THE COMPANY | 2 | |||
2 | ||||
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA | 3 | |||
MANAGEMENT'S DISCUSSION | ||||
2005 in Summary | ||||
Events in 2005 | ||||
Events in 2004 | ||||
Events in 2003 | ||||
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES | 13 | |||
16 | ||||
Citigroup Net Income—Product View | ||||
Citigroup Net Income—Regional View | ||||
Selected Revenue and Expense Items | ||||
GLOBAL CONSUMER | ||||
21 | ||||
U.S. Retail Distribution | 23 | |||
U.S. Consumer Lending | 25 | |||
U.S. Commercial Business | 27 | |||
U.S. Consumer Outlook | 29 | |||
International Consumer | 30 | |||
International Cards | 31 | |||
International Consumer Finance | 33 | |||
International Retail Banking | ||||
International Consumer Outlook | 37 | |||
Other Consumer | ||||
Capital Markets and Banking | ||||
Transaction Services | ||||
Other | ||||
GLOBAL WEALTH MANAGEMENT | ||||
Smith Barney | ||||
Private Bank | ||||
Global Wealth Management Outlook | ||||
CORPORATE/OTHER | 55 | |||
56 | ||||
MANAGING GLOBAL RISK | ||||
Risk Capital | ||||
Credit Risk Management Process | ||||
Loans Outstanding | ||||
Other Real Estate Owned and Other Repossessed Assets | ||||
Details of Credit Loss Experience | ||||
Cash-Basis, Renegotiated, and Past Due Loans | ||||
Foregone Interest Revenue on Loans | ||||
Consumer Credit Risk | ||||
Consumer Portfolio Review | ||||
Corporate Credit Risk | ||||
Citigroup Derivatives | 68 | |||
Global Corporate Portfolio Review | ||||
Loan Maturities and Fixed/Variable Pricing | ||||
Market Risk Management Process | ||||
Operational Risk Management Process | ||||
Country and Cross-Border Risk Management Process | ||||
BALANCE SHEET REVIEW | ||||
Average Balances and Interest Rates—Assets | ||||
Average Balances and Interest Rates—Liabilities and Equity, and Net Interest Revenue | ||||
Analysis of Changes in Interest Revenue | 81 | |||
Analysis of Changes in Interest Expense and Net Interest Revenue | 82 | |||
CAPITAL RESOURCES AND LIQUIDITY | ||||
Capital Resources | ||||
Liquidity | ||||
Funding | 87 | |||
Off-Balance Sheet Arrangements | ||||
Interest Rate Risk Associated with Consumer Mortgage Lending Activity | 92 | |||
Pension and Postretirement Plans | 93 | |||
CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES | ||||
FORWARD-LOOKING STATEMENTS | ||||
GLOSSARY OF TERMS | ||||
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—INTERNAL CONTROL OVER FINANCIAL REPORTING | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—CONSOLIDATED FINANCIAL STATEMENTS | ||||
CONSOLIDATED FINANCIAL STATEMENTS | ||||
Consolidated Statement of Income | ||||
Consolidated Balance Sheet | ||||
Consolidated Statement of Changes in Stockholders' Equity | ||||
Consolidated Statement of | ||||
Consolidated Balance Sheet—Citibank, N.A. | 107 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||||
FINANCIAL DATA SUPPLEMENT (Unaudited) | ||||
Ratios | ||||
Average Deposit Liabilities in Offices Outside the U.S. | ||||
Maturity Profile of Time Deposits ($100,000 or more) in U.S. Offices | ||||
Short-Term and Other Borrowings | ||||
LEGAL AND REGULATORY REQUIREMENTS | 172 | |||
Securities Regulation | ||||
Capital Requirements | 173 | |||
General Business Factors | 174 | |||
Properties | 174 | |||
Legal Proceedings | ||||
Unregistered Sales of Equity and Use of Proceeds | 180 | |||
Equity Compensation Plan Information | 181 | |||
10-K CROSS-REFERENCE INDEX | ||||
CORPORATE INFORMATION | ||||
Exhibits and Financial Statement Schedules | ||||
CITIGROUP BOARD OF DIRECTORS |
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 withcustomers. Citigroup has more than 200 million customer accounts doingand does business in more than 100 countries. 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), Global Wealth Management, 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 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). CertainSome 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 138.
At December 31, 2004,2005, the Company had approximately 141,000140,000 full-time and 7,0008,000 part-time employees in the United States and approximately 146,000159,000 full-time employees outside the United States.
The periodic reportsCompany has completed certain strategic business acquisitions and divestitures during the past three years, details of Citicorp, Citigroup Global Markets Holdings Inc., The Student Loan Corporation (STU), The Travelers Insurance Company (TIC)which can be found in Notes 2 and Travelers Life and Annuity Company (TLAC), subsidiaries of the Company that make filings pursuant3 to the Securities Exchange Act of 1934, as amended (the Exchange Act), provide additional businessConsolidated Financial Statements on page 118 and financial information concerning those companies and their consolidated subsidiaries.119, respectively.
The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10043, telephone number 212 559 1000.212-559-1000. Additional information about Citigroup is available on the Company's Web site at 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 Web site by clicking on the "Investor Relations" page and selecting "SEC Filings." The Securities and Exchange Commission (SEC) Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.
Citigroup is managed along the following segment and product lines:
The following are the six regions in which Citigroup operates. The regional results are fully reflected in the product results.
2
CITIGROUP INC. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars, except per share amounts | |||||||||||||||
Revenues, net of interest expense | $ | 83,642 | $ | 79,635 | $ | 71,594 | $ | 66,246 | $ | 61,621 | ||||||
Operating expenses | 45,163 | 49,782 | 37,500 | 35,886 | 35,026 | |||||||||||
Provisions for credit losses and for benefits and claims | 9,046 | 7,117 | 8,924 | 10,972 | 7,666 | |||||||||||
Income from continuing operations before taxes, minority interest, and cumulative effect of account changes | $ | 29,433 | $ | 22,736 | $ | 25,170 | $ | 19,388 | $ | 18,929 | ||||||
Income taxes | 9,078 | 6,464 | 7,838 | 6,615 | 6,659 | |||||||||||
Minority interest, net of taxes | 549 | 218 | 274 | 91 | 87 | |||||||||||
Income from continuing operations before cumulative effect of accounting changes | $ | 19,806 | $ | 16,054 | $ | 17,058 | $ | 12,682 | $ | 12,183 | ||||||
Income from discontinued operations, net of taxes(1) | 4,832 | 992 | 795 | 2,641 | 2,101 | |||||||||||
Cumulative effect of accounting changes, net of taxes(2) | (49 | ) | — | — | (47 | ) | (158 | ) | ||||||||
Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 14,126 | ||||||
Earnings per share | ||||||||||||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 3.90 | $ | 3.13 | $ | 3.34 | $ | 2.48 | $ | 2.40 | ||||||
Net income | 4.84 | 3.32 | 3.49 | 2.99 | 2.79 | |||||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | 3.82 | 3.07 | 3.27 | 2.44 | 2.35 | |||||||||||
Net income | 4.75 | 3.26 | 3.42 | 2.94 | 2.72 | |||||||||||
Dividends declared per common share | $ | 1.76 | $ | 1.60 | $ | 1.10 | $ | 0.70 | $ | 0.60 | ||||||
At December 31 | ||||||||||||||||
Total assets | $ | 1,494,037 | $ | 1,484,101 | $ | 1,264,032 | $ | 1,097,590 | $ | 1,051,850 | ||||||
Total deposits | 592,595 | 562,081 | 474,015 | 430,895 | 374,525 | |||||||||||
Long-term debt | 217,499 | 207,910 | 162,702 | 126,927 | 121,631 | |||||||||||
Mandatorily redeemable securities of subsidiary trusts(3) | 6,264 | 6,209 | 6,057 | 6,152 | 7,125 | |||||||||||
Common stockholders' equity | 111,412 | 108,166 | 96,889 | 85,318 | 79,722 | |||||||||||
Total stockholders' equity | 112,537 | 109,291 | 98,014 | 86,718 | 81,247 | |||||||||||
Ratios: | ||||||||||||||||
Return on common stockholders' equity(4) | 22.3 | % | 17.0 | % | 19.8 | % | 18.6 | % | 19.7 | % | ||||||
Return on total stockholders' equity(4) | 22.1 | 16.8 | 19.5 | 18.3 | 19.4 | |||||||||||
Return on risk capital(5) | 38 | 35 | 39 | |||||||||||||
Return on invested capital(5) | 22 | 17 | 20 | |||||||||||||
Tier 1 capital | 8.79 | % | 8.74 | % | 8.91 | % | 8.47 | % | 8.42 | % | ||||||
Total capital | 12.02 | 11.85 | 12.04 | 11.25 | 10.92 | |||||||||||
Leverage(6) | 5.35 | 5.20 | 5.56 | 5.67 | 5.64 | |||||||||||
Common stockholders' equity to assets | 7.46 | % | 7.29 | % | 7.67 | % | 7.77 | % | 7.58 | % | ||||||
Total stockholders' equity to assets | 7.53 | 7.36 | 7.75 | 7.90 | 7.72 | |||||||||||
Dividends declared(7) | 37.1 | 49.1 | 32.2 | 23.8 | 22.1 | |||||||||||
Ratio of earnings to fixed charges and preferred stock dividends | 1.79x | 2.00x | 2.41x | 1.89x | 1.58x | |||||||||||
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
2005 in Summary
During 2005, we shifted our business mix more toward the distribution of financial services, with the sales of our Asset Management and Travelers Life & Annuities businesses. We reorganized our U.S. Consumer business to more closely integrate our product offerings to better meet the needs of our customers. We focused on organic investment, adding more than 200 retail bank branches and nearly 350 consumer finance branches during the year, most of them outside of the U.S.
All of these changes reflect our competitive advantages:
These advantages combined to generate net income of $24.6 billion in 2005. Income was well diversified by segment, product and region, as shown in the charts below. Results in 2005 included a $2.1 billion after-tax gain on the sale of the Travelers Life & Annuities Business and a $2.1 billion after-tax gain on the sale of the Asset Management Business. Income from Continuing Operations (which excludes the gains from these transactions and the historical results from these businesses) was $19.8 billion.
Income from Continuing Operations
In billions of dollars
*Excludes Corporate/Other and Discontinued Operations. |
*Excludes Alternative Investments, Corporate/Other and Discontinued Operations. |
Diluted Earnings Per Share - Income from Continuing Operations
Revenues increased 5% from 2004, reaching $83.6 billion. Our international operations recorded revenue growth of 7% in 2005, including a 12% increase in International Consumer. A 10% increase in International Consumer loans, 23% increase in international investment product sales, 8% increase inU.S. Cards purchase sales, and 9% increase in U.S. Consumer loans drove Global Consumer volume growth. CIB revenues grew by 10%, with particularly strong performance inTransaction Services.Capital Markets and Banking finished the year ranked #1 in equity underwriting and #2 in completed mergers and acquisitions activity. Higher equity market valuations led to significantly increased results in Alternative Investments.
A challenging business environment and competitive pricing pressures during 2005 accentuated the impact of flattening global yield curves, which drove a decline in net interest revenue. This spread compression negatively impacted the Company's operating leverage ratios, particularly inU.S. Cards andCapital Markets and Banking.
Revenue growth benefited from increased loan volumes, including corporate loan growth of 13% and consumer loan growth of 4%.Transaction Services assets under custody increased 9% andSmith Barney client assets increased 16%.
