2002, Argentina experienced significant political and economic
changes including severe recessionary conditions, high inflation and political
uncertainty. The government of Argentina implemented substantial economic
changes, including abandoning the country's fixed U.S. dollar-to-peso exchange
rate, and asymmetrically redenominating substantially all of the banking
industry's loans, deposits (which were also restricted) and other assets and
liabilities previously denominated in U.S. dollars into pesos at different
rates. As a result of the impact of these government actions, the Company
changed its functional currency in Argentina from the U.S. dollar to the
Argentine peso. Additionally, the government issued certain compensation
instruments to financial institutions to compensate them in part for losses
incurred as a result of the redenomination events. The government also announced
a 180-day moratorium against creditors filing foreclosures or bankruptcy
proceedings against borrowers. Later in the year, the government modified the
terms of certain of their Patriotic Bonds making them less valuable. The
government actions, combined with the severe recessionary economic situation and
the devaluation of the peso, adversely impacted Citigroup's business in
Argentina.
During 2002, Citigroup recorded a total of $1.704 billion in net pretax
charges, as follows: $1,018 million in net provisions for credit losses; $284
million in investment write-downs; $232 million in losses relating to Amparos
(representing judicial orders requiring previously dollar-denominated deposits
and insurance contracts that had been redenominated at government rates to be
immediately repaid at market exchange rates); $98 million of write-downs of
Patriotic Bonds; a $42 million restructuring charge; and a $30 million net
charge for currency redenomination and other foreign currency items that
includes a benefit from compensation instruments issued in 2002.
In addition, the impact of the devaluation of the peso during 2002 produced
foreign currency translation losses that reduced Citigroup's equity by $595
million, net of tax.
As the economic situation as well as legal and regulatory issues in
Argentina remain fluid, we continue to work with the government and our
customers and continue to monitor conditions closely. Additional losses may be
incurred. In particular, we continue to monitor the potential additional impact
that the continued economic crisis may have on our corporate borrowers, as well
as the impact on consumer deposits and insurance liabilities of potential
government actions, including re-dollarization. This paragraph contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 36.
ACCOUNTING CHANGES IN 2002
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
141), and certain provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), as required for goodwill and indefinite-lived intangible
assets resulting from business combinations consummated after June 30, 2001.
These new rules required that all business combinations consummated after June
30, 2001 be accounted for under the purchase method. The non-amortization
provisions of the new rules affecting goodwill and intangible assets deemed to
have indefinite lives were effective for all purchase business combinations
completed after June 30, 2001.
On January 1, 2002, when the rules became effective for calendar year
companies, Citigroup adopted the remaining provisions of SFAS 142. Under the new
rules, effective January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives. During 2001 and 2000, the after-tax amortization expense related to
goodwill and indefinite-lived intangible assets which are no longer amortized
was as follows:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
GLOBAL CONSUMER
CARDS $ 23 $ 25
CONSUMER FINANCE 117 78
RETAIL BANKING 43 45
Other 14 16
-------------------------
TOTAL GLOBAL CONSUMER 197 164
-------------------------
GLOBAL CORPORATE AND INVESTMENT BANK
CAPITAL MARKETS AND BANKING 49 24
TRANSACTION SERVICES 11 11
Other 54 53
-------------------------
TOTAL GLOBAL CORPORATE AND
INVESTMENT BANK 114 88
-------------------------
PRIVATE CLIENT SERVICES 9 1
-------------------------
GLOBAL INVESTMENT MANAGEMENT
LIFE INSURANCE AND ANNUITIES(1) (6) -
PRIVATE BANK - -
ASSET MANAGEMENT 68 63
-------------------------
TOTAL GLOBAL INVESTMENT MANAGEMENT 62 63
-------------------------
PROPRIETARY INVESTMENT ACTIVITIES - -
CORPORATE/OTHER 18 18
DISCONTINUED OPERATIONS 79 78
-------------------------
TOTAL AFTER-TAX AMORTIZATION EXPENSE $ 479 $ 412
=========================
</Table>
(1) During 2001, the Company reversed $8 million of negative goodwill
associated with LIFE INSURANCE AND ANNUITIES.
The Company has performed the required impairment tests of goodwill and
indefinite-lived intangible assets and there was no impairment of goodwill. The
initial adoption resulted in a cumulative adjustment of $47 million after-tax
recorded as a charge to earnings related to the impairment of certain intangible
assets. See Note 2 to the Consolidated Financial Statements for additional
information about this accounting change.
8
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EVENTS IN 2001
IMPACT FROM ARGENTINA'S POLITICAL AND ECONOMIC CHANGES
During 2001 Argentina underwent significant political and economic changes.
The government of Argentina implemented substantial economic changes, including
abandoning the country's fixed U.S. dollar-to-peso exchange rate, as well as
converting certain U.S. dollar-denominated consumer loans into pesos. The
Company recognized charges in the 2001 fourth quarter of $235 million (pretax)
related to write-downs of Argentine credit exposures and $235 million (pretax)
in losses related to the foreign exchange revaluation of the consumer loan
portfolio.
IMPACT FROM ENRON
As a result of the financial deterioration and eventual bankruptcy of Enron
Corporation in 2001, Citigroup's results were reduced by $228 million (pretax)
as a result of the write-down of Enron-related credit exposure and trading
positions, and the impairment of Enron-related investments.
SEPTEMBER 11TH EVENTS
The September 11, 2001 terrorist attack financially impacted the Company in
several areas. Revenues were reduced due to the disruption to Citigroup's
businesses. Additional expenses incurred as a result of the attack resulted in
after-tax losses of approximately $200 million. The Company also experienced
significant property loss, for which it is insured. The Company initially
recorded insurance recoveries up to the net book value of the assets written
off. During 2002, additional insurance recoveries were recorded when realized.
Reductions in equity values during the 2001 third quarter were further impacted
by the September 11th attack, which reduced Citigroup's Investment Activities
results in the 2001 third quarter. Additionally, after-tax losses related to
insurance claims (net of reinsurance impact) totaled $502 million, the bulk of
which related to the property and casualty insurance operations of TPC and is
reflected as discontinued operations.
ACQUISITION OF BANAMEX
In August 2001, Citicorp, an indirect wholly owned subsidiary of Citigroup,
completed its acquisition of Grupo Financiero Banamex-Accival (Banamex), a
leading Mexican financial institution, for approximately $12.5 billion in cash
and Citigroup stock. Citicorp completed the acquisition by settling transactions
that were conducted on the Mexican Stock Exchange. Those transactions comprised
both the acquisition of Banamex shares tendered in response to Citicorp's offer
to acquire all of Banamex's outstanding shares and the simultaneous sale of
126,705,281 Citigroup shares to the tendering Banamex shareholders. On September
24, 2001, Citicorp became the holder of 100% of the issued and outstanding
ordinary shares of Banamex following a share redemption by Banamex. The results
of Banamex are included from August 2001 forward.
ACCOUNTING CHANGES IN 2001
ADOPTION OF EITF 99-20
During the 2001 second quarter, the Company adopted Emerging Issues Task
Force (EITF) Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
(EITF 99-20). EITF 99-20 provides new guidance regarding income recognition and
identification and determination of impairment on certain asset-backed
securities. The initial adoption resulted in a cumulative adjustment of $116
million after-tax, recorded as a charge to earnings, and an increase of $93
million included in stockholders' equity from non-owner sources.
DERIVATIVES AND HEDGE ACCOUNTING
On January 1, 2001, Citigroup adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). This Statement
changed the accounting treatment of derivative contracts (including foreign
exchange contracts) that are employed to manage risk outside of Citigroup's
trading activities, as well as certain derivative instruments embedded in other
contracts. SFAS 133 requires that all derivatives be recorded on the balance
sheet at their fair value. The treatment of changes in the fair value of
derivatives depends on the character of the transaction, including whether it
has been designated and qualifies as part of a hedging relationship. The
majority of Citigroup's derivatives are entered into for trading purposes and
were not impacted by the adoption of SFAS 133. The cumulative effect of adopting
SFAS 133 at January 1, 2001 was an after-tax charge of $42 million included in
net income and an increase of $25 million included in other changes in
stockholders' equity from non-owner sources.
9
<Page>
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Notes to the Consolidated Financial Statements contain a summary of
Citigroup's significant accounting policies, including a discussion of recently
issued accounting pronouncements. Certain of these policies as well as estimates
made by management are considered to be important to the portrayal of the
Company's financial condition, since they require management to make difficult,
complex or subjective judgments and estimates, some of which may relate to
matters that are inherently uncertain. These significant policies and estimates
include valuation of financial instruments, the allowance for credit losses,
securitizations, and estimating our exposure to losses in Argentina. Additional
information about these policies can be found in Note 1 to the Consolidated
Financial Statements. Management has discussed each of these significant
accounting policies and the related estimates with the Audit Committee of the
Board of Directors.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
VALUATIONS OF FINANCIAL INSTRUMENTS
Investments and trading account assets and liabilities, held by the Global
Corporate and Investment Bank and Proprietary Investment Activities segments,
include fixed maturity and equity securities, derivatives, investments in
private equity and other financial instruments. Citigroup carries its
investments and trading account assets and liabilities at fair value if they are
considered to be available-for-sale or trading securities. For a substantial
majority of our investments and trading account assets and liabilities, fair
values are determined based upon quoted prices or validated models with
externally verifiable model inputs. Changes in values of available-for-sale
securities are recognized in a component of stockholders' equity net of taxes,
unless the value is impaired and the impairment is not considered to be
temporary. Impairment losses that are not considered temporary are recognized in
earnings. The Company conducts regular reviews to assess whether
other-than-temporary impairment exists. Changing economic conditions-global,
regional, or related to specific issuers or industries-could adversely affect
these values. Changes in the fair values of trading account assets and
liabilities are recognized in earnings. Private equity subsidiaries also carry
their investments at fair value with changes in value recognized in earnings.
If available, quoted market prices provide the best indication of value. If
quoted market prices are not available for fixed maturity securities, equity
securities, derivatives or commodities, the Company discounts the expected cash
flows using market interest rates commensurate with the credit quality and
duration of the investment. Alternatively, matrix or model pricing may be used
to determine an appropriate fair value. It is Citigroup's policy that all models
used to produce valuations for the published financial statements be validated
by qualified personnel independent from those that created the models. The
determination of market or fair value considers various factors, including time
value and volatility factors, underlying options, warrants and derivatives;
price activity for equivalent 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 derivative transaction maintenance costs during
the period. Changes in assumptions could affect the fair values of investments
and trading account assets and liabilities.
For our available-for-sale and trading portfolios amounting to assets of
$320.9 billion and liabilities of $91.4 billion at December 31, 2002, fair
values were determined in the following ways: externally verified via comparison
to quoted market prices or third-party broker quotations; by using models that
were validated by qualified personnel independent of the area that created the
model and inputs that were verified by comparison to third-party broker
quotations or other third-party sources; or by using alternative procedures such
as comparison to comparable securities and/or subsequent liquidation prices. At
December 31, 2002, approximately 98% of the available-for-sale and trading
portfolios' gross assets and liabilities are considered verified and
approximately 2% are considered unverified. Of the unverified, approximately 60%
consists of cash products, where independent quotes were not available and/or
alternative procedures were not feasible, and 40% consists of derivative
products where either the model was not validated and/or the inputs were not
verified due to the lack of appropriate market quotations. Such values are
actively reviewed by management.
In determining the fair values of our securities portfolios, management
also reviews the length of time trading positions have been held to identify
aged inventory. During 2002, the monthly average aged inventory designated as
available-for-immediate-sale was approximately $4.3 billion. Inventory positions
that are both aged and whose values are unverified amounted to less than $2.1
billion at December 31, 2002. The fair value of aged inventory is actively
monitored and, where appropriate, is discounted to reflect the implied
illiquidity for positions that have been available-for-immediate-sale for longer
than 90 days. At December 31, 2002, such valuation adjustments amounted to $56
million.
Citigroup's private equity subsidiaries include subsidiaries registered as
Small Business Investment Companies and other subsidiaries that engage
exclusively in venture capital activities. Investments held by private equity
subsidiaries related to the Company's venture capital activities amounted to
$3.7 billion at December 31, 2002. For investments in publicly traded securities
held by private equity subsidiaries amounting to approximately $0.9 billion at
December 31, 2002, fair value is generally based upon quoted market prices.
These publicly traded securities include thinly traded securities, large block
holdings, restricted shares or other special situations, and the quoted market
price is adjusted to produce an estimate of the attainable fair value for the
securities. To determine the amount of the adjustment, the Company uses a model
that is based on option theory. The model is validated annually by an
independent valuation consulting firm. Such adjustments ranged from 5% to 30% of
the investments' quoted prices in 2002. For investments that are not publicly
traded that are held by private equity subsidiaries amounting to approximately
$2.8 billion at December 31, 2002, estimates of fair value are made periodically
by management based upon relevant third-party arm's length transactions, current
and subsequent financings and comparisons to similar companies for which quoted
market prices are available. Independent consultants may be used to provide
valuations periodically for certain investments that are not publicly traded or
the valuations may be done internally. Internal valuations are reviewed by
personnel independent of the investing entity.
See the discussion of trading account assets and liabilities and
investments in Summary of Significant Accounting Policies in Note 1 to the
Consolidated Financial Statements. For additional information regarding the
sensitivity of these instruments, see "Market Risk Management Process"
on page 45.
10
<Page>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management's estimate of
probable losses inherent in the lending portfolio. This evaluation process is
subject to numerous estimates and judgments. The frequency of default, risk
ratings, and the loss recovery rates, among other things, are considered in
making this evaluation, as are the size and diversity of individual large
credits. Changes in these estimates could have a direct impact on the credit
costs in any quarter and could result in a change in the allowance. At December
31, 2002, the allowance totaled $5.091 billion for the corporate loan portfolio
and $6.410 billion for the consumer portfolio. Attribution of the allowance is
made for analytic purposes only, and the entire allowance of $11.501 billion is
available to absorb probable credit losses inherent in the portfolio including
unfunded commitments.
From December 31, 2000 to December 31, 2002, corporate cash-basis loans
increased from $1.970 billion to $4.902 billion and net credit losses rose from
$771 million in 2000 to $2.206 billion in 2002, reflecting the worsening
condition of the energy and telecommunications industries and deterioration of
economic conditions in Latin America and Asia. Over that period, the corporate
allowance for credit losses also rose from $4.015 billion to $5.091 billion.
Consumer net credit losses increased from $4.423 billion in 2000 to $6.796
billion in 2002 and consumer loans on which accrual of interest has been
suspended increased from $3.404 billion to $5.023 billion. The consumer
allowance rose from $4.946 billion to $6.410 billion from December 31, 2000 to
December 31, 2002, including $640 million and $452 million associated with the
acquisitions of Banamex and GSB, respectively, and $206 million in connection
with recent Federal Financial Institutions Examination Council (FFIEC) guidance.
The level of the consumer allowance was also impacted by deteriorating economic
conditions and increased bankruptcies, and the deterioration in Argentina and in
the CONSUMER FINANCE portfolio in Japan. Management expects that 2003 loss
experience for the corporate portfolio will be comparable to that of 2002.
Consumer credit loss rates are expected to be flat despite current economic
conditions in the U.S. and Japan, including rising bankruptcy filings and
unemployment rates.
In the corporate loan portfolio, larger-balance, non-homogeneous
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.
Reserves are established based upon an estimate of probable losses for
individual larger-balance, non-homogeneous loans deemed impaired, a
statistical model of expected losses on the remaining performing portfolio,
as well as management's detailed knowledge of the portfolio and current
conditions. Reserves for individual loans that are deemed to be impaired
consider all available evidence, including, as appropriate, the present value
of expected future cash flows discounted at the loan's contractual effective
rate, the secondary market value of the loan and the fair value of collateral.
The allowance for credit losses attributed to the corporate portfolio,
excluding CitiCapital, primarily in the GCIB segment, is established through a
process that begins with statistical estimates of probable losses inherent in
the portfolio. These estimates are based upon: (1) Citigroup's internal system
of credit risk ratings, which are analogous to the risk ratings of the major
rating agencies; (2) the corporate portfolio database; and (3) historical
default and loss data, including rating agency information regarding default
rates from 1983 to 2001 and internal data, dating to the early 1970s, on
severity of losses in the event of default. This statistical process generates
an estimate for losses inherent in the portfolio as well as a one standard
deviation confidence interval around the estimate.
The statistical estimate for losses inherent in the portfolio is based on
historical average default rates, whereas the range of the confidence interval
reflects the historical fluctuation of default rates over the credit cycle, the
historical variability of loss severity among defaulted loans, and the degree to
which there are large obligor concentrations in the global portfolio.
The statistical estimate of losses inherent in the portfolio may then be
adjusted, both for management's estimate of probable losses on specific
exposures, as well as for other considerations, such as environmental factors
and trends in portfolio indicators, including risk rated exposures, cash-basis
loans, historical and forecasted write-offs, and portfolio concentrations. In
addition, management considers the current business strategy and credit process,
including credit limit setting and compliance, credit approvals, loan
underwriting criteria and loan workout procedures.
For December 31, 2002, the statistical estimate for inherent losses in the
total corporate portfolio (excluding CitiCapital) was $3.434 billion, with a
standard deviation of $785 million. This analysis included all corporate loans,
commitments and unfunded letters of credit. Management then identified those
exposures for which name-specific loss estimates were required, and replaced the
statistical estimate of losses with management's estimate of losses. Management
made adjustments for other considerations, including portfolio trends and
economic indicators. As a result of these adjustments, at December 31, 2002, the
allowance for credit losses attributable to the corporate portfolio, excluding
CitiCapital, was set at $4.480 billion. In addition, the reserve for unfunded
letters of credit was set at $167 million, and is included in other liabilities
rather than in the allowance for credit losses.
CitiCapital's allowance is established based upon an estimate of probable
losses inherent in the portfolio for individual loans and leases deemed
impaired, and the application of annualized weighted average credit loss ratio
to the remaining portfolio. The annualized weighted average credit loss ratio
reflects both historical and projected losses. Additional reserves are
established to provide for imprecision caused by the use of estimated loss data.
11
<Page>
At December 31, 2002, the CitiCapital allowance totaled $611 million, and
was composed of $40 million of reserves on impaired loans, $511 million to be
provided for expected credit losses in the performing portfolio and $60 million
to reflect imprecision caused by the use of historical data and projected loss
data. The reserve for expected credit losses reflects a 1.87% annualized
weighted average loss ratio on the performing portfolio. A 0.50% change in the
weighted average loss ratio would increase or decrease the December 31, 2002
allowance by $137 million.
Each portfolio of smaller-balance, homogeneous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, primarily
in the Global Consumer segment, is collectively evaluated for impairment in
order to provide an allowance sufficient to cover all loans that have shown
evidence of impairment as of the balance sheet date. The foundation for
assessing the adequacy of the allowance for credit losses for consumer loans is
a statistical methodology that estimates the losses inherent in the portfolio at
the balance sheet date based on historical delinquency flow rates, charge-off
statistics and loss severity. The statistical methodology is applied separately
for each individual product within each different geographic region in which the
product is offered.
Under this statistical method, the portfolio of loans is aged and separated
into groups based upon the aging of the loan balances (current, 1 to 29 days
past due, 30 to 59 days past due, etc.). The statistical method stresses each
group of loans based upon the highest quarterly net charge-off rate over the
past five years. In addition, management adjusts the statistical result to
reflect an additional amount related to economic trends and competitive factors
and also considers other available information, including seasonality, portfolio
acquisitions, solicitation of new loans, changes in lending policies and
procedures, geographical, product, and other environmental factors, changes in
bankruptcy laws, and evolving regulatory standards.
Citigroup has well-established credit loss recognition criteria for its
various consumer loan products. These credit loss recognition criteria are based
on contractual delinquency status, consistently applied from period to period
and in compliance with FFIEC guidelines, including bankruptcy loss recognition.
The allowance for credit losses is replenished through a charge to the provision
for credit losses for all net credit losses incurred during the relevant
accounting period and adjusted to reflect current economic trends and the
results of the statistical methodology. The provision for credit losses is
highly dependent on both bankruptcy loss recognition and the time it takes for
loans to move through the delinquency buckets and eventually to write-off (flow
rates). An increase in the Company's share of bankruptcy losses would generally
result in a corresponding increase in the provision for credit losses. For
example, a 10% increase in the Company's portion of bankruptcy losses would
generally result in a similar increase in the provision for credit losses. In
addition, an acceleration of flow rates would also result in a corresponding
increase to the provision for credit losses. The precise impact that an
acceleration of flow rates would have on the provision for credit losses would
depend upon the product and geography mix that comprise the flow rate
acceleration.
The evaluation of the total allowance includes an assessment of the ability
of borrowers with foreign currency obligations to obtain the foreign currency
necessary for orderly debt servicing.
See the discussions of "Consumer Credit Risk" and "Corporate Credit Risk"
on pages 40 and 42, respectively, for additional information.
SECURITIZATIONS
Securitization is a process by which a legal entity issues certain
securities to investors, which securities pay a return based on the principal
and interest cash flows from a pool of loans or other financial assets.
Citigroup securitizes credit card receivables, mortgages, and other loans that
it originated and/or purchased and certain other financial assets. After
securitization of credit card receivables, the Company continues to maintain
account relationships with customers.
Citigroup also assists its clients in securitizing the clients' financial
assets. Citigroup may provide administrative, asset management, underwriting,
liquidity facilities and/or other services to the resulting securitization
entities, and may continue to service the financial assets sold to the
securitization entity.
There are two key accounting determinations that must be made relating to
securitizations. In the case where Citigroup originated or previously owned the
financial assets transferred to the securitization entity, a decision must be
made as to whether that transfer would be considered a sale under generally
accepted accounting principles, resulting in the transferred assets being
removed from the Company's Consolidated Statement of Financial Position with a
gain or loss recognized. Alternatively, the transfer would be considered a
financing, resulting in recognition of a liability in the Company's Consolidated
Statement of Financial Position. The second key determination to be made is
whether the securitization entity should be considered a subsidiary of the
Company and be included in the Company's Consolidated Financial Statements or
whether the entity is sufficiently independent that it does not need to be
consolidated. If the securitization entity's activities are sufficiently
restricted to meet certain accounting requirements to be considered a qualifying
special purpose entity (QSPE), the securitization entity is not consolidated by
the seller of the transferred assets. Most of the Company's securitization
transactions meet the existing criteria for sale accounting and
non-consolidation. In January 2003, the Financial Accounting Standards Board
(FASB) issued a new interpretation on consolidation accounting.
The Company participates in 4,249 securitization transactions, structured
investment vehicles and other investment funds with its own and with clients'
assets totaling $926.3 billion at December 31, 2002.
Global Consumer uses QSPEs to conduct its securitization activities,
including credit card receivables, and mortgage, home equity and auto loans.
Securitizations done by Global Consumer are for the Company's own account.
12
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QSPEs are qualifying special-purpose entities established in accordance with
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 140). The Company is the transferor of
assets to these QSPEs and, accordingly, does not consolidate these QSPEs. At
December 31, 2002, Global Consumer was involved with 172 special purpose
entities (SPEs) with assets of $250.0 billion, including five SPEs with
assets of $1.8 billion that were consolidated by the Company and 166 QSPEs
with assets of $248.2 billion.
GCIB's securitization activities are conducted on behalf of the
Company's clients and to generate revenues for services provided to the SPEs.
GCIB uses SPEs to securitize mortgage-backed securities and clients' trade
receivables, to create investment opportunities for clients through
collateralized debt obligations (CDOs), and to meet other client needs
through structured financing and leasing transactions. All the
mortgage-backed securities transactions use QSPEs, as do certain CDOs and
structured financing transactions. At December 31, 2002, GCIB was involved
with 1,344 SPEs with assets of $384.4 billion, including 482 SPEs with assets
of $11.0 billion that were consolidated by the Company and 368 QSPEs with
assets amounting to $249.7 billion.
Global Investment Management uses SPEs to create investment opportunities
for clients through mutual and money market funds, unit investment trusts, hedge
funds and alternative investment structures, substantially all of which were not
consolidated by the Company at December 31, 2002. At December 31, 2002, Global
Investment Management was involved with 2,711 SPEs with assets of $287.8
billion, including three SPEs with assets of $3.0 billion that were consolidated
by the Company and one QSPE with assets of $0.4 billion.
Proprietary Investment Activities invests in various funds as part of its
activities on behalf of the Company and also uses SPEs in creating investment
opportunities. At December 31, 2002, Proprietary Investment Activities was
involved with 22 SPEs with assets of $4.0 billion, including two SPEs with
assets of $0.8 billion that were consolidated by the Company and one QSPE with
assets of $0.9 billion.
Additional information on the Company's securitization activities can be
found in "Off-Balance Sheet Arrangements" on page 53, in Note 13 to the
Consolidated Financial Statements, and in "Consolidation of Variable Interest
Entities" on page 14.
ARGENTINA
The carrying value of assets and exposures to loss related to the Company's
operations in Argentina represents management's estimates based on current
economic, legal and political conditions. While these conditions continue to be
closely monitored, they remain fluid, and future actions by the Argentine
government or further deterioration of its economy could result in changes to
those estimates.
The carrying values of certain assets, including the compensation
instruments, government-guaranteed promissory notes (GPNs) and government
Patriotic Bonds are based on management's estimates of default, recovery rates
and any collateral features. These instruments continue to be monitored, and
have been written down to represent management's estimate of their
collectibility, which could change as economic conditions in Argentina either
stabilize or worsen.
At December 31, 2002, the carrying values of the compensation notes, GPNs,
and Patriotic Bonds were $276 million, $273 million, and $59 million,
respectively. These valuations include write-downs which reduced income.
Management continues to monitor the potential additional economic impact
that the ongoing economic crisis may have on the collectibility of loans in
Argentina. In 2002, the Company recognized net additions to the allowance for
credit losses of $855 million. Additional losses may be incurred in the future.
In 2002, the Company recognized $232 million in charges and related
reserves for Amparos. The Argentina Supreme Court is considering the
constitutionality of the 2002 redenomination of bank deposits to pesos. A
decision that the redenomination was unconstitutional could result in a
potential cost to re-dollarize the deposits depending on the terms of the
court's decision. Because the provisions of any such decision could take an
unknown variety of forms, the additional cost cannot be estimated. Further, any
voluntary actions the Company might undertake, such as the settlement of
reprogrammed deposits announced in January 2003, could mitigate such cost. In
addition, the Company believes it has a sound basis to bring a claim, as a
result of various actions of the Argentine government. A recovery on such a
claim could serve to reduce the economic loss of the Company. In the opinion
of management, the ultimate resolution of the redenomination would not be likely
to have a material adverse effect on the consolidated financial condition of the
Company, but may be material to the Company's operating results for any
particular period.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), prospectively to all awards granted, modified, or settled after January 1,
2003. The prospective method is one of the adoption methods provided for under
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," issued in December 2002. SFAS 123 requires that compensation cost
for all stock awards be calculated and recognized over the service period
(generally equal to the vesting period). This compensation cost is determined
using option pricing models, intended to estimate the fair value of the awards
at the grant date. Similar to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," the alternative method of
accounting, an offsetting increase to stockholders' equity under SFAS 123 is
recorded equal to the amount of compensation expense charged. Earnings per share
dilution is recognized as well.
Assuming a three-year vesting provision for options, the estimated impact
of this change will be approximately $0.03 per diluted share in 2003 and, when
fully phased in over the next three years, approximately $0.06 per diluted share
annually. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 36.
13
<Page>
The Company has made changes to various stock-based compensation plan
provisions for future awards. For example, the vesting period and the term of
stock options granted in 2003 have been shortened to three and six years,
respectively. In addition, the sale of underlying shares acquired through the
exercise of options granted after December 31, 2002 will be restricted for a
two-year period. The existing stock ownership commitment for senior executives
will continue, under which such executives must retain 75% of the shares they
own and acquire from the Company over the term of their employment. Original
option grants in 2003 and thereafter will not have a reload feature; however,
previously granted options will retain that feature. Other changes also may be
made that may impact the SFAS 123 adoption estimates disclosed above.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, Citigroup adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that
a liability for costs associated with exit or disposal activities, other than in
a business combination, be recognized when the liability is incurred. Previous
generally accepted accounting principles provided for the recognition of such
costs at the date of management's commitment to an exit plan. In addition, SFAS
146 requires that the liability be measured at fair value and be adjusted for
changes in estimated cash flows. The provisions of the new standard are
effective for exit or disposal activities initiated after December 31, 2002. It
is not expected that SFAS 146 will materially affect the financial statements.
This statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 36.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, FASB released FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This interpretation
changes the method of determining whether certain entities, including
securitization entities, should be included in the Company's Consolidated
Financial Statements. An entity is subject to FIN 46 and is called a variable
interest entity (VIE) if it has (1) equity that is insufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb
the expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation in accordance with SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries" (SFAS 94). A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both.
The provisions of the interpretation are to be applied immediately to VIEs
created after January 31, 2003, and to VIEs in which an enterprise obtains an
interest after that date. For VIEs in which an enterprise holds a variable
interest that it acquired before February 1, 2003, FIN 46 applies in the first
fiscal period beginning after June 15, 2003. For any VIEs that must be
consolidated under FIN 46 that were created before February 1, 2003, the assets,
liabilities and noncontrolling interest of the VIE would be initially measured
at their carrying amounts with any difference between the net amount added to
the balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46 first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. FIN 46
also mandates new disclosures about VIEs, some of which are required to be
presented in financial statements issued after January 31, 2003. See Note 13 to
the Consolidated Financial Statements.
The Company is evaluating the impact of applying FIN 46 to existing VIEs in
which it has variable interests and has not yet completed this analysis. The
rules are recent and, accordingly, they contain numerous provisions that the
accounting profession continues to analyze. The Company is considering
restructuring alternatives that would enable certain VIEs to meet the criteria
for non-consolidation as presently understood. However, at this time, it is
anticipated that the effect on the Company's Consolidated Statement of Financial
Position could be an increase of $55 billion to assets and liabilities,
primarily due to several multi-seller finance companies administered by the
Company and certain structured investment vehicles, if these non-consolidation
alternatives are not viable. The future viability of these businesses is being
assessed. As we continue to evaluate the impact of applying FIN 46, additional
entities may be identified that would need to be consolidated by the Company.
This paragraph contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 36.
GUARANTEES AND INDEMNIFICATIONS
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which requires that, for
guarantees within the scope of FIN 45 issued or amended after December 31,
2002, a liability for the fair value of the obligation undertaken in issuing
the guarantee be recognized. FIN 45 also requires additional disclosures in
financial statements for periods ending after December 15, 2002. Accordingly,
these new disclosures are included in Note 28 to the Consolidated Financial
Statements. It is not expected that the recognition and measurement
provisions of FIN 45 will have a material effect on the Company's financial
position or operating results. This statement is a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on page 36.
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL (FFIEC)
In January 2003, the FFIEC issued guidance on account management and loss
allowance practices related to credit card lending. This guidance addresses
certain account management and risk management practices as well as income
recognition and loss allowance practices for credit card portfolios. The Company
is in compliance with the income recognition and loss allowance practices that
are set forth in the guidance. The Company continues to assess the impact of the
account management and risk management practices portion of the guidance.
Certain provisions of the guidance require affected institutions to hold an
allowance against the uncollectible portion of accrued interest and fees related
to credit card loans that exist on the balance sheet (held portfolio). The
Company includes accrued interest and fees receivable on held credit card loans
as part of the loan balance, which is included in Loans on the Consolidated
Statement of Financial Position. The Company estimates uncollectible interest
and fees on credit card loans using migration analysis in which historical
delinquency and credit loss experience is applied to the aging of the portfolio.
The inherent losses as of the balance sheet date are included as a component of
the allowance for credit losses. During 2002, the Company increased the
allowance for credit losses by $206 million, through a charge to the provision
for credit losses, related to uncollectible interest and fees on held credit
card loans.
14
<Page>
PENSION ASSUMPTIONS
For the year ended December 31, 2002, pension expense was $24 million for the
U.S. plans and $133 million for the foreign plans. During the year ended
December 31, 2002, the Company contributed $500 million of Citigroup common
stock to its U.S. pension plans and $695 million to its foreign pension plans.
Citigroup common stock comprises 7.7% of the U.S. plans' assets at December 31,
2002. All U.S. qualified plans and the funded foreign plans are generally funded
to the amounts of accumulated benefit obligations. Net pension expense for the
year ended December 31, 2003 for the U.S. plans is not expected to change
materially as a result of the amortization of unrecognized net actuarial losses,
reflecting our use of the calculated value of assets, which is an averaging
process that recognizes changes in the fair values of assets over a period of
three years. As the foreign pension plans all use the fair value of plan assets,
their pension expense will be directly affected by the actual performance of the
plans' assets. This paragraph contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
EXPECTED RATE OF RETURN
Citigroup determines its assumptions for the expected rate of return on
plan assets for its U.S. plans using a "building block" approach, which focuses
on ranges of anticipated rates of return for each asset class. A weighted range
of nominal rates is then determined based on target allocations to each asset
class. Citigroup considers the expected rate of return to be a longer-term
assessment of return expectations and does not anticipate changing this
assumption annually unless there are significant changes in economic conditions.
This contrasts with the selection of the discount rate, future compensation
increase rate, and certain other assumptions, which are reconsidered annually in
accordance with generally accepted accounting principles. The expected rate of
return was 8.0% at December 31, 2002 compared with 9.5% at December 31, 2001,
reflecting the trend in equity markets. The 8.0% rate was implemented as of
September 1, 2002 when plan assets were revalued in connection with the
distribution of a majority portion of Citigroup's ownership interest in TPC to
Citigroup common stockholders.
In calculating pension expense for the U.S. plans and in determining the
expected rate of return, the Company uses the calculated value of assets. The
plans' assets are allocated 58% to equities, 26% to fixed income, and 16% to
real estate and other investments at December 31, 2002. The year-end allocation
is within the plans' target ranges. Changing the expected rate of return from
9.5% to 8.0% in 2002 had the effect of increasing 2002 net pension expense by
$45 million for the year ended December 31, 2002. For the year ended December
31, 2002, if the expected rate of return had been increased by 1%, net pension
expense for the U.S. plans would have decreased by $85 million, and if the
expected rate of return had been decreased by 1%, net pension expense would have
increased by $85 million.
A similar approach has been taken in selecting the expected rates of return
for Citigroup's foreign plans. The expected rate of return for each plan is
based upon its expected asset allocation. Market performance over a number of
earlier years is evaluated covering a wide range of economic conditions to
determine whether there are sound reasons for projecting forward any past
trends. The expected rates of return for the foreign plans ranged from 3.0% to
12.0% for 2002 compared with a range of 3.0% to 12.0% in 2001. The wide
variation in these rates is a result of differing asset allocations in the plans
as well as varying local economic conditions. For example in certain countries,
local law requires that all pension plan assets must be invested in fixed income
investments, or in government funds, or in local country securities. Asset
allocations for the foreign plans ranged from 100% fixed income investments to
75% equities/25% fixed income investments. For the year ended December 31,
2002, if the expected rate of return had been increased by 1%, net pension
expense for the foreign plans would have decreased by $21 million; if the
expected rate of return had been decreased by 1%, net pension expense would have
increased by $21 million.
DISCOUNT RATE
The discount rate for the U.S. pension and postretirement plans is selected
by reference to the Moody's Aa Long-Term Corporate Bond Yield. At December 31,
2002, the Moody's Aa Long-Term Corporate Bond Yield was 6.52% and the discount
rate for both the pension and postretirement plans was set at 6.75%, while at
December 31, 2001, the Moody's Long-Term Corporate Bond Yield was 7.08% and the
discount rate was set at 7.25%. For the year ended December 31, 2002, if the
discount rate had been increased by 1%, net pension expense for the U.S. plans
would have decreased by $5.0 million, and if the discount rate had been
decreased by 1%, net pension expense would have increased by $70 million.
The discount rates for the foreign pension and postretirement plans are
selected by reference to high quality corporate bond rates in countries that
have developed corporate bond markets. However, where developed corporate bond
markets do not exist, the discount rates are selected by reference to local
government bond rates with a premium added to reflect the additional risk for
corporate bonds. At December 31, 2002, the discount rates for the foreign plans
ranged from 2.25% to 12.0% compared with a range of 2.5% to 12.0% at December
31, 2001. For the year ended December 31, 2002, if the discount rate had been
increased by 1%, net pension expense for the foreign plans would have decreased
by $41 million; if the discount rate had been decreased by 1%, net pension
expense would have increased by $46 million.