4
Total Deposits
In billions of dollars
Operating expenses decreased 9% from the previous year, primarily reflecting the absence of the $7.9 billion WorldCom and Litigation Reserve Charge and the $400 million charge related to closing the Japan Private Bank, which were both recorded in 2004. Expenses in 2005 reflected a $600 million release from the WorldCom and Litigation Reserve Charge. Excluding these items, operating expenses increased 10% in 2005, reflecting increased investment spending, the impact of foreign exchange, and an increase in other legal expenses. Investment spending included, among other things, the addition of Consumer branches and investments in technology.
Net Revenue and Operating Expense
In billions of dollars
Despite the negative impact of the U.S. bankruptcy law change and Hurricane Katrina, the global credit environment remained favorable; however, total credit costs increased $1.9 billion, primarily due to the absence of the reserve releases recorded during 2004. The effective tax rate increased 241 basis points to 30.8% for the year, primarily reflecting the impact of indefinitely invested international earnings and other items on the lower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge.
During 2005, we maintained our focus on disciplined capital allocation and returns to our shareholders. Our equity capital base and trust preferred securities grew to $118.8 billion at December 31, 2005. Stockholders' equity increased by $3.2 billion during 2005 to $112.5 billion, even with the distribution of $9.1 billion in dividends to common shareholders and the repurchase of $12.8 billion of common stock during the year. Return on common equity was 22.3% for 2005.
Return on Average Common Equity
The Board of Directors increased the quarterly common dividend by 10% during 2005 and by an additional 11% in January 2006, bringing the current quarterly payout to $0.49 per share. Citigroup maintained its "well-capitalized" position with a Tier 1 Capital Ratio of 8.79% at December 31, 2005.
Total Capital (Tier 1 and Tier 2)
In billions of dollars
During 2005, we made progress towards our goal of ensuring that all of our businesses are best in class; we grew our Global Consumer franchise; and significantly expanded our International businesses. Our Five Point Plan was a priority during 2005, and we met every deadline for implementation. We also continued to resolve our legal and regulatory issues. And we promoted a new generation of business leaders.
5
Outlook for 2006
We enter 2006 optimistic and well-positioned to gain from our competitive advantages.
We are a global company with an unparalleled presence around the world. We have operations in 100 countries and customers in nearly 50 more, with 40% of our revenues in 2005 from outside of the U.S. The international market for goods and services is more than twice the size of, and is growing at a faster rate than the U.S. market, leading to significant opportunities for us globally.
Our strategic initiatives for 2006 include the expansion of both our international and U.S. distribution. Our pace of opening branches and distribution points will accelerate. We plan to transfer our expertise and market knowledge from business to business and region to region. We will continue to invest in technology and people, integrating these investments across the Company. To do each of these effectively, disciplined capital allocation is fundamental to our strategic process.
We expect to continue to achieve growth in loans, deposits and other customer activity as we add distribution points and continue to enhance our product offerings.
During 2006, we will continue to build on our Shared Responsibilities and strive to exceed our customers' needs.
Citigroup's financial results are closely tied to the external global economic environment. Movements in interest rates and foreign exchange rates present both opportunities and risks for the Company. Weakness in the global economy, credit deterioration, inflation, and geopolitical uncertainty are examples of risks that could adversely impact our earnings.
We expect revenue growth in 2006 to continue to reflect some pressure from the flat yield curve in the U.S. and many international markets, as well as a competitive pricing environment in the U.S. We look for these to be more than offset by continued strong growth in our customer businesses, particularly outside the U.S., as the investments we have made in our businesses are reflected in our results. We will continue to be disciplined in our expense management, while investing for our future. Credit is stable as we enter 2006.
Although there may be volatility in our results in any given year, over time we look for our revenues to grow at a mid to high single-digit rate, with strong expense and credit management driving earnings and earnings per share growth at a faster level. We look to augment this growth rate over time through targeted acquisitions.
A detailed review and outlook for each of our business segments and products are included in the discussions that follow, and the risks are more fully discussed on pages 19 to 51.
Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 95.
6
EVENTS IN 2005
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 95.
Sale of Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for Legg Mason's broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business inMexico, its retirement services business inLatin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business").
Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management business.
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Sale of Travelers Life & Annuity
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed the Travelers Life & Annuity's U.S. businesses and its international operations, other than Citigroup's life insurance business inMexico (which is now included withinInternational Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business").
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Change in EMEA Consumer Write-off Policy
Prior to the third quarter of 2005, certain Western European consumer portfolios were granted an exception to Citigroup's global write-off policy. The exception extended the write-off period from the standard 120-day policy for personal installment loans, and was granted because of the higher recovery rates experienced in these portfolios. Citigroup recently observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany and, as a result, rescinded the exception to the global standard. The net charge was $332 million ($490 million pretax) resulting from the recording of $1.153 billion of write-offs and a corresponding utilization of $663 million of reserves in the 2005 third quarter. These write-offs, along with the underlying portfolio performance, caused the 90-day delinquency rate for the Consumer EMEA portfolio to decline to 1.29% at December 31, 2005, compared to 3.36% at December 31, 2004.
These write-offs did not relate to a change in the portfolio credit quality but rather to a change in environmental factors due to law changes and consumer behavior that led Citigroup to re-evaluate its estimates of future long-term recoveries and their appropriateness to the write-off exception.
A slight upward movement in net charge-offs may occur inEMEA in the near term due to the timing of the write-offs, now at 120 days, versus the longer period of time over which recoveries will be realized. The Company is in the process of adjusting its collection strategies inEMEA to reflect the revised write-off time frame.
Impact from Hurricane Katrina
The Company recorded a $222 million after-tax charge ($357 million pretax) for the estimated probable losses incurred from Hurricane Katrina. This charge consists primarily of additional credit costs inU.S. Cards,U.S. Commercial Business, U.S. Consumer Lending andU.S. Retail Distribution businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. This charge does not include an after-tax estimate of $75 million ($109 million pretax) for fees and interest due from related customers that were waived during 2005.
United States Bankruptcy Legislation
On October 17, 2005, the Bankruptcy Reform Act (or the Act) became effective. The Act imposes a means test to determine if people who file for Chapter 7 bankruptcy earn more than the median income in their state and could repay at least $6,000 of unsecured debt over five years. Bankruptcy filers who meet this test are required to enter into a repayment plan under Chapter 13, instead of canceling their debt entirely under Chapter 7. As a result of these more stringent guidelines, bankruptcy claims accelerated prior to the effective date. The incremental bankruptcy losses over the Company's estimated baseline in 2005 that was attributable to the Act inU.S. Cards business was approximately $970 million on a managed basis ($550 million in the Company's on balance sheet portfolio and $420 million in the securitized portfolio). In addition, theU.S. Retail Distribution business incurred incremental bankruptcy losses of approximately $90 million during 2005.
7
Bank and Credit Card Customer Rewards Costs
During the 2005 fourth quarter, the Company conformed its global policy approach for the accounting of rewards costs for bank and credit card customers. Conforming the global policy resulted in the write-off of $354 million after-tax ($565 million pretax) of unamortized deferred rewards costs. Previously, accounting practices for these costs varied across the Company. The revised policy requires all businesses to recognize rewards costs as incurred.
Sale of Nikko Cordial Stake
On December 13, 2005, Citigroup and Nikko Cordial agreed that Citigroup would reduce its stake in Nikko Cordial from approximately 11.2% to 4.9%. The sale resulted in an after-tax gain of $248 million ($386 million pretax). In connection with this sale, Nikko Cordial and Citigroup each contributed an additional approximately $175 million to their joint venture, Nikko Citigroup Limited.
Sale of the Merchant Acquiring Businesses
In December 2005, Citigroup sold its European merchant acquiring business to EuroConex for $127 million. This transaction resulted in a $62 million after-tax gain ($98 million pretax).
In September 2005, Citigroup sold its U.S. merchant acquiring business, Citigroup Payment Service Inc., to First Data Corporation for $70 million, resulting in a $41 million after-tax gain ($61 million pretax).
Homeland Investment Act Benefit
The Company's results from continuing operations include a $198 million tax benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas. The amount of dividends that were repatriated relating to this benefit is approximately $3.2 billion.
Copelco Litigation Settlement
In 2000, Citigroup purchased Copelco Capital, Inc., a leasing business, from Itochu International Inc. and III Holding Inc. (collectively "Itochu") for $666 million. During 2001, Citigroup filed a lawsuit asserting breach of representations and warranties, among other causes of action, under the Stock Purchase Agreement entered into between Citigroup and Itochu in March of 2000. During the 2005 third quarter, Citigroup and Itochu signed a settlement agreement that mutually released all claims, and under which Itochu paid Citigroup $185 million.
Mexico Value Added Tax (VAT) Refund
During the 2005 third quarter, Citigroup Mexico received a $182 million refund of VAT taxes from the Mexican government related to the 2003 and 2004 tax years as a result of a Mexico Supreme Court ruling. The refund was recorded as a reduction of $140 million (pretax) in other operating expense and $42 million (pretax) in other revenue.
Legal Settlements and Charges for Enron and WorldCom Class Action Litigations and for Other Regulatory and Legal Matters
The Company is a defendant in numerous lawsuits and other legal proceedings arising out of alleged misconduct in connection with:
During the 2004 second quarter, in connection with the settlement of the WorldCom class action, the Company re-evaluated and increased its reserves for these matters. The Company recorded a charge of $7.915 billion ($4.95 billion after-tax) relating to (i) the settlement of class action litigation brought on behalf of purchasers of WorldCom securities, and (ii) an increase in litigation reserves for the other matters described above. Subject to the terms of the WorldCom class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.57 billion pretax to the WorldCom settlement class. In addition, subject to the terms of the Enron class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.01 billion pretax to the Enron settlement class.
During the fourth quarter of 2005, in connection with an evaluation of these matters and as a result of the favorable resolution of certain WorldCom/Research litigation matters, the Company re-evaluated its reserves for these matters and released $600 million ($375 million after-tax) from this reserve. As of December 31, 2005, the Company's litigation reserve for these matters, net of settlement amounts previously paid, the amounts to be paid upon final approval of the WorldCom and Enron class action settlements and other settlements arising out of the matters above not yet paid, and the $600 million release that was recorded during the 2005 fourth quarter, was approximately $3.3 billion.
The Company believes that this reserve is adequate to meet all of its remaining exposure for these matters. However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, the novel issues presented, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. The Company will continue to defend itself vigorously in these cases, and seek to resolve them in the manner management believes is in the best interests of the Company.
The Company continues to evaluate its reserves on an ongoing basis. See Legal Proceedings on page 175.
8
Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
Settlement of the Securities and Exchange Commission's Transfer Agent Investigation
On May 31, 2005, the Company completed the settlement with the Securities and Exchange Commission (SEC), disclosed by Citigroup in January 2005, resolving an investigation by the SEC into matters relating to arrangements between certainSmith Barney mutual funds (the Funds), an affiliated transfer agent, and an unaffiliated sub-transfer agent.
Under the terms of the settlement, Citigroup paid a total of $208 million, consisting of $128 million in disgorgement and $80 million in penalties. These funds, less $24 million already credited to the Funds, have been paid to the U.S. Treasury and will be distributed pursuant to a distribution plan prepared by Citigroup and to be approved by the SEC. The terms of the settlement had been fully reserved by Citigroup in prior periods.
Resolution of the 2004 Eurozone Bond Trade
As announced on June 28, 2005, Citigroup paid $7.29 million to the U.K. Financial Services Authority (FSA) during the 2005 third quarter relating to trading activity in the European government bond and bond derivative markets on August 2, 2004. The Company also relinquished to the FSA approximately $18.2 million in profits generated by the trade. In Italy, Citigroup was suspended from trading on the Multilateral Trading System (MTS) domestic electronic bond trading platform for one month beginning November 1, 2005.
Merger of Bank Holding Companies
On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp.
During the 2005 second quarter, Citigroup also consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, and preferred and common stock, and (ii) Citigroup Funding Inc. (CFI), a newly formed first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes, all of which is guaranteed by Citigroup.
As part of the funding consolidation, Citigroup unconditionally guaranteed Citigroup Global Markets Holdings Inc.'s (CGMHI) outstanding SEC-registered indebtedness. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.
Due to unified access to the capital markets and a reduction in the number of the Company's credit-rated entities, this legal vehicle simplification has resulted in more efficient management of capital and liquidity. See "Capital Resources and Liquidity" on page 83 and Note 27 to the Consolidated Financial Statements on page 159 for further discussion.
Credit Reserves
During 2005, the Company recorded a net release/utilization of its credit reserves of $227 million, consisting of a net release/utilization of $459 million in Global Consumer and Global Wealth Management, and a net build of $232 million in CIB.
The net release/utilization in Global Consumer included a utilization inEMEA of $663 million, related to write-offs of $1.153 billion in loans, and a reserve build of $260 million in the U.S. for the credit impact from Hurricane Katrina realized in the third quarter of 2005. TheEMEA utilization and corresponding write-offs were the results of the standardization of the loan write-off policy in certain Western European consumer portfolios.
The net build of $232 million in CIB was primarily composed of $204 million inCapital Markets and Banking,which included a $238 million reserve increase for unfunded lending commitments and letters of credit, and $28 million inTransaction Services, which included a $12 million increase for unfunded lending commitments and letters of credit.
During 2004, the Company recorded a net release/utilization of $2,368 million to its credit reserves, consisting of a net release/utilization of $1,266 million in Global Consumer and a net release/utilization of $1,102 million in CIB.
9
Credit Reserve Builds (Releases)
| 2005 | 2004 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||
By Product: | |||||||
U.S. Cards | $ | (170 | ) | $ | (639 | ) | |
U.S. Retail Distribution | 302 | (16 | ) | ||||
U.S. Consumer Lending | (64 | ) | (155 | ) | |||
U.S. Commercial Business | (39 | ) | (316 | ) | |||
International Cards | 72 | (103 | ) | ||||
International Consumer Finance | (9 | ) | (24 | ) | |||
International Retail Banking | (588 | ) | (12 | ) | |||
Smith Barney | 12 | — | |||||
Private Bank | 25 | — | |||||
Consumer Other | — | (1 | ) | ||||
Total Consumer | $ | (459 | ) | $ | (1,266 | ) | |
Capital Markets and Banking | 204 | (921 | ) | ||||
Transaction Services | 28 | (181 | ) | ||||
Total CIB | $ | 232 | $ | (1,102 | ) | ||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
By Region: | |||||||
U.S. | $ | 33 | $ | (1,586 | ) | ||
Mexico | 242 | (96 | ) | ||||
EMEA | (433 | ) | (16 | ) | |||
Japan | 25 | (39 | ) | ||||
Asia | (35 | ) | (165 | ) | |||
Latin America | (59 | ) | (466 | ) | |||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
Allowance for Credit Losses
| Dec. 31, 2005 | Dec. 31, 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars at year end | |||||
Allowance for loan losses | $ | 9,782 | $ | 11,269 | ||
Allowance for unfunded lending commitments | 850 | 600 | ||||
Total allowance for loans and unfunded lending commitments | $ | 10,632 | $ | 11,869 | ||
Repositioning Charges
The Company recorded a $272 million after-tax ($435 million pretax) charge during the 2005 first quarter for repositioning costs. The repositioning charges were predominantly severance-related costs recorded in CIB ($151 million after-tax) and in Global Consumer ($95 million after-tax). These repositioning actions are consistent with the Company's objectives of controlling expenses while continuing to invest in growth opportunities.
Resolution of Glendale Litigation
During the 2005 first quarter, the Company recorded a $72 million after-tax gain ($114 million pretax) following the resolution ofGlendale Federal Bank v. United States, an action brought by Glendale Federal Bank, a predecessor to Citibank (West), FSB, against the United States government.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of transaction closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of the Manufactured Housing Loan Portfolio
On May 1, 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the 2005 first quarter related to the divestiture.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million ($157 million pretax).
Shutdown of the Private Bank in Japan and Related Charge and Other Activities in Japan
On September 29, 2005, the Company officially closed itsPrivate Bank business in Japan.
In September 2004, the Financial Services Agency of Japan (FSA) issued an administrative order against Citibank Japan. This order included a requirement that Citigroup exit all private banking operations in Japan by September 30, 2005. In connection with this required exit, the Company established a $400 million ($244 million after-tax) reserve (the Exit Plan Charge) during the 2004 fourth quarter. During 2005, the Company utilized $220 million and released $95 million of this reserve due to favorable foreign exchange translation and interest rate movements in the customers' investment accounts. The Company believes that the remaining reserve of $50 million (adjusted by $35 million for current foreign exchange translation rates) is adequate to cover any future settlements with ex-Private Bank Japan customers.
The Company'sPrivate Bank operations in Japan had total revenues, net of interest expense, of $200 million and net income of $39 million (excluding the Exit Plan Charge) during the year ended December 31, 2004 and $264 million and $83 million, respectively, for 2003.
On October 25, 2004, Citigroup announced its decision to wind down Cititrust and Banking Corporation (Cititrust), a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary. On April 22, 2005, the FSA issued an administrative order requiring Cititrust to suspend from engaging in all new trust business in 2005. Cititrust closed all customer accounts in 2005, and the Company expects to be liquidated in 2006.
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EVENTS IN 2004
Settlement of WorldCom Class Action Litigation and Charge for Regulatory and Legal Matters
As discussed on page 5, during the 2004 second quarter, Citigroup recorded a charge of $4.95 billion after-tax ($7.915 billion pretax) related to a settlement of class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in The Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all of the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition KorAm was a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion. During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Electronic Financial Services Inc. (EFS) for $390 million. EFS is a provider of government-issued benefit payments and prepaid stored-value cards used by state and federal government agencies, as well as of stored-value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
11
EVENTS IN 2003
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears), the eighth largest credit card portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of Sears are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of Home Depot are included in the Consolidated Financial Statements from July 2003 forward.
Settlement of Certain Legal and Regulatory Matters
On July 28, 2003, Citigroup entered into financial settlement agreements with the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank of New York (FED), and the Manhattan District Attorney's Office that resolved on a civil basis their investigations into Citigroup's structured finance work for Enron. The Company also announced that its settlement agreement with the SEC concluded that agency's investigation into certain Citigroup work for Dynegy. The agreements were reached by Citigroup (and, in the case of the agreement with the OCC, Citibank, N.A.) without admitting or denying any wrongdoing or liability, and the agreements do not establish wrongdoing or liability for the purpose of civil litigation or any other proceeding. Citigroup paid from previously established reserves an aggregate amount of $145.5 million in connection with these settlements.
12
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Notes to the Consolidated Financial Statements on page 108, contain a summary of the Company's significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of the Company's financial condition. It is important to note that they require management to make difficult, complex or subjective judgments and estimates, at times, regarding matters that are inherently uncertain. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements on page 108.
Certain statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 95.
Valuations of Financial Instruments
The Company holds fixed income and equity securities, derivatives, investments in private equity and other financial instruments. The Company holds its investments and trading assets and liabilities on the balance sheet to meet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading and private equity investing.
Substantially all of these assets and liabilities are reflected at fair value on the Company's balance sheet. Fair values are determined in the following ways:
At December 31, 2005 and 2004, respectively, approximately 94.5% and 96.2% of the available-for-sale and trading portfolios' gross assets and liabilities (prior to netting positions pursuant to FIN 39) are considered verified and approximately 5.5% and 3.8% are considered unverified. Of the unverified assets, at December 31, 2005 and 2004, respectively, approximately 60.6% and 66.4% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 39.4% and 33.6% consist 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.
Changes in the valuation of the trading assets and liabilities flow through the income statement. Changes in the valuation of available-for-sale assets generally flow through other comprehensive income, which is a component of equity on the balance sheet. A full description of the Company's related policies and procedures can be found in Notes 1, 5 and 8 to the Consolidated Financial Statements on pages 108, 121, and 125, respectively.
Allowance for Credit Losses
Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheet in the form of an allowance for credit losses. In addition, management has established and maintained reserves for the potential losses related to the Company's off-balance sheet exposures of unfunded lending commitments, including standby letters of credit and guarantees. These reserves are established in accordance with Citigroup's Loan Loss Reserve Policies, as approved by the Company's Board of Directors. Under these policies, the Company's Senior Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from Risk Management and Financial Control for each applicable business area.
During these reviews, these above-mentioned representatives covering the business area having classifiably-managed portfolios (that is, portfolios where internal credit-risk ratings are assigned, which are primarily Corporate and Investment Banking, Global Consumer's commercial lending businesses, and Global Wealth Management) present recommended reserve balances for their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data includes:
In addition, representatives from Risk Management and Financial Control that cover business areas which have delinquency-managed portfolios containing smaller homogeneous loans (primarily Global Consumer's non-commercial lending areas) present their recommended reserve
13
balances based upon historical delinquency flow rates, charge-off statistics and loss severity. This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist. Adjustments are also made for specifically known items, such as changing regulations, current environmental factors and credit trends.
This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates, the size and diversity of individual large credits, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing, among other things, are all taken into account during this review. 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. Changes to the reserve flow through the income statement on the lines "provision for loan losses" and "provision for unfunded lending commitments." For a further description of the loan loss reserve and related accounts, see Notes 1 and 12 to the Consolidated Financial Statements on pages 108 and 128, respectively.
Securitizations
The Company securitizes a number of different asset classes as a means of strengthening its balance sheet and to access competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by the trust to access financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets stringent accounting guidelines, trust assets are treated as sold and no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company's assets, with the financing activity recorded as liabilities on Citigroup's balance sheet. The Financial Accounting Standards Board (FASB) is currently working on amendments to the accounting standards governing asset transfers, securitization accounting, and fair value of financial instruments. Upon completion of these standards the Company will need to re-evaluate its accounting and disclosures. Due to the FASB's ongoing deliberations, the Company is unable to accurately determine the effect of future amendments at this time.
The Company assists its clients in securitizing their financial assets and also packages and securitizes financial assets purchased in the financial markets. The Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities, and may continue to service these financial assets.
A complete description of the Company's accounting for securitized assets can be found in "Off-Balance Sheet Arrangements" on page 89 and in Notes 1 and 13 to the Consolidated Financial Statements on pages 108 and 128, respectively.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.
Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.
The Company reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.
SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the 2004 fourth quarter, the U.S. Congress passed and the President signed into law a new tax bill, "The American Jobs Creation Act of 2004." The Homeland Investment Act (HIA) provision of the American Jobs Creation Act of 2004 is intended to provide companies with a one-time 85% reduction in the U.S. net tax liability on cash dividends paid by foreign subsidiaries in 2005, to the extent that they exceed a baseline level of dividends paid in prior years. In accordance with FASB Staff Position FAS No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" (FSP FAS 109-2), the Company did not recognize any income tax effects of the repatriation provisions of the Act in its 2004 financial statements. In 2005, the Company's results from continuing operations included a $198 million tax benefit from the HIA provision of the Act, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas.
See Note 16 to the Consolidated Financial Statements on page 139 for a further description of the Company's provision and related income tax assets and liabilities.
14
Legal Reserves
The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker/dealer or investment advisor. Reserves are established for legal and regulatory claims based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in the Company's financial statements and SEC filings, management's view of the Company's exposure. The Company reviews outstanding claims with internal as well as external counsel to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available and reserves are adjusted, as appropriate. The actual cost of resolving a claim may be substantially higher, or lower, than the amount of the recorded reserve. See Note 26 to the Consolidated Financial Statements on page 158 and the discussion of "Legal Proceedings" beginning on page 175.