15
<Page>
BUSINESS FOCUS
The following tables show the net income (loss) for Citigroup's businesses both
on a product view and on a regional view:
CITIGROUP NET INCOME - PRODUCT VIEW
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 (1) 2000 (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL CONSUMER
CARDS $ 3,125 $ 2,536 $ 2,179
CONSUMER FINANCE 2,210 1,905 1,365
RETAIL BANKING 3,230 2,508 1,957
Other (140) (113) (91)
--------------------------------
TOTAL GLOBAL CONSUMER 8,425 6,836 5,410
--------------------------------
GLOBAL CORPORATE AND INVESTMENT BANK
CAPITAL MARKETS AND BANKING 3,871 3,887 3,567
TRANSACTION SERVICES 521 407 465
Other(2) (1,363) 52 (29)
--------------------------------
TOTAL GLOBAL CORPORATE
AND INVESTMENT BANK 3,029 4,346 4,003
--------------------------------
PRIVATE CLIENT SERVICES 722 767 1,068
--------------------------------
GLOBAL INVESTMENT MANAGEMENT
LIFE INSURANCE AND ANNUITIES 836 836 794
PRIVATE BANK 456 368 317
ASSET MANAGEMENT 521 392 349
--------------------------------
TOTAL GLOBAL INVESTMENT MANAGEMENT 1,813 1,596 1,460
--------------------------------
PROPRIETARY INVESTMENT ACTIVITIES(3) (448) 318 1,340
CORPORATE/OTHER (93) (634) (1,050)
INCOME FROM CONTINUING OPERATIONS 13,448 13,229 12,231
INCOME FROM DISCONTINUED OPERATIONS(4) 1,875 1,055 1,288
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES(5) (47) (158) -
--------------------------------
TOTAL NET INCOME $ 15,276 $ 14,126 $ 13,519
================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
(2) 2002 includes a $1.3 billion after-tax reserve for settlement-in-principle
and charge for regulatory and legal matters.
(3) Includes Realized Insurance Investment Portfolio Gains (Losses) primarily
from the LIFE INSURANCE AND ANNUITIES and Primerica businesses of ($215)
million, $94 million and ($72) million for 2002, 2001 and 2000,
respectively.
(4) On August 20, 2002, Citigroup completed the distribution to its
stockholders of a majority portion of its remaining ownership interest in
TPC. Following the distribution, Citigroup began accounting for TPC as
discontinued operations. See Note 4 to the Consolidated Financial
Statements.
(5) Accounting changes in 2002 of ($47) million include the adoption of the
remaining provisions of SFAS 142. Accounting changes in 2001 of ($42)
million and ($116) million include the adoption of SFAS 133 and EITF Issue
99-20, respectively. See Note 1 to the Consolidated Financial Statements.
16
<page>
CITIGROUP NET INCOME -- REGIONAL VIEW(1)
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 (2) 2000 (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH AMERICA (EXCLUDING MEXICO)
Consumer $ 5,399 $ 4,562 $ 3,571
Corporate and Private Client Services(3) 1,736 2,750 2,464
Investment Management 1,367 1,313 1,255
--------------------------------
TOTAL NORTH AMERICA 8,502 8,625 7,290
--------------------------------
MEXICO(4)
Consumer 761 119 (60)
Corporate and Private Client Services 210 101 96
Investment Management 234 73 27
--------------------------------
TOTAL MEXICO 1,205 293 63
--------------------------------
WESTERN EUROPE
Consumer 613 446 369
Corporate and Private Client Services 375 509 697
Investment Management 4 4 (21)
--------------------------------
TOTAL WESTERN EUROPE 992 959 1,045
--------------------------------
JAPAN
Consumer 977 957 746
Corporate and Private Client Services 97 97 348
Investment Management 57 33 17
--------------------------------
TOTAL JAPAN 1,131 1,087 1,111
--------------------------------
ASIA (EXCLUDING JAPAN)
Consumer 652 605 530
Corporate and Private Client Services 662 617 547
Investment Management 107 79 53
--------------------------------
TOTAL ASIA 1,421 1,301 1,130
--------------------------------
LATIN AMERICA
Consumer (144) 64 209
Corporate and Private Client Services 75 538 524
Investment Management 22 63 94
--------------------------------
TOTAL LATIN AMERICA (47) 665 827
--------------------------------
CENTRAL AND EASTERN EUROPE,
MIDDLE EAST AND AFRICA
Consumer 167 83 45
Corporate and Private Client Services 596 501 395
Investment Management 22 31 35
--------------------------------
TOTAL CENTRAL AND EASTERN EUROPE,
MIDDLE EAST AND AFRICA 785 615 475
--------------------------------
PROPRIETARY INVESTMENT ACTIVITIES (448) 318 1,340
CORPORATE /OTHER(5) (93) (634) (1,050)
INCOME FROM CONTINUING OPERATIONS 13,448 13,229 12,231
INCOME FROM DISCONTINUED OPERATIONS(6) 1,875 1,055 1,288
CUMULATIVE EFFECT
OF ACCOUNTING CHANGES(7) (47) (158) -
--------------------------------
TOTAL NET INCOME $ 15,276 $ 14,126 $ 13,519
================================
</Table>
(1) Proprietary Investment Activities is centrally managed and not allocated to
any region.
(2) Reclassified to conform to the 2002 presentation.
(3) 2002 includes a $1.3 billion after-tax reserve for settlement-in-principle
and charge for regulatory and legal matters.
(4) Mexico's results include the operations of Banamex from August 2001
forward.
(5) Corporate/Other is not allocated to any region, however, it is primarily
concentrated within North America (excluding Mexico).
(6) See Note 4 to the Consolidated Financial Statements.
(7) See Note 1 to the Consolidated Financial Statements.
SELECTED REVENUE AND EXPENSE ITEMS
Net interest revenue was $37.7 billion in 2002, up $5.0 billion or 15% from
2001, which was up $6.4 billion or 24% from 2000, reflecting the impact of a
changing rate environment, business volume growth in most markets and the impact
of acquisitions.
Total commissions, asset management and administration fees and other fee
revenues of $20.4 billion were down $578 million or 3% in 2002 primarily
reflecting decreased activity in over-the-counter securities sales and mutual
fund commissions due to depressed market conditions, partially offset by the
impact of acquisitions. Insurance premiums of $3.4 billion in 2002 were down 1%
from year-ago levels and up $214 million or 7% in 2001 compared to 2000.
Principal transactions revenues of $4.5 billion decreased $1.0 billion or
19% from 2001 primarily reflecting results in GCIB. Realized gains/(losses) from
sales of investments of ($485) million in 2002 were down from $237 million in
2001, and down from $760 million in 2000. Other revenue of $5.8 billion in 2002
increased $1.3 billion from 2001, which was down $1.5 billion from 2000. The
2002 increase primarily reflected the gain on the sale of 399 Park Avenue,
higher securitization gains and activities, partially offset by lower venture
capital activity and increased credit losses on securitized credit card
receivables.
OPERATING EXPENSES
Operating expenses grew $770 million or 2% to $37.3 billion in 2002, and
increased $719 million or 2% from 2000 to 2001. Expenses included the impact
from acquisitions and the settlement-in-principle charge which were largely
offset by lower compensation and benefits, expense rationalization initiatives
and a benefit of $610 million from the absence of goodwill and other
indefinite-lived intangible asset amortizations.
THE NET INCOME LINE IN THE FOLLOWING BUSINESS SEGMENTS AND OPERATING UNIT
DISCUSSIONS EXCLUDES THE CUMULATIVE EFFECT OF ACCOUNTING CHANGES AND INCOME FROM
DISCONTINUED OPERATIONS. THE CUMULATIVE EFFECT OF ACCOUNTING CHANGES AND INCOME
FROM DISCONTINUED OPERATIONS IS DISCLOSED WITHIN THE CORPORATE/OTHER BUSINESS
SEGMENT. SEE NOTES 1 AND 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN
AMOUNTS IN PRIOR YEARS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR'S
PRESENTATION.
17
<Page>
GLOBAL CONSUMER
GLOBAL CONSUMER--2002 NET INCOME
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2000 $5.410
2001 $6.836
2002 $8.425
GLOBAL CONSUMER--2002 NET INCOME BY PRODUCT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Retail Banking 38%
Consumer Finance 26%
Cards 36%
* Excludes Other
GLOBAL CONSUMER--2002 NET INCOME BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
CEEMEA 2%
Asia 8%
Japan 11%
Western Europe 7%
Mexico 9%
North America 63%
* Excludes Latin America
GLOBAL CONSUMER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 37,069 $ 32,365 $ 28,319
Operating expenses 16,234 15,558 14,737
Provisions for benefits,
claims, and credit losses 7,899 6,096 5,063
--------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 12,936 10,711 8,519
Income taxes 4,471 3,848 3,090
Minority interest, after-tax 40 27 19
--------------------------------
NET INCOME $ 8,425 $ 6,836 $ 5,410
================================
</Table>
GLOBAL CONSUMER -- which provides banking, lending, including credit and
charge cards, investment and personal insurance products and services to
customers around the world -- reported net income of $8.425 billion in 2002, up
$1.589 billion or 23% from 2001, which, in turn, increased $1.426 billion or 26%
from 2000, driven by double digit growth in RETAIL BANKING, CARDS and CONSUMER
FINANCE. RETAIL BANKING net income increased $722 million or 29% in 2002 and
$551 million or 28% in 2001 as the impact of acquisitions, including prior-year
restructuring charges, combined with growth in North America and the
international markets was partially offset by losses in Argentina. CARDS net
income increased $589 million or 23% in 2002 and $357 million or 16% in 2001
mainly reflecting growth in Citi Cards and the acquisition of Banamex. CONSUMER
FINANCE net income increased $305 million or 16% in 2002 primarily due to growth
in North America and Western Europe, partially offset by the impact of higher
net credit losses in Japan. CONSUMER FINANCE net income increased $540 million
or 40% in 2001 mainly reflecting revenue growth and expense savings in North
America and higher business volumes, including the impact of acquisitions, in
Japan.
Global Consumer net income included a net restructuring-related release of
$10 million ($14 million pretax) in 2002 and restructuring-related charges of
$127 million ($198 million pretax) in 2001 and $144 million ($223 million
pretax) in 2000. See Note 17 to the Consolidated Financial Statements for a
discussion of restructuring-related items.
In November 2002, Citigroup completed the acquisition of GSB, which added
$25 billion in deposits and $35 billion in loans, including $33 billion in
RETAIL BANKING and $2 billion in CONSUMER FINANCE. In February and May 2002,
CitiFinancial Japan acquired the consumer finance businesses of Taihei Co., Ltd.
(Taihei) and Marufuku Co., Ltd. (Marufuku), respectively, adding $1.1 billion in
loans. In August 2001, Citicorp completed its acquisition of Banamex, adding
approximately $20 billion in consumer deposits and $10 billion in loans,
including $8 billion in RETAIL BANKING and $2 billion in CARDS. Subsequently,
Citibank Mexico's banking operations merged into Banamex, with Banamex being the
surviving entity. In July 2001, Citibanking North America completed the
acquisition of European American Bank (EAB), adding $9 billion in deposits and
$4 billion in loans. In September 2000, CitiFinancial Japan completed the
acquisition of Unimat Life Corporation (Unimat) which added $1.2 billion in
loans. These acquisitions were accounted for as purchases, therefore, their
results are included in the Global Consumer results from the dates of
acquisition. On November 30, 2000, Citigroup completed its acquisition of
Associates First Capital Corporation (Associates) which was accounted for as a
pooling of interests and is included in the results of CARDS, CONSUMER FINANCE
and RETAIL BANKING.
The table below shows net income by region for Global Consumer.
GLOBAL CONSUMER NET INCOME -- REGIONAL VIEW
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America (excluding Mexico) $ 5,399 $ 4,562 $ 3,571
Mexico 761 119 (60)
Western Europe 613 446 369
Japan 977 957 746
Asia (excluding Japan) 652 605 530
Latin America (144) 64 209
Central and Eastern Europe,
Middle East and Africa 167 83 45
--------------------------------
TOTAL NET INCOME $ 8,425 $ 6,836 $ 5,410
================================
</Table>
Growth in Global Consumer in 2002 was led by North America (excluding
Mexico), Mexico and Western Europe and was partially offset by a decline in
Latin America. North America (excluding Mexico) grew 18%, reflecting increases
in all product lines combined with the addition of GSB. Mexico increased $642
million, mainly due to the Banamex acquisition in August
18
<Page>
2001. Western Europe experienced growth of 37% in 2002, driven by
strengthening currencies and higher loan volumes in RETAIL BANKING and
CONSUMER FINANCE. Income in Japan increased 2% as a gain on sale of the
mortgage portfolio in RETAIL BANKING was partially offset by higher
credit costs in CONSUMER FINANCE. The decline in Latin America of $208 million
in 2002 was mainly due to economic conditions in Argentina which impacted all
product lines. The increase in CEEMEA of $84 million mainly reflected a gain
resulting from the disposition of a portion of an equity investment along with
growth in credit card receivables and deposit volumes.
CARDS
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 13,788 $ 12,054 $ 10,703
Operating expenses 5,560 5,499 5,343
Provision for credit losses 3,424 2,596 1,951
--------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 4,804 3,959 3,409
Income taxes 1,677 1,423 1,230
Minority interest, after-tax 2 - -
--------------------------------
NET INCOME $ 3,125 $ 2,536 $ 2,179
================================
Average assets (IN BILLIONS OF DOLLARS) 63 60 57
Return on assets 4.96% 4.23% 3.82%
================================
</Table>
CARDS -- which includes bankcards, private-label cards and charge cards
in 47 countries around the world -- reported net income of $3.125 billion in
2002, up $589 million or 23% from 2001, led by North America which benefited
from revenue growth and expense management as well as the acquisition of
Banamex in August 2001. Net income in 2001 of $2.536 billion was up $357
million or 16% from 2000, driven by growth in Citi Cards, prior-year
restructuring-related items and the Banamex acquisition, partially offset by
declines resulting from economic conditions in Argentina.
As shown in the following table, average managed loans grew 6% in 2002,
reflecting growth of 5% in North America and 8% in International Cards. Growth
in North America was led by Citi Cards, which benefited from increased
advertising and marketing expenditures, and Mexico, which included the effect of
the Banamex acquisition. Growth in International Cards reflected broad-based
increases in Asia and growth in Western Europe, led by the U.K., Greece and
Spain, all of which also benefited from strengthening currencies in 2002. The
growth in International Cards was partially offset by a decline in Argentina
reflecting the negative impact of foreign currency translation and lower loan
volumes. Average managed loans grew 10% in 2001, mainly reflecting growth in
Citi Cards and the addition of Banamex. Sales were up 5% in 2002, reflecting
growth in Citi Cards, Western Europe and Asia combined with the impact of the
events of September 11th on prior-year sales levels. Sales were unchanged in
2001 as the negative impact of the events of September 11th and the sale of
Diners Club franchises in Western Europe were partially offset by the addition
of Banamex.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES
North America $ 245.1 $ 233.2 $ 231.4
International 34.0 32.4 34.2
--------------------------------
TOTAL SALES $ 279.1 $ 265.6 $ 265.6
AVERAGE MANAGED LOANS
North America $ 110.2 $ 104.6 $ 94.0
International 10.8 10.0 9.8
--------------------------------
TOTAL AVERAGE MANAGED LOANS $ 121.0 $ 114.6 $ 103.8
================================
</Table>
Revenues, net of interest expense, of $13.788 billion in 2002 increased
$1.734 billion or 14% from 2001, primarily reflecting growth in North America,
Asia and Western Europe, partially offset by a decline in Latin America. Revenue
growth in North America was mainly due to spread improvements, resulting from
lower cost of funds that was partially offset by lower yields, combined with the
benefit of receivable growth and the acquisition of Banamex. Citi Cards revenues
in 2002 also included net gains of $425 million as a result of changes in
estimates in the timing of revenue recognition on securitizations and $128
million from an increase in the amortization period for certain direct loan
origination costs. Growth in Asia was led by Korea, the Philippines and Malaysia
while growth in Western Europe was led by the U.K., Spain and Greece, and
included the benefit of foreign currency translation. The decline in Latin
America reflected continued weakness in Argentina where reduced business
activity and the negative impact of foreign currency translation in 2002 were
partially offset by redenomination losses of $111 million associated with
consumer loans in 2001. Revenues in 2001 increased $1.351 billion or 13% from
2000 as spread improvements, increased receivables and the addition of Banamex
were partially offset by redenomination losses in Argentina.
Operating expenses of $5.560 billion in 2002 increased $61 million or 1%
from 2001. Operating expenses in 2002 included a net restructuring reserve
release of $23 million ($14 million after-tax) compared to restructuring-related
charges of $16 million ($11 million after-tax) in 2001. Excluding
restructuring-related items, expenses increased 2% in North America and 1% in
International Cards. Expense growth in North America reflected the addition of
Banamex and increased advertising and marketing costs in Citi Cards that were
partially offset by disciplined expense management including the impact of
expense reduction initiatives in Diners Club N.A. In 2001, operating expenses of
$5.499 billion grew $156 million or 3% from 2000 as volume-related increases and
the addition of Banamex were partially offset by lower restructuring-related
charges. Operating expenses in 2000 included restructuring-related charges of
$96 million ($60 million after-tax), mainly reflecting actions in Citi Cards.
The provision for credit losses in 2002 was $3.424 billion compared to
$2.596 billion in 2001 and $1.951 billion in 2000. The increase in the provision
for credit losses reflected the impact of receivable growth, primarily in Citi
Cards and the U.K., and higher loss rates in Hong Kong, as well as an increase
resulting from the Argentine crisis. The provision for credit loss in 2002 also
included a $206 million addition to the loan loss reserve established in
accordance with recent FFIEC guidance related to uncollectible interest and late
fees for on-balance sheet credit card receivables in Citi Cards.
The securitization of credit card receivables is limited to the Citi Cards
business within North America. At December 31, 2002, securitized credit card
19
<Page>
receivables were $67.1 billion, compared to $67.0 billion at December 31, 2001
and $57.2 billion at December 31, 2000. Credit card receivables held-for-sale
were $6.5 billion at December 31, 2002 and 2001, compared to $8.1 billion at
December 31, 2000. Because securitization changes Citigroup's role from that of
a lender to that of a loan servicer, it removes the receivables from Citigroup's
balance sheet and affects the amount of revenue and the manner in which revenue
and the provision for credit losses are classified in the income statement. For
securitized receivables and receivables held-for-sale, gains are recognized upon
sale and amounts that would otherwise be reported as net interest revenue, fee
and commission revenue, and credit losses on loans are instead reported as fee
and commission revenue (for servicing fees) and other revenue (for the remaining
revenue, net of credit losses and the amortization of previously recognized
securitization gains). Because credit losses are a component of these cash
flows, revenues over the term of the transactions may vary depending upon the
credit performance of the securitized receivables. However, Citigroup's exposure
to credit losses on the securitized receivables is contractually limited to the
cash flows from the receivables.
Including the effect of securitizations, managed net credit losses in 2002
were $7.175 billion with a related loss ratio of 5.93%, compared to $6.051
billion and 5.28% in 2001 and $4.367 billion and 4.21% in 2000. The increase in
the net credit loss ratio in 2002 was primarily due to increases in Citi Cards,
reflecting industry-wide trends in the U.S., combined with increases in Asia
resulting from higher bankruptcy losses in Hong Kong. Loans delinquent 90 days
or more on a managed basis were $2.398 billion or 1.84% at December 31, 2002,
compared to $2.384 billion or 1.96% at December 31, 2001 and $1.671 billion or
1.46% at December 31, 2000.
CONSUMER FINANCE
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 9,654 $ 8,838 $ 7,704
Operating expenses 3,002 3,336 3,446
Provisions for benefits,
claims, and credit losses 3,240 2,499 2,127
--------------------------------
INCOME BEFORE TAXES 3,412 3,003 2,131
Income taxes 1,202 1,098 766
--------------------------------
NET INCOME $ 2,210 $ 1,905 $ 1,365
- --------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 91 $ 84 $ 76
Return on assets 2.43% 2.27% 1.80%
================================================================================
</Table>
CONSUMER FINANCE -- which provides community-based lending services through
branch networks, regional sales offices and cross-selling initiatives with other
Citigroup businesses -- reported net income of $2.210 billion in 2002, up $305
million or 16% from 2001, as revenue growth and continued efficiencies resulting
from the integration of Associates in North America were partially offset by
higher net credit losses in the U.S. and Japan. Net income growth in 2002
included after-tax benefits of $117 million due to the absence of goodwill and
other indefinite-lived intangible asset amortization. Net income of $1.905
billion in 2001 grew $540 million or 40% from 2000, primarily reflecting growth
in receivables and expense savings in North America combined with the impact of
acquisitions in Japan.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE LOANS
Real estate-secured loans $ 46.9 $ 44.1 $ 37.8
Personal 20.6 19.2 17.3
Auto 6.6 4.6 3.7
Sales finance and other 3.8 3.5 3.5
--------------------------------
TOTAL AVERAGE LOANS $ 77.9 $ 71.4 $ 62.3
================================
</Table>
As shown in the preceding table, average loans grew 9% in 2002 resulting
from the cross-selling of products through Primerica, an increase in auto loans
in the U.S., the acquisitions of Taihei and Marufuku in Japan and growth in real
estate-secured loans in Western Europe. Average auto loans in 2002 increased
$2.0 billion or 43% from 2001, reflecting a shift in funding policy to fund
business volumes internally and the addition of GSB auto loans in November 2002.
In Japan, average loans of $12.2 billion in 2002 grew $1.6 billion or 15% from
2001, reflecting, in part, the acquisitions of Taihei and Marufuku which added
$1.1 billion to average loans, primarily personal loans. Average loans grew 15%
in 2001 mainly reflecting higher volumes from CitiFinancial locations, the
cross-selling of products through Primerica and the impact of acquisitions in
the U.S. and Japan.
As shown in the following table, the average net interest margin of 11.01%
in 2002 increased 15 basis points from 2001 as improved margins in North America
were partially offset by compression in International Consumer Finance. In North
America, the average net interest margin was 8.47% in 2002, increasing 28 basis
points from the prior year as the benefit of lower cost of funds was partially
offset by lower yields, both reflecting a lower interest rate environment. The
average net interest margin for International Consumer Finance was 21.14% in
2002, down 99 basis points from the prior year as lower cost of funds was more
than offset by a decrease in yields resulting, in part, from strong growth in
lower-risk real estate-secured loans, that have lower yields, in Western Europe.
The average net interest margin of 10.86% in 2001 increased 40 basis points from
2000, as lower cost of funds was partially offset by growth in real
estate-secured loans.
<Table>
<Caption>
2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE NET INTEREST MARGIN
North America 8.47% 8.19% 8.01%
International 21.14% 22.13% 21.66%
TOTAL 11.01% 10.86% 10.46%
================================================================================
</Table>
Revenues, net of interest expense, of $9.654 billion in 2002 increased $816
million or 9% from 2001. The increase in revenue reflected growth of 10% in
North America and 8% in International Consumer Finance. Revenue growth in North
America reflected the benefit of receivable growth which included the
acquisition of GSB and improved net interest margins. In International Consumer
Finance, revenue growth in Japan and Western Europe was partially offset by a
decline in Latin America. Revenue growth in Japan was primarily driven by the
impact of acquisitions and was partially offset by lower foreign currency gains.
Revenue growth in Western Europe reflected higher volumes and the benefit of
foreign currency translation, partially offset by lower yields. The decline in
Latin America was due to continued weakness in Argentina where reduced business
activity and the negative impact of foreign currency translation in 2002 was
partially offset by redenomination losses of $62 million associated with
consumer loans in 2001. Revenues of $8.838 billion in 2001 increased $1.134
billion or
20
<Page>
15% from 2000 reflecting the benefit of receivable growth in North America,
Western Europe and Japan, including the acquisition of Unimat, partially
offset by redenomination losses in Argentina.
Operating expenses of $3.002 billion in 2002 decreased $334 million or 10%
from 2001 reflecting declines of 8% in North America and 13% in International
Consumer Finance. The improvement in expenses was primarily due to continued
benefits from the integration of Associates in the U.S., the absence of goodwill
and other indefinite-lived intangible asset amortization and the benefit of
foreign currency translation and management expense initiatives in Latin
America. Expenses of $3.336 billion in 2001 decreased $110 million or 3% from
2000 reflecting expense savings in the U.S., as well as higher
restructuring-related charges in 2000, partially offset by the addition of
Unimat in Japan. Operating expenses included restructuring-related charges of $8
million ($6 million after-tax) in 2002, $34 million ($20 million after-tax) in
2001 and $108 million ($70 million after-tax) in 2000. Restructuring-related
charges in 2001 and 2000 were mainly due to actions in the U.S.
The provisions for benefits, claims, and credit losses were $3.240 billion
in 2002, up from $2.499 billion in 2001 and $2.127 billion in 2000, primarily
reflecting increases in the provision for credit losses in Japan and the U.S.,
including the impact of acquisitions. Net credit losses and the related loss
ratio were $2.968 billion and 3.81% in 2002, up from $2.213 billion and 3.10% in
2001 and $1.845 billion and 2.96% in 2000. In North America, net credit losses
were $1.865 billion and the related loss ratio was 3.00% in 2002, compared to
$1.527 billion and 2.65% in 2001, and $1.339 billion and 2.61% in 2000. The
increase in net credit losses in 2002 was due to increases in the personal and
auto loan portfolios in the U.S. Net credit losses in the U.S. included $76
million in 2001 from sales of certain under-performing loans, which were charged
against the allowance for credit losses and resulted in a 13 basis point
increase to the net credit loss ratio in North America. Net credit losses in
International Consumer Finance were $1.103 billion and the related loss ratio
was 7.05% in 2002, up from $686 million and 5.01% in 2001 and $506 million and
4.58% in 2000 primarily due to increased bankruptcy filings and deteriorating
credit quality in selected portions of the Japan portfolio.
Loans delinquent 90 days or more were $2.119 billion or 2.52% of loans at
December 31, 2002, compared to $2.243 billion or 3.04% at December 31, 2001 and
$1.435 billion or 2.15% at December 31, 2000. The decrease in delinquencies in
2002 was primarily due to improvements in the U.S., including the impact of
credit risk management initiatives undertaken as part of the integration of
Associates.
In Japan, net credit losses and the related loss ratio are expected to
increase from 2002 as a result of economic conditions and credit performance of
the portfolios, including increased bankruptcy filings. This is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 36.
RETAIL BANKING
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 13,335 $ 11,281 $ 9,696
Operating expenses 7,149 6,300 5,585
Provisions for benefits,
claims, and credit losses 1,235 1,061 980
--------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 4,951 3,920 3,131
Income taxes 1,683 1,385 1,155
Minority interest, after-tax 38 27 19
--------------------------------
NET INCOME $ 3,230 $ 2,508 $ 1,957
- --------------------------------------------------------------------------------
Average assets (IN BILLIONS OF DOLLARS) $ 176 $ 139 $ 110
Return on assets 1.84% 1.80% 1.78%
================================================================================
</Table>
RETAIL BANKING -- which delivers banking, lending, investment and insurance
services to customers through retail branches, electronic delivery systems and
the network of Primerica independent agents -- reported net income of $3.230
billion in 2002, up $722 million or 29% from 2001. The increase in RETAIL
BANKING reflected growth in both North America and International Retail Banking
net income of $714 million or 47% and $8 million or 1%, respectively. Growth in
North America was primarily due to the impact of acquisitions, revenue growth in
Citibanking North America and Consumer Assets as well as restructuring-related
charges in the prior year. The increase in International Retail Banking
reflected growth in all regions except Latin America, which continued to be
impacted by economic weakness in Argentina. Net income of $2.508 billion in 2001
grew $551 million or 28% from 2000 reflecting the impact of acquisitions in
North America and growth in International Retail Banking in all regions except
Latin America.
As shown in the following table, RETAIL BANKING grew customer deposits and
average loans in 2002. The growth in North America primarily reflected the
timing of acquisitions. In addition, North America experienced customer deposit
growth in Citibanking North America and average loan growth in Consumer Assets,
primarily due to increased student loans and mortgage loans held for sale.
International Retail Banking average loans declined 1% in 2002 as the impact of
credit risk management initiatives and foreign currency translation in Argentina
and the sale of the mortgage portfolio in Japan were partially offset by growth
in installment loans, including the impact of foreign currency translation, in
Germany. Average customer deposits in the international markets were essentially
unchanged in 2002 as growth in Japan was offset by the negative impact of
foreign currency translation in Argentina. Growth in average customer deposits
in 2001 was driven by the acquisitions of Banamex and EAB as well as increases
in all markets except Latin America.
21
<Page>
Increases in average loans in 2001 were mainly due to acquisitions and growth
in Consumer Assets and Western Europe.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE CUSTOMER DEPOSITS
North America $ 91.2 $ 68.2 $ 50.0
International 79.0 78.8 72.8
--------------------------------
TOTAL AVERAGE CUSTOMER DEPOSITS $ 170.2 $ 147.0 $ 122.8
AVERAGE LOANS
North America(1) $ 75.6 $ 59.8 $ 45.4
International 37.4 37.6 36.4
--------------------------------
TOTAL AVERAGE LOANS $ 113.0 $ 97.4 $ 81.8
================================
</Table>
(1) Includes loans held for sale.
Revenues, net of interest expense, of $13.335 billion in 2002 increased
$2.054 billion or 18% from 2001. Revenues in North America grew $1.939 billion
or 28%, driven by the impact of acquisitions combined with growth in Citibanking
North America, Consumer Assets and Primerica. Excluding the acquisitions of EAB
and GSB, growth in Citibanking North America reflected the benefit of customer
deposit growth and increased debit card fees, partially offset by reduced net
funding and positioning spreads. Excluding the acquisition of GSB, revenue
growth in Consumer Assets was mainly due to higher mortgage securitization
income and increased spreads and volumes in student loans, partially offset by
lower servicing revenue. The decline in servicing revenue primarily reflected
increased mortgage refinancing and prepayment activity that was driven by lower
interest rates. Revenue growth in Primerica was driven by volume-related growth
in insurance premiums. International Retail Banking revenues increased $115
million or 3% reflecting growth across the regions, partially offset by a
decline in Latin America. Growth in Western Europe was largely due to increased
loan volumes and improved spreads, along with the benefit of foreign currency
translation. Revenue increases in Asia and CEEMEA reflected the benefit of
growth in business volumes and investment product fees. In Japan, a $65 million
gain on sale of the mortgage portfolio and growth in investment product fees
resulted in a 15% increase in revenues. The decline in Latin America was due to
events in Argentina, which included losses on Amparos, reduced business activity
due to the economic situation, the negative impact of foreign currency
translation and losses resulting from government-mandated inflation-indexed
interest accruals. The 2002 decline in Latin America was partially offset by
redenomination losses in 2001 of $62 million associated with consumer loans in
Argentina. Revenues of $11.281 billion in 2001 grew $1.585 billion or 16% from
2000 reflecting the impact of acquisitions along with growth in Citibanking
North America, Consumer Assets, Asia and CEEMEA.
Operating expenses of $7.149 billion in 2002 increased $849 million or
13% from 2001 reflecting increases of 21% in North America and 2% in
International Retail Banking. Operating expenses in 2002 included
restructuring-related charges of $5 million compared to restructuring-related
charges of $128 million ($83 million after-tax) in 2001, primarily related to
the acquisition of Banamex, and $22 million ($16 million after-tax) in 2000.
Excluding restructuring-related charges, the increase in North America
resulted from the impact of acquisitions and other volume-related increases.
The increase in International Retail Banking reflected the impact of
increased business volumes, partially offset by expense reduction initiatives
and the impact of foreign currency translation in Latin America. Operating
expenses in 2001 were up $715 million or 13% compared to 2000 primarily
reflecting the addition of EAB and Banamex, higher restructuring-related
charges, increased advertising and marketing costs and other volume-related
increases.
The provisions for benefits, claims, and credit losses were $1.235 billion
in 2002, up from $1.061 billion in 2001 and $980 million in 2000. The increase
in the provisions for benefits, claims, and credit losses in 2002 was mainly due
to the inclusion of a full year for Banamex combined with the impact of loan
growth and higher net credit losses as well as an increase resulting from the
Argentine crisis. The increase in the provisions in 2001 compared to 2000 was
mainly due to the impact of acquisitions, partially offset by a decline in Asia.
Net credit losses were $753 million and the related loss ratio was 0.67% in
2002, compared to $636 million and 0.65% in 2001 and $618 million and 0.76% in
2000. The 2002 increase in net credit losses was mainly due to the acquisition
of Banamex.
Loans delinquent 90 days or more were $4.150 billion or 2.84% of loans at
December 31, 2002, compared to $3.437 billion or 3.30% at December 31, 2001 and
$2.124 billion or 2.37% in 2000. The increase in delinquent loans in 2002 was
primarily due to increases in Consumer Assets and Western Europe, partially
offset by improvements in the mortgage and middle market loan portfolios in
Mexico. The increase in Consumer Assets mainly reflected the addition of GSB and
a higher level of buy backs from GNMA pools where credit risk is maintained by
government agencies. The increase in Western Europe occurred mainly in Germany
and reflected the impact of statutory changes and foreign currency translation.
Average assets of $176 billion in 2002 increased $37 billion from 2001,
which, in turn, increased $29 billion from 2000. The increases in 2002 and 2001
primarily reflected the acquisitions of Banamex, EAB and GSB.
OTHER CONSUMER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 292 $ 192 $ 216
Operating expenses 523 423 363
Provisions for benefits,
claims, and credit losses - (60) 5
---------------------------------
INCOME BEFORE TAX BENEFITS (231) (171) (152)
Income tax benefits (91) (58) (61)
---------------------------------
NET LOSS $ (140) $ (113) $ (91)
=================================
</Table>
OTHER CONSUMER - which includes certain treasury and other unallocated staff
functions, global marketing and other programs -- reported losses of $140
million, $113 million and $91 million in 2002, 2001 and 2000, respectively.
Included in the 2002 results was a $52 million gain resulting from the
disposition of a portion of an equity investment in CEEMEA and gains from the
sales of buildings in Asia. Excluding these items, the increase in losses from
2001 reflected lower foreign currency hedge gains and an increase in legal costs
in connection with settlements reached during the year. The increase in losses
from 2000 was primarily due to lower treasury results and lower foreign currency
hedge gains.
Operating expenses included a restructuring-related credit of $4 million in
2002, a restructuring-related charge of $20 million ($13 million after-tax) in
2001 and a restructuring-related credit of $3 million in 2000.
22
<Page>
Revenues, expenses, and the provisions for benefits, claims and credit
losses reflect offsets to certain line-item reclassifications reported in other
Global Consumer operating segments.
GLOBAL CONSUMER OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
During 2003, the Global Consumer businesses will continue to maintain a
focus on tight expense control and productivity improvements. While the
businesses will also focus on expanding the base of stable and recurring
revenues and managing credit risk, revenue and credit performance will also be
impacted by U.S. and global economic conditions, including the level of interest
rates, bankruptcy filings and unemployment rates, as well as political policies
and developments around the world. The Company remains diversified across a
number of geographies, product groups and customer segments and continues to
monitor the economic situation in all of the countries in which it operates.
CARDS -- In 2002, CARDS reported record income of $3.1 billion, an increase
of 23% from 2001 as operating margins continued to expand with 13% growth in
risk-adjusted revenue outpacing a 1% increase in expenses. In 2003, CARDS is
expected to deliver strong earnings growth with increased receivables and
moderately improved net credit losses.
In 2003, Citi Cards expects continued income growth and consistent
risk-adjusted revenue performance, despite the continuation of a challenging
competitive environment. The business expects to achieve strong receivable
growth through the addition of certain private label card programs, organic
growth and new product launches. In Mexico, the Company will continue to
leverage the expertise and experience of the global CARDS franchise.