Accounting Changes and Future Application of Accounting Standards
See Note 1 to the Consolidated Financial Statements on page 108 for a discussion of Accounting Changes and the Future Application of Accounting Standards.
15
SEGMENT, PRODUCT AND REGIONAL NET INCOME
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
| 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
Global Consumer | ||||||||||||||||
U.S. Cards | $ | 2,754 | $ | 3,562 | $ | 2,854 | (23 | )% | 25 | % | ||||||
U.S. Retail Distribution | 1,752 | 2,019 | 1,707 | (13 | ) | 18 | ||||||||||
U.S. Consumer Lending | 1,938 | 1,664 | 1,636 | 16 | 2 | |||||||||||
U.S. Commercial Business | 729 | 765 | 525 | (5 | ) | 46 | ||||||||||
Total U.S. Consumer(2) | $ | 7,173 | $ | 8,010 | $ | 6,722 | (10 | )% | 19 | % | ||||||
International Cards | $ | 1,373 | $ | 1,137 | $ | 725 | 21 | % | 57 | % | ||||||
International Consumer Finance | 642 | 586 | 579 | 10 | 1 | |||||||||||
International Retail Banking | 2,083 | 2,157 | 1,752 | (3 | ) | 23 | ||||||||||
Total International Consumer | $ | 4,098 | $ | 3,880 | $ | 3,056 | 6 | % | 27 | % | ||||||
Other(3) | $ | (374 | ) | $ | 97 | $ | (113 | ) | NM | NM | ||||||
Total Global Consumer | $ | 10,897 | $ | 11,987 | $ | 9,665 | (9 | )% | 24 | % | ||||||
Corporate and Investment Banking | ||||||||||||||||
Capital Markets and Banking | $ | 5,327 | $ | 5,395 | $ | 4,642 | (1 | )% | 16 | % | ||||||
Transaction Services | 1,135 | 1,045 | 748 | 9 | 40 | |||||||||||
Other(4)(5) | 433 | (4,398 | ) | (16 | ) | NM | NM | |||||||||
Total Corporate and Investment Banking | $ | 6,895 | $ | 2,042 | $ | 5,374 | NM | (62 | )% | |||||||
Global Wealth Management | ||||||||||||||||
Smith Barney | $ | 871 | $ | 891 | $ | 795 | (2 | )% | 12 | % | ||||||
Private Bank(6) | 373 | 318 | 551 | 17 | (42 | ) | ||||||||||
Total Global Wealth Management | $ | 1,244 | $ | 1,209 | $ | 1,346 | 3 | % | (10 | )% | ||||||
Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | ||||||
Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | |||||||||
Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | ||||||
Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | |||||||||||
Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||
Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | ||||||
16
Citigroup Net Income—Regional View
| 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
U.S.(2) | ||||||||||||||||
Global Consumer | $ | 6,799 | $ | 7,729 | $ | 6,609 | (12 | )% | 17 | % | ||||||
Corporate and Investment Banking(3)(4) | 2,950 | (2,190 | ) | 2,540 | NM | NM | ||||||||||
Global Wealth Management | 1,141 | 1,179 | 1,076 | (3 | ) | 10 | ||||||||||
TotalU.S. | $ | 10,890 | $ | 6,718 | $ | 10,225 | 62 | % | (34 | )% | ||||||
Mexico | ||||||||||||||||
Global Consumer | $ | 1,432 | $ | 978 | $ | 785 | 46 | % | 25 | % | ||||||
Corporate and Investment Banking | 450 | 659 | 407 | (32 | ) | 62 | ||||||||||
Global Wealth Management | 44 | 52 | 41 | (15 | ) | 27 | ||||||||||
TotalMexico | $ | 1,926 | $ | 1,689 | $ | 1,233 | 14 | % | 37 | % | ||||||
Latin America | ||||||||||||||||
Global Consumer | $ | 236 | $ | 296 | $ | 197 | (20 | )% | 50 | % | ||||||
Corporate and Investment Banking | 619 | 813 | 566 | (24 | ) | 44 | ||||||||||
Global Wealth Management | 17 | 43 | 44 | (60 | ) | (2 | ) | |||||||||
TotalLatin America | $ | 872 | $ | 1,152 | $ | 807 | (24 | )% | 43 | % | ||||||
EMEA | ||||||||||||||||
Global Consumer(5) | $ | 374 | $ | 1,180 | $ | 680 | (68 | )% | 74 | % | ||||||
Corporate and Investment Banking(5) | 1,130 | 1,136 | 924 | (1 | ) | 23 | ||||||||||
Global Wealth Management | 8 | 15 | (16 | ) | (47 | ) | NM | |||||||||
TotalEMEA | $ | 1,512 | $ | 2,331 | $ | 1,588 | (35 | )% | 47 | % | ||||||
Japan | ||||||||||||||||
Global Consumer | $ | 706 | $ | 616 | $ | 583 | 15 | % | 6 | % | ||||||
Corporate and Investment Banking | 498 | 334 | 162 | 49 | NM | |||||||||||
Global Wealth Management(6) | (82 | ) | (205 | ) | 83 | 60 | NM | |||||||||
TotalJapan | $ | 1,122 | $ | 745 | $ | 828 | 51 | % | (10 | )% | ||||||
Asia | ||||||||||||||||
Global Consumer | $ | 1,350 | $ | 1,188 | $ | 811 | 14 | % | 46 | % | ||||||
Corporate and Investment Banking | 1,248 | 1,290 | 775 | (3 | ) | 66 | ||||||||||
Global Wealth Management | 116 | 125 | 118 | (7 | ) | 6 | ||||||||||
TotalAsia | $ | 2,714 | $ | 2,603 | $ | 1,704 | 4 | % | 53 | % | ||||||
Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | ||||||
Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | |||||||||
Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | ||||||
Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | |||||||||||
Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||
Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | ||||||
17
SELECTED REVENUE AND EXPENSE ITEMS
Revenues
Net interest revenue was $39.3 billion in 2005, down $2.3 billion, or 6%, from 2004. This, in turn, was up $4.3 billion, or 12%, from 2003. Increases in business volumes during 2005 were more than offset by spread compression, as the Company's cost of funding increased more significantly than the rates on interest-bearing assets. Rates on the Company's interest-earning assets were impacted during the year by competitive pricing (particularly inU.S. Cards andCapital Markets and Banking), as well as business mix shifts.
Total commissions, asset management and administration fees, and other fee revenues of $23.3 billion were up $1.8 billion, or 8%, in 2005. The 2004 amount of $21.5 billion was up $1.3 billion, or 6%, from 2003. The 2005 increase primarily reflected improved global equity markets, higher transactional volume and continued strong investment banking results. Insurance premiums of $3.1 billion in 2005 were up $406 million, or 15%, from 2004 and up $271 million, or 11%, in 2004 compared to 2003. The 2005 increase primarily represents higher business volumes.
Principal transactions revenues of $6.4 billion increased $2.7 billion, or 73%, from 2004, primarily reflecting record revenues in the fixed income and equity markets. Principal transactions revenue in 2004 decreased $1.2 billion, or 24%, from 2003, primarily reflecting decreased fixed income markets revenues related to interest rate fluctuations, positioning and lower volatility.
Realized gains from sales of investments of $2.0 billion in 2005 were up $1.1 billion from 2004, which was up $304 million from 2003. The increase from 2004 is primarily attributable to the gain of $386 million (pretax) on the sale of Nikko Cordial stock and sales of St. Paul Travelers shares over the course of the year.
Other revenue of $9.5 billion in 2005 increased $322 million from 2004, which was up $3.0 billion from 2003. The increase from 2004 is related to securitization and hedging gains and activity. The increase from 2003 primarily reflected the $1.2 billion gain on the sale of Samba, increased securitization gains and improved investment results.
Operating Expenses
Operating expenses decreased $4.6 billion, or 9%, to $45.2 billion in 2005, and increased $12.3 billion, or 33%, from 2003 to 2004. The expense fluctuations were primarily related to the reserve charges taken in 2004 (a $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge and a $400 million Private Bank Japan Exit Plan Charge). Expenses in 2005 reflect a $600 million release from the WorldCom and Litigation Reserve Charge. Partially offsetting the absence of these items was increased expenses related to higher incentive compensation (driven by increased revenue), and higher pension and insurance expenses.
Provisions for Credit Losses and for Benefits and Claims
Total provisions for credit losses and for benefits and claims were $9.0 billion, $7.1 billion and $8.9 billion in 2005, 2004 and 2003, respectively. Policyholder benefits and claims in 2005 decreased $17 million, or 2%, from 2004. The provision for credit losses increased $1.9 billion, or 31%, from 2004 to $8.2 billion in 2005.
Global Consumer provisions for loan losses and for policyholder benefits and claims of $9.1 billion in 2005 were up $966 million, or 12% from 2004, reflecting increases inInternational Retail Banking,U.S. Retail Distribution, International Cards, andU.S. Commercial Business, partially offset by decreases inU.S. Cards, International Consumer Finance andU.S. Consumer Lending. Net credit losses were $8.683 billion, and the related loss ratio was 2.01% in 2005, as compared to $8.471 billion and 2.13% in 2004 and $7.555 billion and 2.22% in 2003.
The CIB provision for credit losses in 2005 increased $933 million from 2004, which decreased $1.7 billion from 2003. The increase in the 2005 balance is primarily due to an increase in expected losses resulting from an increase in off-balance sheet exposure and related credit quality. Corporate cash-basis loans at December 31, 2005, 2004 and 2003 were $1.004 billion, $1.906 billion and $3.419 billion, respectively.
Income Taxes
The Company's effective tax rate on continuing operations of 30.8% in 2005 increased from 28.4% in 2004. The 2005 tax provision on continuing operations included a $198 million benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas, and a $65 million release due to the resolution of an audit. The 2004 tax provision on continuing operations included a $234 million benefit for the release of a valuation allowance relating to the utilization of foreign tax credits and the releases of $150 million and $147 million due to the closing of tax audits. The 2005 effective tax rate also increased from 2004 because of the impact of indefinitely invested international earnings and other items on the lower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge. The Company's effective tax rate on continuing operations was 31.1% in 2003. See additional discussion on page 14 and in Note 16 to the Consolidated Financial Statements on page 139.
The net income line in the following business segment and operating unit discussions excludes the cumulative effect of accounting change and income from discontinued operations. The cumulative effect of accounting change and income from discontinued operations are disclosed within the Corporate/Other business segment. See Notes 1 and 3 to the Consolidated Financial Statements on pages 108 and 119, respectively. Certain amounts in prior years have been reclassified to conform to the current year's presentation.
18
GLOBAL CONSUMERFIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars, except per share amounts | |||||||||||||||
Revenues, net of interest expense | $ | 83,642 | $ | 79,635 | $ | 71,594 | $ | 66,246 | $ | 61,621 | ||||||
Operating expenses | 45,163 | 49,782 | 37,500 | 35,886 | 35,026 | |||||||||||
Provisions for credit losses and for benefits and claims | 9,046 | 7,117 | 8,924 | 10,972 | 7,666 | |||||||||||
Income from continuing operations before taxes, minority interest, and cumulative effect of account changes | $ | 29,433 | $ | 22,736 | $ | 25,170 | $ | 19,388 | $ | 18,929 | ||||||
Income taxes | 9,078 | 6,464 | 7,838 | 6,615 | 6,659 | |||||||||||
Minority interest, net of taxes | 549 | 218 | 274 | 91 | 87 | |||||||||||
Income from continuing operations before cumulative effect of accounting changes | $ | 19,806 | $ | 16,054 | $ | 17,058 | $ | 12,682 | $ | 12,183 | ||||||
Income from discontinued operations, net of taxes(1) | 4,832 | 992 | 795 | 2,641 | 2,101 | |||||||||||
Cumulative effect of accounting changes, net of taxes(2) | (49 | ) | — | — | (47 | ) | (158 | ) | ||||||||
Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 14,126 | ||||||
Earnings per share | ||||||||||||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 3.90 | $ | 3.13 | $ | 3.34 | $ | 2.48 | $ | 2.40 | ||||||
Net income | 4.84 | 3.32 | 3.49 | 2.99 | 2.79 | |||||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | 3.82 | 3.07 | 3.27 | 2.44 | 2.35 | |||||||||||
Net income | 4.75 | 3.26 | 3.42 | 2.94 | 2.72 | |||||||||||
Dividends declared per common share | $ | 1.76 | $ | 1.60 | $ | 1.10 | $ | 0.70 | $ | 0.60 | ||||||
At December 31 | ||||||||||||||||
Total assets | $ | 1,494,037 | $ | 1,484,101 | $ | 1,264,032 | $ | 1,097,590 | $ | 1,051,850 | ||||||
Total deposits | 592,595 | 562,081 | 474,015 | 430,895 | 374,525 | |||||||||||
Long-term debt | 217,499 | 207,910 | 162,702 | 126,927 | 121,631 | |||||||||||
Mandatorily redeemable securities of subsidiary trusts(3) | 6,264 | 6,209 | 6,057 | 6,152 | 7,125 | |||||||||||
Common stockholders' equity | 111,412 | 108,166 | 96,889 | 85,318 | 79,722 | |||||||||||
Total stockholders' equity | 112,537 | 109,291 | 98,014 | 86,718 | 81,247 | |||||||||||
Ratios: | ||||||||||||||||
Return on common stockholders' equity(4) | 22.3 | % | 17.0 | % | 19.8 | % | 18.6 | % | 19.7 | % | ||||||
Return on total stockholders' equity(4) | 22.1 | 16.8 | 19.5 | 18.3 | 19.4 | |||||||||||
Return on risk capital(5) | 38 | 35 | 39 | |||||||||||||
Return on invested capital(5) | 22 | 17 | 20 | |||||||||||||
Tier 1 capital | 8.79 | % | 8.74 | % | 8.91 | % | 8.47 | % | 8.42 | % | ||||||
Total capital | 12.02 | 11.85 | 12.04 | 11.25 | 10.92 | |||||||||||
Leverage(6) | 5.35 | 5.20 | 5.56 | 5.67 | 5.64 | |||||||||||
Common stockholders' equity to assets | 7.46 | % | 7.29 | % | 7.67 | % | 7.77 | % | 7.58 | % | ||||||
Total stockholders' equity to assets | 7.53 | 7.36 | 7.75 | 7.90 | 7.72 | |||||||||||
Dividends declared(7) | 37.1 | 49.1 | 32.2 | 23.8 | 22.1 | |||||||||||
Ratio of earnings to fixed charges and preferred stock dividends | 1.79x | 2.00x | 2.41x | 1.89x | 1.58x | |||||||||||
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
2005 in Summary
During 2005, we shifted our business mix more toward the distribution of financial services, with the sales of our Asset Management and Travelers Life & Annuities businesses. We reorganized our U.S. Consumer business to more closely integrate our product offerings to better meet the needs of our customers. We focused on organic investment, adding more than 200 retail bank branches and nearly 350 consumer finance branches during the year, most of them outside of the U.S.
All of these changes reflect our competitive advantages:
These advantages combined to generate net income of $24.6 billion in 2005. Income was well diversified by segment, product and region, as shown in the charts below. Results in 2005 included a $2.1 billion after-tax gain on the sale of the Travelers Life & Annuities Business and a $2.1 billion after-tax gain on the sale of the Asset Management Business. Income from Continuing Operations (which excludes the gains from these transactions and the historical results from these businesses) was $19.8 billion.
Income from Continuing Operations
In billions of dollars
*Excludes Corporate/Other and Discontinued Operations. |
*Excludes Alternative Investments, Corporate/Other and Discontinued Operations. |
Diluted Earnings Per Share - Income from Continuing Operations
Revenues increased 5% from 2004, reaching $83.6 billion. Our international operations recorded revenue growth of 7% in 2005, including a 12% increase in International Consumer. A 10% increase in International Consumer loans, 23% increase in international investment product sales, 8% increase inU.S. Cards purchase sales, and 9% increase in U.S. Consumer loans drove Global Consumer volume growth. CIB revenues grew by 10%, with particularly strong performance inTransaction Services.Capital Markets and Banking deliversfinished the year ranked #1 in equity underwriting and #2 in completed mergers and acquisitions activity. Higher equity market valuations led to significantly increased results in Alternative Investments.
A challenging business environment and competitive pricing pressures during 2005 accentuated the impact of flattening global yield curves, which drove a wide arraydecline in net interest revenue. This spread compression negatively impacted the Company's operating leverage ratios, particularly inU.S. Cards andCapital Markets and Banking.
Revenue growth benefited from increased loan volumes, including corporate loan growth of banking, lending, insurance13% and investment services through a networkconsumer loan growth of local branches, offices,4%.Transaction Services assets under custody increased 9% and electronic delivery systems, including ATMs, Automated Lending Machines (ALMs),Smith Barney client assets increased 16%.
4
Total Deposits
In billions of dollars
Operating expenses decreased 9% from the Internet,previous year, primarily reflecting the absence of the $7.9 billion WorldCom and Litigation Reserve Charge and the Primerica Financial Services (Primerica) sales force.$400 million charge related to closing the Japan Private Bank, which were both recorded in 2004. Expenses in 2005 reflected a $600 million release from the WorldCom and Litigation Reserve Charge. Excluding these items, operating expenses increased 10% in 2005, reflecting increased investment spending, the impact of foreign exchange, and an increase in other legal expenses. Investment spending included, among other things, the addition of Consumer branches and investments in technology.
Net Revenue and Operating Expense
In billions of dollars
Despite the negative impact of the U.S. bankruptcy law change and Hurricane Katrina, the global credit environment remained favorable; however, total credit costs increased $1.9 billion, primarily due to the absence of the reserve releases recorded during 2004. The effective tax rate increased 241 basis points to 30.8% for the year, primarily reflecting the impact of indefinitely invested international earnings and other items on the lower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge.
During 2005, we maintained our focus on disciplined capital allocation and returns to our shareholders. Our equity capital base and trust preferred securities grew to $118.8 billion at December 31, 2005. Stockholders' equity increased by $3.2 billion during 2005 to $112.5 billion, even with the distribution of $9.1 billion in dividends to common shareholders and the repurchase of $12.8 billion of common stock during the year. Return on common equity was 22.3% for 2005.
Return on Average Common Equity
The Board of Directors increased the quarterly common dividend by 10% during 2005 and by an additional 11% in January 2006, bringing the current quarterly payout to $0.49 per share. Citigroup maintained its "well-capitalized" position with a Tier 1 Capital Ratio of 8.79% at December 31, 2005.
Total Capital (Tier 1 and Tier 2)
In billions of dollars
During 2005, we made progress towards our goal of ensuring that all of our businesses are best in class; we grew our Global Consumer businesses serve individual consumersfranchise; and significantly expanded our International businesses. Our Five Point Plan was a priority during 2005, and we met every deadline for implementation. We also continued to resolve our legal and regulatory issues. And we promoted a new generation of business leaders.
5
Outlook for 2006
We enter 2006 optimistic and well-positioned to gain from our competitive advantages.
We are a global company with an unparalleled presence around the world. We have operations in 100 countries and customers in nearly 50 more, with 40% of our revenues in 2005 from outside of the U.S. The international market for goods and services is more than twice the size of, and is growing at a faster rate than the U.S. market, leading to significant opportunities for us globally.
Our strategic initiatives for 2006 include the expansion of both our international and U.S. distribution. Our pace of opening branches and distribution points will accelerate. We plan to transfer our expertise and market knowledge from business to business and region to region. We will continue to invest in technology and people, integrating these investments across the Company. To do each of these effectively, disciplined capital allocation is fundamental to our strategic process.
We expect to continue to achieve growth in loans, deposits and other customer activity as we add distribution points and continue to enhance our product offerings.
During 2006, we will continue to build on our Shared Responsibilities and strive to exceed our customers' needs.
Citigroup's financial results are closely tied to the external global economic environment. Movements in interest rates and foreign exchange rates present both opportunities and risks for the Company. Weakness in the global economy, credit deterioration, inflation, and geopolitical uncertainty are examples of risks that could adversely impact our earnings.
We expect revenue growth in 2006 to continue to reflect some pressure from the flat yield curve in the U.S. and many international markets, as well as small businesses.a competitive pricing environment in the U.S. We look for these to be more than offset by continued strong growth in our customer businesses, particularly outside the U.S., as the investments we have made in our businesses are reflected in our results. We will continue to be disciplined in our expense management, while investing for our future. Credit is stable as we enter 2006.
Although there may be volatility in our results in any given year, over time we look for our revenues to grow at a mid to high single-digit rate, with strong expense and credit management driving earnings and earnings per share growth at a faster level. We look to augment this growth rate over time through targeted acquisitions.
A detailed review and outlook for each of our business segments and products are included in the discussions that follow, and the risks are more fully discussed on pages 19 to 51.
Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 95.
6
EVENTS IN 2005
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 95.
Sale of Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for Legg Mason's broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business inMexico, its retirement services business inLatin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business").
Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Consumer includesWealth Management business.
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Sale of Travelers Life & Annuity
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed the Travelers Life & Annuity's U.S. businesses and its international operations, other than Citigroup's life insurance business inMexico (which is now included withinInternational Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business").
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Change in EMEA Consumer Write-off Policy
Prior to the third quarter of 2005, certain Western European consumer portfolios were granted an exception to Citigroup's global write-off policy. The exception extended the write-off period from the standard 120-day policy for personal installment loans, and was granted because of the higher recovery rates experienced in these portfolios. Citigroup recently observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany and, as a result, rescinded the exception to the global standard. The net charge was $332 million ($490 million pretax) resulting from the recording of $1.153 billion of write-offs and a corresponding utilization of $663 million of reserves in the 2005 third quarter. These write-offs, along with the underlying portfolio performance, caused the 90-day delinquency rate for the Consumer EMEA portfolio to decline to 1.29% at December 31, 2005, compared to 3.36% at December 31, 2004.
These write-offs did not relate to a change in the portfolio credit quality but rather to a change in environmental factors due to law changes and consumer behavior that led Citigroup to re-evaluate its estimates of future long-term recoveries and their appropriateness to the write-off exception.
A slight upward movement in net charge-offs may occur inEMEA in the near term due to the timing of the write-offs, now at 120 days, versus the longer period of time over which recoveries will be realized. The Company is in the process of adjusting its collection strategies inEMEA to reflect the revised write-off time frame.
Impact from Hurricane Katrina
The Company recorded a $222 million after-tax charge ($357 million pretax) for the estimated probable losses incurred from Hurricane Katrina. This charge consists primarily of additional credit costs inU.S. Cards,U.S. Commercial Business, U.S. Consumer Finance,Retail BankingLending and Other Consumer.U.S. Retail Distribution businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. This charge does not include an after-tax estimate of $75 million ($109 million pretax) for fees and interest due from related customers that were waived during 2005.