International Cards is also expecting strong earnings growth in 2003 with a
focus on expanding the revenue base through growth in sales, receivables and
accounts while investing in both new and existing markets, including expansion
in Europe and the recently announced joint venture with the Shanghai Pudong
Development Bank in China.
CONSUMER FINANCE -- In 2002, CONSUMER FINANCE reported record income of
$2.2 billion, an increase of 16% from 2001 as revenue growth and continued
expense reductions offset higher credit costs. In 2003, CONSUMER FINANCE expects
moderate income growth.
In North America, CitiFinancial expects to deliver income growth through
the integration of GSB auto operations combined with growth in receivables and a
continued focus on expense management. Moderate revenue growth is anticipated in
2003 as the impact of receivable growth is partially offset by the continued
shift in the portfolio toward higher-quality credits with a more diversified and
competitively priced product set. In the international markets, growth in 2003
is expected to be negatively impacted by performance in Japan, where challenging
economic conditions persist. Throughout 2002, the consumer finance industry in
Japan experienced significant increases in bankruptcy losses that reached record
levels. In 2003, we expect credit losses in Japan to continue to rise and volume
pressure, resulting from a tightening of underwriting standards in 2002, to
continue. To mitigate the impact of the deteriorating environment, the business
increased its focus on operating efficiencies through the centralization of
back-office functions and rationalization of the branch network. In other
international markets, important growth opportunities are anticipated as we
continue to focus on gaining market share in both new and established markets
including Denmark, Poland, South Korea and Thailand.
RETAIL BANKING -- In 2002, RETAIL BANKING reported record income of $3.2
billion, an increase of 29% from 2001, reflecting a year of continued success in
core business performance across most regions combined with the impact of
acquisitions, which helped to drive North America income up 47%. In 2003, RETAIL
BANKING expects to deliver strong income increases with ongoing improvements in
core business performance and the addition of GSB while continuing to manage
through the economic uncertainties in Latin America, including the impact of
Argentine government actions on consumer deposits in that country. For further
information regarding the situation in Argentina, see the discussions on the
"Impact from Argentina's Economic Changes" and "Argentina" on pages 8 and 13,
respectively.
In 2003, we expect to complete the integration of GSB, which added 352
branches, primarily in California, and significantly improves our penetration in
the west coast market as well as provides an important foothold in the growing
Hispanic banking market. The technology portion of the integration should be
completed in the first quarter of 2003, while the transition to the Citi sales
model, which began with the offering of selective Citigroup products in November
2002, is expected to be ongoing throughout 2003. In 2003, Citibanking North
America will maintain a focus on improving sales productivity in the financial
centers, increasing customer retention and cross-selling in the branch network
and leveraging technologies to drive cost efficiencies. In Consumer Assets,
CitiMortgage is expected to achieve growth through continued market share gains
in originations and reduced costs from operational efficiencies while Student
Loans will continue to benefit from the strong Citi brand, an expanded national
sales force and best-in-class online applications and customer service.
Primerica expects to sustain momentum in recruiting and production volumes
through focused product offerings, sales and product training programs, and
continued dedication to its cross-selling relationships while further developing
its international presence. The RETAIL BANKING business in Mexico is expected to
benefit from improved operating margins in 2003 as cost management restrains
expense growth and the business focuses on deposit growth in the retail and
middle market segments. In the international markets, Western Europe is expected
to deliver strong growth through continued focus on defined customer segments
and core product offerings combined with strategic investments in distribution
platforms and tight expense management. In Japan, the business will continue to
build on its strength in investment product sales and deposit gathering. In
2003, the business focus in Asia will be on maintaining sound expense management
and tight credit underwriting while continuing to build on revenue momentum
through growth in branch lending and investment product sales. CEEMEA
anticipates continued market share expansion in established markets, as well as
the build-out of the new franchise in Russia.
23
<Page>
GLOBAL CORPORATE AND INVESTMENT BANK
GLOBAL CORPORATE AND INVESTMENT BANK--2002 NET INCOME
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2000 $4.003
2001 $4.346
2002 $3.029
GLOBAL CORPORATE AND INVESTMENT BANK--2002 NET INCOME BY PRODUCT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Transaction Services 12%
Capital Markets and Banking 88%
* Excludes Other Corporate
GLOBAL CORPORATE AND INVESTMENT BANK--2002 NET INCOME BY REGION
[EDGAR REPRESENTATION OF GRAPHIC DATA]
CEEMEA 20%
Latin America 2%
Asia 22%
Japan 3%
Western Europe 12%
Mexico 7%
North America 34%
GLOBAL CORPORATE AND INVESTMENT BANK
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 20,218 $ 20,806 $ 19,342
Operating expenses 12,746 12,610 12,108
Provision for credit losses 2,814 1,460 947
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 4,658 6,736 6,287
Income taxes 1,604 2,364 2,266
Minority interest, after-tax 25 26 18
---------------------------------
NET INCOME $ 3,029 $ 4,346 $ 4,003
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
GLOBAL CORPORATE AND INVESTMENT BANK (GCIB) serves corporations, financial
institutions, governments, investors and other participants in capital markets
throughout the world and consists of CAPITAL MARKETS AND BANKING and TRANSACTION
SERVICES. The primary businesses in CAPITAL MARKETS AND BANKING include Fixed
Income, Equities, Investment Banking, Sales & Trading (which mainly operates in
Asia, Latin America, CEEMEA and Mexico), CitiCapital and Lending.
On June 7, 2000, GCIB completed the acquisition of a majority interest in
Bank Handlowy, a leading bank in Poland. On May 1, 2000, GCIB completed the
acquisition of the global investment banking business and related net assets of
Schroders PLC (Schroders), including all corporate finance, financial markets
and securities activities. During the second quarter of 2000, GCIB strengthened
its position in the U.S. leasing market through the purchase of Copelco. The
results of Banamex are included from August 6, 2001 forward.
GCIB reported net income of $3.029 billion, $4.346 billion and $4.003
billion in 2002, 2001 and 2000, respectively. The decrease in 2002 net income
reflects decreases of $1.415 billion in Other Corporate and $16 million in
CAPITAL MARKETS AND BANKING, offset by an increase of $114 million or 28% in
TRANSACTION SERVICES. The increase in 2001 net income reflects increases of $320
million or 9% in CAPITAL MARKETS AND BANKING and $81 million in Other Corporate,
offset by a decline of $58 million or 12% in TRANSACTION SERVICES.
CAPITAL MARKETS AND BANKING net income of $3.871 billion in 2002 decreased
$16 million compared to 2001 primarily reflecting a higher provision for credit
losses, decreases in Latin America primarily due to Argentina and lower business
volumes in Investment Banking and Equities, partially offset by lower
compensation and benefits, increases in Sales & Trading and Fixed Income, gains
on credit derivatives associated with the loan portfolio, 2001 restructuring
charges of $121 million (after-tax) and the benefit from the absence of goodwill
and other indefinite-lived intangible asset amortization. The increase in
CAPITAL MARKETS AND Banking 2001 net income compared to 2000 was primarily due
to strong growth in Fixed Income, Sales & Trading and gains on asset sales in
CitiCapital, partially offset by weakness in Equities, lower earnings from the
investment in Nikko Cordial, a higher provision for credit losses and
restructuring-related charges of $121 million (after-tax) in 2001.
TRANSACTION SERVICES net income of $521 million in 2002 increased $114
million or 28% from 2001 primarily due to higher volumes, the impact of expense
control initiatives, investment gains in Europe and Asia and prior-year
restructuring-related charges of $13 million (after-tax), partially offset by
trade finance write-offs in Argentina and Brazil and spread compression. The
decrease in TRANSACTION SERVICES 2001 net income compared to 2000 was primarily
due to increased investment spending on internet initiatives, declining spreads
and a restructuring related charge of $13 million (after-tax) in 2001, partially
offset by higher business volumes, including the acquisitions of Bank Handlowy
and Banamex.
The decline in Other Corporate in 2002 was primarily due to a $1.323
billion after-tax charge related to the establishment of reserves for the
settlement-in-principle with regulators and related civil litigation, as well as
regulatory inquiries and private litigation related to Enron, partially offset
by a $52 million after-tax gain resulting from the disposition of a portion of
an equity investment in CEEMEA. The improvement in 2001 was primarily due to
gains on building sales in Asia and the release of a rent reserve in 2001 that
was no longer required.
The businesses of GCIB 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 over 100
countries in which the businesses operate. Global economic and market events can
have both positive and negative effects on the revenue performance of the
businesses and can affect credit performance. Losses on corporate
24
<Page>
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. Net credit losses and cash-basis loans are expected to
be comparable to 2002 levels due to weak global economic conditions,
sovereign or regulatory actions and other factors. This paragraph contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 36.
CAPITAL MARKETS AND BANKING
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 16,898 $ 17,492 $ 16,192
Operating expenses 8,350 9,941 9,528
Provision for credit losses 2,605 1,439 920
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 5,943 6,112 5,744
Income taxes 2,048 2,206 2,152
Minority interest, after-tax 24 19 25
---------------------------------
NET INCOME $ 3,871 $ 3,887 $ 3,567
=================================
</Table>
CAPITAL MARKETS AND BANKING delivers a full range of global financial
services and products including investment banking, institutional brokerage,
advisory services, foreign exchange, structured products, derivatives, loans,
leasing and equipment finance.
CAPITAL MARKETS AND BANKING net income was $3.871 billion in 2002 compared
to $3.887 billion in 2001 and $3.567 billion in 2000. Net income decreased $16
million during 2002 primarily due to a higher provision for credit losses,
decreases in Latin America primarily due to Argentina and lower business volumes
in Investment Banking and Equities, partially offset by lower compensation and
benefits; increases in Sales & Trading and Fixed Income; gains on credit
derivatives associated with the loan portfolio; 2001 restructuring charges of
$121 million (after-tax); and the benefit from the absence of goodwill and other
indefinite-lived intangible asset amortization. Net income in 2001 increased
$320 million or 9% primarily reflecting strong growth in Fixed Income, Sales &
Trading and gains on asset sales in CitiCapital, partially offset by weakness in
Equities, lower earnings from the investment in Nikko Cordial, a higher
provision for credit losses and restructuring-related charges of $121 million
(after-tax) in 2001.
Revenues, net of interest expense, of $16.898 billion in 2002 decreased
$594 million or 3% from 2001 primarily reflecting decreases in Latin America
that were mainly due to redenomination losses and write-downs of sovereign
securities in Argentina and declines in Investment Banking and Equities,
partially offset by growth in Sales & Trading and Fixed Income, gains on credit
derivatives associated with the loan portfolio, a gain on sale of interest in
European market exchanges and the acquisition of Banamex. In 2002, Fixed Income
and Sales & Trading benefited from a low interest rate environment. Revenues,
net of interest expense, of $17.492 billion in 2001 increased $1.300 billion or
8% from 2000 primarily due to strong growth in Fixed Income, higher Sales &
Trading, gains on asset sales in CitiCapital, the acquisition of Banamex and
benefits from capital hedging activities, partially offset by weakness in
Equities and lower earnings from the investment in Nikko Cordial.
Operating expenses were $8.350 billion in 2002 compared to $9.941 billion
in 2001 and $9.528 billion in 2000. Operating expenses decreased $1.591 billion
or 16% in 2002 compared to 2001 primarily due to lower compensation and
benefits, expense rationalization initiatives, a benefit from the absence of
goodwill and other indefinite-lived intangible asset amortization of $69 million
(pretax) and 2001 restructuring charges of $200 million (pretax), partially
offset by severance-related charges in the fourth quarter of 2002. Compensation
and benefits decreased primarily reflecting lower incentive compensation, which
is impacted by the revenue and credit performance of the business, and savings
from restructuring actions initiated in 2001. Operating expenses increased $413
million or 4% in 2001 compared to 2000 primarily due to increases in incentive
compensation and the acquisition of Banamex.
The provision for credit losses was $2.605 billion in 2002 compared to
$1.439 billion in 2001 and $920 million in 2000. The increase in 2002 primarily
reflects higher provisions for exposures in the energy and telecommunications
industries and Argentina, partially offset by higher 2001 credit losses in the
CitiCapital transportation portfolio. The increase in 2001 was primarily due to
increases in the transportation leasing portfolio, higher net credit losses in
the telecommunications, energy, retail and airline industries as well as
write-downs in Argentina.
Cash-basis loans were $4.268 billion, $3.048 billion and $1.901 billion at
December 31, 2002, 2001 and 2000, respectively. The increase in 2002 primarily
reflects increases in the energy and telecommunications industries and the
transportation leasing and equipment finance portfolios in CitiCapital, as well
as corporate borrowers in Argentina, Brazil, Thailand and Australia. The
increase in 2001 primarily reflects increases in the telecommunications, energy
and retail industries, combined with increases in CitiCapital, Mexico, Latin
America, mainly Argentina, and Asia, mainly Australia and New Zealand.
CitiCapital increased primarily due to increases in the transportation
portfolio. The increase in Mexico primarily reflects the acquisition of Banamex,
which included exposures in steel, textile, food products and other industries.
Losses on corporate 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. Net credit losses and cash-basis loans
are expected to be comparable to 2002 levels due to weak economic conditions in
the U.S. and Europe, the economic crisis in Argentina, sovereign or regulatory
actions and other factors. This statement is a forward-looking statement within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on page 36.
TRANSACTION SERVICES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 3,537 $ 3,516 $ 3,427
Operating expenses 2,557 2,845 2,680
Provision for credit losses 209 21 27
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 771 650 720
Income taxes 249 236 262
Minority interest, after-tax 1 7 (7)
---------------------------------
NET INCOME $ 521 $ 407 $ 465
=================================
</Table>
TRANSACTION SERVICES - which provides cash management, trade finance,
custody, clearing and depository services globally - reported net income of $521
million in 2002, up $114 million or 28% from 2001 primarily due to higher
volumes, the impact of expense control initiatives, investment
25
<Page>
gains in Europe and Asia and prior-year restructuring-related charges of $13
million (after-tax), partially offset by trade finance write-offs in
Argentina as well as spread compression. Net income of $407 million in 2001,
decreased $58 million or 12% from 2000 primarily due to increased investment
spending on Internet initiatives, declining spreads and a
restructuring-related charge of $13 million (after-tax), partially offset by
higher business volumes, including the acquisitions of Bank Handlowy and
Banamex.
As shown in the following table, average liability balances and assets
under custody experienced growth in 2002 and 2001. Average liability balances of
$85 billion, $77 billion and $64 billion in 2002, 2001 and 2000, respectively,
primarily reflect growth in Asia, Japan and CEEMEA. Assets under custody
increased 6% to $5.1 trillion in 2002 and 17% to $4.8 trillion in 2001 primarily
reflecting increases in Europe and North America.
<Table>
<Caption>
2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Liability balances (AVERAGE IN BILLIONS) $ 85 $ 77 $ 64
Assets under custody (EOP IN TRILLIONS) $ 5.1 $ 4.8 $ 4.1
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
Revenues, net of interest expense, were $3.537 billion in 2002, up $21
million or 1% primarily reflecting higher business volumes, including the
benefit of the Banamex acquisition, and investment gains in Europe and Asia,
partially offset by continued spread compression. Revenues, net of interest
expense, of $3.516 billion in 2001, increased $89 million or 3% compared to 2000
primarily reflecting higher business volumes, including the benefit of the
acquisitions of Bank Handlowy and Banamex, partially offset by lower spreads.
Operating expenses decreased $288 million or 10% in 2002 to $2.557 billion
from $2.845 billion in 2001 primarily reflecting expense control initiatives
across all regions, operational efficiency improvements resulting from
prior-year investments in Internet initiatives and a prior-year
restructuring-related charge of $17 million (pretax). Operating expenses of
$2.845 billion in 2001, increased $165 million or 6% from $2.680 billion in 2000
primarily due to Internet-related investment spending, the impact of the Banamex
acquisition and a restructuring-related charge of $17 million (pretax).
The provision for credit losses was $209 million, $21 million and $27
million in 2002, 2001 and 2000, respectively. The increase in 2002 was primarily
due to trade finance write-offs in Argentina.
Cash-basis loans, which in the TRANSACTION SERVICES business are primarily
trade finance receivables, were $572 million, $464 million and $23 million at
December 31, 2002, 2001 and 2000, respectively. The increase in 2002 was
primarily due to an increase in trade finance receivables in Argentina and
Brazil. The increase in 2001 primarily reflects increases in Mexico due to the
acquisition of Banamex.
OTHER CORPORATE
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ (217) $ (202) $ (277)
Operating expenses 1,839 (176) (100)
---------------------------------
LOSS BEFORE INCOME TAX BENEFITS (2,056) (26) (177)
Income tax benefits (693) (78) (148)
---------------------------------
NET INCOME (LOSS) $ (1,363) $ 52 $ (29)
=================================
</Table>
OTHER CORPORATE - which includes intra-GCIB segment eliminations, certain
one-time non-recurring items and tax amounts not allocated to GCIB products -
reported a net loss of $1.363 billion in 2002 compared to net income of $52
million in 2001 primarily reflecting a $1.323 billion after-tax charge related
to the establishment of reserves for the settlement-in-principle with regulators
and related civil litigation, as well as regulatory inquiries and private
litigation related to Enron, partially offset by a $52 million gain resulting
from the disposition of a portion of an equity investment in CEEMEA. Net income
of $52 million in 2001 increased from a net loss of $29 million in 2000
primarily due to gains on building sales in Asia and the release of a rent
reserve in 2001 that was no longer required.
GLOBAL CORPORATE AND INVESTMENT BANK OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
GCIB is 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 over 100 countries and
territories in which the businesses operate. Global economic and market events
can have both positive and negative effects on the revenue and credit
performance of the businesses.
Losses on corporate 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.
CAPITAL MARKETS AND BANKING -- In 2002, CAPITAL MARKETS AND BANKING
continued to be affected by the slowdown in capital markets activity combined
with higher net credit losses from weakening economic conditions. Growth in
fixed income and market share improvements mitigated weakness in global equities
and investment banking. The business initiated several expense reduction
initiatives.
In 2003, focus will remain on credit risk mitigation, expense management,
market share expansion and continued diversification. The Company will focus on
identifying problem credits early and taking appropriate remedial actions. Net
credit losses and cash-basis loans are expected to be comparable to 2002 levels
due to continued weak economic conditions. While other initiatives will focus on
expanding market share in priority countries through organic growth, revenue
performance is dependent upon the timing and strength of a recovery in U.S. and
global economic conditions. Citigroup remains diversified across a number of
geographies and industry groups. Citigroup continues to monitor the economic
situation in emerging market countries closely and, where appropriate, adjusts
exposures and strengthens risk management oversight.
TRANSACTION SERVICES -- In 2002, TRANSACTION SERVICES was adversely
impacted by a low interest rate environment, heightened price compression and
higher net credit losses.
In 2003, the business will focus on continued expense rationalization,
further development of competitive advantages and mitigation of credit losses.
While revenue performance depends on the timing and strength of a recovery in
U.S. and global economic conditions, the business will also focus on
strengthening its franchise across all regions. Additionally, the business will
continue to leverage Citigroup's global corporate relationship client base
through cross-selling initiatives.
26
<Page>
PRIVATE CLIENT SERVICES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 5,717 $ 5,940 $ 6,900
Operating expenses 4,555 4,710 5,191
Provision for credit losses 6 4 -
---------------------------------
INCOME BEFORE TAXES 1,156 1,226 1,709
Income taxes 434 459 641
---------------------------------
NET INCOME $ 722 $ 767 $ 1,068
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
PRIVATE CLIENT SERVICES provides investment advice and financial planning
and brokerage services, primarily through the network of Smith Barney Financial
Consultants. In addition, Private Client Services provides independent,
client-focused research to individuals and institutions around the world.
Private Client Services net income was $722 million in 2002 compared to
$767 million in 2001 and $1.068 billion in 2000. Private Client Services net
income decreased $45 million or 6% during 2002 primarily due to lower
asset-based fee revenue, a decline in net interest revenue on securities-based
lending, and lower transaction volumes, which were partially offset by lower
production-related compensation, the impact of continued expense control
initiatives, and a prior-year restructuring-related charge of $6 million
(after-tax). Net income of $767 million in 2001 decreased $301 million or 28%
compared to 2000 primarily reflecting decreases in customer transaction volumes,
net interest revenue on security-based lending and asset-based fee revenue,
partially offset by higher revenue from the bank deposit program.
Revenues, net of interest expense, decreased $223 million or 4% in 2002 to
$5.717 billion primarily due to declines in fees from managed accounts, lower
net interest revenue on security-based lending and lower customer transaction
volumes. Revenues, net of interest expense, decreased $960 million or 14% in
2001 to $5.940 billion, primarily due to declines in equity markets resulting in
lower customer transaction volumes, decreases in revenue on security-based
lending and lower asset-based fee revenue, partially offset by higher revenue
from the SB Bank Deposit Program.
Total assets under fee-based management were $179 billion, $205 billion and
$202 billion as of December 31, 2002, 2001 and 2000, respectively. The decrease
in 2002 was primarily due to a decline in market values, while the increase in
2001 reflects higher business volumes compared to 2000. Total client assets,
including assets under fee-based management of $897 billion in 2002 decreased
$80 billion or 8% from $977 billion in 2001, which in turn were flat from 2000.
The decrease in 2002 primarily reflects market depreciation, partially offset by
net positive flows of $35 billion. Balances in Smith Barney's bank deposit
program totaled $41 billion in 2002 compared to $36 billion in 2001. Private
Client Services had 12,690 financial consultants as of December 31, 2002,
compared with 12,927 as of December 31, 2001 and 12,353 as of December 31, 2000.
Annualized revenue per financial consultant of $447,000 in 2002 declined 4% from
$466,000 in 2001, which in turn decreased 20% from $583,000 in 2000.
The following table details trends in total assets under fee-based
management, total client assets and annualized revenue per financial consultant:
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Consulting group and
internally managed accounts $ 127 $ 150 $ 146
Financial consultant managed accounts 52 55 56
---------------------------------
TOTAL ASSETS UNDER
FEE-BASED MANAGEMENT(1) $ 179 $ 205 $ 202
---------------------------------
Private Client assets $ 761 $ 846 $ 889
Citigroup Asset Management (CAM)
institutional/other assets with
Salomon Smith Barney 136 131 88
---------------------------------
TOTAL CLIENT ASSETS WITH SALOMON SMITH
BARNEY(1) $ 897 $ 977 $ 977
Annualized revenue per FC
(IN THOUSANDS OF DOLLARS) $ 447 $ 466 $ 583
=================================
</Table>
(1) Includes assets managed jointly with Global Investment Management.
Operating expenses decreased $155 million or 3% in 2002 to $4.555 billion
from $4.710 billion in 2001, which, in turn, decreased $481 million or 9% from
$5.191 billion in 2000 primarily reflecting lower production-related
compensation resulting from a decline in revenue combined with the impact of
expense control initiatives. The decrease for 2002 also reflects a prior-year
restructuring-related charge of $9 million (pretax).
PRIVATE CLIENT SERVICES OUTLOOK
In 2003, focus for Private Client Services will be on expense management,
franchise growth through customer acquisition and selected recruiting of
experienced Financial Consultants, as well as continued expansion of fee-based
services. While initiatives will focus on expanding client services in priority
areas, revenue performance is dependent upon the timing and strength of a
recovery in the U.S. In particular, growth in asset-based fee revenues and
commission-generating transaction volumes are primarily influenced by
performance of the capital markets, principally the U.S. equity markets. In
Global Equity Research, major initiatives will include working closely with
institutional equities to help drive client revenue, continued expense
management as well as refining the scope and management structure of our global
research platform.
The table below shows combined net income by region for GCIB and Private
Client Services:
GCIB AND PRIVATE CLIENT SERVICES COMBINED NET INCOME -- REGIONAL VIEW
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America (excluding Mexico) $ 1,736 $ 2,750 $ 2,464
Mexico 210 101 96
Western Europe 375 509 697
Japan 97 97 348
Asia (excluding Japan) 662 617 547
Latin America 75 538 524
Central and Eastern Europe,
Middle East and Africa 596 501 395
---------------------------------
TOTAL NET INCOME $ 3,751 $ 5,113 $ 5,071
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
27
<Page>
GLOBAL INVESTMENT MANAGEMENT
GLOBAL INVESTMENT MANAGEMENT--2002 NET INCOME
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2000 $1.460
2001 $1.596
2002 $1.813
GLOBAL INVESTMENT MANAGEMENT--2002 NET INCOME BY PRODUCT
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Asset Management 29%
Private Bank 25%
Life Insurance and Annuities 46%
GLOBAL INVESTMENT MANAGEMENT--2002 NET INCOME BY REGION
[EDGAR REPRESENTATION OF GRAPHIC DATA]
CEEMEA 1%
Asia 6%
Japan 3%
Mexico 13%
Latin America 1%
North America 76%
GLOBAL INVESTMENT MANAGEMENT
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 8,175 $ 8,006 $ 7,330
Operating expenses 2,797 2,770 2,645
Provisions for benefits,
claims, and credit losses 2,744 2,768 2,411
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 2,634 2,468 2,274
Income taxes 820 844 810
Minority interest, after-tax 1 28 4
---------------------------------
NET INCOME $ 1,813 $ 1,596 $ 1,460
=================================
</Table>
GLOBAL INVESTMENT MANAGEMENT is comprised of LIFE INSURANCE AND ANNUITIES,
PRIVATE BANK and ASSET MANAGEMENT. These businesses offer a broad range of life
insurance, annuity, asset management and personalized wealth management products
and services distributed to institutional, high-net-worth and retail clients.
Global Investment Management net income in 2002 increased to $1.813
billion, up $217 million or 14% from 2001. LIFE INSURANCE AND ANNUITIES net
income of $836 million in 2002 was flat compared to 2001 reflecting increased
International Insurance Manufacturing (IIM) earnings of $42 million, primarily
resulting from the full-year impact of the Banamex acquisition, as well as
increases in Asia and Latin America, offset by lower TLA earnings of $42 million
due to lower fixed income investment earnings and higher variable expenses,
which were partially offset by higher business volumes. PRIVATE BANK net income
of $456 million in 2002 was up $88 million or 24% from 2001 primarily reflecting
increased client revenues, the impact of lower interest rates and the benefit of
lower taxes due to the application of APB 23 indefinite investment criteria,
partially offset by increased expenses. ASSET MANAGEMENT income of $521 million
in 2002 was up $129 million or 33% from 2001 primarily reflecting the full-year
impact of the Banamex acquisition, the cumulative impact of positive flows and
lower expenses, including the absence of goodwill and indefinite-lived
intangible asset amortization in 2002. These increases were partially offset by
negative market action, the cumulative impact of outflows of U.S. Retail Money
Market funds to the SB Bank Deposit Program and declines in the Latin America
retirement services businesses due to the continuing economic crisis in
Argentina. Global Investment Management net income in 2001 increased to $1.596
billion, up $136 million or 9% from 2000. The 2001 increase in net income
primarily reflected the Banamex acquisition in both the LIFE INSURANCE AND
ANNUITIES and ASSET MANAGEMENT businesses, increased client activity across most
products within PRIVATE BANK and higher business volumes and premiums within
TLA. Income of $1.813 billion in 2002, $1.596 billion in 2001, and $1.460
billion in 2000 included restructuring charges of $8 million ($12 million
pretax), $16 million ($27 million pretax) and $11 million ($18 million
pretax) in 2002, 2001 and 2000, respectively.
The table below shows net income by region for Global Investment
Management:
GLOBAL INVESTMENT MANAGEMENT NET INCOME -- REGIONAL VIEW
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America (excluding Mexico) $ 1,367 $ 1,313 $ 1,255
Mexico 234 73 27
Western Europe 4 4 (21)
Japan 57 33 17
Asia (excluding Japan) 107 79 53
Latin America 22 63 94
Central and Eastern Europe,
Middle East and Africa 22 31 35
---------------------------------
TOTAL NET INCOME $ 1,813 $ 1,596 $ 1,460
=================================
</Table>
Global Investment Management net income increased $217 million in 2002 from
the prior year, primarily driven by Mexico, North America, Asia and Japan,
partially offset by declines in Latin America and CEEMEA.
Mexico net income of $234 million in 2002 increased $161 million from 2001
primarily reflecting the full-year impact of the Banamex acquisition in August
2001, which primarily impacted the LIFE INSURANCE AND ANNUITIES and the ASSET
MANAGEMENT businesses. North America net income of $1.367 billion in 2002
increased $54 million from 2001 resulting from higher lending and client trading
revenues in PRIVATE BANK and lower expenses, increased income from alternative
investment products and higher retail/institutional net flows in ASSET
MANAGEMENT, partially offset by lower net income in LIFE INSURANCE AND ANNUITIES
resulting from lower fixed income investment earnings and increased variable
expenses which was partially
28
<Page>
offset by increased business volumes. Asia net income of $107 million in 2002
increased $28 million from 2001 primarily relating to LIFE INSURANCE AND
ANNUITIES and PRIVATE BANK. The increase in PRIVATE BANK reflects higher client
trading and lending revenues, while the increase in LIFE INSURANCE AND ANNUITIES
is due to increased investment income and business volume growth. Japan net
income in 2002 of $57 million increased $24 million from 2001 primarily related
to increased client trading activity in PRIVATE BANK. Latin America net income
of $22 million in 2002 declined $41 million from 2001 reflecting declines in
ASSET MANAGEMENT and PRIVATE BANK resulting from the continuing economic crisis
in Argentina, partially offset by the benefit of lower benefits and claims
expense due to changes in Argentine regulations and the impact of the peso
devaluation on U.S. dollar denominated investments in LIFE INSURANCE AND
ANNUITIES. CEEMEA net income of $22 million in 2002 decreased $9 million from
2001 primarily due to weakness in PRIVATE BANK.
LIFE INSURANCE AND ANNUITIES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 4,412 $ 4,379 $ 4,018
Provision for benefits and claims 2,726 2,745 2,388
Operating expenses 501 394 447
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 1,185 1,240 1,183
Income taxes 349 394 389
Minority interest, after-tax - 10 -
---------------------------------
NET INCOME(1) $ 836 $ 836 $ 794
=================================
</Table>
(1) Excludes investment gains/losses included within the Proprietary Investment
Activities segment.
LIFE INSURANCE AND ANNUITIES is comprised of TLA and IIM. TLA offers
individual annuity, group annuity, individual life insurance and Corporate Owned
Life Insurance (COLI) products primarily marketed by The Travelers Insurance
Company (TIC) and its wholly owned subsidiary The Travelers Life and Annuity
Company (TLAC) under the Travelers Life and Annuity name. Among the range of
individual products offered are fixed and variable deferred annuities, payout
annuities and term, universal and variable life insurance. These products are
primarily distributed through a CitiStreet Retirement Services (CitiStreet)
joint venture, Smith Barney Financial Consultants, Primerica, Citibank, and a
nationwide network of independent agents and the growing outside broker/dealer
channel. The COLI product is a variable universal life product distributed
through independent specialty brokers. 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. IIM provides credit, life, disability and other
insurance products, as well as annuities internationally, leveraging the
existing distribution channels of the CONSUMER FINANCE, RETAIL BANKING and ASSET
MANAGEMENT (retirement services) businesses. IIM primarily has operations in
Mexico, Western Europe, Latin America and Asia.
LIFE INSURANCE AND ANNUITIES net income was $836 million for both 2002 and
2001. The level earnings in 2002 from 2001 resulted from a $42 million increase
in IIM earnings to $60 million in 2002 from $18 million in 2001, offset by a $42
million or 5% decline in TLA earnings to $776 million in 2002 from $818 million
in 2001. The $42 million or 5% increase in net income in 2001 from 2000
primarily resulted from a $41 million increase in TLA from $777 million in 2000
and a $1 million increase in IIM from $17 million in 2000.
TLA net income of $776 million in 2002 declined $42 million or 5% from $818
million in 2001 primarily due to decreased retained investment margins as a
result of lower fixed income investment earnings and a declining equity market,
partially offset by continued strong volumes in the group annuity and individual
life businesses.
During 2002, TLA expenses increased primarily due to volume-related
insurance expenses, including premium taxes and renewal commissions and expenses
related to the transfer of employee benefit liabilities from the distribution of
TPC, which were largely offset by earnings on the related invested assets in
revenue. During the 2002 fourth quarter, TLA re-assessed the rate at which it
amortized its Deferred Acquisition Costs (DAC) due to the significant decline in
its individual annuity account balances and benefit reserves, largely resulting
from negative market action. Based on this re-assessment, a higher amortization
rate was implemented, resulting in an increase in amortization costs. The 2002
fourth quarter increase in DAC amortization was largely offset by a one-time
decrease in DAC amortization in the 2002 first quarter in the individual annuity
business due to changes in underlying lapse and interest rate assumptions.
Net income for TLA of $818 million in 2001 increased $41 million or 5% from
$777 million in 2000 primarily reflecting increased business volumes in group
annuities and individual life, operating expense reductions and a 3% net
investment income growth, despite declining markets. During 2001, TLA's business
volume was achieved through double-digit growth in individual life direct
periodic premiums, group annuity net written premiums and deposits and account
balances versus 2000. Total operating expenses decreased in 2001 compared to the
prior-year period due to continued expense management and the absence of
expenses related to the long-term care insurance business, which was sold during
the third quarter of 2000. The long-term care transaction also reduced the
amount of premium revenue reported in 2001.
On July 31, 2000, TIC sold 90% of its individual long-term care insurance
business to General Electric Capital Assurance Company in the form of an
indemnity reinsurance arrangement. Proceeds from the sale were $410 million
resulting in a deferred gain of approximately $150 million after-tax.
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 35,290 $ 30,044 $ 25,179
Equity investments 2,065 1,959 1,866
Real estate 2,411 2,594 2,777
---------------------------------
Total invested assets $ 39,766 $ 34,597 $ 29,822
Net investment income $ 2,570 $ 2,571 $ 2,499
---------------------------------
Investment yield 7.02% 8.08% 8.69%
---------------------------------
</Table>
TLA investment income of $2.570 billion in 2002 was approximately flat
compared to 2001. The overall rate deterioration in 2002 was offset by higher
business volumes. Fixed maturities suffered from the lower rate environment and
credit issues. Equity investment returns were below the prior year, but were
offset by growth in real estate income. Real estate is primarily comprised of
mortgage loan investments and real estate joint ventures, which performed
extremely well with notable commercial sales. The following table shows the
major invested asset balances by type as of December 31, and the associated net
investment income and yields for the years ending December 31.
29
<Page>
The amortization of capitalized DAC is a significant component of TLA
expenses. TLA's recording of DAC varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as per SFAS 91. DAC for universal life (UL) and COLI are
amortized in relation to estimated gross profits as per SFAS 97, with
traditional life, including term insurance and other products, amortized in
relation to anticipated premiums as per SFAS 60. The following is a roll forward
of capitalized DAC by type:
<Table>
<Caption>
Deferred
and Payout UL and
IN MILLIONS OF DOLLARS Annuities COLI Other Total
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE JAN. 1, 2001 $ 936 $ 305 $ 96 $ 1,337
----------------------------------------
Deferred expenses
and other 388 147 27 562
Amortization expense (149) (11) (17) (177)
----------------------------------------
BALANCE DEC. 31, 2001 1,175 441 106 1,722
Deferred expenses
and other 352 175 26 553
Amortization expense (136) (24) (20) (180)
----------------------------------------
BALANCE DEC. 31, 2002 $ 1,391 $ 592 $ 112 $ 2,095
----------------------------------------
</Table>
IIM net income of $60 million in 2002 increased $42 million from 2001
primarily reflecting a $26 million increase in Mexico due to the full-year
impact of the Banamex acquisition, a $13 million increase in Asia and a $10
million increase in Latin America, partially offset by lower results in Japan,
Western Europe and CEEMEA. The increase in Asia primarily represents increased
investment income and business volume growth. The increase in Latin America
primarily represents lower benefits and claims expense due to 2001 changes in
Argentine regulations, foreign exchange gains on U.S. dollar-denominated
investments, write-downs of Argentine government promissory notes (GPNs) in
2001, and the net impact of Amparos and other reserve activity. The 2001 fourth
quarter included a net charge for the write-down of Argentine debt securities
exchanged for loans (GPNs) held in the Siembra insurance companies, which were
held in support of existing contractholders' liabilities. In 2002 the Company
recorded an Amparos charge relating to Siembra's voluntary annuity business in
the amount of $21 million. The decline in Japan and CEEMEA earnings primarily
resulted from start-up operations in these regions. Net income of $18 million in
2001 increased $1 million or 6% from 2000 primarily reflecting a $13 million
increase in Mexico due to the Banamex acquisition and an $8 million increase in
Western Europe, partially offset by a $21 million decline in Latin America. The
$21 million decline in Latin America primarily reflected the 2001 fourth quarter
charge from Argentine debt securities. IIM expenses increased $66 million in
2002 versus 2001 due to the addition of full-year Banamex expenses of $43
million and increased commissions paid to various consumer businesses. The
Banamex transaction increased the 2001 expenses versus 2000 by $31 million.