United States Bankruptcy Legislation
On October 17, 2005, the Bankruptcy Reform Act (or the Act) became effective. The Act imposes a means test to determine if people who file for Chapter 7 bankruptcy earn more than the median income in their state and could repay at least $6,000 of unsecured debt over five years. Bankruptcy filers who meet this test are required to enter into a repayment plan under Chapter 13, instead of canceling their debt entirely under Chapter 7. As a result of these more stringent guidelines, bankruptcy claims accelerated prior to the effective date. The incremental bankruptcy losses over the Company's estimated baseline in 2005 that was attributable to the Act inU.S. Cards provides MasterCard, VISA, Diner's Club and private label credit and charge cards. North America Cards includes the operations of Citi Cards,business was approximately $970 million on a managed basis ($550 million in the Company's primary brandon balance sheet portfolio and $420 million in North America, and Mexico Cards. International Cards provides credit and charge cards to customers in Europe, the Middle East and Africa (EMEA), Japan, Asia and Latin America.securitized portfolio). In addition, the
Consumer FinanceU.S. Retail Distribution provides community-based lending services through branch networks, regional sales officesbusiness incurred incremental bankruptcy losses of approximately $90 million during 2005.
7
Bank and cross-selling initiativesCredit Card Customer Rewards Costs
During the 2005 fourth quarter, the Company conformed its global policy approach for the accounting of rewards costs for bank and credit card customers. Conforming the global policy resulted in the write-off of $354 million after-tax ($565 million pretax) of unamortized deferred rewards costs. Previously, accounting practices for these costs varied across the Company. The revised policy requires all businesses to recognize rewards costs as incurred.
Sale of Nikko Cordial Stake
On December 13, 2005, Citigroup and Nikko Cordial agreed that Citigroup would reduce its stake in Nikko Cordial from approximately 11.2% to 4.9%. The sale resulted in an after-tax gain of $248 million ($386 million pretax). In connection with this sale, Nikko Cordial and Citigroup each contributed an additional approximately $175 million to their joint venture, Nikko Citigroup Limited.
Sale of the Merchant Acquiring Businesses
In December 2005, Citigroup sold its European merchant acquiring business to EuroConex for $127 million. This transaction resulted in a $62 million after-tax gain ($98 million pretax).
In September 2005, Citigroup sold its U.S. merchant acquiring business, Citigroup Payment Service Inc., to First Data Corporation for $70 million, resulting in a $41 million after-tax gain ($61 million pretax).
Homeland Investment Act Benefit
The Company's results from continuing operations include a $198 million tax benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas. The amount of dividends that were repatriated relating to this benefit is approximately $3.2 billion.
Copelco Litigation Settlement
In 2000, Citigroup purchased Copelco Capital, Inc., a leasing business, from Itochu International Inc. and III Holding Inc. (collectively "Itochu") for $666 million. During 2001, Citigroup filed a lawsuit asserting breach of representations and warranties, among other causes of action, under the Stock Purchase Agreement entered into between Citigroup businesses.and Itochu in March of 2000. During the 2005 third quarter, Citigroup and Itochu signed a settlement agreement that mutually released all claims, and under which Itochu paid Citigroup $185 million.
Mexico Value Added Tax (VAT) Refund
During the 2005 third quarter, Citigroup Mexico received a $182 million refund of VAT taxes from the Mexican government related to the 2003 and 2004 tax years as a result of a Mexico Supreme Court ruling. The businessrefund was recorded as a reduction of CitiFinancial$140 million (pretax) in other operating expense and $42 million (pretax) in other revenue.
Legal Settlements and Charges for Enron and WorldCom Class Action Litigations and for Other Regulatory and Legal Matters
The Company is includeda defendant in North America Consumer Finance.numerous lawsuits and other legal proceedings arising out of alleged misconduct in connection with:
During the 2004 second quarter, in connection with the settlement of the WorldCom class action, the Company re-evaluated and increased its reserves for these matters. The Company recorded a charge of $7.915 billion ($4.95 billion after-tax) relating to (i) the settlement of class action litigation brought on behalf of purchasers of WorldCom securities, and (ii) an increase in litigation reserves for the other matters described above. Subject to the terms of the WorldCom class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.57 billion pretax to the WorldCom settlement class. In addition, subject to the terms of the Enron class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.01 billion pretax to the Enron settlement class.
During the fourth quarter of 2005, in connection with an evaluation of these matters and as a result of the favorable resolution of certain WorldCom/Research litigation matters, the Company re-evaluated its reserves for these matters and released $600 million ($375 million after-tax) from this reserve. As of December 31, 2004, North America Consumer Finance maintained 2,642 offices, including 2,4522005, the Company's litigation reserve for these matters, net of settlement amounts previously paid, the amounts to be paid upon final approval of the WorldCom and Enron class action settlements and other settlements arising out of the matters above not yet paid, and the $600 million release that was recorded during the 2005 fourth quarter, was approximately $3.3 billion.
The Company believes that this reserve is adequate to meet all of its remaining exposure for these matters. However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, the novel issues presented, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. The Company will continue to defend itself vigorously in these cases, and seek to resolve them in the U.S.manner management believes is in the best interests of the Company.
The Company continues to evaluate its reserves on an ongoing basis. See Legal Proceedings on page 175.
8
Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), Canada,which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and Puerto Rico,certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and 190 offices in Mexico, while International Consumer Finance maintained 1,481 sales points, including 405 branchesMay credit card portfolios comprise a total of approximately 17 million active accounts.
Settlement of the Securities and 512 ALMs 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.Exchange Commission's Transfer Agent Investigation
Retail Banking provides banking, lending, investment On May 31, 2005, the Company completed the settlement with the Securities and insurance servicesExchange Commission (SEC), disclosed by Citigroup in January 2005, resolving an investigation by the SEC into matters relating to customers through retail branches, electronic delivery systems, and the Primerica sales force. In North America,Retail Banking includes the operations of Retail Distribution, the Commercial Business, Prime Home Finance, Student Loans, Primerica, and Mexico Retail Banking. Retail Distribution delivers banking, lending, investment and insurance services through 775 branches in the U.S. and Puerto Rico and through Citibank Online, an Internet bank. The Commercial Business provides equipment leasing and financing, and banking services to small- and middle-market businesses. The Prime Home Finance business originates and services mortgages for customers across the U.S. The Student Loan business is comprised of the origination and servicing of student loans in 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, includingarrangements between certainSmith Barney mutual funds CitiFinancial mortgages(the Funds), an affiliated transfer agent, and personalan unaffiliated sub-transfer agent.
Under the terms of the settlement, Citigroup paid a total of $208 million, consisting of $128 million in disgorgement and $80 million in penalties. These funds, less $24 million already credited to the Funds, have been paid to the U.S. Treasury and will be distributed pursuant to a distribution plan prepared by Citigroup and to be approved by the SEC. The terms of the settlement had been fully reserved by Citigroup in prior periods.
Resolution of the 2004 Eurozone Bond Trade
As announced on June 28, 2005, Citigroup paid $7.29 million to the U.K. Financial Services Authority (FSA) during the 2005 third quarter relating to trading activity in the European government bond and bond derivative markets on August 2, 2004. The Company also relinquished to the FSA approximately $18.2 million in profits generated by the trade. In Italy, Citigroup was suspended from trading on the Multilateral Trading System (MTS) domestic electronic bond trading platform for one month beginning November 1, 2005.
Merger of Bank Holding Companies
On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp.
During the 2005 second quarter, Citigroup also consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, and preferred and common stock, and (ii) Citigroup Funding Inc. (CFI), a newly formed first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes, all of which is guaranteed by Citigroup.
As part of the funding consolidation, Citigroup unconditionally guaranteed Citigroup Global Markets Holdings Inc.'s (CGMHI) outstanding SEC-registered indebtedness. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.
Due to unified access to the capital markets and a reduction in the number of the Company's credit-rated entities, this legal vehicle simplification has resulted in more efficient management of capital and liquidity. See "Capital Resources and Liquidity" on page 83 and Note 27 to the Consolidated Financial Statements on page 159 for further discussion.
Credit Reserves
During 2005, the Company recorded a net release/utilization of its credit reserves of $227 million, consisting of a net release/utilization of $459 million in Global Consumer and Global Wealth Management, and a net build of $232 million in CIB.
The net release/utilization in Global Consumer included a utilization inEMEA of $663 million, related to write-offs of $1.153 billion in loans, and a reserve build of $260 million in the productsU.S. for the credit impact from Hurricane Katrina realized in the third quarter of our2005. TheLife Insurance and AnnuitiesEMEA business. The Primerica sales force is composed of more than 100,000 independent representatives. Mexico Retail Banking consistsutilization and corresponding write-offs were the results of the branch banking operations of Banamex, which maintains 1,349 branches. International Retail Banking consists of 1,129 branches and provides full-service banking and investment services in EMEA, Japan, Asia, and Latin America. In addition to North America, the Commercial Business consistsstandardization of the suite of products and services offered to small- and middle-market businessesloan write-off policy in the international regions.
GLOBAL CORPORATE AND INVESTMENT BANKcertain Western European consumer portfolios.
Global Corporate and Investment Bank (GCIB) provides corporations, governments, institutions and investorsThe net build of $232 million in approximately 100 countries with a broad rangeCIB was primarily composed of financial products and services. GCIB includes$204 million inCapital Markets and Banking,,which included a $238 million reserve increase for unfunded lending commitments and letters of credit, and $28 million inTransaction Services, which included a $12 million increase for unfunded lending commitments and letters of credit.
During 2004, the Company recorded a net release/utilization of $2,368 million to its credit reserves, consisting of a net release/utilization of $1,266 million in Global Consumer and a net release/utilization of $1,102 million in CIB.
9
Credit Reserve Builds (Releases)
| 2005 | 2004 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||
By Product: | |||||||
U.S. Cards | $ | (170 | ) | $ | (639 | ) | |
U.S. Retail Distribution | 302 | (16 | ) | ||||
U.S. Consumer Lending | (64 | ) | (155 | ) | |||
U.S. Commercial Business | (39 | ) | (316 | ) | |||
International Cards | 72 | (103 | ) | ||||
International Consumer Finance | (9 | ) | (24 | ) | |||
International Retail Banking | (588 | ) | (12 | ) | |||
Smith Barney | 12 | — | |||||
Private Bank | 25 | — | |||||
Consumer Other | — | (1 | ) | ||||
Total Consumer | $ | (459 | ) | $ | (1,266 | ) | |
Capital Markets and Banking | 204 | (921 | ) | ||||
Transaction Services | 28 | (181 | ) | ||||
Total CIB | $ | 232 | $ | (1,102 | ) | ||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
By Region: | |||||||
U.S. | $ | 33 | $ | (1,586 | ) | ||
Mexico | 242 | (96 | ) | ||||
EMEA | (433 | ) | (16 | ) | |||
Japan | 25 | (39 | ) | ||||
Asia | (35 | ) | (165 | ) | |||
Latin America | (59 | ) | (466 | ) | |||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
Allowance for Credit Losses
| Dec. 31, 2005 | Dec. 31, 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars at year end | |||||
Allowance for loan losses | $ | 9,782 | $ | 11,269 | ||
Allowance for unfunded lending commitments | 850 | 600 | ||||
Total allowance for loans and unfunded lending commitments | $ | 10,632 | $ | 11,869 | ||
Repositioning Charges
The Company recorded a $272 million after-tax ($435 million pretax) charge during the 2005 first quarter for repositioning costs. The repositioning charges were predominantly severance-related costs recorded in CIB ($151 million after-tax) and in Global Consumer ($95 million after-tax). These repositioning actions are consistent with the Company's objectives of controlling expenses while continuing to invest in growth opportunities.
Resolution of Glendale Litigation
During the 2005 first quarter, the Company recorded a $72 million after-tax gain ($114 million pretax) following the resolution ofGlendale Federal Bank v. United States, an action brought by Glendale Federal Bank, a predecessor to Citibank (West), FSB, against the United States government.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of transaction closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of the Manufactured Housing Loan Portfolio
On May 1, 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the 2005 first quarter related to the divestiture.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million ($157 million pretax).