TRAVELERS LIFE AND ANNUITY
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, such that the
premiums are considered deposits and not included in revenues.
The following table shows net written premiums and deposits by product
line, excluding long-term care insurance written premiums for the three years
ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INDIVIDUAL ANNUITIES
Fixed $ 2,240 $ 2,120 $ 1,267
Variable 3,135 4,000 5,025
Individual payout 58 59 80
---------------------------------
TOTAL INDIVIDUAL ANNUITIES 5,433 6,179 6,372
GICS AND OTHER GROUP ANNUITIES 6,292 7,068 5,528
INDIVIDUAL LIFE INSURANCE
Direct periodic premiums and
deposits 771 652 511
Single premium deposits 285 208 98
Reinsurance (113) (96) (83)
---------------------------------
TOTAL INDIVIDUAL LIFE INSURANCE 943 764 526
---------------------------------
TOTAL $ 12,668 $ 14,011 $ 12,426
=================================
</Table>
Individual annuity net written premiums and deposits decreased 12% in 2002
to $5.433 billion from $6.179 billion in 2001 and decreased 3% in 2001 from
$6.372 billion in 2000. The decreases were driven by a decline in variable
annuity sales due to current market conditions, but were partially offset by
strong fixed annuity sales increases over the prior-year periods. In 2002,
non-affiliated sales channel business grew to 29% of total individual annuity
sales as TLA continued to penetrate the broker/dealer marketplace. Individual
annuity account balances and benefit reserves were $28.4 billion at December 31,
2002 down from $30.0 billion at December 31, 2001 and $29.4 billion at year-end
2000. These decreases reflect declines in market values of variable annuity
investments of $3.7 billion in 2002 and $2.5 billion in 2001, partially offset
by good in-force retention.
Group annuity net written premiums and deposits (excluding the Company's
employee pension plan deposits) in 2002 were $6.292 billion, versus $7.068
billion in 2001 and $5.528 billion in 2000. The decline of $776 million in 2002
from 2001 reflects lower fixed GIC and large case employer pension sales. The
decline in fixed GIC net written premiums and deposits reflects lower European
Medium-Term Note sales due to market conditions. The $1.540 billion increase in
2001 from 2000 reflected fixed GIC growth through structured finance
transactions and long-term liability growth through the extension of structured
settlement broker relationships and large case employer pension sales. Group
annuity account balances and benefit reserves reached $22.3 billion at December
31, 2002, an increase of $1.3 billion or 6% from $21.0 billion at December 31,
2001, primarily reflecting continued strong retention in all products and
continued sales momentum in structured settlement products. Group annuity
account balances and benefit reserves were $21.0 billion at December 31, 2001,
an increase of $3.5 billion from $17.5 billion at December 31, 2000, primarily
reflecting strong sales momentum in all products.
Net written premiums and deposits for the life insurance business were $943
million in 2002, up 23% from $764 million in 2001 and $526 million in 2000 (up
45%). Direct periodic premiums and deposits for individual life insurance in
2002 were up 18% to $771 million from $652 million in 2001 and $511 million in
2000 (up 28%), driven by independent agent high-end estate planning and COLI
sales. Life insurance in force was $82.0 billion at
30
<Page>
December 31, 2002 up from $75.0 billion at December 31, 2001 and $66.9
billion at December 31, 2000.
PRIVATE BANK
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 1,695 $ 1,542 $ 1,417
Operating expenses 1,007 946 892
Provision for credit losses 18 23 23
---------------------------------
INCOME BEFORE TAXES 670 573 502
Income taxes 214 205 185
---------------------------------
NET INCOME $ 456 $ 368 $ 317
=================================
Average assets (IN BILLIONS OF DOLLARS) $ 29 $ 26 $ 25
Return on assets 1.57% 1.42% 1.27%
---------------------------------
Client business volumes under
management (IN BILLIONS OF DOLLARS) $ 164 $ 159 $ 153
=================================
</Table>
PRIVATE BANK provides personalized wealth management services for
high-net-worth clients around the world. PRIVATE BANK net income was $456
million in 2002, up $88 million or 24% from 2001, primarily reflecting increased
client revenues, the impact of lower interest rates and the benefit of lower
taxes due to the application of APB 23 indefinite investment criteria, partially
offset by increased expenses to expand front-end sales and servicing
capabilities. Net income of $368 million in 2001 was up $51 million or 16% from
2000 primarily reflecting increased client activity across most products,
partially offset by increased investment spending in technology and front-end
sales and servicing capabilities.
Client business volumes under management, which include custody accounts,
assets under fee-based management, deposits and loans, were $164 billion at the
end of the year, up 3% from $159 billion in 2001, reflecting increases in loans
of $6 billion and banking and fiduciary deposits of $4 billion, partially offset
by declines in proprietary managed assets of $2 billion and other declines of $3
billion (primarily custody). Regionally, the increase reflects continued growth
in Asia, Japan and North America, partially offset by declines in CEEMEA, Latin
America and Western Europe.
Revenues, net of interest expense, were $1.695 billion in 2002, up $153
million or 10% from 2001, primarily driven by continued client revenue increases
in client trading and lending activity and the benefit of lower interest rates,
partially offset by the absence of prior-year performance and placement fees due
to 2002 market conditions. The 2002 increase also reflects continued favorable
trends in North America (including Mexico), up $132 million or 21% from 2001,
primarily in lending and client trading activity. International revenues
increased $21 million or 2% from 2001, primarily due to growth in Japan of $44
million or 29% (client trading) and Asia of $15 million or 5% (client trading
and lending, offset by absence of 2001 performance and placement fees). These
increases were partially offset by declines in Latin America of $21 million or
10%, CEEMEA of $10 million or 8% and Western Europe of $7 million or 5%.
Revenues in 2001 were $1.542 billion, up $125 million or 9% from 2000, primarily
driven by the impact of lower interest rates and higher investment product
revenues. The 2001 increase also reflects strong international growth in Japan
and Asia, up 22% and 20%, respectively, and continued growth in the North
American region, up 12% from 2000.
Operating expenses of $1.007 billion in 2002 were up $61 million or 6% from
2001 primarily reflecting higher levels of employee-related expenses, including
increased front-end sales and servicing capabilities, and investment spending in
technology. The increase in employee-related expenses includes $13 million of
severance costs, primarily related to North America, Western Europe and CEEMEA.
Operating expenses were $946 million in 2001, up $54 million or 6% from 2000
primarily reflecting continued investment spending in technology and front-end
sales and servicing capabilities. Operating expenses include restructuring
charges of $1 million ($1 million after-tax), $7 million ($4 million after-tax)
and $8 million ($5 million after-tax) in 2002, 2001 and 2000, respectively.
The provision for credit losses was $18 million in 2002, down $5 million or
22% from 2001, primarily reflecting lower write-offs in North America and Japan
and a lower provision in Asia, partially offset by higher write-offs in Western
Europe in 2002. Net credit losses in 2002 remained at a nominal level of 0.05%
of average loans outstanding, compared with 0.06% in 2001 and 0.09% in 2000.
Loans 90 days or more past due at year-end 2002 were $174 million or 0.56% of
total loans outstanding, compared with $135 million or 0.54% at the end of 2001.
Average assets of $29 billion in 2002 increased $3 billion or 12% from $26
billion in 2001, which, in turn, increased $1 billion or 4% from $25 billion in
2000. The increase in 2002 was primarily related to increased lending activity
(higher real estate-secured and tailored loans).
ASSET MANAGEMENT
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 2,068 $ 2,085 $ 1,895
Operating expenses 1,289 1,430 1,306
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST 779 655 589
Income taxes 257 245 236
Minority interest, after-tax 1 18 4
---------------------------------
NET INCOME $ 521 $ 392 $ 349
=================================
Assets under management
(IN BILLIONS OF DOLLARS)(1) $ 479 $ 440 $ 410
=================================
</Table>
(1) Includes $29 billion, $31 billion and $30 billion in 2002, 2001 and 2000,
respectively, for PRIVATE BANK clients.
ASSET MANAGEMENT includes the businesses of Citigroup Asset Management
(CAM), Citigroup Alternative Investments (CAI), Banamex asset management and
retirement services businesses and Citigroup's other retirement services
businesses in North America and Latin America. These businesses offer
institutional, high-net-worth and retail clients a broad range of investment
alternatives from investment centers located around the world. Products and
services offered include mutual funds, closed-end funds, separately managed
accounts, unit investment trusts, alternative investments (including hedge
funds, private equity and credit structures), variable annuities through
affiliated and third-party insurance companies and pension administration
services.
Net income of $521 million in 2002 was up $129 million or 33% compared to
2001 primarily reflecting the full-year impact of the Banamex acquisition of
$121 million, the cumulative impact of positive flows and lower expenses,
partially offset by negative market action, the cumulative impact of outflows of
U.S. Retail Money Market Funds to the Smith Barney (SB) Bank Deposit Program and
declines in the Latin America retirement services businesses due
31
<Page>
to the continuing economic crisis in Argentina. Net income of $392 million in
2001 was up $43 million or 12% compared to 2000 primarily reflecting the
Banamex acquisition, an increase in CAI and the cumulative impact of positive
flows, partially offset by negative market action and the cumulative impact
of outflows of U.S. Retail Money Market Funds to the SB Bank Deposit Program.
The following table is a roll forward of assets under management by
business as of December 31:
ASSETS UNDER MANAGEMENT
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2002 2001
- -----------------------------------------------------------------------------
<S> <C> <C>
RETAIL AND PRIVATE BANK
Balance, beginning of year $ 237 $ 244
Net flows excluding U.S. Retail
Money Market funds 11 31
U.S. Retail Money Market fund flows (13) (26)
Market action/other (30) (12)
-------------------------
Balance, end of year 205 237
INSTITUTIONAL
Balance, beginning of year 143 115
Long term product flows 11 9
Liquidity flows 13 26
-------------------------
Net flows 24 35
Market action/other (3) (7)
-------------------------
Balance, end of year 164 143
CITIGROUP ALTERNATIVE INVESTMENTS 99 48
RETIREMENT SERVICES 11 12
-------------------------
ASSETS UNDER MANAGEMENT $ 479 $ 440
=========================
</Table>
Assets under management rose to $479 billion as of December 31, 2002, up
$39 billion or 9% from $440 billion in 2001, primarily reflecting an increase in
CAI of $51 billion and strong net flows (excluding U.S. Money Market funds) of
$35 billion, partially offset by negative market action of $33 billion, net
outflows of U.S. Retail Money Market funds of $13 billion, including the
transfer of assets to the SB Bank Deposit Program and a $1 billion decline in
Retirement Services assets. Retail and Private Bank client assets were $205
billion as of December 31, 2002, down $32 billion or 14% from $237 billion in
2001. Institutional client assets of $164 billion as of December 31, 2002 were
up $21 billion or 15% compared to a year ago. CAI assets were $99 billion as of
December 31, 2002, up $51 billion from $48 billion in 2001, primarily reflecting
TPC assets of $35 billion which CAI manages on a third-party basis following the
August 20, 2002 distribution, an increase due to the Real Estate and Managed
Futures businesses (transferred from GCIB in the 2002 third quarter), and
business growth. Retirement Services assets were $11 billion as of December 31,
2002, down $1 billion or 8% from $12 billion in 2001, primarily due to a decline
in the Latin America retirement services businesses due to the continuing
economic crisis in Argentina, partially offset by growth in Banamex retirement
services.
Sales of proprietary mutual funds and managed account products at Smith
Barney fell 26% to $20.7 billion in 2002 from the prior year, primarily driven
by weakness in equity markets and declines in managed account products, and
represented 46% of SB's retail channel sales for the year. Sales of mutual and
money funds through Global Consumer's banking network (excluding Mexico) were $8
billion for the year, representing 45% of total sales, including $5 billion in
International and $3 billion in the U.S. Of the $3 billion, Primerica sold $2.1
billion of proprietary U.S. mutual and money funds in 2002, a 6% increase
compared to 2001, representing 73% of Primerica's total fund sales.
Institutional long-term product sales of $28.4 billion increased 3% over the
prior year primarily due to Japanese sub-advisory flows, and include $16 billion
of sales to GCIB clients.
Revenues, net of interest expense, decreased $17 million or 1% to $2.068
billion in 2002. This was compared to $2.085 billion in 2001, which was up $190
million or 10% from 2000. The decrease in 2002 was primarily due to decreases in
the Latin America retirement services businesses due to the continuing economic
crisis in Argentina, the impact of negative market action and the cumulative
impact of transfers to the SB Bank Deposit Program in CAM, partially offset by
the impact of the Banamex acquisition, increases in CAI and the cumulative
impact of positive flows in CAM. The CAI growth primarily resulted from the
transfer of the managed futures business, the impact of the TPC contract and
growth in various products. The increase in 2001 from 2000 was primarily due to
the impact of the Banamex acquisition of $108 million and other acquisitions, as
well as the cumulative impact of positive flows, partially offset by negative
market action and the cumulative impact of transfers to the SB Bank Deposit
Program.
Operating expenses of $1.289 billion in 2002 decreased $141 million or 10%
from 2001. The decrease in 2002 primarily resulted from a decline in the Latin
America retirement services businesses due to economic conditions, the absence
of goodwill and indefinite-lived intangible asset amortization in 2002 and
reduced personnel, occupancy, and advertising and marketing expenses, partially
offset by increases in CAI from the TPC contract and growth/transfers, and the
impact of the Banamex acquisition of $5 million. Operating expenses of $1.430
billion in 2001 increased $124 million or 9% from 2000 primarily resulting from
the impact of the Banamex acquisition of $45 million and other retirement
services acquisitions, and increases in other variable expenses related to
revenue growth. Operating expenses include restructuring charges of $11 million
($7 million after-tax), $20 million ($12 million after-tax) and $10 million ($6
million after-tax) in 2002, 2001 and 2000, respectively.
Minority interest, after-tax, of $1 million in 2002 decreased $17 million
or 94% from 2001 primarily due to the impact of acquiring the remaining interest
in Banamex Afore, a retirement services business, in January 2002. Minority
interest, after-tax, of $18 million in 2001 increased $14 million from 2000
primarily due to the impact of the Banamex Afore acquisition.
GLOBAL INVESTMENT MANAGEMENT OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
TRAVELERS LIFE AND ANNUITY (TLA) -- should benefit from growth in the aging
population which is 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. TLA 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,
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
32
<Page>
and/or distribution of insurance products. Also, the annuities business is
interest rate and market sensitive. TLA's business is significantly affected
by movements in the U.S. equity and fixed income credit markets. U.S. equity
and credit market events can have both positive and negative effects on the
deposit, revenue and policy retention performance of the business. A
sustained weakness in the equity markets will decrease revenues and earnings
in variable annuity products. Declines in credit quality of issuers will have
a negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure.
The recent U.S. Federal Budget Proposal (the Budget Proposal) contains a
number of provisions that could impact TLA, including provisions to eliminate
the double taxation of corporate dividends and to create new types of savings
accounts with tax-free earnings. The Budget Proposal is in its early stages of
consideration.
It is not possible to predict whether the Budget Proposal will be enacted,
what form such legislation might take when enacted, or the potential effects of
such legislation on TLA and its competitors. TLA does not expect the Budget
Proposal to have a material impact on its financial condition or liquidity.
INTERNATIONAL INSURANCE MANUFACTURING (IIM) -- leverages the distribution
strength of Citigroup globally by manufacturing insurance linked to credit
products as well as stand-alone indemnity and investment-related products. In
the less-developed markets where populations are generally under insured,
increasing disposable income, pension reform, greater awareness of the benefits
of insurance among the general population and promotion of the insurance
industry by local governments is expected to continue assisting IIM's growth. In
mature but restructuring economies, such as Japan, IIM is capturing a share of
the insurance market on products associated with the movement of savings from
traditional products to new alternatives, including variable annuities. The
growth of IIM is affected by the expansion of Citigroup's consumer business,
including the volume of new loans and credit cards. It is also highly dependent
on local regulations governing the cross-selling of insurance products to
Citigroup customers and the evolution of consumer buying patterns. In Argentina,
the potential impact from the economic crisis on the valuation of IIM's assets
relative to liabilities will continue to be a key concern, including the impact
of Argentine government actions on insurance contract liabilities in that
country. For further information regarding the situation in Argentina, see the
discussions on the "Impact from Argentina's Economic Changes" and "Argentina" on
pages 8 and 13, respectively.
PRIVATE BANK -- Leveraging the global reach of Citigroup and its full range
of products and services has allowed the PRIVATE BANK to significantly grow
earnings in 2002 while most competitors' earnings have declined. The continued
execution of this strategy presents the PRIVATE BANK with the opportunity to
increase its presence in the highly fragmented private banking market and
continue the strong earnings growth experienced in the past few years.
While certain macro-economic and geopolitical factors are expected to
affect the business on a global scale in the year ahead, different opportunities
exist in our businesses around the world. In the U.S., the build-out of the
investments business and focus on under- penetrated markets will allow for
continued growth. Asia will continue to leverage Citigroup platforms and build
on-shore capabilities while Japan will focus on expanding its client set and
building a discretionary asset management business. Latin America will focus on
leveraging its competitive position and strong brand-name. Western Europe and
CEEMEA will focus on penetrating key markets.
ASSET MANAGEMENT -- The ASSET MANAGEMENT business generated
industry-leading income growth during 2002 despite the impact of weak global
markets. The inclusion of full-year Banamex results, continued strength in net
flows and expense reductions contributed to the income growth. The weakness in
global markets was evident in U.S. equities and the economic instability and
currency devaluation in Argentina.
The global economic outlook and equity market levels will continue to
affect the level of assets under management and revenues in the asset management
businesses in the near-term, but underlying demand for asset management services
remains strong. Overall, demographic trends remain favorable: aging populations
and insufficient retirement savings will continue to drive growth in the
industry across the retail/high-net-worth, institutional and retirement services
markets. Competition will continue to increase as open architecture distribution
expands and major global financial services firms focus on opportunities in
asset management.
For 2003, the business will focus on leveraging the full breadth of its
global investment capabilities, continuing to capture the economic value of
Citigroup's global distribution network, expansion of third-party distribution
in key geographies and emphasis on penetration of the institutional pension
segment.
PROPRIETARY INVESTMENT ACTIVITIES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ (471) $ 584 $ 2,263
Operating expenses 140 118 127
Provision for credit losses 31 - 7
---------------------------------
INCOME BEFORE TAXES
AND MINORITY INTEREST (642) 466 2,129
Income taxes (benefits) (217) 153 791
Minority interest, after-tax 23 (5) (2)
---------------------------------
NET INCOME $ (448) $ 318 $ 1,340
=================================
</Table>
PROPRIETARY INVESTMENT ACTIVITIES is comprised of Citigroup's private
equity investments, including venture capital activities (Private Equity),
realized investment gains (losses) from sales on certain Insurance-Related
Investments and the results from certain other proprietary investments,
including investments in countries that refinanced debt under the 1989 Brady
Plan or plans of a similar nature (Other Investment Activities).
Revenues, net of interest expense, in 2002 of ($471) million decreased
$1.055 billion from 2001 primarily reflecting lower Private Equity results and
higher impairment write-downs in Insurance-Related Investments, partially offset
by increased gains in Other Investment Activities, including a $527 million gain
on the sale of 399 Park Avenue. Revenues, net of interest expense, in 2001 of
$584 million decreased $1.679 billion from 2000 primarily reflecting lower
Private Equity results, higher impairment write-downs in Insurance-Related
Investments and the absence of 2000 gains on the sale of certain Latin America
bonds and technology investments in Other
33
<Page>
Investment Activities, partially offset by increased net realized gains in
Insurance-Related Investments.
Operating expenses of $140 million in 2002 increased $22 million from 2001
primarily reflecting increased Private Equity and Other Investment Activities
costs, partially related to majority-owned investment funds established in late
2001 and 2002.
The increase in the provision for credit losses of $31 million from 2001
primarily relates to write-offs of loans in Private Equity.
Minority interest, after-tax, of $23 million in 2002 increased $28 million
from 2001 primarily due to the net impact of majority-owned investment funds
established in late 2001 and 2002.
See Note 6 to the Consolidated Financial Statements for additional
information on investments in fixed maturity and equity securities.
The following sections contain information concerning revenues, net of
interest expense, for the three main investment classifications of Proprietary
Investment Activities:
PRIVATE EQUITY provides equity and mezzanine debt financing on both a
direct and indirect basis to companies primarily located in the United States
and Western Europe, investments in companies located in developing economies
with a private equity focus, the investment portfolio related to the Banamex
acquisition in August 2001 and CVC/Opportunity Equity Partners, LP
(Opportunity). Opportunity is a third-party managed fund through which
Citigroup co-invests in companies that were privatized by the government of
Brazil in the mid-1990s.
Certain private equity investments held in investment company subsidiaries
are carried at fair value with unrealized gains and losses recorded in income.
Direct investments in companies located in developing economies are principally
carried at cost with impairment write-downs recognized in income for "other than
temporary" declines in value. The public equity investment portfolio related to
Banamex is classified as available-for-sale and carried at fair value, while
Opportunity is accounted for under the equity method.
As of December 31, 2002, Private Equity included assets of $5.971 billion,
of which $2.626 billion was in the United States, $974 million in Western
Europe, $1.660 billion in Latin America, $279 million in Asia and $432 million
in CEEMEA. As of December 31, 2001, Private Equity included assets of $7.835
billion, of which $3.754 billion was in the United States, $830 million in
Western Europe, $2.710 billion in Latin America, $259 million in Asia and $282
million in CEEMEA. The portfolio is primarily invested in industrial, consumer
goods, communication and technology companies.
Revenues for Private Equity, net of interest expense, are composed of the
following:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized gains (losses) $ 575 $ 1,298 $ 1,557
Public mark-to-market(2) (680) (499) 439
Net impairment (write-downs)/write-ups(3) (401) (478) 142
Other(4) (93) 169 (300)
---------------------------------
REVENUES, NET OF INTEREST EXPENSE $ (599) $ 490 $ 1,838
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
(2) Includes the changes in unrealized gains (losses) related to mark-to-market
reversals for investments sold during the year.
(3) Includes private valuation adjustments.
(4) Includes Opportunity, net investment income and management fees.
Revenues, net of interest expense, of ($599) million in 2002 declined
$1.089 billion from 2001 primarily relating to lower net realized gains (losses)
on sales of investments of $723 million, greater public mark-to-market losses of
$181 million and lower other revenues of $262 million, including $135 million
related to net interest income, partially offset by lower net impairment
write-downs. These declines included $738 million relating to Latin America,
resulting from lower revenues on the Opportunity investment of $388 million
(other revenues), higher impairment write-downs of $340 million, including $271
million on certain investments in Argentina, and lower net realized gains.
Revenues, net of interest expense, of $490 million in 2001 declined $1.348
billion from 2000 primarily from lower public mark-to-market revenues of $938
million, higher impairment write-downs of $620 million and the absence of a $156
million gain in 2000 on certain investments in Argentina, partially offset by
increased revenues on the Opportunity investment of $384 million. The lower
public mark-to-market revenues and higher impairment write-downs primarily
resulted from weakened market conditions in the portfolio's technology sector.
INSURANCE-RELATED INVESTMENTS include realized gains (losses) upon the
sale of investments and impairment write-downs resulting from an "other than
temporary" decline in value associated with certain Citigroup insurance
operations, primarily the TLA and Primerica businesses. The underlying
invested assets and net investment income are recorded in the respective
Citigroup segments containing these businesses (LIFE INSURANCE AND ANNUITIES,
RETAIL BANKING and CONSUMER FINANCE). The assets primarily consist of fixed
maturity investments including bonds and notes, as well as redeemable
preferred stock and, to a lesser extent, equity securities. These investments
are primarily classified as "available-for-sale."
As of December 31, 2002 and 2001, total Insurance-Related Investments
included investments of $46 billion and $41 billion, respectively. The largest
portfolio, the fixed income portfolio, held investments with a carrying value of
$40 billion and $35 billion as of December 31, 2002 and December 31, 2001,
respectively.
The following is a breakdown of revenues, net of interest expense:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized gains (losses) $ 378 $ 421 $ (64)
Net impairment write-downs (708) (278) (46)
---------------------------------
REVENUES, NET OF INTEREST EXPENSE $ (330) $ 143 $ (110)
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
Revenues, net of interest expense, for 2002 were ($330) million, a
decrease of $473 million from 2001 resulting from higher impairment
write-downs of $430 million and lower realized gains (losses) on sales of
securities of $43 million. The increase in impairment write-downs included
$211 million related to WorldCom debt instruments, with the remaining
increase primarily concentrated in the energy and telecommunications
industries. The decrease in realized gains (losses) primarily resulted from
lower gains on sales of fixed income securities. Revenues, net of interest
expense, for 2001 were $143 million, an increase of $253 million from 2000
resulting from higher realized gains (losses) of $485 million, offset by
higher impairment write-downs
34
<Page>
of $232 million. The increase in realized gains (losses) primarily resulted
from higher gains on sales of fixed income securities. The increase in
impairment write-downs included $44 million related to Enron, with the
remaining increase primarily concentrated in the telecommunications and
technology industries.
Total revenues relating to the fixed income portfolio were ($318) million,
$246 million and ($214) million for 2002, 2001 and 2000, respectively.
OTHER INVESTMENT ACTIVITIES include various proprietary investments,
including Citigroup's approximate 9.9% remaining ownership interest in TPC's
outstanding equity securities, certain hedge fund investments and the LDC
Debt/Refinancing portfolios. The LDC Debt/Refinancing portfolios include
investments in certain countries that refinanced debt under the 1989 Brady Plan
or plans of a similar nature and earnings are generally derived from interest
and restructuring gains (losses).
Other Investment Activities investments are primarily carried at fair
value, with impairment write-downs recognized in income for "other than
temporary" declines in value. The TPC common stock position is classified as
available-for-sale. As of December 31, 2002, total assets of Other Investment
Activities were $3.275 billion, including $1.464 billion in TPC shares, $579
million in the LDC Debt/ Refinancing portfolios, $951 million in hedge funds,
the majority of which represents money managed for TPC, and $281 million in
other assets. As of December 31, 2001, total assets of Other Investment
Activities were $1.492 billion, including $815 million in the LDC
Debt/Refinancing portfolios, $225 million in hedge funds and $452 million in
other assets.
The major components of Other Investment Activities revenues, net of
interest expense are as follows:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 (1) 2000 (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LDC Debt/Refinancing portfolios $ 15 $ 59 $ 331
Hedge fund investments 70 10 (1)
Other 373 (118) 205
---------------------------------
REVENUES, NET OF INTEREST EXPENSE $ 458 $ (49) $ 535
=================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
Revenues, net of interest expense, in 2002 of $458 million, increased $507
million from 2001 primarily resulting from a $527 million gain on the 2002 third
quarter sale of 399 Park Avenue, relating to the portion of the building that
the Company did not occupy. The decline in LDC Debt/Refinancing portfolio
revenues primarily results from lower interest earnings, as the portfolios are
in run-off. Revenues, net of interest expense, in 2001 of ($49) million
decreased $584 million from 2000 primarily resulting from a 2000 gain on the
exchange of certain Latin America bonds in the LDC Debt/Refinancing portfolio,
higher impairment write-downs in 2001 in certain technology investments and the
absence of net realized gains in 2000 related to certain technology investments.
Proprietary Investment Activities results 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 36.
CORPORATE/OTHER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES, NET OF INTEREST EXPENSE $ 600 $ (334) $ (582)
Operating expenses 826 762 1,001
Provisions for benefits,
claims, and credit losses (21) (8) 38
---------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE TAXES, MINORITY INTEREST, AND (205) (1,088) (1,621)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Income tax benefits (114) (465) (571)
Minority interest, after-tax 2 11 -
---------------------------------
LOSS FROM CONTINUING OPERATIONS (93) (634) (1,050)
INCOME FROM DISCONTINUED OPERATIONS 1,875 1,055 1,288
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (47) (158) -
---------------------------------
NET INCOME $ 1,735 $ 263 $ 238
=================================
</Table>
CORPORATE/OTHER includes net corporate treasury results, corporate
expenses, certain intersegment eliminations, the results of discontinued
operations, the Internet-related development activities, cumulative effect
of accounting changes and taxes not allocated to the individual businesses. In
2000, Corporate/Other also includes certain activities related to the Associates
Housing Finance (AHF) unit, which originated and serviced loans for manufactured
homes. In January 2000, Associates announced its intention to discontinue the
loan origination operations of its AHF unit.
Revenues, net of interest expense, of $600 million in 2002 increased $934
million from 2001, primarily due to lower net treasury costs and the impact of
higher intersegment eliminations. The lower net treasury costs primarily related
to favorable interest rate positioning and lower funding costs, including the
impact of lower interest rates and earnings on fixed income investments,
partially offset by the impact of increased borrowing levels. Revenues, net of
interest expense, of ($334) million in 2001 increased $248 million from 2000
primarily due to lower net treasury costs largely related to reduced rates and
the impact of higher intersegment eliminations, partially offset by increased
funding costs related to the Associates and Banamex acquisitions.
Operating expenses of $826 million in 2002 increased $64 million primarily
due to higher intersegment eliminations and employee-related costs, partially
offset by a decrease in certain net unallocated corporate costs and the absence
of a $57 million 2001 fourth quarter pretax expense for the contribution of
appreciated venture capital securities to Citigroup's Foundation. This
contribution had minimal impact on Citigroup's earnings after related tax
benefits and investment gains. Operating expenses of $762 million in 2001
decreased $239 million from 2000 primarily reflecting restructuring-related
items and merger-related charges of $346 million, including exit costs, incurred
in 2000 as a result of Citigroup's acquisition of Associates and a $108 million
pretax expense in 2000 for the contribution of appreciated venture capital
securities to Citigroup's Foundation. Partially offsetting these decreases were
higher intersegment eliminations and the $57 million 2001 fourth quarter pretax
expense for the contribution of appreciated venture capital securities to
Citigroup's Foundation.
The provisions for benefits, claims and credit losses in 2002 and 2001 are
primarily the result of intersegment eliminations. Income tax benefits of $114
35
<Page>
million in 2002 includes the tax benefit resulting from the loss incurred on the
sale of the Associates property and casualty operations to TPC, which was
spun-off in the 2002 third quarter.
Revenues, net of interest expense, operating expenses, the provisions for
benefits, claims and credit losses and net income were negatively impacted in
2000 by $47 million, $25 million, $40 million and $71 million, respectively,
relating to a Housing Finance unit charge, which included costs related to the
discontinuation of AHF loan origination operations.
Discontinued operations (see Note 4 to the Consolidated Financial
Statements) includes the operations of TPC through August 20, 2002. Income from
discontinued operations in 2002 also includes gains on the sale of stock by a
subsidiary of $1.270 billion ($1.158 billion after-tax), primarily consisting of
an after-tax gain of $1.061 billion as a result of the TPC IPO of 231 million
shares of its class A common stock. Income from discontinued operations in 2001
reflects catastrophe losses from the property and casualty business associated
with the events of September 11th.
The 2002 cumulative effect of accounting changes of $47 million reflects
the 2002 impact of adopting SFAS 142 relating to goodwill and indefinite-lived
intangible assets. The 2001 cumulative effect of accounting changes of $158
million includes a charge of $42 million related to the adoption of SFAS 133 and
a charge of $116 million reflecting the impact of adopting EITF 99-20. See Note
1 to the Consolidated Financial Statements for further details of the cumulative
effect of accounting changes.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may increase," "may fluctuate," 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: weak U.S. and global economic conditions;
sovereign or regulatory actions; the ability to gain market share in both new
and established markets internationally; levels of activity in the global
capital markets; macro-economic factors and political policies and developments
in the countries in which the Company's businesses operate; the level of
interest rates, bankruptcy filings and unemployment rates, as well as political
policies and developments around the world; the continued economic crisis in
Argentina; changes in assumptions underlying the valuations of financial
instruments; uncertainty in Brazil; stress in the telecommunications and energy
markets; changes in management's estimates underlying the allowance for credit
losses; possible changes to various stock-based compensation plan provisions for
future awards; the effect of adopting SFAS 146 and applying FIN 45 and FIN 46;
the effect of the amortization of unrecognized net actuarial losses on net
pension expense; economic conditions and credit performance of the portfolios in
Japan; the ability of CARDS to increase receivables and improve net credit
losses; CitiFinancial's ability to successfully integrate the GSB auto
operations and to grow its receivables; the ability of RETAIL BANKING to
continue improvements in core business performance; the ability of CitiMortgage
to make market share gains in originations and to reduce costs from operational
efficiencies; Primerica's ability to further develop its international presence
and its cross-selling relationships; the ability of RETAIL BANKING in Mexico to
restrain expense growth and to develop deposit growth; the ability of GCIB's
TRANSACTION SERVICES businesses to continue expense rationalization, to further
develop competitive advantages, to mitigate credit losses and to continue to
leverage the Company's global corporate relationship client base through
cross-selling initiatives; the ability of TLA to take advantage of long-term
demographic trends, to effect strong sales growth and to maintain an efficient
cost structure; the effect of local regulations governing the cross-selling of
insurance products to Citigroup customers; in the PRIVATE BANK'S U.S. business,
the ability to build out the investments business and to focus on
under-penetrated markets; portfolio growth and seasonal factors; the effect of
banking and financial services reforms; possible amendments to, and
interpretations of, risk-based capital guidelines and reporting instructions;
the ability of states to adopt more extensive consumer privacy protections
through legislation or regulation; and the resolution of legal proceedings and
related matters.
36
<Page>
MANAGING GLOBAL RISK
The Citigroup Risk Management framework recognizes the wide range and diversity
of global business activities by balancing strong corporate oversight with
defined independent risk management functions at the business level.
The risk management framework is grounded on the following seven
principles, which apply universally across all businesses and all risk types:
- - INTEGRATION OF BUSINESS AND RISK MANAGEMENT - Risk management is integrated
within the business plan and strategy.
- - RISK OWNERSHIP - All risks and resulting returns are owned and managed by
an accountable business unit.
- - INDEPENDENT OVERSIGHT - Risk limits are approved by both business
management and independent risk management.
- - POLICIES - All risk management policies are clearly and formally
documented.
- - RISK IDENTIFICATION AND MEASUREMENT - All risks are measured using defined
methodologies, including stress testing.
- - LIMITS AND METRICS - All risks are managed within a limit framework.
- - RISK REPORTING - All risks are comprehensively reported across the
organization.
The Citigroup Chief Risk Officer, with the assistance of risk management
functions at the Citigroup-level, is responsible for establishing standards for
the measurement, approval, reporting and limiting of risk, for appointing
independent risk managers at the business-level, for approving business-level
risk management policies, for approving business risk-taking authority through
the allocation of limits and capital, and for reviewing, on an ongoing basis,
major risk exposures and concentrations across the organization. Risks are
regularly reviewed with the independent business-level risk managers, the
Citigroup Risk Management Committee, and as appropriate, with the Citigroup
Board of Directors.
The independent risk managers at the business-level are responsible for
establishing and implementing risk management policies and practices within
their business, while ensuring consistency with Citigroup standards. The
business risk managers have dual accountability - to the Citigroup Chief Risk
Officer and to the head of their business unit.
During 2002, the Citigroup Risk Management Committee was formed. It is
chaired by the Citigroup Chief Risk Officer, and its members include senior
business and risk managers across the organization. Its objectives include the
review of the major risk exposures of Citigroup, particularly those that cut
across business lines; the review of current and emerging risk issues; and the
ongoing review of the risk management infrastructure, including policies, people
and systems. The scope of risks covered includes, but is not limited to:
- - Corporate Credit Risk, including obligor exposures vis-a-vis limits, risk
ratings, industry concentrations, and country cross-border risks;
- - Consumer Credit Risk, including product concentrations, regional
concentrations, and trends in portfolio performance;
- - Counterparty pre-settlement risk in trading activities;
- - Distribution and underwriting risks;
- - Price Risk, including the earnings or economic impact of changes in the
level and volatilities of interest rates, foreign exchange rates
and commodity, debt and equity prices on trading portfolios and on
investment portfolios;
- - Liquidity Risk, including funding concentrations and diversification
strategy;
- - Risks resulting from the underwriting, sale and reinsurance of life
insurance policies; and
- - Other risks, including legal, technology, operational and franchise, as
well as specific matters identified and reviewed in the Audit and Risk
Review process.
The following sections summarize the processes for managing credit, market,
operational and country risks within Citigroup's major businesses.
CREDIT RISK MANAGEMENT PROCESS
Credit risk is the potential for financial loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual obligation.
Credit risk arises in many of the Company's business activities including
lending activities, sales and trading activities, derivatives activities, and
securities transactions settlement activities, and when the Company acts as an
intermediary on behalf of its clients and other third parties. The credit risk
management process at Citigroup relies on corporate-wide standards to ensure
consistency and integrity, with business-specific policies and practices to
ensure applicability and ownership.
37
<Page>
LOANS OUTSTANDING
<Table>
<Caption>
IN MILLIONS
OF DOLLARS AT YEAR-END 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER LOANS
In U.S. offices:
Mortgage and real estate $ 121,178 $ 80,099 $ 73,166 $ 59,376 $ 51,381
Installment, revolving credit, and other 99,881 84,367 78,017 63,374 60,564
------------------------------------------------------------
221,059 164,466 151,183 122,750 111,945
------------------------------------------------------------
In offices outside the U.S.:
Mortgage and real estate 26,564 28,688 24,988 24,808 21,578
Installment, revolving credit, and other 64,454 56,684 55,515 50,293 42,375
Lease financing 493 501 427 475 484
------------------------------------------------------------
91,511 85,873 80,930 75,576 64,437
------------------------------------------------------------
312,570 250,339 232,113 198,326 176,382
Unearned income (1,973) (2,677) (3,234) (3,757) (3,377)
------------------------------------------------------------
CONSUMER LOANS--NET 310,597 247,662 228,879 194,569 173,005
------------------------------------------------------------
CORPORATE LOANS
In U.S. offices:
Commercial and industrial 35,780 32,431 37,220 30,163 26,182
Lease financing 14,044 17,679 13,805 9,513 8,769
Mortgage and real estate 2,573 2,784 3,490 5,439 9,000
------------------------------------------------------------
52,397 52,894 54,515 45,115 43,951
------------------------------------------------------------
In offices outside the U.S.:
Commercial and industrial 68,345 73,512 69,111 61,984 56,761
Mortgage and real estate 1,885 1,874 1,720 1,728 1,792
Loans to financial
Institutions 8,583 10,163 9,559 7,692 8,008
Lease financing 4,414 3,678 3,689 2,459 1,760
Governments and official
institutions 3,081 4,033 1,952 3,250 2,132
------------------------------------------------------------
86,308 93,260 86,031 77,113 70,453
------------------------------------------------------------
138,705 146,154 140,546 122,228 114,404
Unearned income (1,497) (2,422) (2,403) (1,896) (1,731)
------------------------------------------------------------
COMMERCIAL LOANS--NET 137,208 143,732 138,143 120,332 112,673
------------------------------------------------------------
TOTAL LOANS--NET OF
UNEARNED INCOME 447,805 391,394 367,022 314,901 285,678
Allowance for credit losses (11,501) (10,088) (8,961) (8,853) (8,596)
------------------------------------------------------------
TOTAL LOANS--NET OF
UNEARNED INCOME AND ALLOWANCE FOR
CREDIT LOSSES $ 436,304 $ 381,306 $ 358,061 $ 306,048 $ 277,082
============================================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
<Table>
<Caption>
IN MILLIONS OF
DOLLARS AT YEAR-END 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER REAL ESTATE
OWNED
Consumer(1) $ 495 $ 393 $ 366 $ 332 $ 358
Corporate(1) 111 265 291 511 514
Corporate/Other - 8 8 14 8
------------------------------------------------------------
TOTAL OTHER
REAL ESTATE OWNED $ 606 $ 666 $ 665 $ 857 $ 880
------------------------------------------------------------
OTHER REPOSSESSED ASSETS(2) $ 230 $ 439 $ 292 $ 256 $ 135
============================================================
</Table>
(1) Represents repossessed real estate, carried at lower of cost or fair value,
less costs to sell.
(2) Primarily commercial transportation equipment and manufactured housing,
carried at lower of cost or fair value, less costs to sell.
38
<Page>
DETAILS OF CREDIT LOSS EXPERIENCE
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT
LOSSES AT BEGINNING OF YEAR $ 10,088 $ 8,961 $ 8,853 $ 8,596 $ 8,087
------------------------------------------------------------
PROVISION FOR CREDIT LOSSES
Consumer 7,154 5,328 4,345 4,169 3,753
Corporate 2,841 1,472 994 591 508
------------------------------------------------------------
9,995 6,800 5,339 4,760 4,261
------------------------------------------------------------
GROSS CREDIT LOSSES CONSUMER(1)
In U.S. offices 5,098 4,185 3,413 3,063 3,057
In offices outside the U.S. 2,813 2,060 1,939 1,799 1,235
CORPORATE
Mortgage and real estate
In U.S. offices 5 13 10 59 40
In offices outside the U.S. 23 3 22 11 58
Governments and official institutions
outside the U.S. - - - - 3
Loans to financial institutions
In U.S. offices - 10 - - -
In offices outside the U.S. 4 - - 11 97
Commercial and industrial
In U.S. offices 1,552 1,378 563 186 125
In offices outside the U.S. 1,070 639 311 479 348
------------------------------------------------------------
10,565 8,288 6,258 5,608 4,963
------------------------------------------------------------
CREDIT RECOVERIES
CONSUMER(1)
In U.S. offices 610 435 526 413 427
In offices outside the U.S. 505 418 403 356 287
CORPORATE(2)
Mortgage and real estate
In U.S. offices 1 1 9 36 89
In offices outside the U.S. - 1 1 2 10
Governments and official
institutions outside the U.S. 2 - 1 - 10
Loans to financial institutions
in offices outside the U.S. 6 9 9 5 16
Commercial and industrial
In U.S. offices 266 262 45 19 36
In offices outside the U.S. 173 134 70 94 30
------------------------------------------------------------
1,563 1,260 1,064 925 905
------------------------------------------------------------
NET CREDIT LOSSES
In U.S. offices 5,778 4,888 3,406 2,840 2,670
In offices outside the U.S. 3,224 2,140 1,788 1,843 1,388
------------------------------------------------------------
9,002 7,028 5,194 4,683 4,058
------------------------------------------------------------
Other -- net(3) 420 1,355 (37) 180 306
------------------------------------------------------------
ALLOWANCE FOR CREDIT
LOSSES AT END OF YEAR $ 11,501 $ 10,088 $ 8,961 $ 8,853 $ 8,596
------------------------------------------------------------
Allowance for credit losses on
Letters of credit(4) 167 50 50 50 -
------------------------------------------------------------
TOTAL ALLOWANCE FOR LOANS, LEASES,
LENDING COMMITMENTS AND
LETTERS OF CREDIT $ 11,668 $ 10,138 $ 9,011 $ 8,903 $ 8,596
------------------------------------------------------------
Net consumer credit losses $ 6,796 $ 5,392 $ 4,423 $ 4,093 $ 3,578
As a percentage of average consumer loans 2.58% 2.31% 2.11% 2.24% 2.23%
------------------------------------------------------------
Net corporate credit losses $ 2,206 $ 1,636 $ 771 $ 590 $ 480
As a percentage of
average corporate losses 1.62% 1.14% 0.60% 0.51% 0.45%
============================================================
</Table>
(1) Consumer credit losses and recoveries primarily relate to revolving credit
and installment loans.
(2) Includes amounts recorded under credit default swaps purchased from third
parties.
(3) 2002 primarily includes the addition of $452 million of credit loss
reserves related to the acquisition of GSB. 2001 primarily includes the
addition of allowance for credit losses related to the acquisitions of
Banamex and EAB. 2000 and 1999 include the addition of allowance for credit
losses related to other acquisitions. 1998 reflects the addition of $320
million of credit loss reserves related to the acquisition of the Universal
Card portfolio. All periods also include the impact of foreign currency
translation.
(4) Primarily represents additional reserves recorded as other liabilities on
the balance sheet.
39
<Page>
CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS
<Table>
<Caption>
IN MILLIONS OF
DOLLARS AT YEAR-END 2002 2001(1) 2000(1) 1999(1) 1998(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE CASH-BASIS LOANS
Collateral dependent
(at lower of cost or
collateral value)(2) $ 616 $ 699 $ 390 $ 473 $ 555
Other(3) 4,286 2,834 1,580 1,162 1,201
------------------------------------------------------------
TOTAL $ 4,902 $ 3,533 $ 1,970 $ 1,635 $ 1,756
============================================================
CORPORATE CASH-BASIS LOANS(3)
In U.S. offices $ 1,724 $ 1,315 $ 700 $ 476 $ 614
In offices outside the U.S. 3,178 2,218 1,270 1,159 1,142
------------------------------------------------------------
TOTAL $ 4,902 $ 3,533 $ 1,970 $ 1,635 $ 1,756
============================================================
CORPORATE RENEGOTIATED LOANS
In U.S. offices $ 115 $ 263 $ 305 $ 256 $ 255
In offices outside the U.S. 55 74 94 56 59
------------------------------------------------------------
TOTAL $ 170 $ 337 $ 399 $ 312 $ 314
============================================================
CONSUMER LOANS ON WHICH ACCRUAL
OF INTEREST HAD BEEN SUSPENDED(3)
In U.S. offices $ 2,300 $ 2,501 $ 1,797 $ 1,696 $ 1,751
In offices outside the U.S. 2,723 2,241 1,607 1,821 1,664
------------------------------------------------------------
TOTAL $ 5,023 $ 4,742 $ 3,404 $ 3,517 $ 3,415
============================================================
ACCRUING LOANS 90 OR MORE DAYS
DELINQUENT(3)(4)
In U.S. offices $ 2,884 $ 1,822 $ 1,247 $ 874 $ 833
In offices outside the U.S. 447 776 385 452 532
------------------------------------------------------------
TOTAL $ 3,331 $ 2,598 $ 1,632 $ 1,326 $ 1,365
============================================================
CORPORATE CASH-BASIS LOANS AS A % OF
TOTAL CORPORATE LOANS 3.57% 2.46% 1.43% 1.36% 1.56%
============================================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
(2) A cash-basis loan is defined as collateral dependent when repayment is
expected to be provided solely by the liquidation of the underlying
collateral and there are no other available and reliable sources of
repayment, in which case the loans are written down to the lower of cost or
collateral value.
(3) The December 31, 2002 balance includes GSB data. The December 31, 2001
balance includes Banamex loan data.
(4) Substantially all consumer loans of which $1,764 million, $920 million,
$503 million, $379 million, and $267 million are government-guaranteed
student loans and Federal Housing Authority mortgages at December 31,
2002, 2001, 2000, 1999, and 1998, respectively.
FOREGONE INTEREST REVENUE ON LOANS (1)
<Table>
<Caption>
In Non-
In U.S. U.S. 2002
IN MILLIONS OF DOLLARS Offices Offices TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue that would have been
accrued at original contractual rates(2) $ 314 $ 588 $ 902
Amount recognized as interest revenue(2) 41 177 218
---------------------------------
FOREGONE INTEREST REVENUE $ 273 $ 411 $ 684
=================================
</Table>
(1) Relates to commercial cash-basis and renegotiated loans and consumer loans
on which accrual of interest had been suspended.
(2) Interest revenue in offices outside the U.S. may reflect prevailing local
interest rates, including the effects of inflation and monetary correction
in certain countries.
CONSUMER CREDIT RISK
Within Global Consumer, business-specific credit risk policies and
procedures are derived from the following risk management framework:
- - Each business must develop a plan, including risk/return tradeoffs, as well
as risk acceptance criteria and policies appropriate to their activities;
- - Senior Business Managers are responsible for managing risk/return tradeoffs
in their business;
- - Senior Business Managers, in conjunction with Senior Credit Officers,
implement business-specific risk management policies and practices;
- - Approval policies for a product or business are tailored to internal audit
ratings, profitability and credit risk management performance;
- - Independent credit risk management is responsible for establishing the
Global Consumer Policy, approving business-specific policies and
procedures, monitoring business risk management performance, providing
ongoing assessment of portfolio credit risks, and approving new products
and new risks.
CONSUMER PORTFOLIO REVIEW
Citigroup's consumer loan portfolio is well diversified by both customer
and product. Consumer loans comprise 69% of the total loan portfolio. These
loans represent thousands of borrowers with relatively small individual
balances. The loans are diversified with respect to the location of the
borrower, with 71% originated in the U.S. and 29% originated from offices
outside the U.S. Mortgage and real estate loans constitute 47% of the total
consumer loan portfolio and installment; revolving credit and other consumer
loans constitute 53% of the portfolio.
In the consumer portfolio, credit loss experience is 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 and
country. 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 following table 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.
40
<Page>
CONSUMER LOAN DELINQUENCY AMOUNTS, NET CREDIT LOSSES, AND RATIOS
<Table>
<Caption>
IN MILLIONS OF DOLLARS, EXCEPT TOTAL TOTAL 90 DAYS OR MORE AVERAGE
AND AVERAGE LOAN AMOUNTS IN BILLIONS LOANS PAST DUE(1) LOANS NET CREDIT LOSSES(1)
-------------------------------------------------------------------------------------
PRODUCT VIEW 2002 2002 2001(2) 2000(2) 2002 2002 2001(2) 2000(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CARDS $ 130.4 $ 2,398 $ 2,384 $ 1,671 $ 121.0 $ 7,175 $ 6,051 $ 4,367
RATIO 1.84% 1.96% 1.46% 5.93% 5.28% 4.21%
North America Cards 118.4 2,185 2,209 1,522 110.2 6,668 5,655 4,017
RATIO 1.85% 1.99% 1.46% 6.05% 5.41% 4.28%
International Cards 12.0 213 175 149 10.8 507 396 350
RATIO 1.77% 1.65% 1.45% 4.71% 3.96% 3.56%
CONSUMER FINANCE 84.1 2,119 2,243 1,435 77.9 2,968 2,213 1,845
RATIO 2.52% 3.04% 2.15% 3.81% 3.10% 2.96%
North America Consumer Finance 67.7 1,785 2,001 1,284 62.3 1,865 1,527 1,339
RATIO 2.64% 3.36% 2.38% 3.00% 2.65% 2.61%
International Consumer Finance 16.4 334 242 151 15.6 1,103 686 506
RATIO 2.04% 1.71% 1.17% 7.05% 5.01% 4.58%
RETAIL BANKING 146.2 4,150 3,437 2,124 113.0 753 636 618
RATIO 2.84% 3.30% 2.37% 0.67% 0.65% 0.76%
North America Retail Banking 109.2 2,818 2,299 1,007 75.6 315 230 162
RATIO 2.58% 3.42% 1.93% 0.42% 0.39% 0.36%
International Retail Banking 37.0 1,332 1,138 1,117 37.4 438 406 456
RATIO 3.60% 3.08% 2.99% 1.17% 1.08% 1.25%
PRIVATE BANK(3) 30.9 174 135 61 28.3 15 14 23
RATIO 0.56% 0.54% 0.23% 0.05% 0.06% 0.09%
Other Consumer 1.0 - 11 9 1.0 9 46 (20)
-------------------------------------------------------------------------------------
TOTAL MANAGED(4) $ 392.6 $ 8,841 $ 8,210 $ 5,300 $ 341.2 $ 10,920 $ 8,960 $ 6,833
RATIO 2.25% 2.50% 1.75% 3.20% 2.88% 2.48%
-------------------------------------------------------------------------------------
Securitized receivables (67.1) (1,129) (1,282) (1,012) (65.2) (3,760) (3,251) (2,228)
Loans held-for-sale (15.9) (99) (110) (110) (12.1) (364) (317) (182)
-------------------------------------------------------------------------------------
CONSUMER LOANS(5) $ 309.6 $ 7,613 $ 6,818 $ 4,178 $ 263.9 $ 6,796 $ 5,392 $ 4,423
RATIO 2.46% 2.75% 1.83% 2.58% 2.31% 2.11%
=====================================================================================
</Table>
<Table>
<Caption>
IN MILLIONS OF DOLLARS, EXCEPT TOTAL TOTAL 90 DAYS OR MORE AVERAGE
AND AVERAGE LOAN AMOUNTS IN BILLIONS LOANS PAST DUE(1) LOANS NET CREDIT LOSSES(1)
-------------------------------------------------------------------------------------
REGIONAL VIEW 2002 2002 2001(2) 2000(2) 2002 2002 2001(2) 2000(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America (excluding Mexico) $ 304.4 $ 6,250 $ 5,567 $ 3,824 $ 255.0 $ 8,650 $ 7,353 $ 5,477
RATIO 2.05% 2.28% 1.58% 3.39% 3.15% 2.52%
Mexico 9.8 638 1,032 16 10.3 216 117 14
RATIO 6.52% 9.04% 4.68% 2.11% 2.15% 3.76%
Western Europe 25.1 1,208 810 851 22.4 418 340 368
RATIO 4.80% 4.04% 4.85% 1.87% 1.76% 2.18%
Japan 17.6 258 192 103 18.1 1,035 590 410
RATIO 1.46% 1.16% 0.75% 5.71% 3.52% 3.46%
Asia (excluding Japan) 27.4 335 385 344 26.9 364 269 258
RATIO 1.22% 1.44% 1.59% 1.35% 1.01% 1.18%
Latin America 3.2 79 166 107 3.7 180 246 265
RATIO 2.49% 3.52% 2.19% 4.85% 4.16% 5.06%
CEEMEA 5.1 73 58 55 4.8 57 45 41
RATIO 1.44% 1.22% 2.17% 1.17% 1.00% 1.81%
-------------------------------------------------------------------------------------
TOTAL MANAGED(4) $ 392.6 $ 8,841 $ 8,210 $ 5,300 $ 341.2 $ 10,920 $ 8,960 $ 6,833
RATIO 2.25% 2.50% 1.75% 3.20% 2.88% 2.48%
-------------------------------------------------------------------------------------
Securitized receivables (67.1) (1,129) (1,282) (1,012) (65.2) (3,760) (3,251) (2,228)
Loans held-for-sale (15.9) (99) (110) (110) (12.1) (364) (317) (182)
-------------------------------------------------------------------------------------
CONSUMER LOANS(5) $ 309.6 $ 7,613 $ 6,818 $ 4,178 $ 263.9 $ 6,796 $ 5,392 $ 4,423
RATIO 2.46% 2.75% 1.83% 2.58% 2.31% 2.11%
=====================================================================================
</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) Reclassified to conform to the 2002 presentation.
(3) PRIVATE BANK results are reported as part of the Global Investment
Management segment.
(4) This table presents credit information on a managed basis and shows the
impact of securitizations to get to a held basis. Only North America Cards
and North America Retail Banking from a product view, and North America
from a regional view, are impacted. Although a managed basis presentation
is not in conformity with GAAP, it provides a representation of performance
and key indicators of the credit card business that is consistent with the
view the Company uses to manage the business.
(5) Total loans and total average loans exclude certain interest and fees on
credit cards of approximately $1.0 billion and $0.4 billion, respectively,
which are included in Consumer Loans on the Consolidated Statement of
Financial Position.
41
<Page>
CONSUMER LOAN BALANCES, NET OF UNEARNED INCOME
<Table>
<Caption>
END OF PERIOD AVERAGE
--------------------------------- ----------------------------------
IN BILLIONS OF DOLLARS 2002 2001(1) 2000(1) 2002 2001(1) 2000(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED $ 392.6 $ 327.9 $ 302.8 $ 341.2 $ 311.5 $ 275.5
Securitized receivables (67.1) (68.3) (60.6) (65.2) (63.8) (57.0)
Loans held-for-sale (15.9) (11.9) (13.3) (12.1) (14.2) (8.7)
--------------------------------- ----------------------------------
ON-BALANCE SHEET (2) $ 309.6 $ 247.7 $ 228.9 $ 263.9 $ 233.5 $ 209.8
================================= ==================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
(2) 2002 end-of-period and average loans exclude certain interest and fees on
credit cards of approximately $1.0 billion and $0.4 billion, respectively.
Total delinquencies 90 days or more past due in the managed portfolio were
$8.841 billion or 2.25% of loans at December 31, 2002, compared to $8.210
billion or 2.50% at December 31, 2001 and $5.300 billion or 1.75% at December
31, 2000. Total managed net credit losses in 2002 were $10.920 billion and the
related loss ratio was 3.20%, compared to $8.960 billion and 2.88% in 2001 and
$6.833 billion and 2.48% in 2000. For a discussion of trends by business, see
business discussions on pages 18 - 23 and page 31.
Citigroup's allowance for credit losses of $11.501 billion is available to
absorb probable credit losses inherent in the entire portfolio. For analytical
purposes only, the portion of Citigroup's allowance for credit losses attributed
to the consumer portfolio was $6.410 billion at December 31, 2002, $5.507
billion at December 31, 2001 and $4.946 billion at December 31, 2000. The
increase in the allowance for credit losses from 2000 was primarily due to a
$640 million and $452 million addition associated with the acquisitions of
Banamex and GSB, respectively, and a $206 million increase in Citi Cards
established in accordance with recent FFIEC guidance related to past due
interest and late fees. The level of the consumer allowance was also impacted by
deteriorating credit in Argentina and the CONSUMER FINANCE portfolio in Japan.
The allowance as a percentage of loans on the balance sheet was 2.06% at
December 31, 2002, compared to 2.22% at December 31, 2001 and 2.16% at December
31, 2000. The decline in the allowance as a percentage of loans from the prior
year primarily reflected the addition of the GSB loan portfolio, which is
predominantly secured by real estate, combined with growth in consumer loans and
the impact of stricter lending standards and portfolio management in individual
businesses. On-balance sheet consumer loans of $309.6 billion increased $61.9
billion or 25% from December 31, 2001. The increase from a year ago was
primarily driven by the addition of GSB loans, receivable growth in Citi Cards,
mortgage and student loan growth in Consumer Assets and increases in real
estate-secured loans in the PRIVATE BANK and CitiFinancial. In addition,
increases in Western Europe were partially offset by declines in Latin America
and Mexico.
Net credit losses, delinquencies and the related ratios are affected by the
credit performance of the portfolios, including bankruptcies, unemployment,
global economic conditions, portfolio growth and seasonal factors, as well as
macro-economic and regulatory policies. In Japan, net credit losses and the
related loss ratio are expected to increase from 2002 due to current economic
conditions in that country, including rising bankruptcy filings and unemployment
rates. Management expects that 2003 consumer credit loss rates will be
comparable to 2002 despite current economic conditions in the U.S. and Japan,
including rising bankruptcy filings and unemployment rates. This paragraph
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 36.
CORPORATE CREDIT RISK
For corporate clients and investment banking activities across the
organization, the credit process is grounded in a series of fundamental
policies, including:
- - Ultimate business accountability for managing credit risks;
- - Joint business and independent risk management responsibility for
establishing limits and risk management practices;
- - Single center of control for each credit relationship that coordinates
credit activities with that client, directly approves or consents to all
extensions of credit to that client, reviews aggregate exposures, and
ensures compliance with exposure limits;
- - Portfolio limits, including obligor limits by risk rating and by maturity,
to ensure diversification and maintain risk/capital alignment;
- - A minimum two-authorized credit officer-signature requirement on extensions
of credit - one from a sponsoring credit officer in the business and one
from a credit officer in independent credit risk management;
- - Uniform risk measurement standards, including risk ratings, which must be
assigned to every obligor and facility in accordance with Citigroup
standards; and
- - Consistent standards for credit origination, measurement and documentation,
as well as problem recognition, classification and remedial action.
These policies apply universally across corporate clients and investment
banking activities. Businesses that require tailored credit processes, due to
unique or unusual risk characteristics in their activities, may only do so under
a Credit Program that has been approved by independent credit risk management.
In all cases, the above policies must be adhered to, or specific exceptions must
be granted by independent credit risk management.
The following table presents the corporate credit portfolio, before
consideration of collateral, by maturity at December 31, 2002. The corporate
portfolio is broken out by direct outstandings which include drawn loans,
overdrafts, interbank placements, banker's acceptances, certain investment
securities and leases, and unfunded commitments which include unused commitments
to lend, letters of credit and financial guarantees.
<Table>
<Caption>
Greater
than 1 Greater
Within year but than 5 Total
IN BILLIONS OF DOLLARS 1 year within 5 years exposure
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct outstandings $ 153 $ 51 $ 19 $ 223
Unfunded commitments 135 59 13 207
-------------------------------------------
TOTAL $ 288 $ 110 $ 32 $ 430
-------------------------------------------
</Table>
42
<Page>
CREDIT EXPOSURE ARISING FROM DERIVATIVES AND FOREIGN EXCHANGE
The current credit exposure arising from derivatives and foreign exchange
contracts is represented by the current mark-to-market (i.e., the current cost
of replacing all contracts), and is reported as a component of Trading Account
Assets. At year-end 2002, the current credit exposure arising from derivative
and foreign exchange contracts was $37.5 billion, after taking into
consideration the benefit of legally enforceable master netting agreements, as
well as cash collateral posted under legally enforceable margin agreements.
Additionally, for purposes of managing credit exposure on derivative and
foreign exchange contracts, particularly when looking at exposure to a single
counterparty, the Company measures and monitors credit exposure taking into
account the current mark-to-market value of each contract plus a prudent
estimate of its potential change in value over its life. This measurement of the
potential future exposure for each credit facility is based on a stressed
simulation of market rates and generally takes into account legally enforceable
risk-mitigating agreements for each obligor such as netting and margining.
The Company's credit exposure on derivatives and foreign exchange
contracts, including both the mark-to-market and the potential future exposure,
is primarily to professional counterparties in the financial sector, with 74%
arising from transactions with banks, investment banks, governments and central
banks, and other financial institutions. Approximately 90% of the exposure is
investment-grade.
PORTFOLIO MIX
The corporate credit portfolio is geographically diverse by region. The
following table shows direct outstandings and unfunded commitments by region:
<Table>
<Caption>
DEC. 31, Dec. 31,
2002 2001
- ----------------------------------------------------
<S> <C> <C>
North America 47% 47%
Europe 19% 16%
Japan 3% 2%
Asia 11% 11%
Latin America 5% 8%
Mexico 8% 9%
CEEMEA 7% 7%
-------------------------
TOTAL 100% 100%
=========================
</Table>
It is corporate credit policy to maintain accurate and consistent risk
ratings across the corporate credit portfolio. This facilitates the comparison
of credit exposures across all lines of business, geographic region and product.
All internal risk ratings must be derived in accordance with the Corporate Risk
Rating Policy. Any exception to the policy must be approved by the Citigroup
Chief Risk Officer. The Corporate Risk Rating Policy establishes standards for
the derivation of obligor and facility risk ratings that are generally
consistent with the approaches used by the major rating agencies.
Obligor risk ratings reflect an estimated probability of default for an
obligor, and are derived through the use of validated statistical models,
external rating agencies (under defined circumstances), or approved scoring or
judgmental methodologies. Facility risk ratings are assigned, using the obligor
risk rating, and then taken into consideration are factors that affect the
loss-given-default of the facility such as parent support, collateral or
structure.
Internal obligor ratings equivalent to BBB- and above are considered
investment-grade. Ratings below the equivalent of BBB- are considered
non-investment-grade.
The following table presents the corporate credit portfolio by facility
risk rating at December 31, 2002 and 2001, as a percentage of the total
portfolio:
<Table>
<Caption>
DIRECT OUTSTANDINGS AND UNFUNDED
COMMITMENTS
- -----------------------------------------------------------
2002 2001
--------------------------------
<S> <C> <C>
AAA/AA/A 49% 43%
BBB 23% 28%
BB/B 23% 18%
CCC or below 2% 3%
Unrated (1) 3% 8%
--------------------------------
100% 100%
================================
</Table>
(1) Includes retail margin loans, as well as portfolios of recent acquisitions,
which are in the process of conforming to Citigroup's risk-rating
methodology.
The corporate credit portfolio is diversified by industry with a
concentration only to the financial sector which includes banks, other financial
institutions, investment banks and governments and central banks. The following
table shows the allocation of direct outstandings and unfunded commitments to
industries as a percentage of the total corporate portfolio:
<Table>
<Caption>
DIRECT OUTSTANDINGS
AND UNFUNDED COMMITMENTS
------------------------
2002 2001
------------------------
<S> <C> <C>
Government and central banks 12% 13%
Other financial institutions 8% 6%
Banks 6% 5%
Insurance 5% 4%
Utilities 5% 4%
Telephone and cable 4% 4%
Agricultural and food preparation 4% 5%
Investment banks 3% 3%
Industrial machinery and equipment 3% 5%
Global information technology 3% 3%
Petroleum 3% 3%
Freight transportation 2% 4%
Chemicals 2% 3%
Autos 2% 2%
Other industries(1) 38% 36%
------------------------
TOTAL 100% 100%
------------------------
</Table>
(1) Includes all other industries, none of which exceeds 2% of total
outstandings.
CREDIT RISK MITIGATION
As part of its overall risk management activities, the Company makes use of
credit derivatives and other risk mitigants to hedge portions of the credit risk
in its portfolio, in addition to outright asset sales. The effect of these
transactions is to transfer credit risk to creditworthy, independent third
parties. At December 31, 2002, $9.6 billion of credit risk exposure was hedged.
The reported amounts of direct outstandings and unfunded commitments in this
43
<Page>
report do not reflect the impact of these hedging transactions. At December 31,
2002, the credit protection was hedging underlying credit exposure with the
following risk rating distribution:
<Table>
<Caption>
RATING OF HEDGED EXPOSURE 2002
- ---------------------------------------------------
<S> <C>
AAA/AA/A 35%
BBB 55%
BB/B 9%
CCC or below 1%
-----
100%
-----
</Table>
At December 31, 2002, the credit protection was hedging underlying credit
exposure with the following industry distribution:
<Table>
<Caption>
INDUSTRY OF HEDGED EXPOSURE 2002
- ---------------------------------------------------
<S> <C>
Telephone and cable 14%
Utilities 12%
Other financial institutions 8%
Agriculture and food preparation 7%
Global information technology 6%
Industrial machinery and equipment 6%
Business services 4%
Chemicals 4%
Entertainment/news group 4%
Natural gas distribution 4%
Petroleum 4%
Other(1) 27%
-----
100%
-----
</Table>
(1) Includes all other industries none of which is greater than 4% of total
hedged amount.
GLOBAL CORPORATE PORTFOLIO REVIEW
Corporate 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. In the case of
CitiCapital, loans and leases are identified as impaired when interest or
principal is past due not later than 120 days but interest ceases to accrue at
90 days. Impaired corporate 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 corporate cash-basis loans and net credit
losses:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2002 2001(1) 2000(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE CASH-BASIS LOANS
Capital Markets and Banking(2)(3) $ 4,268 $ 3,048 $ 1,901
Transaction Services(3) 572 464 23
Insurance Subsidiaries 44 19 43
Investment Activities(4) 18 2 3
--------------------------------------
TOTAL CORPORATE CASH-BASIS LOANS $ 4,902 $ 3,533 $ 1,970
======================================
NET CREDIT LOSSES
Capital Markets and Banking(2)(3) $ 2,004 $ 1,615 $ 735
Transaction Services(3) 165 21 29
Private Client Services(5) 6 -- --
Investment Activities(4) 31 -- 7
--------------------------------------
TOTAL NET CREDIT LOSSES $ 2,206 $ 1,636 $ 771
======================================
CORPORATE ALLOWANCE FOR CREDIT LOSSES $ 5,091 $ 4,581 $ 4,015
Corporate allowance for credit
losses on letters of credit(6) 167 50 50
--------------------------------------
TOTAL CORPORATE ALLOWANCE FOR LOANS,
LEASES, LENDING COMMITMENTS
AND LETTERS OF CREDIT $ 5,258 $ 4,631 $ 4,065
======================================
As a percentage of total corporate loans(7) 3.71% 3.19% 2.91%
======================================
</Table>
(1) Reclassified to conform to the 2002 presentation.
(2) Prior period cash-basis loans were restated to change the policy of the
Associates Corporate Leasing business for suspending accrual of interest on
past due loans to conform with other leasing businesses in GCIB. The prior
policy of placing loans that are 60 days or more past due into cash-basis
was changed to 90 days or more past due.
(3) 2001 includes Banamex cash-basis loans and net credit losses.
(4) Investment Activities results are reported in the Proprietary Investment
Activities segment.
(5) Private Client Services is included within the Private Client Services
segment.
(6) Represents additional reserves as other liabilities on the balance sheet.
(7) Does not include the allowance for letters of credit.
Corporate cash-basis loans were $4.902 billion, $3.533 billion and $1.970
billion at December 31, 2002, 2001 and 2000, respectively. Cash-basis loans
increased $1.369 billion in 2002 primarily due to increases in CAPITAL MARKETS
AND BANKING and TRANSACTION SERVICES. CAPITAL MARKETS AND BANKING primarily
reflects increases in the energy and telecommunications industries combined with
increases in Latin America, mainly Argentina and Brazil, CitiCapital and Asia,
mainly Thailand and Australia. CitiCapital increased primarily due to increases
in the transportation and equipment finance portfolios. TRANSACTION SERVICES
increased primarily due to increases in trade finance receivables in Argentina
and Brazil.
Cash-basis loans increased $1.563 billion in 2001 primarily due to
increases in CAPITAL MARKETS AND BANKING and TRANSACTION SERVICES. CAPITAL
MARKETS AND BANKING primarily reflects increases in the telecommunications,
energy, and retail industries, combined with increases in CitiCapital, Mexico,
Latin America, mainly Argentina, and Asia, mainly Australia and New Zealand.
CitiCapital increased primarily due to increases in the transportation
portfolio. The increase in Mexico primarily reflects the acquisition of Banamex
which includes exposures in steel, textile, food products and other industries.
TRANSACTION SERVICES increased primarily due to increases in Mexico due to the
acquisition of Banamex.
Total corporate Other Real Estate Owned (OREO) was $111 million, $273
million and $299 million at December 31, 2002, 2001 and 2000, respectively. The
$162 million decrease from 2001 reflects a $38 million decrease due to the TPC
distribution and continued improvement in the North America real
44
<Page>
estate portfolio. The $26 million decrease in 2001 reflects improvements in
the North America real estate portfolio.
Total corporate Other Repossessed Assets were $139 million, $284 million
and $208 million at December 31, 2002, 2001 and 2000, respectively. The $145
million decrease in 2002 primarily reflects improvements in the transportation
equipment portfolio due to a decline in portfolio size and improved credit
quality. The $76 million increase in 2001 primarily reflects the deterioration
in the transportation equipment portfolio and the acquisition of Banamex.
Total corporate loans outstanding at December 31, 2002 were $137 billion as
compared to $144 billion and $138 billion at December 31, 2001 and 2000,
respectively.
Total corporate net credit losses of $2.206 billion in 2002 increased $570
million compared to 2001 primarily due to higher net credit losses in the energy
and telecommunications industries and Argentina, partially offset by higher 2001
credit losses in the CitiCapital transportation portfolio. Total corporate net
credit losses of $1.636 billion in 2001 increased $865 million compared to 2000
reflecting increases in the transportation leasing portfolio, higher net credit
losses in the telecommunications, energy, retail and airline industries as well
as write-downs in Argentina.