Shutdown of the Private Bank in Japan and Related Charge and Other Corporate.Activities in Japan
On September 29, 2005, the Company officially closed itsPrivate Bank business in Japan.
In September 2004, the Financial Services Agency of Japan (FSA) issued an administrative order against Citibank Japan. This order included a requirement that Citigroup exit all private banking operations in Japan by September 30, 2005. In connection with this required exit, the Company established a $400 million ($244 million after-tax) reserve (the Exit Plan Charge) during the 2004 fourth quarter. During 2005, the Company utilized $220 million and released $95 million of this reserve due to favorable foreign exchange translation and interest rate movements in the customers' investment accounts. The Company believes that the remaining reserve of $50 million (adjusted by $35 million for current foreign exchange translation rates) is adequate to cover any future settlements with ex-Private Bank Japan customers.
The Company'sPrivate Bank operations in Japan had total revenues, net of interest expense, of $200 million and net income of $39 million (excluding the Exit Plan Charge) during the year ended December 31, 2004 and $264 million and $83 million, respectively, for 2003.
On October 25, 2004, Citigroup announced its decision to wind down Cititrust and Banking Corporation (Cititrust), a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary. On April 22, 2005, the FSA issued an administrative order requiring Cititrust to suspend from engaging in all new trust business in 2005. Cititrust closed all customer accounts in 2005, and the Company expects to be liquidated in 2006.
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EVENTS IN 2004
Settlement of WorldCom Class Action Litigation and Charge for Regulatory and Legal Matters
As discussed on page 5, during the 2004 second quarter, Citigroup recorded a charge of $4.95 billion after-tax ($7.915 billion pretax) related to a settlement of class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in The Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all of the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition KorAm was a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion. During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Electronic Financial Services Inc. (EFS) for $390 million. EFS is a provider of government-issued benefit payments and prepaid stored-value cards used by state and federal government agencies, as well as of stored-value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
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EVENTS IN 2003
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears), the eighth largest credit card portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of Sears are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of Home Depot are included in the Consolidated Financial Statements from July 2003 forward.
Settlement of Certain Legal and Regulatory Matters
On July 28, 2003, Citigroup entered into financial settlement agreements with the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank of New York (FED), and the Manhattan District Attorney's Office that resolved on a civil basis their investigations into Citigroup's structured finance work for Enron. The Company also announced that its settlement agreement with the SEC concluded that agency's investigation into certain Citigroup work for Dynegy. The agreements were reached by Citigroup (and, in the case of the agreement with the OCC, Citibank, N.A.) without admitting or denying any wrongdoing or liability, and the agreements do not establish wrongdoing or liability for the purpose of civil litigation or any other proceeding. Citigroup paid from previously established reserves an aggregate amount of $145.5 million in connection with these settlements.
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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Notes to the Consolidated Financial Statements on page 108, contain a summary of the Company's significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of the Company's financial condition. It is important to note that they require management to make difficult, complex or subjective judgments and estimates, at times, regarding matters that are inherently uncertain. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements on page 108.
Certain statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 95.
Valuations of Financial Instruments
The Company holds fixed income and equity securities, derivatives, investments in private equity and other financial instruments. The Company holds its investments and trading assets and liabilities on the balance sheet to meet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading and private equity investing.
Substantially all of these assets and liabilities are reflected at fair value on the Company's balance sheet. Fair values are determined in the following ways:
At December 31, 2005 and 2004, respectively, approximately 94.5% and 96.2% of the available-for-sale and trading portfolios' gross assets and liabilities (prior to netting positions pursuant to FIN 39) are considered verified and approximately 5.5% and 3.8% are considered unverified. Of the unverified assets, at December 31, 2005 and 2004, respectively, approximately 60.6% and 66.4% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 39.4% and 33.6% consist 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.
Changes in the valuation of the trading assets and liabilities flow through the income statement. Changes in the valuation of available-for-sale assets generally flow through other comprehensive income, which is a component of equity on the balance sheet. A full description of the Company's related policies and procedures can be found in Notes 1, 5 and 8 to the Consolidated Financial Statements on pages 108, 121, and 125, respectively.
Allowance for Credit Losses
Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheet in the form of an allowance for credit losses. In addition, management has established and maintained reserves for the potential losses related to the Company's off-balance sheet exposures of unfunded lending commitments, including standby letters of credit and guarantees. These reserves are established in accordance with Citigroup's Loan Loss Reserve Policies, as approved by the Company's Board of Directors. Under these policies, the Company's Senior Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from Risk Management and Financial Control for each applicable business area.
During these reviews, these above-mentioned representatives covering the business area having classifiably-managed portfolios (that is, portfolios where internal credit-risk ratings are assigned, which are primarily Corporate and Investment Banking, Global Consumer's commercial lending businesses, and Global Wealth Management) present recommended reserve balances for their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data includes:
In addition, representatives from Risk Management and Financial Control that cover business areas which have delinquency-managed portfolios containing smaller homogeneous loans (primarily Global Consumer's non-commercial lending areas) present their recommended reserve
13
balances based upon historical delinquency flow rates, charge-off statistics and loss severity. This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist. Adjustments are also made for specifically known items, such as changing regulations, current environmental factors and credit trends.
This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates, the size and diversity of individual large credits, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing, among other things, are all taken into account during this review. 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. Changes to the reserve flow through the income statement on the lines "provision for loan losses" and "provision for unfunded lending commitments." For a further description of the loan loss reserve and related accounts, see Notes 1 and 12 to the Consolidated Financial Statements on pages 108 and 128, respectively.
Securitizations
The Company securitizes a number of different asset classes as a means of strengthening its balance sheet and to access competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by the trust to access financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets stringent accounting guidelines, trust assets are treated as sold and no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company's assets, with the financing activity recorded as liabilities on Citigroup's balance sheet. The Financial Accounting Standards Board (FASB) is currently working on amendments to the accounting standards governing asset transfers, securitization accounting, and fair value of financial instruments. Upon completion of these standards the Company will need to re-evaluate its accounting and disclosures. Due to the FASB's ongoing deliberations, the Company is unable to accurately determine the effect of future amendments at this time.
The Company assists its clients in securitizing their financial assets and also packages and securitizes financial assets purchased in the financial markets. The Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities, and may continue to service these financial assets.
A complete description of the Company's accounting for securitized assets can be found in "Off-Balance Sheet Arrangements" on page 89 and in Notes 1 and 13 to the Consolidated Financial Statements on pages 108 and 128, respectively.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.
Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.
The Company reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.
SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the 2004 fourth quarter, the U.S. Congress passed and the President signed into law a new tax bill, "The American Jobs Creation Act of 2004." The Homeland Investment Act (HIA) provision of the American Jobs Creation Act of 2004 is intended to provide companies with a one-time 85% reduction in the U.S. net tax liability on cash dividends paid by foreign subsidiaries in 2005, to the extent that they exceed a baseline level of dividends paid in prior years. In accordance with FASB Staff Position FAS No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" (FSP FAS 109-2), the Company did not recognize any income tax effects of the repatriation provisions of the Act in its 2004 financial statements. In 2005, the Company's results from continuing operations included a $198 million tax benefit from the HIA provision of the Act, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas.
See Note 16 to the Consolidated Financial Statements on page 139 for a further description of the Company's provision and related income tax assets and liabilities.
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Legal Reserves
The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker/dealer or investment advisor. Reserves are established for legal and regulatory claims based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in the Company's financial statements and SEC filings, management's view of the Company's exposure. The Company reviews outstanding claims with internal as well as external counsel to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available and reserves are adjusted, as appropriate. The actual cost of resolving a claim may be substantially higher, or lower, than the amount of the recorded reserve. See Note 26 to the Consolidated Financial Statements on page 158 and the discussion of "Legal Proceedings" beginning on page 175.
Accounting Changes and Future Application of Accounting Standards
See Note 1 to the Consolidated Financial Statements on page 108 for a discussion of Accounting Changes and the Future Application of Accounting Standards.
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SEGMENT, PRODUCT AND REGIONAL NET INCOME
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
| 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
Global Consumer | ||||||||||||||||
U.S. Cards | $ | 2,754 | $ | 3,562 | $ | 2,854 | (23 | )% | 25 | % | ||||||
U.S. Retail Distribution | 1,752 | 2,019 | 1,707 | (13 | ) | 18 | ||||||||||
U.S. Consumer Lending | 1,938 | 1,664 | 1,636 | 16 | 2 | |||||||||||
U.S. Commercial Business | 729 | 765 | 525 | (5 | ) | 46 | ||||||||||
Total U.S. Consumer(2) | $ | 7,173 | $ | 8,010 | $ | 6,722 | (10 | )% | 19 | % | ||||||
International Cards | $ | 1,373 | $ | 1,137 | $ | 725 | 21 | % | 57 | % | ||||||
International Consumer Finance | 642 | 586 | 579 | 10 | 1 | |||||||||||
International Retail Banking | 2,083 | 2,157 | 1,752 | (3 | ) | 23 | ||||||||||
Total International Consumer | $ | 4,098 | $ | 3,880 | $ | 3,056 | 6 | % | 27 | % | ||||||
Other(3) | $ | (374 | ) | $ | 97 | $ | (113 | ) | NM | NM | ||||||
Total Global Consumer | $ | 10,897 | $ | 11,987 | $ | 9,665 | (9 | )% | 24 | % | ||||||
Corporate and Investment Banking | ||||||||||||||||
Capital Markets and Banking | $ | 5,327 | $ | 5,395 | $ | 4,642 | (1 | )% | 16 | % | ||||||
Transaction Services | 1,135 | 1,045 | 748 | 9 | 40 | |||||||||||
Other(4)(5) | 433 | (4,398 | ) | (16 | ) | NM | NM | |||||||||
Total Corporate and Investment Banking | $ | 6,895 | $ | 2,042 | $ | 5,374 | NM | (62 | )% | |||||||
Global Wealth Management | ||||||||||||||||
Smith Barney | $ | 871 | $ | 891 | $ | 795 | (2 | )% | 12 | % | ||||||
Private Bank(6) | 373 | 318 | 551 | 17 | (42 | ) | ||||||||||
Total Global Wealth Management | $ | 1,244 | $ | 1,209 | $ | 1,346 | 3 | % | (10 | )% | ||||||
Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | ||||||
Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | |||||||||
Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | ||||||
Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | |||||||||||
Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||
Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | ||||||
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Citigroup Net Income—Regional View
| 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
U.S.(2) | ||||||||||||||||
Global Consumer | $ | 6,799 | $ | 7,729 | $ | 6,609 | (12 | )% | 17 | % | ||||||
Corporate and Investment Banking(3)(4) | 2,950 | (2,190 | ) | 2,540 | NM | NM | ||||||||||
Global Wealth Management | 1,141 | 1,179 | 1,076 | (3 | ) | 10 | ||||||||||
TotalU.S. | $ | 10,890 | $ | 6,718 | $ | 10,225 | 62 | % | (34 | )% | ||||||
Mexico | ||||||||||||||||
Global Consumer | $ | 1,432 | $ | 978 | $ | 785 | 46 | % | 25 | % | ||||||
Corporate and Investment Banking | 450 | 659 | 407 | (32 | ) | 62 | ||||||||||
Global Wealth Management | 44 | 52 | 41 | (15 | ) | 27 | ||||||||||
TotalMexico | $ | 1,926 | $ | 1,689 | $ | 1,233 | 14 | % | 37 | % | ||||||
Latin America | ||||||||||||||||
Global Consumer | $ | 236 | $ | 296 | $ | 197 | (20 | )% | 50 | % | ||||||
Corporate and Investment Banking | 619 | 813 | 566 | (24 | ) | 44 | ||||||||||
Global Wealth Management | 17 | 43 | 44 | (60 | ) | (2 | ) | |||||||||
TotalLatin America | $ | 872 | $ | 1,152 | $ | 807 | (24 | )% | 43 | % | ||||||
EMEA | ||||||||||||||||
Global Consumer(5) | $ | 374 | $ | 1,180 | $ | 680 | (68 | )% | 74 | % | ||||||
Corporate and Investment Banking(5) | 1,130 | 1,136 | 924 | (1 | ) | 23 | ||||||||||
Global Wealth Management | 8 | 15 | (16 | ) | (47 | ) | NM | |||||||||
TotalEMEA | $ | 1,512 | $ | 2,331 | $ | 1,588 | (35 | )% | 47 | % | ||||||
Japan | ||||||||||||||||
Global Consumer | $ | 706 | $ | 616 | $ | 583 | 15 | % | 6 | % | ||||||
Corporate and Investment Banking | 498 | 334 | 162 | 49 | NM | |||||||||||
Global Wealth Management(6) | (82 | ) | (205 | ) | 83 | 60 | NM | |||||||||
TotalJapan | $ | 1,122 | $ | 745 | $ | 828 | 51 | % | (10 | )% | ||||||
Asia | ||||||||||||||||
Global Consumer | $ | 1,350 | $ | 1,188 | $ | 811 | 14 | % | 46 | % | ||||||
Corporate and Investment Banking | 1,248 | 1,290 | 775 | (3 | ) | 66 | ||||||||||
Global Wealth Management | 116 | 125 | 118 | (7 | ) | 6 | ||||||||||
TotalAsia | $ | 2,714 | $ | 2,603 | $ | 1,704 | 4 | % | 53 | % | ||||||
Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | ||||||
Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | |||||||||
Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | ||||||
Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | |||||||||||
Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||
Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | ||||||
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SELECTED REVENUE AND EXPENSE ITEMS
Revenues
Net interest revenue was $39.3 billion in 2005, down $2.3 billion, or 6%, from 2004. This, in turn, was up $4.3 billion, or 12%, from 2003. Increases in business volumes during 2005 were more than offset by spread compression, as the Company's cost of funding increased more significantly than the rates on interest-bearing assets. Rates on the Company's interest-earning assets were impacted during the year by competitive pricing (particularly inU.S. Cards andCapital Markets and Banking offers a wide array), as well as business mix shifts.