The allowance for credit losses is established by management based upon
estimates of probable losses inherent in the portfolio. This evaluative process
includes the utilization of statistical models to analyze such factors as
default rates, both historic and projected, geographic and industry
concentrations and environmental factors. Larger non-homogeneous credits are
evaluated on an individual loan basis examining such factors as the borrower's
financial strength, payment history, the financial stability of any guarantors
and for secured loans, the realizable value of any collateral. CitiCapital's
allowance is established based upon an estimate of probable losses inherent in
the portfolio for individual loans which are deemed impaired as well as by
applying an annualized weighted average credit loss ratio utilizing both
historical and projected losses to the remaining portfolio. Additional reserves
are established to provide for imprecision caused by the use of historical and
projected loss data. Judgmental assessments are used to determine residual
losses on the leasing portfolio.
Citigroup's allowance for credit losses for loans, leases, lending
commitments and letters of credit of $11.668 billion is available to absorb
probable credit losses inherent in the entire portfolio. For analytical purposes
only, the portion of Citigroup's allowance for credit. losses attributed to the
corporate portfolio was $5.091 billion at December 31, 2002, compared to $4.581
billion at December 31, 2001. The allowance attributed to corporate loans,
leases and lending commitments as a percentage of corporate loans was 3.71% at
December 31, 2002, as compared to 3.19% and 2.91% at December 31, 2001 and 2000,
respectively. The $627 million increase in the total allowance at December 31,
2002 primarily reflects reserves established as a result of the impact of the
continuing deterioration in the Argentine economy and the telecommunications and
energy industries on the commercial portfolio. The $566 million increase in the
total allowance at December 31, 2001 primarily reflects the acquisition of
Banamex. Losses on corporate 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. Corporate net credit losses and
cash-basis loans are expected to be comparable to 2002 levels due to weak global
economic conditions, stress in the telecommunications and energy industries,
uncertainty regarding the political and economic environment in Brazil,
sovereign or regulatory actions, the economic crisis in Argentina, and other
factors. This statement is a forward-looking statement within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 36.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<Table>
<Caption>
DUE OVER 1 YEAR
WITHIN 1 BUT WITHIN OVER 5
IN MILLIONS OF DOLLARS AT YEAR- END YEAR 5 YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MATURITIES OF THE GROSS CORPORATE LOAN
PORTFOLIO
In U.S. offices
Commercial and industrial loans $ 10,826 $ 20,019 $ 4,935 $ 35,780
Mortgage and real estate 778 1,440 355 2,573
Lease financing 4,249 7,858 1,937 14,044
In offices outside the U.S. 54,251 28,003 4,054 86,308
-------------------------------------------------
TOTAL CORPORATE LOAN PORTFOLIO $ 70,104 $ 57,320 $ 11,281 $ 138,705
=================================================
SENSITIVITY OF LOANS DUE AFTER ONE
YEAR TO CHANGES IN INTEREST RATES(1)
Loans at predetermined interest rates $ 24,847 $ 6,360
Loans at floating or adjustable interest rates 32,473 4,921
-----------------------
TOTAL $ 57,320 $ 11,281
=======================
</Table>
(1) Based on contractual terms. Repricing characteristics may effectively be
modified from time to time using derivative contracts. See Notes 25 and 27
to the Consolidated Financial Statements.
MARKET RISK MANAGEMENT PROCESS
Market risk at Citigroup - like credit risk - is managed through
corporate-wide standards and business policies and procedures. Market risks
are measured in accordance with established standards to ensure consistency
across businesses and the ability to aggregate like risks at the
Citigroup-level. Each business is required to establish, and have approved by
independent market risk management, a market risk limit framework, including
risk measures, limits and controls, that clearly defines approved risk
profiles and is within the parameters of Citigroup's overall risk appetite.
Businesses, working in conjunction with independent Market Risk Management,
must ensure that market risks are independently measured, monitored and reported
to ensure transparency in risk-taking activities and integrity in risk reports.
In all cases, the businesses are ultimately responsible for the market risks
that they take and for remaining within their defined limits.
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. Liquidity risk is discussed in the Liquidity and Capital Resources section.
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. Price risk arises in Non-trading Portfolios, as well as in Trading
Portfolios.
45
<Page>
NON-TRADING PORTFOLIOS
Price risk in non-trading portfolios is measured predominantly through
Earnings-at-Risk and Factor Sensitivity techniques. These measurement techniques
are supplemented with additional tools, including stress testing and
cost-to-close analysis.
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 that are designated and effective as hedges. 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.
Earnings-at-Risk is the primary method for measuring price risk in
Citigroup's non-trading portfolios (excluding the Insurance companies).
Earnings-at-Risk measures the pretax earnings impact of a specified upward and
downward instantaneous parallel shift in the yield curve for the appropriate
currency assuming a static portfolio. Citigroup generally measures this impact
over a one-year and five-year time horizon under business-as-usual conditions.
The 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. U.S. dollar exposures in the non-trading portfolios are calculated by
multiplying the gap between interest sensitive items, including assets,
liabilities, derivatives and other off-balance sheet instruments, by 100 basis
points. Non-U.S. dollar exposures are calculated utilizing the statistical
equivalent of a 100 basis point change in interest rates and assuming no
correlation between exposures in different currencies.
Citigroup's primary non-trading price risk exposure is to movements in the
U.S. dollar and Mexican peso interest rates. Citigroup also has Earnings-at-Risk
in various other currencies; however, there are no significant risk
concentrations in any other individual non-U.S. dollar currency.
The table below illustrates the impact to Citigroup's pretax earnings from
a 100 basis point increase or decrease in the U.S. dollar yield curve. As of
December 31, 2002, the potential impact on pretax earnings over the next 12
months is a decrease of $822 million from an interest rate increase and an
increase of $969 million from an interest rate decrease. The potential impact on
pretax earnings for periods beyond the first 12 months is an increase of $460
million from an increase in interest rates and a decrease of $380 million from
an interest rate decrease. The change in Earnings-at-Risk from the prior year
primarily reflects the change in the asset/liability mix to reflect Citigroup's
view of interest rates.
As of December 31, 2002, the statistical equivalent of a 100 basis point
increase in Mexican peso interest rates would have a potential positive impact
on Citigroup's pretax earnings over the next twelve months of approximately $249
million and a potential negative impact of $157 million for the years
thereafter. The statistical equivalent of a 100 basis points decrease in Mexican
peso interest rates would have a potential negative impact on Citigroup's pretax
earnings over the next twelve months of approximately $249 million and potential
positive impact of $157 million for the years thereafter. The change in
Earnings-at-Risk from December 31, 2001 primarily reflects a reduction of
interest rate exposure in the balance sheet, partially offset by an increase in
the relative volatility of Mexican peso interest rates.
As of December 31, 2002, excluding the impact of changes in Mexican peso
interest rates, the statistical equivalent of a 100 basis point increase in
other non-U.S. dollar interest rates would have a potential negative impact on
Citigroup's pretax earnings over the next twelve months of $188 million and a
potential positive impact of $500 million for the years thereafter. The
statistical equivalent of a 100 basis point decrease in other non-U.S. dollar
interest rates would have a potential positive impact on Citigroup's pretax
earnings over the next twelve months of $191 million and a potential negative
impact of $484 million for the years thereafter. The change in the other
non-U.S. dollar Earnings-at-Risk from the prior year primarily reflects changes
in the asset/liability mix across a range of currencies based on Citigroup's
view of interest rates as well as changes in the repricing profile of the
balance sheet.
CITIGROUP EARNINGS-AT-RISK (IMPACT ON PRETAX EARNINGS)(1)
<Table>
<Caption>
DECEMBER 31, 2002
------------------------------------------------------------------------
IN MILLIONS OF DOLLARS U.S. DOLLAR MEXICAN PESO OTHER NON-U.S. DOLLAR(3)
------------------------------------------------------------------------
INCREASE DECREASE INCREASE DECREASE INCREASE DECREASE
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve months and less $ (822) $ 969 $ 249 $ (249) $ (188) $ 191
Thereafter(4) 460 (380) (157) 157 500 (484)
------------------------------------------------------------------------
Total $ (362) $ 589 $ 92 $ (92) $ 312 $ (293)
========================================================================
<Caption>
DECEMBER 31, 2001(2)
----------------------------------------------------------------------
IN MILLIONS OF DOLLARS U.S. DOLLAR MEXICAN PESO OTHER NON-U.S. DOLLAR
----------------------------------------------------------------------
INCREASE DECREASE INCREASE DECREASE INCREASE DECREASE
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve months and less $ (420) $ 423 $ 208 $ (208) $ (275) $ 278
Thereafter(4) 197 (380) 207 (207) (236) 250
----------------------------------------------------------------------
Total $ (223) $ 43 $ 415 $ (415) $ (511) $ 528
======================================================================
</Table>
(1) Excludes the Insurance Companies (see below).
(2) Prior year's U.S. dollar amounts have been restated to conform to the 2002
presentation.
(3) Excludes exposure to the Argentine peso beyond twelve months which reflects
Citigroup's current risk management practice given the volatile and
uncertain economic conditions in Argentina.
(4) Represents discounted Earnings-at-Risk beyond twelve months and up to and
including five years.
46
<Page>
INSURANCE COMPANIES
The table below reflects the estimated decrease in the fair value of
financial instruments held in the Insurance companies, as a result of a 100
basis point increase in interest rates.
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT DECEMBER 31, 2002 2001
- ------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments(1) $ 1,897 $ 3,404
-------------------
LIABILITIES
Long-term debt $ 11 $ 18
Contractholder funds 932 775
Redeemable securities of subsidiary trusts -- 1
===================
</Table>
(1) The decline from December 2001 is primarily attributable to discontinued
operations. See Note 4 to the Consolidated Financial Statements.
A significant portion of the Insurance companies' 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 Citigroup non-trading portfolios
or the Value-at-Risk used for the trading portfolios.
TRADING PORTFOLIOS
Price risk in trading portfolios is measured through a complementary set of
tools, including Factor Sensitivities, Value-at-Risk, and Stress Testing. Each
trading portfolio has its own market risk limit framework, encompassing these
measures and other controls, including permitted product lists and a new product
approval process for complex products, established by the business and approved
by independent market risk management.
Factor Sensitivities are defined as the change in the value of a position
for a defined change in a market risk factor (e.g., the change in the value of a
Treasury bill for a 1 basis point change in interest rates). It is the
responsibility of independent market risk management to ensure that factor
sensitivities are calculated, monitored and, in some cases, limited, for all
relevant risks taken in a trading portfolio. Value-at-Risk estimates the
potential decline in the value of a position or a portfolio, under normal market
conditions, over a one-day holding period, at a 99% confidence level. The
Value-at-Risk method incorporates the Factor Sensitivities of the trading
portfolio with the volatilities and correlations of those factors.
Stress Testing is performed on trading portfolios on a regular basis, to
estimate the impact of extreme market movements. Stress Testing is performed on
individual trading portfolios, as well as on aggregations of portfolios and
businesses, as appropriate. It is the responsibility of independent market risk
management, in conjunction with the businesses, to develop stress scenarios,
review the output of periodic stress testing exercises, and utilize the
information to make judgments as to the ongoing appropriateness of exposure
levels and limits.
New and/or complex products in trading portfolios are required to be
reviewed and approved by the Capital Markets Approval Committee (CMAC). The
CMAC is responsible for ensuring that all relevant risks are identified and
understood, and can be measured, managed and reported in accordance with
applicable business policies and practices. The CMAC is made up of senior
representatives from market and credit risk management, legal, accounting,
operations and other support areas, as required.
The level of price risk exposure at any given point in time depends on the
market environment and expectations of future price and market movements, and
will vary from period to period.
For Citigroup's major trading centers, the aggregate pretax Value-at-Risk in the
trading portfolios was $83 million at December 31, 2002. Daily exposures
averaged $66 million in 2002 and ranged from $54 million to $97 million.
The following table summarizes Value-at-Risk in the trading portfolios as of
December 31, 2002 and 2001, along with the averages:
<Table>
<Caption>
DEC. 31, 2002 Dec. 31, 2001
IN MILLIONS OF DOLLARS 2002 AVERAGE 2001 Average
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $ 75 $ 54 $ 44 $ 55
Foreign exchange 25 16 9 12
Equity 12 18 10 15
All other (primarily commodity) 5 13 21 18
Covariance adjustment (34) (35) (30) (37)
--------------------------------------------
TOTAL $ 83 $ 66 $ 54 $ 63
============================================
</Table>
The table below provides the range of Value-at-Risk in the trading portfolios
that was experienced during 2002 and 2001:
2002 2001 (1)
---------------------------------
IN MILLIONS OF DOLLARS LOW HIGH Low High
- -------------------------------------------------------------------
Interest rate $ 41 $ 75 $ 33 $ 90
Foreign exchange 5 32 6 22
Equity 8 51 9 53
All other (primarily commodity) 4 26 8 52
=================================
(1) Reclassified to conform to the 2002 presentation.
OPERATIONAL RISK MANAGEMENT PROCESS
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people or systems or from external events. It includes
reputation and franchise risks associated with business practices or market
conduct that the Company may undertake with respect to activities as principal,
as well as agent, or through a special purpose vehicle.
The management of operational risk is not new; businesses have typically
managed operational risk as part of their standard business practices. However,
management of operational risk has begun to evolve into a distinct discipline
with its own risk management structure, tools, and processes, much like credit
and market risk.
In February 2002, the Citigroup Operational Risk Policy was issued,
codifying the core governing principles for operational risk management and
providing the framework to identify, control, monitor, measure, and report
operational risks in a consistent manner across the Company.
Citigroup's information security and continuity of business processes
illustrate the implementation of controls consistent with the Operational Risk
Policy. Citigroup has an Information Security Program that complies with the
Gramm-Leach-Bliley Act and other regulatory guidance. The Citigroup Information
Security Office conducted an end-to-end review of its risk management processes
during 2002 and developed a more objective and measurable approach to assessing,
mitigating, monitoring and responding to information security risk. The Office
of Business Continuity
47
<Page>
formed the Continuity of Business Committee in late 2001 and issued a
corporate-wide Continuity of Business policy effective January 2003 to ensure
consistency in contingency planning standards across the Company. To mitigate
operational risks associated with business continuity, the Office of Business
Continuity ensures that Continuity of Business Plans are reviewed and tested,
at least annually.
The core operational risk principles, which apply without exception to all
of Citigroup's businesses, are:
- - Senior Business Managers are accountable for managing Operational Risk.
- - Citigroup has a system of checks and balances in place for operational risk
management including:
- an independent operational risk oversight function, reporting to
the Citigroup Chief Risk Officer
- an independent Audit and Risk Review function
- - Each major Citigroup business segment must have approved business-specific
policies and procedures for managing operational risk including risk
identification, mitigation, monitoring, measurement and reporting, as well
as processes for ensuring compliance with corporate policies and applicable
laws and regulations.
The Operational Risk Policy and its requirements facilitate the aggregation of
operational risks across products and businesses and promote effective
communication of those risks to management, including the Citigroup Risk
Management Committee, and Citigroup's Board of Directors. It also facilitates
Citigroup's response to the requirements of emerging regulatory guidance on
Operational Risk.
COUNTRY AND CROSS-BORDER RISK MANAGEMENT PROCESS
COUNTRY RISK
During 2002, the Citigroup Country Risk Committee was formed. It is chaired
by senior international business management, and includes as its members
business managers and independent risk managers from around the world. The
committee's primary objective is to strengthen the management of country risk,
defined as the total risk to the Company of an event that impacts a country. The
committee regularly reviews all risk exposures within a country, makes
recommendations as to actions, and follows up to ensure appropriate
accountability.
CROSS-BORDER RISK
The Company's cross-border outstandings reflect various economic and
political risks, including those arising from restrictions on the transfer of
funds as well as the inability to obtain payment from customers on their
contractual obligations as a result of actions taken by foreign governments such
as exchange controls, debt moratorium and restrictions on the remittance of
funds.
Management oversight of cross-border risk is performed through a formal
country risk review process that includes setting of cross-border limits, at
least annually, in each country in which Citigroup has cross-border exposure,
monitoring of economic conditions globally and within individual countries with
proactive action as warranted, and the establishment of internal risk management
policies. Under FFIEC guidelines, total cross-border outstandings include
cross-border claims on third parties as well as investments in and funding of
local franchises. Cross-border claims on third parties (trade, short-term, and
medium- and long-term claims) include cross-border loans, securities, deposits
with banks, investments in affiliates, and other monetary assets, as well as net
revaluation gains on foreign exchange and derivative products.
The cross-border outstandings are reported by assigning externally
guaranteed outstandings to the country of the guarantor and outstandings for
which tangible, liquid collateral is held outside of the obligor's country to
the country in which the collateral is held. For securities received as
collateral, outstandings are assigned to the domicile of the issuer of the
securities.
Investments in and funding of local franchises represents the excess of
local country assets over local country liabilities. Local country assets are
claims on local residents recorded by branches and majority-owned subsidiaries
of Citigroup domiciled in the country, adjusted for externally guaranteed
outstandings and certain collateral. Local country liabilities are obligations
of branches and majority-owned subsidiaries of Citigroup domiciled in the
country, for which no cross-border guarantee is issued by Citigroup offices
outside the country.
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 trading 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.
48
<Page>
The table below shows all countries where total FFIEC cross-border outstandings
exceed 0.75% of total Citigroup assets:
<Table>
<Caption>
CROSS-BORDER CLAIMS ON THIRD PARTIES INVESTMENTS IN LOCAL FRANCHISES
-------------------------------------------------------------------------------------------------
NET
INVESTMENTS
TRADING IN AND
AND SHORT- LOCAL LOCAL FUNDING OF
IN BILLIONS OF TERM RESALE ALL COUNTRY COUNTRY LOCAL
DOLLARS CLAIMS(1) AGREEMENTS OTHER TOTAL ASSETS LIABILITIES FRANCHISES(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Germany $ 10.9 $ 6.9 $ 1.0 $ 18.8 $ 16.0 $ 15.8 $ 0.2
France 5.0 9.9 0.9 15.8 1.1 1.0 0.1
United Kingdom 4.7 6.4 2.7 13.8 31.1 45.8 -
Italy 8.7 0.8 0.3 9.8 3.2 1.7 1.5
Netherlands 5.3 3.4 1.2 9.9 0.1 1.9 -
Japan 2.6 5.2 1.6 9.4 23.6 32.6 -
Mexico(4) 3.1 0.1 5.0 8.2 44.9 44.0 0.9
Brazil 1.9 - 2.5 4.4 6.4 3.3 3.1
Canada 2.4 0.8 1.2 4.4 9.6 7.0 2.6
=================================================================================================
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
-----------------------------------------------------
TOTAL TOTAL
CROSS- CROSS-
BORDER BORDER
OUT- COMMIT- OUT- COMMIT-
STANDINGS MENTS(3) STANDINGS MENTS(3)
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Germany $ 19.0 $ 10.9 $ 13.5 $ 7.3
France 15.9 5.9 10.9 8.7
United Kingdom 13.8 26.3 11.2 16.8
Italy 11.3 1.6 9.7 2.4
Netherlands 9.9 4.1 7.2 3.0
Japan 9.4 0.4 7.9 3.3
Mexico(4) 9.1 0.5 12.3 0.6
Brazil 7.5 -- 10.7 0.3
Canada 7.0 2.1 7.9 3.4
=====================================================
</Table>
(1) 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.
(2) If local country liabilities exceed local country assets, zero is used for
net investments in and funding of local franchises.
(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.
(4) For further information on Mexico see Note 26 to the Consolidated Financial
Statements.
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, 2002, 2001 and 2000, respectively, were (in
billions): Germany ($26.5, $19.5 and $16.8), France ($11.7, $13.5 and $13.5),
the United Kingdom ($9.9, $9.3 and $9.6), Italy ($20.3, $12.8 and $13.9), the
Netherlands ($7.8, $6.9 and $7.7), Japan ($9.3, $6.5 and $9.1), Mexico ($10.4,
$13.2 and $4.7), Brazil ($8.8, $11.9 and $9.8), and Canada ($7.3, $8.9 and
$9.0).
Cross-border commitments (in billions) at December 31, 2000 were $7.1 for
Germany, $8.4 for France, $15.4 for the United Kingdom, $5.7 for Italy, $1.9 for
the Netherlands, $0.8 for Japan, $1.7 for Mexico, $0.2 for Brazil, and $5.0 for
Canada.
The sector percentage allocation for bank, public and private cross-border
claims, respectively, on third parties under FFIEC guidelines at December 31,
2002 was: Germany (21%, 62% and 17%), France (16%, 55% and 29%), the United
Kingdom (22%, 18% and 60%), Italy (4%, 83% and 13%), the Netherlands (25%, 23%
and 52%), Japan (6%, 18% and 76%), Mexico (3%, 38% and 59%), Brazil (8%, 24% and
68%), and Canada (18%, 23% and 59%).
The following table shows cross-border outstandings to our ten largest non-OECD
countries:
<Table>
<Caption>
CROSS-BORDER CLAIMS ON THIRD PARTIES INVESTMENTS IN LOCAL FRANCHISES
-------------------------------------------------------------------------------------------------
NET
INVESTMENTS
TRADING IN AND
AND SHORT- LOCAL LOCAL FUNDING OF
IN BILLIONS OF TERM RESALE ALL COUNTRY COUNTRY LOCAL
DOLLARS CLAIMS(1) AGREEMENTS OTHER TOTAL ASSETS LIABILITIES FRANCHISES(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brazil 1.9 -- 2.5 4.4 6.4 3.3 3.1
India 0.6 -- 0.6 1.2 5.7 3.8 1.9
Taiwan 0.8 1.0 0.8 2.6 8.9 10.2 --
Russia 0.6 0.3 0.4 1.3 0.8 0.7 0.1
Argentina 0.5 0.2 0.3 1.0 2.4 2.0 0.4
Chile 0.3 -- 0.5 0.8 2.9 2.5 0.4
Malaysia 0.2 0.3 0.1 0.6 6.5 5.9 0.6
Hong Kong 0.9 -- 0.2 1.1 8.7 19.2 --
Colombia 0.6 -- 0.3 0.9 1.0 0.9 0.1
Singapore 0.7 0.2 0.1 1.0 12.1 23.1 --
===================================================================================================================
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------------------------
TOTAL TOTAL
CROSS- CROSS-
BORDER BORDER
OUT- COMMIT- OUT- COMMIT-
STANDINGS MENTS(3) STANDINGS MENTS(3)
----------------------------------------------------
<S> <C> <C> <C> <C>
Brazil 7.5 -- 10.7 0.3
India 3.1 0.3 2.4 0.4
Taiwan 2.6 0.5 2.8 0.7
Russia 1.4 -- 0.6 0.3
Argentina 1.4 0.2 3.2 0.3
Chile 1.2 0.1 1.6 0.1
Malaysia 1.2 -- 0.9 0.2
Hong Kong 1.1 0.2 1.0 0.2
Colombia 1.0 0.1 1.4 0.1
Singapore 1.0 1.2 0.8 0.2
=====================================================================
</Table>
(1) 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.
(2) If local country liabilities exceed local country assets, zero is used for
net investments in and funding of local franchises.
(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.
49
<Page>
BALANCE SHEET REVIEW
GENERAL
At December 31, 2002, total assets were $1.1 trillion, an increase of
$45.7 billion or 4% from the prior year. At December 31, 2002, total assets
were primarily comprised of loans (net of unearned income) of $447.8 billion
or 41% of total assets, investments of $169.5 billion or 15% of total assets,
trading assets of $155.2 billion or 14% of total assets and federal funds
sold and securities borrowed or purchased under agreements to resell of
$139.9 billion or 13% of total assets. Total interest-earning assets from
continuing operations were $867.0 billion compared to $803.1 billion in 2001.
Supporting this asset growth was a $56.4 billion or 15% increase in total
deposits, an $11.5 billion or 8% increase in short- and long-term borrowings,
a $10.9 billion or 14 % increase in trading account liabilities, a $9.1
billion or 6% increase in federal funds purchased and securities loaned or
sold under agreements to repurchase and a $4.9 billion or 30% increase in
investment banking and brokerage borrowings. In addition at December 31,
2002, total stockholders' equity increased $5.5 billion to $86.7 billion. See
"Liquidity and Capital Resources" on page 52 for further discussions on
capital.
FACTORS AFFECTING FINANCIAL POSITION
On August 20, 2002, Citigroup completed the tax-free distribution to its
stockholders of a majority portion of its remaining ownership interest in TPC.
This non-cash transaction resulted in a reduction in assets at December 31, 2002
of approximately $53.6 billion, primarily comprised of $30.1 billion in
investments and $9.8 billion in reinsurance recoverables. Liabilities were
reduced by approximately $42.5 billion, primarily comprised of a $34.1 billion
reduction in insurance policy claims. In accordance with GAAP, the Consolidated
Statement of Financial Position has not been restated. See Notes 1 and 4 to the
Consolidated Financial Statements.
On November 6, 2002, Citigroup completed its acquisition of GSB. This
transaction resulted in an increase in assets at December 31, 2002 of
approximately $56.0 billion. The impact on the balance sheet primarily included
increases of approximately $35.0 billion in consumer loans, $4.0 billion in
investment securities, $4.0 billion in goodwill, $25.0 billion in deposits and
$13.0 billion in long-term debt. See Note 3 to the Consolidated Financial
Statements.
ASSETS
CASH AND DUE FROM BANKS
At December 31, 2002, the balance was $17.3 billion, a decrease of $1.2
billion from the prior year. Net cash provided by operating and financing
activities of continuing operations were $26.0 billion and $28.0 billion,
respectively, while net cash used in investing activities of continuing
operations was $59.1 billion. Net cash used in discontinued operations was $237
million, while proceeds from the sale of subsidiary stock (TPC) were $4.1
billion.
FEDERAL FUNDS SOLD AND SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO
RESELL
At December 31, 2002, the balance was $139.9 billion, an increase of
$5.1 billion from the prior year, attributable to an increase in federal
funds and resale agreements of $5.0 billion, and deposits paid for securities
borrowed of $0.1 billion. Average domestic federal funds sold and securities
borrowed or purchased under agreements to resell were $91.2 billion yielding
3.8% in 2002, compared to $104.2 billion and 6.8% in 2001, while average
foreign balances were $57.4 billion yielding 3.3% in 2002, compared to $34.1
billion and 5.3% in 2001. Federal funds and resale agreements represented 17%
of total interest-earning assets during 2002. See Note 7 to the Consolidated
Financial Statements.
TRADING ACCOUNT ASSETS
At December 31, 2002, the balance was $155.2 billion, an increase of $10.3
billion or 7% from the prior year. The increase was primarily attributable to
increased revaluation gains of $7.8 billion or 26% primarily on foreign exchange
derivative transactions. The trading asset portfolio grew by $2.5 billion or 2%
attributable to an increase in corporate and other debt securities of $12.0
billion and foreign government securities of $4.0 billion, offset by a $10.8
billion decline in U.S. Treasury and Federal agency securities and a $2.6
billion decrease in equity securities. See Note 9 to the Consolidated Financial
Statements.
INVESTMENTS
At December 31, 2002, the balance was $169.5 billion, an increase of $8.1
billion from the prior year. The Company was primarily invested in fixed
maturity securities, including mortgage-backed securities, U.S. Treasury and
Federal agencies securities, state and municipal securities, foreign government
and U.S. corporate securities. At December 31, 2002, the Company's investment in
TPC was $1.5 billion. Investments represented 16% of total interest- earning
assets from continuing operations at December 31, 2002. The average rate earned
on these investments in 2002 was 5.5%, compared to 6.2% in the prior year.
Excluding the impact of the TPC and GSB transactions, investments increased by
$32.7 billion or 25% from the prior year. The increase was primarily due to
growth in the fixed maturity securities portfolio of $11.7 billion, due to an
increase in asset allocation and an increase in unrealized gains driven by a
declining interest rate yield curve. See Note 6 to the Consolidated Financial
Statements.
LOANS
Total loans outstanding (net of unearned income) at December 31, 2002
were $447.8 billion compared to $391.4 billion in the prior year, an increase
of $56.4 billion or 14% (including the GSB acquisition). Total loans
comprised 46% of total interest-earning assets from continuing operations in
2002, compared to 47% in the prior year. The increase reflects growth in the
consumer loan portfolio of $62.9 billion, approximately half of which is
attributable to GSB, offset by a $6.5 billion decrease in the corporate
portfolio. The 25% increase in the consumer loan portfolio was comprised of
$39.0 billion or 36% in mortgage and real estate loans and $23.3 billion or
17% in installment, revolving credit and other. For more information see the
"Consumer Portfolio Review" on page 37. The 5% decline in the corporate
portfolio was driven by decreases of $1.8 billion or 2% in commercial and
industrial loans, $2.9 billion or 14% in lease financings, $1.6 billion or
16% in loans to financial institutions and $1.0 billion or 24% in loans to
governments and official institutions. These declines were driven primarily
by the pesification of the Argentine portfolio, combined with the weakening
of certain currencies in Latin America, tightening of credit policies in
selected countries and maturities in CitiCapital's transportation portfolio,
partially offset by increases in Western Europe and CEEMEA. For further
information see the "Global Corporate Portfolio Review" on page 41. During
2002, average consumer loans of $264.3 billion yielded an average rate of
10.7%, compared to $233.5 billion and 11.8% in the prior year. Average
corporate loans of $136.2 billion yielded an average rate of 7.1% in 2002,
compared to $143.5 billion and 8.4% in the prior year. See Note 11 to the
Consolidated Financial Statements.
50
<Page>
Total loans-held-for-sale, included in Other Assets at December 31, 2002,
were $15.9 billion compared to $11.9 billion in the prior year, an increase of
$4.0 billion or 34% (including the GSB acquisition). This increase is
attributable to consumer mortgages and student loans.
LIABILITIES
DEPOSITS
The Company's primary source of funding for loans and investments is
deposits. At December 31, 2002, total deposits were $430.9 billion, an increase
of $56.4 billion or 15% from the prior year. Interest-bearing foreign deposits
comprise 55% of total deposits, interest-bearing domestic deposits comprise 33%,
non-interest-bearing domestic deposits comprise 7%, and non-interest-bearing
foreign deposits comprise 5%. The growth in deposit balances is attributable to
a $37.9 billion increase in domestic deposits and an $18.5 billion increase in
foreign deposits, both primarily in interest-bearing savings deposits. The
growth in domestic deposits was mainly driven by the addition of GSB combined
with increases in the Smith Barney bank deposit program and consumer deposit
growth in Citibanking North America and the Private Bank. The growth in foreign
deposits reflected growth in the GCIB and the Private Bank that was partially
offset by a decline in Retail Banking. The GCIB and the Private Bank deposit
growth was driven by increases in Europe, Asia and Japan and was partially
offset by declines in Mexico and Latin America. The decline in Retail Banking
was due to the ongoing economic crisis in Argentina and was partially offset by
strong consumer deposit growth in Japan. See the Financial Data Supplement to
the Consolidated Financial Statements.
FEDERAL FUNDS PURCHASED AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO
REPURCHASE
At December 31, 2002, federal funds purchased and securities loaned or sold
under agreements to repurchase increased $9.1 billion or 6% to $162.6 billion,
compared to $153.5 billion at the prior year end. This increase is attributable
to increases of $12.0 billion in federal funds purchased and repurchase
agreements, offset by a $2.9 billion decrease in deposits held for securities
loaned. Average volume from continuing operations in 2002 increased to $169.0
billion yielding 3.9%, compared to $155.0 billion and 6.8% in 2001. See Note 7
to the Consolidated Financial Statements.
TRADING ACCOUNT LIABILITIES
At December 31, 2002, trading account liabilities of $91.4 billion
increased $10.9 billion from the prior year. The 14% increase includes a $12.2
billion increase in revaluation losses primarily on foreign exchange derivative
transactions. Additionally, securities sold, not yet purchased declined by $1.3
billion, or 3% attributable to a decrease of $11.0 billion in non-U.S. Treasury
securities, offset by an increase of $9.7 billion in short U.S. Treasury
securities. See Note 9 to the Consolidated Financial Statements.
DEBT
At December 31, 2002, total Citigroup debt was $178.9 billion, comprised of
long-term debt of $126.9 billion, short-term borrowings of $30.6 billion, and
investment banking and brokerage borrowings of $21.4 billion, up 10% from $162.6
billion in the prior year. This $16.3 billion increase from 2001 includes
increases of $6.2 billion in short-term borrowings, $5.3 billion in long-term
debt and $4.9 billion in investment banking and brokerage borrowings.
The 30% increase in investment banking and brokerage borrowings in 2002
includes a $4.4 billion increase in commercial paper and a $0.4 billion increase
in other short-term borrowings.
The 25% increase in short-term borrowings in 2002 includes increases of
$2.0 billion in other borrowings and $4.2 billion in commercial paper.
The long-term debt balance at December 31, 2002 includes $114.0 billion of
senior notes and $12.9 billion of subordinated debt, with maturities ranging
from 2003-2098. During 2002, subordinated debt increased by $2.0 billion.
U.S. dollar- and non-U.S. dollar-denominated fixed and variable rate debt
increased by $3.3 billion, including approximately $13.0 billion attributable to
GSB, partially offset by maturities. Average long-term debt at December 31, 2002
was $133.3 billion.
For more information on debt, see Note 14 to the Consolidated Financial
Statements.
51
<Page>
LIQUIDITY AND CAPITAL RESOURCES
Citigroup's primary source of incremental capital resources is its net
earnings. Other sources include proceeds from the issuance of trust preferred
securities, senior debt, subordinated debt and commercial paper. Citigroup can
also generate funds by securitizing various financial assets including credit
card receivables and other receivables generally secured by collateral such as
single-family residences and automobiles.
Citigroup uses these capital resources to pay dividends to its
stockholders, to repurchase its shares in the market pursuant to
Board-of-Directors approved plans, to support organic growth, to make
acquisitions and to service its debt obligations.
As a financial holding company, substantially all of Citigroup's net
earnings are generated within its operating subsidiaries including Citibank,
Salomon Smith Barney Holdings Inc. (Salomon Smith Barney), CitiFinancial, GSB,
and TIC. Each of these subsidiaries makes these funds available to Citigroup in
the form of dividends. The subsidiaries' dividend paying abilities are limited
by certain covenant restrictions in credit agreements and/or by regulatory
requirements. Certain of these subsidiaries are also subject to rating agency
requirements that also impact their capitalization levels.
During 2003, it is not anticipated that any restrictions on the
subsidiaries' dividending capability will restrict Citigroup's ability to meet
its obligations as and when they become due. It is also anticipated that during
2003 Citigroup will continue to maintain its share repurchase program. At
December 31, 2002, there was $5.1 billion remaining under the authorized
program. This paragraph contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 36.
The following table summarizes the Company's repurchase program during
2002:
<Table>
<Caption>
Dollar Value
of Remaining
Authorized
IN MILLIONS OF DOLLARS, TOTAL SHARES Average Price Repurchase
EXCEPT PER SHARE AMOUNTS REPURCHASED (1) Paid per Share Program
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter 2002 17.8 $ 46.37 $ 4,774
Second quarter 2002 38.3 41.82 3,172
Third quarter 2002 77.2 31.72 5,724
Fourth quarter 2002 17.8 34.06 5,119
-------------------------------------------------
Total 151.1 $ 36.29 $ 5,119
=================================================
</Table>
(1) All repurchases were transacted through Smith Barney, which is included
within the Private Client Services segment.
The TPC distribution was treated as a dividend to stockholders for
accounting purposes that reduced Citigroup stockholders' equity by approximately
$7.0 billion.
Citigroup, Citicorp and certain other subsidiaries issue commercial paper
directly to investors. Citigroup and Citicorp, both of which are bank holding
companies, maintain combined liquidity reserves of cash, securities and unused
bank lines of credit to support their combined outstanding commercial paper.
Citigroup maintains sufficient liquidity at the Parent Company to meet all
maturing unsecured debt obligations due within a one-year time horizon without
incremental access to the unsecured markets.
Citigroup has unutilized bilateral committed revolving credit facilities in
the amount of $2.5 billion that expire on various dates in 2003. Under these
facilities, Citigroup is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreements). Citigroup exceeded this
requirement by approximately $62 billion at December 31, 2002.
Associates First Capital Corporation (Associates), a subsidiary of
Citicorp, had a combination of unutilized credit facilities of $4.5 billion as
of December 31, 2002 which have maturities ranging from 2003 to 2005. All of
these facilities are guaranteed by Citicorp. In connection with the facilities,
Citicorp is required to maintain a certain level of consolidated stockholder's
equity (as defined in the agreements). At December 31, 2002, this requirement
was exceeded by approximately $59 billion. Citicorp has also guaranteed various
debt obligations of Associates and CitiFinancial Credit Company (CCC), an
indirect subsidiary of Citicorp.
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 facility 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.
The following table summarizes the maturity profile of the Company's
consolidated contractual long-term debt payments and operating leases at
December 31, 2002:
<Table>
<Caption>
IN MILLIONS OF DOLLARS LONG-TERM DEBT OPERATING LEASES
- -----------------------------------------------------------------
<S> <C> <C>
2003 $ 34,229 $ 961
2004 28,682 819
2005 17,666 818
2006 9,451 605
2007 7,533 512
Thereafter 29,366 2,748
------------------------------------
TOTAL $ 126,927 $ 6,463
====================================
</Table>
MANAGEMENT OF LIQUIDITY
Management of liquidity at Citigroup is the responsibility of the Corporate
Treasurer. A uniform liquidity risk management policy exists for Citigroup and
its major operating subsidiaries. Under this policy, there is a single set of
standards for the measurement of liquidity risk in order to ensure consistency
across businesses, stability in methodologies and transparency of risk.
Management of liquidity at each operating subsidiary and/or country is performed
on a daily basis and is monitored by Corporate Treasury.
A primary tenet of Citigroup's liquidity management is strong decentralized
liquidity management at each of its principal operating subsidiaries and in each
of its countries, combined with an active corporate oversight function. Along
with the role of the Corporate Treasurer, the Global Asset and Liability
Committee (ALCO) undertakes this oversight responsibility. The Global ALCO
functions as an oversight forum for Citigroup's Chief Financial Officer, Chief
Risk Officer, Corporate Treasurer, independent Senior Treasury Risk Officer, and
the senior corporate and business treasurers and risk managers. One objective of
the Global ALCO is to monitor and review the overall liquidity and balance sheet
position of Citigroup and its principal subsidiaries and to address
corporate-wide policies and make recommendations back to senior management and
the business units. Similarly, ALCOs are also established for each country
and/or major line of business.
Each major operating subsidiary and/or country must prepare an annual
funding and liquidity plan for review by the Corporate Treasurer and approval by
the independent Senior Treasury Risk Officer. The funding and liquidity
52
<Page>
plan includes analysis of the balance sheet as well as the economic and
business conditions impacting the liquidity of the major operating subsidiary
and/or country. As part of the funding and liquidity plan, liquidity limits,
liquidity ratios, market triggers, and assumptions for periodic stress tests
are established and approved.
Liquidity limits establish boundaries for potential market access in
business-as-usual conditions and are monitored against the liquidity position on
a daily basis. These limits are established based on the size of the balance
sheet, depth of the market, experience level of local management, the stability
of the liabilities, and liquidity of the assets. Finally, the limits are subject
to the evaluation of the entities' stress test results. Generally, limits are
established such that in stress scenarios, entities need to be self-funded or
net providers of liquidity.
A series of standard corporate-wide liquidity ratios have been established
to monitor the structural elements of Citigroup's liquidity. For bank entities
these include measures of liquid assets against liquidity gaps, core deposits to
loans, long-term assets to long-term liabilities and deposits to loans. In
addition, several measures exist to review potential concentrations of funding
by individual name, product, industry, or geography. For the Parent Company,
Insurance Entities and the Broker/Dealer, there are ratios established for
liquid assets against short-term obligations. Triggers to elicit management
discussion have been established against these ratios. In addition, each
individual major operating subsidiary or country establishes targets against
these ratios and may monitor other ratios as approved in its funding and
liquidity plan.
Market triggers are internal or external market or economic factors that
may imply a change to market liquidity or Citigroup's access to the markets.
Citigroup market triggers are monitored by the Corporate Treasurer and the
independent Senior Treasury Risk Officer and are discussed with the Global ALCO.
Appropriate market triggers are also established and monitored for each major
operating subsidiary and/or country as part of the funding and liquidity plans.
Local triggers are reviewed with the local country or business ALCO and
independent risk management.
Periodic liquidity stress testing is performed for each major operating
subsidiary and/or country. The scenarios include assumptions about significant
changes in key funding sources, credit ratings, contingent uses of funding, and
political and economic conditions in certain countries. The results of stress
tests of individual countries and operating subsidiaries are reviewed to ensure
that each individual major operating subsidiary or country is self-funded or a
net provider of liquidity. In addition, a Contingency Funding Plan is prepared
on a periodic basis for Citigroup. The plan includes detailed policies,
procedures, roles and responsibilities, and the results of corporate stress
tests. The product of these stress tests is a menu of alternatives that can be
utilized by the Corporate Treasurer in a liquidity event.
Citigroup's funding sources are well-diversified across funding types
and geography, a benefit of the strength of the global franchise. Funding for
the Parent and its major operating subsidiaries includes a large
geographically diverse retail and corporate deposit base, a significant
portion of which is expected to be long-term and stable and is considered
core. Other sources of funding include collateralized borrowings,
securitizations (primarily credit card and mortgages), long-term debt, and
purchased/wholesale funds. This funding is significantly enhanced by
Citigroup's strong capital position. Each of Citigroup's major operating
subsidiaries finances its operations on a basis consistent with its
capitalization, regulatory structure and the operating environment in which
it operates.
Other liquidity and capital resource considerations for Citigroup follow.
OFF-BALANCE SHEET ARRANGEMENTS
Citigroup and its subsidiaries are involved with several types of off-balance
sheet arrangements, including special purpose entities (SPEs), lines and letters
of credit, and loan commitments. The principal uses of SPEs are to obtain
sources of liquidity by securitizing certain of Citigroup's financial assets, to
assist our clients in securitizing their financial assets, and to create other
investment products for our clients.
SPEs may be organized as trusts, partnerships, or corporations. In a
securitization, the company transferring assets to an SPE converts those assets
into cash before they would have been realized in the normal course of business.
The SPE obtains the cash needed to pay the transferor for the assets received by
issuing securities to investors in the form of debt and equity instruments,
certificates, commercial paper, and other notes of indebtedness. Investors
usually have recourse to the assets in the SPE and often benefit from other
credit enhancements, such as a cash collateral account or overcollateralization
in the form of excess assets in the SPE, or from a liquidity facility, such as a
line of credit or asset purchase agreement. Accordingly, the SPE can typically
obtain a more favorable credit rating from rating agencies, such as Standard and
Poor's and Moody's Investors Service, than the transferor could obtain for its
own debt issuances, resulting in less expensive financing costs. The transferor
can use the cash proceeds from the sale to extend credit to additional customers
or for other business purposes. The SPE may also enter into a derivative
contract in order to convert the yield or currency of the underlying assets to
match the needs of the SPE's investors or to limit or change the credit risk of
the SPE. The Company may be the counterparty to any such derivative. The
securitization process enhances the liquidity of the financial markets, may
spread credit risk among several market participants, and makes new funds
available to extend credit to consumers and commercial entities.
Citigroup also acts as intermediary or agent for its corporate clients,
assisting them in obtaining sources of liquidity by selling the clients' trade
receivables or other financial assets to an SPE. The Company also securitizes
clients' debt obligations in transactions involving SPEs that issue
collateralized debt obligations. In yet other arrangements, the Company packages
and securitizes assets purchased in the financial markets in order to create new
security offerings for institutional and private bank clients as well as retail
customers. In connection with such arrangements, Citigroup may purchase, and
temporarily hold assets designated for subsequent securitization.
SECURITIZATION OF CITIGROUP'S ASSETS
In certain of these off-balance sheet arrangements, including credit card
receivable and mortgage loan securitizations Citigroup is securitizing assets
that were previously recorded in its Consolidated Statement of Financial
Position.
53
<Page>
The following table summarizes certain cash flows received from and paid to
securitization trusts during the years ended December 31, 2002, 2001 and 2000:
<Table>
<Caption>
2002 2001 2000
------------------------------------------------------------------------------------------------------
CREDIT Credit Credit
IN BILLIONS OF DOLLARS CARDS MORTGAGES OTHER(1) Cards Mortgages Other(1) Cards Mortgages Other(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proceeds from new
securitizations $ 15.3 $ 40.1 $ 10.0 $ 22.7 $ 34.8 $ 6.4 $ 9.1 $ 16.5 $ 1.7
Proceeds from collections
reinvested in new 130.9 - - 131.4 0.4 - 127.2 0.2 -
receivables
Servicing fees received 1.2 0.3 - 1.2 0.2 - 1.0 0.3 -
Cash flows received on
retained interest
and other net cash flows 3.9 0.1 0.1 3.6 0.2 0.2 2.8 0.3 -
======================================================================================================
</Table>
(1) Other includes corporate debt securities, auto loans, student loans and
other assets.
CREDIT CARD RECEIVABLES
Credit card receivables are securitized through trusts, which are
established to purchase the receivables. Citigroup sells receivables into the
trusts on a non-recourse basis. After securitization of credit card receivables,
the Company continues to maintain credit card customer account relationships and
provides servicing for receivables transferred to the SPE trusts. As a result,
the Company considers both the securitized and unsecuritized credit card
receivables to be part of the business it manages. The documents establishing
the trusts generally require the Company to maintain an ownership interest in
the trusts. The Company also arranges for third parties to provide credit
enhancement to the trusts, including cash collateral accounts, subordinated
securities, and letters of credit. As specified in certain of the sale
agreements, the net revenue with respect to the investors' interest collected by
the trusts each month is accumulated up to a predetermined maximum amount and is
available over the remaining term of that transaction to make payments of
interest to trust investors, fees, and transaction costs in the event that net
cash flows from the receivables are not sufficient. If the net cash flows are
insufficient, Citigroup's loss is limited to its retained interest, consisting
of seller's interest and an interest-only strip that arises from the calculation
of gain or loss at the time receivables are sold to the SPE. When the
predetermined amount is reached, net revenue with respect to the investors'
interest is passed directly to the Citigroup subsidiary that sold the
receivables. Credit card securitizations are revolving securitizations; that is,
as customers pay their credit card balances, the cash proceeds are used to
purchase new receivables and replenish the receivables in the trust. Salomon
Smith Barney is one of several underwriters that distribute securities issued by
the trusts to investors. The Company relies on securitizations to fund
approximately 60% of its Citi Cards business.
At December 31, 2002 and 2001, total assets in the credit card trusts were $84
billion and $87 billion, respectively. Of that amount at December 31, 2002 and
2001, $67 billion and $67 billion, respectively, has been sold to investors via
trust-issued securities, and the remaining seller's interest of $17 billion and
$20 billion, respectively, is recorded in Citigroup's Consolidated Statement of
Financial Position as Consumer Loans. Citigroup retains credit risk on its
seller's interests and reserves for expected credit losses. Amounts receivable
from the trusts were $1.112 billion and $1.098 billion, respectively, and
amounts due to the trusts were $889 million and $701 million, respectively, at
December 31, 2002 and 2001. The Company also recognized an interest-only strip
of $494 million at December 31, 2002 that arose from the calculation of gain or
loss at the time assets were sold to the SPE. During the years ended December
31, 2002 and 2001, finance charges and interchange fees of $10.3 billion and
$10.1 billion, respectively, were collected by the trusts in each year. Also for
the years ended December 31, 2002 and 2001, the trusts recorded $7.2 billion and
$6.5 billion, respectively, in coupon interest paid to third-party investors,
servicing fees, and other costs. Servicing fees of $1.2 billion were earned in
each of 2002 and 2001 and an additional $3.9 billion and $3.6 billion,
respectively, of net cash flows were received by the Company in 2002 and 2001.
In 2002, the Company recorded net gains of $425 million related to the
securitization of credit card receivables as a result of changes in estimates in
the timing of revenue recognition on securitizations.
MORTGAGES AND OTHER ASSETS
The Company provides a wide range of mortgage and other loan products to a
diverse customer base. In addition to providing a source of liquidity and less
expensive funding, securitizing these assets also reduces the Company's credit
exposure to the borrowers. In connection with the securitization of these loans,
the Company may retain servicing rights which entitle the Company to a future
stream of cash flows based on the outstanding principal balances of the loans
and the contractual servicing fee. Failure to service the loans in accordance
with contractual servicing obligations may lead to a termination of the
servicing contracts and the loss of future servicing fees. In non-recourse
servicing, the principal credit risk to the servicer arises from temporary
advances of funds. In recourse servicing, the servicer agrees to share credit
risk with the owner of the mortgage loans, such as FNMA, FHLMC, GNMA, or with a
private investor, insurer or guarantor. The Company's mortgage loan
securitizations are primarily non-recourse, thereby effectively transferring the
risk of future credit losses to the purchasers of the securities issued by the
trust. Home equity loans may be revolving lines of credit under which borrowers
have the right to draw on the line of credit up to their maximum amount for a
specified number of years. In addition to servicing rights, the Company also
retains a residual interest in its home equity, manufactured housing, auto and
student loan securitizations, consisting of seller's interest and interest-only
strips that arise from the calculation of gain or loss at the time assets are
sold to the SPE. The Company recognized gains related to the securitization of
mortgages and other assets of $331 million, $271 million and $172 million in
2002, 2001, and 2000, respectively.
Under generally accepted accounting principles, the assets and
liabilities of these SPEs do not appear in Citigroup's Consolidated Statement
of Financial Position. At December 31, 2002 and 2001 the total amount of
loans securitized and outstanding was $234 billion and $85 billion,
respectively. Servicing rights and other retained interests amounted to $4.4
billion and $3.2 billion at December 31, 2002 and 2001, respectively.
54
<Page>
SECURITIZATIONS OF CLIENT ASSETS
The Company acts as an intermediary or agent for its corporate clients,
assisting them in obtaining sources of liquidity by selling the clients' trade
receivables or other financial assets to an SPE.
The Company administers several third-party owned, special purpose,
multi-seller finance companies that purchase pools of trade receivables, credit
cards, and other financial assets from third-party clients of the Company. As
administrator, the Company provides accounting, funding, and operations services
to these conduits. The Company has no ownership interest in the conduits. The
clients continue to service the transferred assets. The conduits' asset
purchases are funded by issuing commercial paper and medium-term notes. Clients
absorb the first losses of the conduit by providing collateral in the form of
excess assets. The Company along with other financial institutions provides
liquidity facilities, such as commercial paper backstop lines of credit to the
conduits. The Company also provides second loss enhancement in the form of
letters of credit and other guarantees. All fees are charged on a market basis.
At December 31, 2002 and 2001, total assets in the conduits were $49 billion and
$52 billion, respectively, and liabilities were $49 billion and $52 billion,
respectively. For the year ended December 31, 2002, the Company's revenues for
these activities amounted to $256 million and estimated expenses before taxes
were $51 million. Expenses have been estimated based upon a percentage of
product revenues to business revenues. In addition, the Company participates in
providing liquidity backstop lines of credit to conduits administered by other
financial institutions with assets totaling $2.9 billion at December 31, 2002.
The Company also securitizes clients' debt obligations in transactions
involving SPEs that issue collateralized debt obligations (CDOs). A majority of
the transactions are on behalf of clients where the Company first purchases the
assets at the request of the clients and warehouses them until the
securitization transaction is executed. Other CDOs are structured where the
underlying debt obligations are purchased directly in the open market or from
issuers. Some CDOs have static unmanaged portfolios of assets, while others have
a more actively managed portfolio of financial assets. At December 31, 2002,
there were 46 CDOs with assets amounting to $17 billion. The Company receives
market-rate fees for structuring and distributing the CDO securities to
investors. For the year ended December 31, 2002, the Company's revenues for
these activities were $81 million and estimated expenses before taxes were $16
million. Expenses have been estimated based upon a percentage of product
revenues to business revenues.
In addition to securitizations of mortgage loans originated by the
Company, the Company also securitizes purchased mortgage loans, creating
collateralized mortgage obligations (CMOs) and other mortgage-backed
securities (MBSs) and distributes them to investors. Since January 1, 2000,
the Company has organized 254 mortgage securitizations with assets of $241.3
billion at December 31, 2002. For the year ended December 31, 2002, the
Company's revenues for these activities were $106 million and estimated
expenses before taxes were $34 million. Expenses have been estimated based
upon a percentage of product revenues to total business revenues.
CREATION OF OTHER INVESTMENT AND FINANCING PRODUCTS
The Company packages and securitizes assets purchased in the financial
markets in order to create new security offerings, including hedge funds, mutual
funds, unit investment trusts, and other investment funds, for institutional and
PRIVATE BANK clients as well as retail customers, that match the clients'
investment needs and preferences. The SPEs may be credit-enhanced by excess
assets in the investment pool or by third-party insurers assuming the risks of
the underlying assets, thus reducing the credit risk assumed by the investors
and diversifying investors' risk to a pool of assets as compared with
investments in individual assets. The Company typically manages the SPEs for
market-rate fees. In addition, the Company may be one of several liquidity
providers to the SPEs and may place the securities with investors.
See Note 13 to the Consolidated Financial Statements for additional
information about off-balance sheet arrangements.
CREDIT COMMITMENTS AND LINES OF CREDIT
The table below summarizes Citigroup's credit commitments. Further details are
included in the footnotes.
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2002 2001
- ------------------------------------------------------------------------------------
<S> <C> <C>
Financial standby letters of credit
and foreign office guarantees $ 32,220 $ 29,541
Performance standby letters of credit
and foreign office guarantees 7,320 7,749
Commercial and similar letters of credit 4,965 5,681
One- to four-family residential mortgages 3,990 5,470
Revolving open-end loans secured
by one- to four-family residential properties 10,297 7,107
Commercial real estate, construction
and land development 1,781 1,882
Credit card lines(1) 407,822 387,396
Commercial and other consumer loan commitments(2) 214,166 210,909
-----------------------
TOTAL $ 682,561 $ 655,735
=======================
</Table>
(1) Credit card lines are unconditionally cancelable by the issuer.
(2) Includes $132 billion and $138 billion with original maturity of less than
one year at December 31, 2002 and 2001, respectively.
See Note 28 to the Consolidated Financial Statements for additional information.
CAPITAL
CITIGROUP INC.
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. 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
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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.
CITIGROUP RATIOS
<Table>
<Caption>
AT YEAR-END 2002 2001
- --------------------------------------------------------------
<S> <C> <C>
Tier 1 capital 8.47% 8.42%
Total capital (Tier 1 and Tier 2) 11.25% 10.92%
Leverage(1) 5.49% 5.64%
Common stockholders' equity 7.78% 7.58%
===============
</Table>
(1) Tier 1 capital divided by adjusted average assets.
Citigroup maintained a strong capital position during 2002. Total capital
(Tier 1 and Tier 2) amounted to $78.3 billion at December 31, 2002, representing
11.25% of risk-adjusted assets. This compares to $75.8 billion and 10.92% at
December 31, 2001. Tier 1 capital of $59.0 billion at December 31, 2002
represented 8.47% of risk-adjusted assets, compared to $58.4 billion and 8.42%
at December 31, 2001. Citigroup's leverage ratio was 5.49% at December 31, 2002,
compared to 5.64% at December 31, 2001. See Note 20 to the Consolidated
Financial Statements.
COMPONENTS OF CAPITAL UNDER REGULATORY GUIDELINES
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2002 2001
- ----------------------------------------------------------------`-----
<S> <C> <C>
TIER 1 CAPITAL
Common stockholders' equity $ 85,318 $ 79,722
Qualifying perpetual preferred stock 1,400 1,400
Qualifying mandatorily redeemable
securities of subsidiary trusts 6,152 6,725
Minority interest 1,236 803
Less: Net unrealized gains on securities
available-for-sale(1) (1,957) (852)
Accumulated net gains on cash flow hedges,
net of tax (1,242) (168)
Intangible assets:
Goodwill (26,961) (23,861)
Other intangible assets (4,322) (4,944)
50% investment in certain subsidiaries(2) (37) (72)
Other (575) (305)
------------------------
TOTAL TIER 1 CAPITAL 59,012 58,448
------------------------
TIER 2 CAPITAL
Allowance for credit losses(3) 8,873 8,694
Qualifying debt(4) 10,288 8,648
Unrealized marketable equity securities
gains(1) 180 79
Less: 50% investment in certain
subsidiaries(2) (36) (72)
------------------------
TOTAL TIER 2 CAPITAL 19,305 17,349
------------------------
TOTAL CAPITAL (TIER 1 AND TIER 2) $ 78,317 $ 75,797
------------------------
Risk-adjusted assets(5) $ 696,339 $ 694,035
========================
</Table>
(1) 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. Institutions are required to deduct from Tier 1 capital net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values, net of tax.
(2) Represents investment in certain overseas insurance activities and
unconsolidated banking and finance subsidiaries.
(3) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is
deducted from risk-adjusted assets.
(4) Includes qualifying senior and subordinated debt in an amount not exceeding
50% of Tier 1 capital, and subordinated capital notes subject to certain
limitations.
(5) Includes risk-weighted credit equivalent amounts, net of applicable
bilateral netting agreements, of $31.5 billion for interest rate, commodity
and equity derivative contracts and foreign exchange contracts, as of
December 31, 2002, compared to $26.2 billion as of December 31, 2001.
Market risk-equivalent assets included in risk-adjusted assets amounted to
$30.6 billion and $31.4 billion at December 31, 2002 and 2001,
respectively. Risk-adjusted assets also includes the effect of other
off-balance sheet exposures such as unused loan commitments and letters of
credit and reflects deductions for intangible assets and any excess
allowance for credit losses.
Common stockholders' equity increased a net $5.6 billion during the year to
$85.3 billion at December 31, 2002, representing 7.78% of assets, compared to
$79.7 billion and 7.58% at year-end 2001. The increase in common stockholders'
equity during the year principally reflected net income of $15.3 billion, $3.5
billion in connection with the acquisition of GSB, $2.7 billion related to the
issuance of shares pursuant to employee benefit plans and other activity, and
$0.6 billion related to the after-tax net charge in unrealized gains and losses
on investment securities, cash-flow hedges, and foreign currency translation
adjustments. These increases were offset by the tax-free distribution to
Citigroup's stockholders of a majority portion of Citigroup's remaining
ownership interest in TPC of $7.0 billion, treasury stock acquired of $5.5
billion, dividends declared on common and preferred stock of $3.7 billion, and
the net issuance of restricted stock of $0.3 billion. The increase in the common
stockholders' equity ratio during the year reflected the above items, and was
partially offset by the increase in total assets.
On March 3, 2003, Citigroup and Salomon Smith Barney redeemed, for cash,
all of the Trust Preferred securities of Citigroup Capital IV and SSBH Capital
I, respectively, at the redemption price of $25 per Preferred security plus any
accrued interest and unpaid distributions thereon. On March 3, 2003, Citigroup
redeemed the Series Q and R Preferred Stock.
During July 2002, the Board of Directors granted approval for the
repurchase of an additional $5 billion of Citigroup common stock, continuing the
Company's program of buying back its shares. Under its long-standing repurchase
program, the Company buys back shares in the market from time to time.
The total mandatorily redeemable securities of subsidiary trusts (trust
securities) which qualify as Tier 1 capital at December 31, 2002 and 2001 were
$6.152 billion and $6.725 billion, respectively. The amount outstanding at
December 31, 2002 includes $4.657 billion of parent-obligated securities and
$1.495 billion of subsidiary-obligated securities, and at December 31, 2001
includes $4.85 billion of parent-obligated securities and $2.275 billion of
subsidiary-obligated securities.
Citigroup's subsidiary depository institutions in the United States 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, 2002, all of Citigroup's subsidiary depository
institutions were "well capitalized" under the Federal bank regulatory agencies'
definitions.
On January 8, 2002, the FRB issued final rules that govern the regulatory
treatment of merchant banking investments and certain similar equity
investments, including investments made by venture capital subsidiaries, in
nonfinancial companies held by bank holding companies with certain exclusions.
The new rules impose a capital charge that would increase in steps as the
banking organization's level of concentration in equity investments increases.
An 8% Tier 1 capital deduction applies on covered investments that in the
aggregate represent up to 15% of an organization's Tier 1 capital. For covered
investments that aggregate more than 25% of the organization's Tier 1 capital, a
top marginal charge of 25% applies. The rules became effective April 1, 2002 and
were adopted for the quarter ended June 30, 2002. The impact of the new rule was
neutral to Citigroup's ratio at December 31, 2002. For the quarter ended
December 31, 2002, the capital ratio impact of the $269 million capital charge
was offset by the $3.4 billion net reduction in risk-adjusted assets for the
nonfinancial equity investments.
56
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In December 2001, the Basel Committee on Banking Supervision (Committee)
announced that a new consultative package on the new Basel Capital Accord
(new Accord) would not be issued in early 2002, as previously indicated.
Instead, the Committee will first seek to complete a comprehensive impact
assessment of the draft proposal, after which a new consultative package will
be issued. The Committee launched a Quantitative Impact Study on October 1,
2002 which allowed banks to perform a concrete and comprehensive assessment
of how the Committee's proposal will affect their organization. Banks were
asked to submit their findings by December 20, 2002. The new Accord, which
will apply to all "significant" banks, as well as to holding companies that
are parents of banking groups, is intended to be finalized in the fourth
quarter of 2003, with implementation of the new framework by year-end 2006.
The Company is monitoring the status and progress of the proposed rule.
On November 29, 2001, the FRB issued final rules regarding the regulatory
capital treatment of recourse, direct credit substitutes and residual interest
in asset securitizations. The rules require a deduction from Tier 1 capital for
the amount of credit-enhancing interest-only strips (a type of residual
interest) that exceeds 25% of Tier 1 capital, as well as requiring
dollar-for-dollar capital for residual interests not deducted from Tier 1
capital. These rules, which were fully implemented in the fourth quarter of
2002, reduced Citigroup's Tier 1 Capital Ratio by approximately 15 basis points.
In January 2003, FASB issued final accounting guidance in FIN 46 which
will require the consolidation of certain types of special purpose vehicles
that previously were recorded as off-balance sheet exposures. During 2003,
the Federal bank regulatory agencies are expected to issue guidance
clarifying how this new requirement will be incorporated into the risk-based
capital framework. The Company is monitoring the status and progress of
regulatory adoption of this new rule. See "Significant Accounting Policies
and Significant Estimates" on page 10 and "Consolidation of Variable Interest
Entities" on page 14 in the "Future Applications of Accounting Standards" and
Note 13 to the Consolidated Financial Statements for a discussion of the
Company's FIN 46 implementation.
Additionally, from time to time, the FRB and the FFIEC 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. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 36.
CITICORP
The in-country forum for liquidity issues is the 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. The Citigroup Country Officer and the Country Treasurer
ensure that all funding obligations in each country are met when due. The
Citigroup Corporate Treasurer, in concert with the Country Corporate Officer and
the Regional Market Risk Manager, appoints the Country Treasurer.
Each Country Treasurer must prepare a funding and liquidity plan at least
annually, reviewed by the country ALCO and approved by the Country Corporate
Officer, and the Regional Market Risk Manager. It is also reviewed by the
Citigroup Corporate Treasurer and approved by the independent Senior Treasury
Risk Officer. The liquidity profile is monitored on a daily basis by the local
Treasurer and independent risk management. Limits are established on the extent
to which businesses in a country can take liquidity risk. The size of the limit
depends on the size of the balance sheet, depth of the market, experience level
of local management, the stability of the liabilities, and liquidity of the
assets. Finally, the limits are subject to the evaluation of the entities'
stress test results. Generally, limits are established such that in stress
scenarios, entities need to be self-funded or providers of liquidity to
Citicorp.
Regional Market Risk Managers 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 60% of
total funding at December 31, 2002 and 59% of funding at December 31, 2001, are
broadly diversified by both geography and customer segments.
Stockholder's equity, which grew $10.1 billion during the year to $73.5
billion at year-end 2002, 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 2002 was
$78.4 billion, compared with $81.1 billion at year-end 2001.
Asset securitization programs remain an important source of liquidity.
Loans securitized during 2002 included $15.4 billion of U.S. credit cards and
$29.3 billion of U.S. consumer mortgages. As credit card securitization
transactions amortize, newly originated receivables are recorded on Citicorp's
balance sheet and become available for asset securitization. In 2002, the
scheduled amortization of certain credit card securitization transactions made
available $10.6 billion of new receivables. In addition, at least $10.3 billion
of credit card securitization transactions are scheduled to amortize during
2003.
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
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 2003, without regulatory
approval, of approximately $6.4 billion, adjusted by the effect of their net
income (loss) for 2003 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
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with these considerations, Citicorp estimates that its bank subsidiaries can
distribute dividends to Citicorp, directly or through their parent holding
company, of approximately $5.4 billion of the available $6.4 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
<Table>
<Caption>
AT YEAR-END 2002 2001
- --------------------------------------------------------------
<S> <C> <C>
Tier 1 capital 8.11% 8.33%
Total capital (Tier 1 and Tier 2) 12.31% 12.41%
Leverage(1) 6.82% 6.85%
Common stockholders' equity 10.11% 9.81%
===============
</Table>
(1) Tier 1 capital divided by adjusted average assets.
Citicorp maintained a strong capital position during 2002. Total capital
(Tier 1 and Tier 2) amounted to $68.7 billion at December 31, 2002, representing
12.31% of risk-adjusted assets. This compares with $62.9 billion and 12.41% at
December 31, 2001. Tier 1 capital of $45.3 billion at year-end 2002 represented
8.11% of risk-adjusted assets, compared with $42.2 billion and 8.33% at year-end
2001. The Tier 1 capital ratio at year-end 2002 was within Citicorp's target
range of 8.00% to 8.30%. See Note 20 to the Consolidated Financial Statements.
SALOMON SMITH BARNEY HOLDINGS INC. (SALOMON SMITH BARNEY)
Salomon Smith Barney's total assets were $292 billion at December 31, 2002,
compared to $301 billion at year-end 2001. Due to the nature of Salomon Smith
Barney's trading activities, it is not uncommon for asset levels to fluctuate
from period to period. At December 31, 2002, approximately 37% of these assets
represent trading securities and derivatives used for proprietary trading and to
facilitate customer transactions. Approximately 48% 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, 6, 7, 8, 9 and 27 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 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. On March 3, 2003, Salomon Smith Barney redeemed, for cash, all
of the Trust Preferred securities of SSBH Capital I at the redemption price of
$25 per Preferred security plus any accrued interest and unpaid distributions
thereon.
Salomon Smith Barney has a $5.0 billion 364-day committed uncollateralized
revolving line of credit with unaffiliated banks. Commitments to lend under this
facility terminate in May 2003. Any borrowings under this facility would mature
in May 2005. Salomon Smith Barney also has a $100 million 364-day facility with
an unaffiliated bank that extends through June 2003, with any borrowings under
this facility maturing in June 2004 and a $100 million 364-day facility that
extends through December 2003. Salomon Smith Barney may borrow under these
revolving credit facilities at various interest rate options (LIBOR or base
rate), and compensates the banks for the facilities through facility fees. At
December 31, 2002, there were no outstanding borrowings under these facilities.
Salomon Smith Barney also has committed long-term financing facilities with
unaffiliated banks. At December 31, 2002, Salomon Smith Barney had drawn down
the full $1.7 billion then available under these facilities. A bank can
terminate its facility by giving Salomon Smith Barney prior notice (generally
one year).
Under all of these facilities, Salomon Smith Barney is required to maintain
a certain level of consolidated adjusted net worth (as defined in the
agreements). At December 31, 2002, this requirement was exceeded by
approximately $4.8 billion. In addition, 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 on-going basis to insure flexibility in meeting
Salomon Smith Barney's short-term requirements.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Long-term debt totaled $28.9 billion at December 31, 2002 and
$26.8 billion at December 31, 2001. 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.
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
58
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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 is 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, 2002, TIC had $38.8 billion of life and annuity product
deposit funds and reserves. Of that total, $21.8 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $17.0 billion is
for life and annuity products that are subject to discretionary withdrawal by
the contractholder. Included in the amount that is subject to discretionary
withdrawal is $5.7 billion of liabilities that is surrenderable with market
value adjustments. Also included is an additional $5.5 billion of the life
insurance and individual annuity liabilities which is subject to discretionary
withdrawals and an average surrender charge of 4.7%. In the payout phase, these
funds are credited at significantly reduced interest rates. The remaining $5.8
billion of liabilities is surrenderable without charge. More than 10% of this
relates 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 2003,
2004, 2005, 2006 and thereafter are $4.460 billion, $1.542 billion, $1.315
billion, $1.383 billion, and $3.987 billion, respectively. At December 31, 2002,
the interest rates credited on GICs had a weighted average rate of 4.81%.
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 $966 million of statutory surplus
is available by the end of the year 2003 for such dividends without the prior
approval of the Connecticut Insurance Department.
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, 2002 and 2001, all of the Company's life and property and casualty companies
had adjusted capital in excess of amounts requiring Company or any regulatory
action.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's reports filed or submitted under the
Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls.
59
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GLOSSARY OF TERMS
<Table>
<Caption>
TERM DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ANNUITY A contract that pays a periodic benefit for the life of a person (the
annuitant), the lives of two or more persons or for a specified period of time.
ASSETS UNDER MANAGEMENT Assets held by Citigroup in a fiduciary capacity for clients. These assets are
not included on Citigroup's balance sheet.
CASH BASIS LOANS Loans in which the borrower has fallen behind in interest payments, and are
considered impaired and are classified as nonperforming or nonaccrual assets. In
situations where the lender reasonably expects that only a portion of the
principal and interest owed ultimately will be collected, payments are credited
directly to the outstanding principal.
CLAIM Request by an insured for a benefit from an insurance company for an insurable
event.
CLEAN LETTER OF CREDIT An instrument issued by a bank on behalf of its customer which gives the
beneficiary the right to draw funds upon the presentation of the letter of
credit in accordance with its terms and conditions. Generally, they are issued
to guarantee the performance of the customer or to act as a payment mechanism.
Clean letters of credit, unlike commercial letters of credit, are not related to
the shipment of goods and do not require the beneficiary to present shipping
documents in order to receive payment from the bank.
CREDIT DEFAULT SWAP An agreement between two parties whereby one party pays the other a fixed coupon
over a specified term. The other party makes no payment unless a specified
credit event such as a default occurs, at which time a payment is made and the
swap terminates.
DEFERRED ACQUISITION COSTS (DAC) Primarily commissions, which vary with and are primarily related to the
production of new insurance business that are deferred and amortized to achieve
a matching of revenues and expenses when reported in financial statements
prepared in accordance with GAAP.
DEFERRED TAX ASSET An asset attributable to deductible temporary differences and carryforwards. A
deferred tax asset is measured using the applicable enacted tax rate and
provisions of the enacted tax law.
DEFERRED TAX LIABILITY A liability attributable to taxable temporary differences. A deferred tax
liability is measured using the applicable enacted tax rate and provisions of
the enacted law.
DERIVATIVE A contract or agreement whose value is derived from changes in interest rates,
foreign exchange rates, prices of securities or commodities or financial or
commodity indices.
FEDERAL FUNDS Non-interest bearing deposits held by member banks at the Federal Reserve Bank.
FOREGONE INTEREST Interest on cash-basis loans that would have been earned at the original
contractual rate if the loans were on accrual status.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) Accounting rules and conventions defining acceptable practices in preparing
financial statements in the United States of America. The Financial Accounting
Standards Board (FASB), an independent self-regulatory organization, is the
primary source of accounting rules.
MANAGED LOANS Includes loans classified as Loans on the balance sheet plus loans held for sale
which are included in other assets and securitized receivables, primarily credit
card receivables.
MANAGED NET CREDIT LOSSES Net credit losses adjusted for the effect of credit card securitizations. See
Managed Loans.
MINORITY INTEREST When a parent owns a majority (but less than 100%) of a subsidiary's stock, the
Consolidated Financial Statements must reflect the minority's interest in the
subsidiary. The minority interest as shown in the Statement of Income is equal
to the minority's proportionate share of the subsidiary's net income and, as
included within other liabilities in the Statement of Financial Position, is
equal to the minority's proportionate share of the subsidiary's net assets.
NET CREDIT LOSSES Gross credit losses (write-offs) less gross credit recoveries.
NET CREDIT LOSS RATIO Annualized net credit losses divided by average loans outstanding.
NET WRITTEN PREMIUMS Direct written premiums plus assumed reinsurance premiums, less premiums ceded
to reinsurers.
</Table>
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GLOSSARY OF TERMS (CONTINUED)
<Table>
<Caption>
TERM DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PREMIUMS The amount charged during the year on policies and contracts issued, renewed or
reinsured by an insurance company.
REINSURANCE A transaction in which a reinsurer (ASSUMING ENTERPRISE), for a consideration
(PREMIUM), assumes all or part of a risk undertaken originally by another
insurer (CEDING ENTERPRISE).
RETENTION The amount of exposure an insurance company retains on any one risk or group of
risks.
RETURN ON ASSETS Annualized income divided by average assets.
RETURN ON COMMON EQUITY Annualized income less preferred stock dividends, divided by average common
equity.
RISK ADJUSTED REVENUE Revenues less net credit losses.
RISK ADJUSTED MARGIN Risk adjusted revenue as a percent of average managed loans.
SB BANK DEPOSIT PROGRAM Smith Barney's Bank Deposit Program provides eligible clients with FDIC
insurance on their cash deposits. Accounts enrolled in the program automatically
have their cash balances invested, or "swept" into interest-bearing, FDIC-
insured deposit accounts at up to 10 participating Citigroup-affiliated banks.
SB CONSULTING GROUP Smith Barney Consulting Group works with financial consultants and their clients
to develop sound investment strategies, select the appropriate third-party
portfolio managers to carry out those strategies, and monitor manager
performance over time.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL An agreement between a seller and a buyer, generally of government or agency
(REVERSE REPO AGREEMENTS) securities, whereby the buyer agrees to purchase the securities, and the seller
agrees to repurchase them at an agreed-upon price at a future date.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE An agreement between a seller and a buyer, generally of government or agency
(REPURCHASE AGREEMENTS) securities, whereby the seller agrees to repurchase the securities at an
agreed-upon price at a future date.
STANDBY LETTER OF CREDIT An obligation issued by a bank on behalf of a bank customer to a third party
where the bank promises to pay the third party, contingent upon the failure by
the bank's customer to perform under the terms of the underlying contract with
the beneficiary or obligates the bank to guarantee or stand as surety for the
benefit of the third party to the extent permitted by law or regulation.
STATUTORY SURPLUS As determined under Statutory Accounting Practices, the amount remaining after
all liabilities, including insurance reserves, are subtracted from all admitted
assets. Admitted assets are assets of an insurer prescribed or permitted by a
state to be recognized on the statutory balance sheet. Statutory surplus is also
referred to as "surplus" or "surplus as regards policyholders" for statutory
accounting purposes.
TIER 1 AND TIER 2 CAPITAL Tier 1 capital includes common stockholders' equity (excluding certain
components of other comprehensive income), qualifying perpetual preferred stock,
mandatorily redeemable securities of subsidiary trusts, and minority interest
that are held by others, less certain intangible assets. Tier 2 capital
includes, among other items, perpetual preferred stock to the extent it does not
qualify for Tier 1, qualifying senior and subordinated debt, limited life
preferred stock and the allowance for credit losses, subject to certain
limitations.
UNEARNED COMPENSATION The unamortized portion of a grant to employees of restricted stock measured at
the market value on the date of grant. Unearned compensation is displayed as a
reduction of stockholders' equity on the Consolidated Statement of Financial
Position.
UNFUNDED COMMITMENTS Legally binding agreements to provide financing at a future date.
</Table>
61
<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 independent directors who are not
officers or employees of Citigroup. The Committee reviews reports by internal
audit covering its extensive program of audit and risk reviews worldwide. In
addition, KPMG LLP, independent auditors, are engaged to audit Citigroup's
consolidated 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 full 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, 2002.
/s/ Sanford I. Weill
Sanford I. Weill
Chairman and Chief Executive Officer
/s/ Todd S. Thomson
Todd S. Thomson
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
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, 2002 and 2001,
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, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its methods of accounting for goodwill and intangible assets
and accounting for the impairment or disposal of long-lived assets. Also, as
discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its methods of accounting for derivative instruments and hedging
activities, accounting for interest income and impairment on purchased and
retained beneficial interests in securitized financial assets, and accounting
for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.
/s/ KPMG LLP
New York, New York
February 24, 2003
62
<Page>
CONSOLIDATED FINANCIAL STATEMENTS
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Loan interest, including fees $ 37,903 $ 39,588 $ 37,319
Other interest and dividends 21,036 24,896 25,430
Insurance premiums 3,410 3,450 3,236
Commissions and fees 15,258 15,593 15,975
Principal transactions 4,513 5,544 5,981
Asset management and administration fees 5,146 5,389 5,338
Realized gains (losses) from sales of investments (485) 237 760
Other revenue 5,775 4,463 5,992
--------------------------------------
TOTAL REVENUES 92,556 99,160 100,031
Interest expense 21,248 31,793 36,459
--------------------------------------
TOTAL REVENUES, NET OF INTEREST EXPENSE 71,308 67,367 63,572
--------------------------------------
BENEFITS, CLAIMS AND CREDIT LOSSES
Policyholder benefits and claims 3,478 3,520 3,127
Provision for credit losses 9,995 6,800 5,339
--------------------------------------
TOTAL BENEFITS, CLAIMS AND CREDIT LOSSES 13,473 10,320 8,466
--------------------------------------
OPERATING EXPENSES
Non-insurance compensation and benefits 18,650 19,449 18,633
Insurance underwriting, acquisition, and operating 992 1,115 1,277
Restructuring- and merger-related items (15) 454 716
Other operating expenses 17,671 15,510 15,183
--------------------------------------
TOTAL OPERATING EXPENSES 37,298 36,528 35,809
--------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 20,537 20,519 19,297
Provision for income taxes 6,998 7,203 7,027
Minority interest, net of income taxes 91 87 39
--------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 13,448 13,229 12,231
--------------------------------------
DISCONTINUED OPERATIONS
Income from discontinued operations 965 1,378 1,786
Gain on sale of stock by subsidiary 1,270 -- --
Provision for income taxes 360 323 498
--------------------------------------
INCOME FROM DISCONTINUED OPERATIONS, NET 1,875 1,055 1,288
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET (47) (158) --
======================================
NET INCOME $ 15,276 $ 14,126 $ 13,519
======================================
BASIC EARNINGS PER SHARE
Income from continuing operations $ 2.63 $ 2.61 $ 2.43
Income from discontinued operations, net 0.37 0.21 0.26
Cumulative effect of accounting changes, net (0.01) (0.03) --
--------------------------------------
NET INCOME $ 2.99 $ 2.79 $ 2.69
======================================
Weighted average common shares outstanding 5,078.0 5,031.7 4,977.0
======================================
DILUTED EARNINGS PER SHARE
Income from continuing operations $ 2.59 $ 2.55 $ 2.37
Income from discontinued operations, net 0.36 0.20 0.25
Cumulative effect of accounting changes, net (0.01) (0.03) --
--------------------------------------
NET INCOME $ 2.94 $ 2.72 $ 2.62
======================================
Adjusted weighted average common shares outstanding 5,166.2 5,147.0 5,122.2
======================================
</Table>
See Notes to the Consolidated Financial Statements.
63
<Page>
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
DECEMBER 31,
----------------------------
IN MILLIONS OF DOLLARS 2002 2001(1)(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (including segregated cash and other deposits) $ 17,326 $ 18,515
Deposits at interest with banks 16,382 19,216
Federal funds sold and securities borrowed or purchased under agreements to resell 139,946 134,809
Brokerage receivables 25,358 35,155
Trading account assets (including $36,975 and $36,351 pledged to creditors at
December 31, 2002 and December 31, 2001, respectively) 155,208 144,904
Investments (including $11,092 and $15,475 pledged to creditors at
December 31, 2002 and December 31, 2001, respectively) 169,513 161,376
Loans, net of unearned income
Consumer 310,597 247,662
Corporate 137,208 143,732
----------------------------
Loans, net of unearned income 447,805 391,394
Allowance for credit losses (11,501) (10,088)
----------------------------
Total loans, net 436,304 381,306
Goodwill 26,961 23,861
Intangible assets 8,509 9,003
Reinsurance recoverables 4,356 12,373
Separate and variable accounts 22,118 25,569
Other assets 75,209 85,363
----------------------------
TOTAL ASSETS $ 1,097,190 $ 1,051,450
============================
LIABILITIES
Non-interest-bearing deposits in U.S. offices $ 29,545 $ 23,054
Interest-bearing deposits in U.S. offices 141,787 110,388
Non-interest-bearing deposits in offices outside the U.S. 21,422 18,779
Interest-bearing deposits in offices outside the U.S. 238,141 222,304
----------------------------
Total deposits 430,895 374,525
Federal funds purchased and securities loaned or sold under agreements to repurchase 162,643 153,511
Brokerage payables 22,024 32,891
Trading account liabilities 91,426 80,543
Contractholder funds and separate and variable accounts 49,331 48,932
Insurance policy and claims reserves 16,350 49,294
Investment banking and brokerage borrowings 21,353 16,480
Short-term borrowings 30,629 24,461
Long-term debt 126,927 121,631
Other liabilities 52,742 60,810
----------------------------
Citigroup or subsidiary obligated mandatorily redeemable securities of
subsidiary trusts holding solely junior subordinated debt securities of -- Parent 4,657 4,850
-- Subsidiary 1,495 2,275
----------------------------
TOTAL LIABILITIES 1,010,472 970,203
----------------------------
STOCKHOLDERS' EQUITY
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 1,400 1,525
Common stock ($.01 par value; authorized shares: 15 billion),
issued shares: 2002 and 2001 - 5,477,416,254 shares 55 55
Additional paid-in capital 17,381 23,196
Retained earnings 81,403 69,803
Treasury stock, at cost: 2002 - 336,734,631 SHARES and 2001 - 328,727,790 shares (11,637) (11,099)
Accumulated other changes in equity from nonowner sources (193) (844)
Unearned compensation (1,691) (1,389)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 86,718 81,247
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,097,190 $ 1,051,450
============================
</Table>
(1) In accordance with GAAP, prior period information has not been restated to
reflect TPC as a discontinued operation. See Note 4 to the Consolidated
Financial Statements.
(2) Reclassified to conform to the 2002 presentation.
See Notes to the Consolidated Financial Statements.
64
<Page>
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
AMOUNTS
--------------------------------------
IN MILLIONS OF DOLLARS, EXCEPT SHARES IN THOUSANDS 2002 2001 2000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK AT AGGREGATE LIQUIDATION VALUE
Balance, beginning of year $ 1,525 $ 1,745 $ 1,895
Redemption or retirement of preferred stock (125) (250) (150)
Other(1) -- 30 --
--------------------------------------
Balance, end of year 1,400 1,525 1,745
--------------------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 23,251 16,558 15,361
Employee benefit plans 664 228 1,119
Contribution to Citigroup Pension Fund (83) -- --
Other(2) (6,396) 6,465 78
--------------------------------------
Balance, end of year 17,436 23,251 16,558
--------------------------------------
RETAINED EARNINGS
Balance, beginning of year 69,803 58,862 47,997
Net income 15,276 14,126 13,519
Common dividends (3,593) (3,075) (2,535)
Preferred dividends (83) (110) (119)
--------------------------------------
Balance, end of year 81,403 69,803 58,862
--------------------------------------
TREASURY STOCK, AT COST
Balance, beginning of year (11,099) (10,213) (7,662)
Issuance of shares pursuant to employee benefit plans 1,495 1,980 1,465
Contribution to Citigroup Pension Fund 583 -- --
Treasury stock acquired (5,483) (3,045) (4,066)
Other(3) 2,867 179 50
--------------------------------------
Balance, end of year (11,637) (11,099) (10,213)
--------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of year (844) 123 1,155
Cumulative effect of accounting changes, after-tax(4) -- 118 --
Net change in unrealized gains and losses
on investment securities, after-tax 1,105 (222) (674)
Net change for cash flow hedges, after-tax 1,074 171 --
Net change in foreign currency translation adjustment,
after-tax (1,528) (1,034) (358)
--------------------------------------
Balance, end of year (193) (844) 123
--------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year (1,389) (869) (456)
Net issuance of restricted and deferred stock (302) (520) (413)
--------------------------------------
Balance, end of year (1,691) (1,389) (869)
--------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY
AND COMMON SHARES OUTSTANDING 85,318 79,722 64,461
--------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 86,718 $ 81,247 $ 66,206
======================================
SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES
Net income $ 15,276 $ 14,126 $ 13,519
Other changes in equity from nonowner sources, after-tax 651 (967) (1,032)
--------------------------------------
TOTAL CHANGES IN EQUITY FROM NONOWNER SOURCES $ 15,927 $ 13,159 $ 12,487
======================================
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
SHARES
--------------------------------------
IN MILLIONS OF DOLLARS, EXCEPT SHARES IN THOUSANDS 2002 2001 2000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK AT AGGREGATE LIQUIDATION VALUE
Balance, beginning of year 5,850 6,233 6,831
Redemption or retirement of preferred stock (500) (500) (598)
Other(1) -- 117 --
--------------------------------------
Balance, end of year 5,350 5,850 6,233
--------------------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 5,477,416 5,351,144 5,350,977
Employee benefit plans -- -- --
Contribution to Citigroup Pension Fund -- -- --
Other(2) -- 126,272 167
--------------------------------------
Balance, end of year 5,477,416 5,477,416 5,351,144
--------------------------------------
RETAINED EARNINGS
Balance, beginning of year
Net income
Common dividends
Preferred dividends
Balance, end of year
TREASURY STOCK, AT COST
Balance, beginning of year (328,728) (328,922) (326,918)
Issuance of shares pursuant to employee benefit plans 43,242 59,681 83,601
Contribution to Citigroup Pension Fund 16,767 -- --
Treasury stock acquired (151,102) (64,184) (87,149)
Other(3) 83,086 4,697 1,544
--------------------------------------
Balance, end of year (336,735) (328,728) (328,922)
--------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of year
Cumulative effect of accounting changes, after-tax
Net change in unrealized gains and losses
on investment securities, after-tax
Net change for cash flow hedges, after-tax
Net change in foreign currency translation adjustment,
after-tax
Balance, end of year
--------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year
Net issuance of restricted and deferred stock
Balance, end of year
TOTAL COMMON STOCKHOLDERS' EQUITY
AND COMMON SHARES OUTSTANDING 5,140,681 5,148,688 5,022,222
--------------------------------------
TOTAL STOCKHOLDERS' EQUITY
======================================
SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES
Net income
Other changes in equity from nonowner sources, after-tax
TOTAL CHANGES IN EQUITY FROM NONOWNER SOURCES
======================================
</Table>
(1) Represents shares previously held by affiliates that have subsequently been
traded on the open market to third parties.
(2) In 2002, primarily represents the $7.0 billion tax-free distribution to
Citigroup's stockholders of a majority portion of Citigroup's remaining
ownership interest in TPC, offset by $0.7 billion for the issuance of
shares in connection with the acquisition of GSB. In 2001, primarily
includes $6.5 billion for the issuance of shares to effect the Banamex
acquisition.
(3) In 2002, primarily represents shares issued in connection with the
acquisition of GSB.
(4) In 2001, refers to the adoption of SFAS 133 and EITF 99-20, resulting in
increases to equity from nonowner sources of $25 million and $93 million,
respectively.
See Notes to the Consolidated Financial Statements.
65
<Page>
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------
IN MILLIONS OF DOLLARS 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS
NET INCOME $ 15,276 $ 14,126 $ 13,519
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 717 1,055 1,288
GAIN ON SALE OF STOCK BY SUBSIDIARY, NET OF TAX 1,158 -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (47) (158) --
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS 13,448 13,229 12,231
Adjustments to reconcile net income to net cash provided by
Amortization of deferred policy acquisition costs and present value of
future profits 405 400 378
Additions to deferred policy acquisition costs (865) (853) (799)
Depreciation and amortization 1,521 2,289 2,526
Deferred tax provision (204) 1,003 1,370
Provision for credit losses 9,995 6,800 5,339
Change in trading account assets (10,625) (11,843) (25,443)
Change in trading account liabilities 10,883 (4,503) (5,284)
Change in federal funds sold and securities borrowed or purchased under (2,127) (28,932) 6,778
agreements to resell
Change in federal funds purchased and securities loaned or sold under
agreements to repurchase 7,176 39,943 17,554
Change in brokerage receivables net of brokerage payables (1,070) 7,550 (1,033)
Change in insurance policy and claims reserves 3,272 1,446 859
Net losses/(gains) from sales of investments 485 (237) (760)
Venture capital activity 577 888 (1,044)
Restructuring-related items and merger-related costs (15) 454 716
Other, net (6,827) (873) (10,510)
--------------------------------------------
TOTAL ADJUSTMENTS 12,581 13,532 (9,353)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 26,029 26,761 2,878
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Change in deposits at interest with banks 2,935 (3,052) (3,898)
Change in loans (40,780) (34,787) (82,985)
Proceeds from sales of loans 17,005 26,470 32,580
Purchases of investments (393,344) (436,461) (87,251)
Proceeds from sales of investments 280,234 388,127 52,029
Proceeds from maturities of investments 78,505 28,601 32,906
Other investments, primarily short-term, net (531) (400) (1,444)
Capital expenditures on premises and equipment (1,377) (1,709) (2,167)
Proceeds from sales of premises and equipment, subsidiaries and affiliates, and
repossessed assets 2,184 1,789 1,220
Business acquisitions (3,953) (7,067) (8,545)
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (59,122) (38,489) (67,555)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Dividends paid (3,676) (3,185) (2,654)
Issuance of common stock 483 875 958
Issuance of mandatorily redeemable securities of parent trusts -- 2,550 --
Redemption of mandatorily redeemable securities of subsidiary trusts (400) (345) --
Redemption of preferred stock, net (125) (220) (150)
Treasury stock acquired (5,483) (3,045) (4,066)
Stock tendered for payment of withholding taxes (475) (506) (593)
Issuance of long-term debt 39,520 43,735 43,527
Payments and redemptions of long-term debt (47,169) (35,299) (22,325)
Change in deposits 30,554 39,398 39,013
Change in short-term borrowings and investment banking and brokerage borrowings 11,988 (30,931) 8,680
Contractholder fund deposits 8,548 8,363 6,077
Contractholder fund withdrawals (5,815) (5,486) (4,758)
--------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS 27,950 15,904 63,709
--------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 98 (323) (530)
--------------------------------------------
DISCONTINUED OPERATIONS
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (237) 41 141
PROCEEDS FROM SALE OF STOCK BY SUBSIDIARY 4,093 -- --
--------------------------------------------
CHANGE IN CASH AND DUE FROM BANKS (1,189) 3,894 (1,357)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 18,515 14,621 15,978
--------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 17,326 $ 18,515 $ 14,621
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION FOR CONTINUING OPERATIONS
Cash paid during the period for income taxes $ 6,834 $ 2,111 $ 5,056
Cash paid during the period for interest $ 20,226 $ 32,711 $ 34,790
NON-CASH INVESTING ACTIVITIES
Transfers to repossessed assets $ 1,180 $ 445 $ 820
Non-cash effects of accounting for the conversion of investments in Nikko
Securities Co., Ltd. -- -- 702
============================================
</Table>
See Notes to the Consolidated Financial Statements
66
<Page>
CITIGROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Citigroup and
its subsidiaries (the Company). 20%- to 50%-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 20%-owned companies is
generally recognized when dividends are received. Gains and losses on
disposition of branches, subsidiaries, affiliates, buildings, 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.
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.
On August 20, 2002, Citigroup completed the distribution to its
stockholders of a majority portion of its remaining ownership interest in
Travelers Property Casualty Corp. (TPC) (an indirect wholly owned subsidiary of
Citigroup on December 31, 2001). Following the distribution, Citigroup began
reporting TPC separately as discontinued operations in the Company's
Consolidated Statements of Income and Cash Flows for all periods presented. In
accordance with generally accepted accounting principles (GAAP), the
Consolidated Statement of Financial Position has not been restated. See Note 4
to the Consolidated Financial Statements for additional discussion of
discontinued operations.
Certain amounts in prior years have been reclassified to conform to the
current year's presentation.
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 that 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.
USE OF ESTIMATES
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 FLOWS
Cash equivalents are defined as those amounts included in cash and due from
banks. Cash flows from risk management activities are classified in the same
category as the related assets and liabilities.
INVESTMENTS
Investments include fixed maturity and equity securities. Fixed maturities
include 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 and marketable equity securities classified as
"available-for-sale" 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 private equity 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.
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. Interest received
or paid is recorded in interest income or interest expense.
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 carried at fair value, which is determined based upon quoted
prices when available, or under an alternative
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approach, such as matrix or model pricing when market prices are not readily
available. If quoted market prices are not available for fixed maturity
securities, derivatives or commodities, the Company discounts the expected cash
flows using market interest rates commensurate with the credit quality and
duration of the investment. Obligations to deliver securities sold but not yet
purchased are also carried at fair value and included in trading account
liabilities. The determination of 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. The fair value of aged inventory is actively monitored and, where
appropriate, is discounted to reflect the implied illiquidity for positions that
have been available-for-immediate-sale for longer than 90 days. Changes in fair
value of trading account assets and liabilities are recognized in earnings.
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
value of derivatives is determined based upon liquid market prices evidenced by
exchange traded prices, broker/dealer quotations or prices of other transactions
with similarly rated counterparties. The fair value includes an adjustment for
individual counterparty credit risk and other adjustments, as appropriate, to
reflect liquidity and ongoing servicing costs. The fair values 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 fair value of such instruments. During the fourth quarter of
2002, the Company adopted Emerging Issues Task Force (EITF) Issue No. 02-3,
"Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 02-3). Under EITF 02-3, recognition of a trading profit at
inception of a derivative transaction is prohibited unless the fair value of
that derivative is obtained from a quoted market price, supported by comparison
to other observable market transactions, or based upon a valuation technique
incorporating observable market data.
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
PRIVATE BANK. Consumer loans are generally written off not later than a
predetermined number of days past due primarily on a contractual basis, 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.
CORPORATE LOANS represent loans and leases managed by Global Corporate and
Investment Bank (GCIB), Global Investment Management's LIFE INSURANCE AND
ANNUITIES business and Proprietary Investment Activities. Corporate 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. In the case of
CitiCapital, loans and leases are identified as impaired when interest or
principal is past due no later than 120 days but interest ceases to accrue at 90
days. Any interest accrued on impaired corporate loans and leases, including
CitiCapital, is reversed at 90 days 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 corporate loans and leases are written down to the extent
that principal is judged to be uncollectible. Impaired collateral-dependent
loans and leases where repayment is expected to be provided solely by the sale
of 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 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.
SECURITIZATIONS
Citigroup securitizes, sells and services various consumer and corporate
loans. Interest in the securitized and sold loans may be retained in the form of
subordinated interest-only strips, subordinated tranches, spread accounts and
servicing rights. The securitization of consumer loans primarily includes the
sale of credit card receivables and mortgage loans. The Company retains a
seller's interest in the credit card receivables transferred to the trust, which
is not in securitized form. Accordingly, the seller's interest is carried on a
historical cost basis and classified as consumer loans. Retained interests in
securitized mortgage loans are classified as available-for-sale investments.
Other retained interests are primarily recorded as available-for-sale
investments. Gains or losses on securitization and sale depend in part on the
previous carrying amount of the loans involved in the transfer and are
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allocated between the loans sold and the retained interests based on their
relative fair values at the date of sale. Gains are recognized at the time of
securitization and are reported in other income.
The Company values its securitized retained interests at fair value using
either financial models, quoted market prices or sales of similar assets. Where
quoted market prices are generally not available, the Company estimates the fair
value of these retained interests by determining the present value of future
expected cash flows using modeling techniques that incorporate management's best
estimates of key assumptions, including payment speeds, credit losses and
discount rates.
For each securitization entity with which the Company is involved, the
Company makes a determination of whether the entity should be considered a
subsidiary of the Company and be included in the Company's Consolidated
Financial Statements or whether the entity is sufficiently independent that it
does not need to be consolidated. If the securitization entity's activities are
sufficiently restricted to meet certain accounting requirements to be a
qualifying special purpose entity, the securitization entity is not consolidated
by Citigroup as seller of the transferred assets. For all other securitizations
in which Citigroup participates, an evaluation is made of whether the Company
controls the entity by considering several factors, including how much of the
entity's ownership is in the hands of third-party investors, who controls the
securitization entity, and who reaps the rewards and bears the risks of the
entity. Only securitization entities controlled by Citigroup are consolidated.
For a transfer of financial assets to be considered a sale: financial
assets transferred by the Company must have been isolated from the seller, even
in bankruptcy or other receivership; the purchaser must have the right to sell
the assets transferred, or the purchaser must be a qualifying special purpose
entity meeting certain significant restrictions on its activities, whose
investors have the right to sell their ownership interests in the entity; and
the seller does not continue to control the assets transferred through an
agreement to repurchase them or have a right to cause the assets to be returned
(known as a call option). A transfer of financial assets that meets the sale
requirements is removed from the Company's Consolidated Statement of Financial
Position. If the conditions for sale are not met, the transfer is considered to
be a secured borrowing, the asset remains on the Company's Consolidated
Statement of Financial Position and the proceeds are recognized as the Company's
liability.
In determining whether financial assets transferred have, in fact, been
isolated from the Company, an opinion of legal counsel is generally obtained for
complex transactions or where the Company has continuing involvement with the
assets transferred or with the securitization entity. For sale treatment to be
appropriate, those opinions must state that the asset transfer would be
considered a sale and that the assets transferred would not be consolidated with
the Company's other assets in the event of the Company's insolvency.
In the case of asset transfers to certain master trust securitization entities,
the Company has until no later than June 30, 2006 to make the changes needed in
the master trusts' organizational structure and governing documents that are
necessary to meet these isolation requirements.
MORTGAGE SERVICING RIGHTS (MSRs), which are included with intangible assets on
the Consolidated Statement of Financial Position, are recognized as assets when
purchased or when the Company sells or securitizes loans acquired through
purchase or origination and retains the right to service the loans. Servicing
rights retained in the securitization of mortgage loans are measured by
allocating the carrying value of the loans between the assets sold and the
interests retained, based on the relative fair values at the date of
securitization. The fair values are determined using internally developed
assumptions comparable to quoted market prices. MSRs are amortized using a
proportionate cash flow method over the period of the related net positive
servicing income to be generated from the various portfolios purchased or loans
originated. The Company periodically estimates the fair value of MSRs by
discounting projected net servicing cash flows of the remaining servicing
portfolio considering market loan prepayment predictions and other economic
factors. Impairment of MSRs is evaluated on a disaggregated basis by type (i.e.,
fixed rate or adjustable rate) and by interest rate band, which are believed to
be the predominant risk characteristics of the Company's servicing portfolio.
Any excess of the carrying value of the capitalized servicing rights over the
fair value by stratum is recognized through a valuation allowance for each
stratum and charged to the provision for impairment on MSRs.
LOANS HELD-FOR-SALE
Credit card and other 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. 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 including unfunded commitments. 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.
In the corporate portfolio, larger-balance, non-homogeneous 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. Reserves are established
for these loans based upon an estimate of probable losses for individual
larger-balance, non-homogeneous loans deemed 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 and the fair value of collateral. The
allowance for credit losses attributed to the remaining portfolio is established
via a process that estimates the 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; and
geographic, industry, and other environmental factors. Management also considers
overall portfolio indicators including trends in internally risk-rated
exposures, classified exposures, cash-basis loans, historical and forecasted
write-offs, and a review of industry, geographic, and portfolio concentrations,
including current developments within those segments. In addition, management
considers the current business strategy and credit process, including credit
limit setting and compliance, credit approvals, loan underwriting criteria, and
loan workout procedures.
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Each portfolio of smaller-balance, homogeneous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
collectively evaluated for impairment. The allowance for credit losses
attributed to these loans is established via a process that estimates the
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 that 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; and economic,
geographical, product and other environmental factors.
This evaluation includes an assessment of the ability of borrowers with
foreign currency obligations to obtain the foreign currency necessary for
orderly debt servicing.
GOODWILL represents an acquired company's acquisition cost less the fair value
of net tangible and intangible assets. Goodwill related to purchase acquisitions
completed prior to June 30, 2001 was amortized on a straight-line basis over its
estimated useful life through the end of 2001. Effective January 1, 2002,
amortization ceased on this goodwill. Goodwill related to purchase acquisitions
completed after June 30, 2001, principally Banamex, Golden State and EAB (as
described in Note 3 to the Consolidated Financial Statements), is not amortized.
Goodwill is subject to annual impairment tests whereby goodwill is allocated to
the Company's reporting units and an impairment is deemed to exist if the
carrying value of a reporting unit exceeds its estimated fair value.
Furthermore, on any business dispositions, goodwill is allocated to the business
disposed of based on the ratio of the fair value of the business disposed of to
the fair value of the reporting unit.
INTANGIBLE ASSETS, including MSRs, core deposit intangibles, present value of
future profits, purchased credit card relationships, other customer
relationships, and other intangible assets are amortized over their estimated
useful lives unless they are deemed to have indefinite useful lives. With the
adoption of SFAS 142, intangible assets deemed to have indefinite useful lives,
primarily certain asset management contracts and trade names, are not amortized
and are subject to annual impairment tests. An impairment exists if the carrying
value of the indefinite-lived intangible asset exceeds its fair value. The
accounting for mortgage servicing rights is discussed above. For other
intangible assets subject to amortization, an impairment is recognized if the
carrying amount is not recoverable and the carrying amount exceeds the fair
value of the intangible asset.
REPOSSESSED ASSETS
Upon repossession, loans are adjusted, if necessary, to the estimated fair
value of the underlying collateral and transferred to Repossessed Assets, 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 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 as well as foreign exchange contracts. These end-user
derivatives are carried at fair value in other assets or other liabilities.
To qualify as a hedge, the hedge relationship is designated and formally
documented at inception detailing the particular risk management objective and
strategy for the hedge which includes the item and risk that is being hedged and
the derivative that is being used, as well as how effectiveness is being
assessed. A derivative must be highly effective in accomplishing the objective
of offsetting either changes in fair value or cash flows for the risk being
hedged. The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis typically using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no longer
qualifies as a hedge and any excess gains or losses attributable to such
ineffectiveness, as well as subsequent changes in fair value, are recognized in
other income.
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
forecasted transaction may be an individual item or a portfolio of similar
items.
For fair value hedges, in which derivatives hedge the fair value of assets,
liabilities or firm commitments, changes in the fair value of derivatives are
reflected in other income, together with changes in the fair value of the
related hedged item. The net amount, representing hedge ineffectiveness, is
reflected in current earnings. Citigroup's fair value hedges are primarily the
hedges of fixed-rate long-term debt, loans and available-for-sale securities.
For cash flow hedges, in which derivatives hedge the variability of cash
flows related to floating rate assets, liabilities or forecasted transactions,
the accounting treatment depends on the effectiveness of the hedge. To the
extent these derivatives are effective in offsetting the variability of the
hedged cash flows, changes in the derivatives' fair value will not be included
in current earnings but are reported as other changes in stockholders' equity
from nonowner sources. These changes in fair value will be included in earnings
of future periods when earnings are also affected by the variability of the
hedged cash flows. To the extent these derivatives are not effective, changes in
their fair values are immediately included in other income. Citigroup's cash
flow hedges primarily include hedges of floating rate credit card receivables
and loans, rollovers of commercial paper and foreign currency denominated
funding. Cash flow hedges also include hedges of certain forecasted transactions
up to a maximum tenor of 30 years, although a substantial majority of the
maturities is under five years.
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting treatment
will similarly depend on the effectiveness of the hedge. The effective portion
of the change in fair value of the derivative, including any forward premium or
discount, is reflected in other changes in stockholders' equity from nonowner
sources as part of the foreign currency translation adjustment.
End-user derivatives that are economic hedges rather than qualifying as
hedges are also carried at fair value with changes in value included either as
an element of the yield or return on the economically hedged item or in other
income.
For those hedge relationships that are terminated, hedge designations that
are removed, or forecasted transactions that are no longer expected to occur,
the hedge accounting treatment described in the paragraphs above is no longer
applied. The end-user derivative is terminated or transferred to the trading
account. For fair value hedges, any changes to the hedged item remain as part of
the basis of the asset or liability and are ultimately reflected
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as an element of the yield. For cash flow hedges, any changes in fair value
of the end-user derivative remain in other changes in stockholders' equity
from nonowner sources and are included in earnings of future periods when
earnings are also affected by the variability of the hedged cash flows. If
the forecasted transaction is no longer likely to occur, any changes in fair
value of the end-user derivative are immediately reflected in other income.
Prior to the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), on January 1, 2001 (see
Accounting Changes below), end-user derivatives designated in qualifying hedges
were accounted for consistent with the risk management strategy as follows.
Amounts payable and receivable on interest rate swaps and options were accrued
according to the contractual terms and included 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 were deferred until the contract was closed;
accumulated deferred amounts on futures contracts and amounts paid or received
at settlement of forward contracts were accounted for as elements of the
carrying value of the associated instrument, affecting the resulting yield.
End-user contracts related to instruments carried at fair value were 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 were reported in stockholders'
equity, net of tax.
If an end-user derivative contract was terminated, any resulting gain or
loss was deferred and amortized over the original term of the agreement provided
that the effectiveness criteria had been met. If the underlying designated items
were no longer held, or if an anticipated transaction was no longer likely to
occur, any previously unrecognized gain or loss on the derivative contract was
recognized in earnings and the contract was accounted for at fair value with
subsequent changes recognized in earnings.
Foreign exchange contracts which qualified as hedges of foreign currency
exposures, including net capital investments outside the U.S., were revalued at
the spot rate with any forward premium or discount recognized over the life of
the contract in interest revenue or interest expense. Gains and losses on
foreign exchange contracts which qualified as a hedge of a firm commitment were
deferred and recognized as part of the measurement of the related transaction,
unless deferral of a loss would have led 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, principally
credit life and accident and health policies, are earned over the related
contract period.
DEFERRED POLICY ACQUISITION COSTS (DAC), included in other assets, represent the
costs of acquiring new business, principally commissions, certain underwriting
and agency expenses and the cost of issuing policies.
For traditional life and health business, including term insurance, DAC is
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 in accordance with SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises," generally over 5-20 years. Assumptions as to the anticipated
premiums are made at the date of policy issuance or acquisition and are
consistently applied over the life of the policy.
For universal life and corporate-owned life insurance products, DAC is
amortized at a constant rate based upon the present value of estimated gross
profits expected to be realized in accordance with SFAS No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from Sale of Investments," generally over 16-25 years.
Actual profits can vary from management's estimates resulting in increases or
decreases in the rate of amortization. Changes in estimates of gross profits
result in retrospective adjustments to earnings by a cumulative charge or credit
to income.
For deferred annuities, both fixed and variable, and payout annuities, DAC
is amortized employing a level effective yield methodology in accordance with
SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases," generally
over 10-15 years. An amortization rate is developed using the outstanding DAC
balance and projected account balances and is applied to actual account balances
to determine the amount of DAC amortization. The projected account balances are
derived using a model that includes assumptions related to investment returns
and persistency. The model rate is evaluated periodically, at least annually,
and the actual rate is reset and applied prospectively resulting in a new
amortization pattern over the remaining estimated life of the business.
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.
PRESENT VALUE OF FUTURE PROFITS, included in intangible 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 insurance businesses using the same assumptions that
were used for computing related liabilities where appropriate. The present value
of future profits 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 effective yield methodology. The value of
present value of future profits is reviewed periodically for recoverability to
determine if any adjustment is required.
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.
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 2.0% to 9.0%,
with a weighted average rate of 7.1% for annuity products, and 2.5% to 7.0%,
with a weighted average interest rate of 6.0% for life products) applicable to
these coverages, including adverse deviation.
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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 related to the operations of TPC which was
distributed to shareholders during 2002 (see Note 4 to the Consolidated
Financial Statements), included unearned premiums representing the unexpired
portion of policy premiums, and estimated provisions for both reported and
unreported claims incurred and related expenses.
In determining insurance policy reserves, the Company performs a continuing
review of its overall position, its reserving techniques and its reinsurance.
The reserves are also reviewed periodically by a qualified actuary employed by
the Company. 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 deferred 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 1.5% to 10.0%, with a
weighted average rate of 4.9% for annuity products, and 4.1% to 6.6% with a
weighted average interest rate of 5.0% for life products), 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 empl