Total commissions, asset management and administration fees, and other fee revenues of investment$23.3 billion were up $1.8 billion, or 8%, in 2005. The 2004 amount of $21.5 billion was up $1.3 billion, or 6%, from 2003. The 2005 increase primarily reflected improved global equity markets, higher transactional volume and commercial banking services and products, includingcontinued strong investment banking debtresults. Insurance premiums of $3.1 billion in 2005 were up $406 million, or 15%, from 2004 and up $271 million, or 11%, in 2004 compared to 2003. The 2005 increase primarily represents higher business volumes.
Principal transactions revenues of $6.4 billion increased $2.7 billion, or 73%, from 2004, primarily reflecting record revenues in the fixed income and equity trading, institutional brokerage, advisory services, foreign exchange, structured products, derivatives,markets. Principal transactions revenue in 2004 decreased $1.2 billion, or 24%, from 2003, primarily reflecting decreased fixed income markets revenues related to interest rate fluctuations, positioning and lending.lower volatility.
Realized gains from sales of investments of $2.0 billion in 2005 were up $1.1 billion from 2004, which was up $304 million from 2003. The increase from 2004 is primarily attributable to the gain of $386 million (pretax) on the sale of Nikko Cordial stock and sales of St. Paul Travelers shares over the course of the year.
Other revenue of $9.5 billion in 2005 increased $322 million from 2004, which was up $3.0 billion from 2003. The increase from 2004 is related to securitization and hedging gains and activity. The increase from 2003 primarily reflected the $1.2 billion gain on the sale of Samba, increased securitization gains and improved investment results.
Operating Expenses
Transaction Services is comprised Operating expenses decreased $4.6 billion, or 9%, to $45.2 billion in 2005, and increased $12.3 billion, or 33%, from 2003 to 2004. The expense fluctuations were primarily related to the reserve charges taken in 2004 (a $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge and a $400 million Private Bank Japan Exit Plan Charge). Expenses in 2005 reflect a $600 million release from the WorldCom and Litigation Reserve Charge. Partially offsetting the absence of Cash Management, Trade Servicesthese items was increased expenses related to higher incentive compensation (driven by increased revenue), and Global Securities Services (GSS). Cash Managementhigher pension and Trade Services provide comprehensive cash managementinsurance expenses.
Provisions for Credit Losses and trade finance for corporationsBenefits and financial institutions worldwide. GSS provides custody and fund services to investors such as insurance companies and pension funds, clearing services to intermediaries such as broker/dealers and depository and agency/trust services to multinational corporations and governments globally.Claims
GLOBAL WEALTH MANAGEMENT Total provisions for credit losses and for benefits and claims were $9.0 billion, $7.1 billion and $8.9 billion in 2005, 2004 and 2003, respectively. Policyholder benefits and claims in 2005 decreased $17 million, or 2%, from 2004. The provision for credit losses increased $1.9 billion, or 31%, from 2004 to $8.2 billion in 2005.
Global Wealth Management is comprisedConsumer provisions for loan losses and for policyholder benefits and claims of the$9.1 billion in 2005 were up $966 million, or 12% from 2004, reflecting increases inSmith BarneyInternational Retail Banking Private Client and Global Equity Research businesses and the Citigroup,Private BankU.S. Retail Distribution, International Cards. Through itsSmith Barney network of Financial Consultants, andPrivate Bank offices, Global Wealth Management is one of the leading providers of wealth management services to high-net-worth and affluent clients in the world.
Smith Barney provides investment advice, financial planning and brokerage services to affluent individuals, small and mid-size companies, non-profits and large corporations through a network of more than 12,000 Financial Consultants in more than 500 offices primarily in the U.S. In addition,Smith Barney provides independent client-focused research to individuals and institutions around the world.
A significant portion ofSmith Barney's 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,Smith Barney generates net interest revenue by financing customers' securities transactions and other borrowing needs through security-based lending.Smith Barney also receives commissions and other sales and service revenues through the sale of proprietary and third-party mutual funds. As part ofSmith BarneyCommercial Business, Global Equity Research produces equity research to serve both institutional and individual investor clients. The majority of expenses for Global Equity Research are allocated to the Global Equities business within GCIB andpartially offset by decreases inSmith Barney businesses.
Private Bank provides personalized wealth management services for high-net-worth clients in 33 countries and territories. With a global network of 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 management, investment finance and banking services. Investment management services include investment funds management and capital markets solutions, as well as trust, fiduciary and custody services. Investment finance provides standard and tailored credit services including real estate financing, commitments and letters of credit, while Banking includes services for deposit, checking and savings accounts, as well as cash management and other traditional banking services.
GLOBAL INVESTMENT MANAGEMENT
Global Investment Management offers a broad range of life insurance, annuity and asset management products and services distributed to institutional and retail clients. Global Investment Management includesLife Insurance and AnnuitiesU.S. Cards, International Consumer Finance andAsset ManagementU.S. Consumer Lending. Net credit losses were $8.683 billion, and the related loss ratio was 2.01% in 2005, as compared to $8.471 billion and 2.13% in 2004 and $7.555 billion and 2.22% in 2003.
Life Insurance The CIB provision for credit losses in 2005 increased $933 million from 2004, which decreased $1.7 billion from 2003. The increase in the 2005 balance is primarily due to an increase in expected losses resulting from an increase in off-balance sheet exposure and Annuities comprises Travelers Liferelated credit quality. Corporate cash-basis loans at December 31, 2005, 2004 and Annuity (TLA)2003 were $1.004 billion, $1.906 billion and International Insurance Manufacturing (IIM). TLA offers retail annuity, institutional annuity, individual life insurance$3.419 billion, respectively.
Income Taxes
The Company's effective tax rate on continuing operations of 30.8% in 2005 increased from 28.4% in 2004. The 2005 tax provision on continuing operations included a $198 million benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and Corporate Owned Life Insurance (COLI) products. The retail annuity products include individual fixed and variable deferred annuities and payout annuities. Individual life insurance includes term, universal, and variable life insurance. These products are primarily distributed through CitiStreet Retirement Services (CitiStreet),Smith Barney, Primerica, Citibank and affiliates,prior years that would otherwise have been indefinitely invested overseas, and a nationwide network$65 million release due to the resolution of independent agentsan audit. The 2004 tax provision on continuing operations included a $234 million benefit for the release of a valuation allowance relating to the utilization of foreign tax credits and the outside broker/dealer channel.releases of $150 million and $147 million due to the closing of tax audits. The COLI products are variable universal life products distributed through independent specialty brokers. The institutional annuity products include institutional pensions, including guaranteed investment contracts, payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. IIM provides annuities, credit, life, health, disability2005 effective tax rate also increased from 2004 because of the impact of indefinitely invested international earnings and other insurance products internationally, leveragingitems on the existing distribution channelslower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge. The Company's effective tax rate on continuing operations was 31.1% in 2003. See additional discussion on page 14 and in Note 16 to the Consolidated Financial Statements on page 139.
Consumer Finance,Retail Banking andAsset Management (retirement services) businesses. IIM has operations in Mexico, Asia, EMEA, Latin America and Japan. TLA and IIM include the realized investment gains/losses from sales on certain insurance-related investments.
Asset Management includes Citigroup Asset Management, the Citigroup Alternative Investments (CAI) institutional business, the 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.
PROPRIETARY INVESTMENT ACTIVITIES
Proprietary Investment Activities is comprised of Citigroup's proprietary Private Equity investments and Other Investment Activities which includes Citigroup's proprietary investments in hedge funds and real estate investments, investments in countries that refinanced debt under the 1989 Brady Plan or plans of a similar nature, ownership of St. Paul Travelers Companies Inc. shares and Citigroup's Alternative Investments business, for which theThe net profits on products distributed through Citigroup'sAsset Management,Smith Barney andPrivate Bank businesses are reflectedincome line in the respective distributor's income statement through net revenues.
CORPORATE/OTHER
Corporate/Other includes net treasury results, corporate expenses, certain intersegment eliminations, the results of discontinued operations,following business segment and operating unit discussions excludes the cumulative effect of accounting change and taxes not allocatedincome from discontinued operations. The cumulative effect of accounting change and income from discontinued operations are disclosed within the Corporate/Other business segment. See Notes 1 and 3 to the individual businesses.Consolidated Financial Statements on pages 108 and 119, respectively. Certain amounts in prior years have been reclassified to conform to the current year's presentation.
18
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| 2004 | 2003 | 2002 | 2001 | 2000 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars, except per share amounts | In millions of dollars, except per share amounts | ||||||||||||||||||||||||||||||
Revenues, net of interest expense | $ | 86,190 | $ | 77,442 | $ | 71,308 | $ | 67,367 | $ | 63,572 | $ | 83,642 | $ | 79,635 | $ | 71,594 | $ | 66,246 | $ | 61,621 | ||||||||||||
Operating expenses | 51,974 | 39,168 | 37,298 | 36,528 | 35,809 | 45,163 | 49,782 | 37,500 | 35,886 | 35,026 | ||||||||||||||||||||||
Benefits, claims, and credit losses(1) | 10,034 | 11,941 | 13,473 | 10,320 | 8,466 | |||||||||||||||||||||||||||
Provisions for credit losses and for benefits and claims | 9,046 | 7,117 | 8,924 | 10,972 | 7,666 | |||||||||||||||||||||||||||
Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes | 24,182 | 26,333 | 20,537 | 20,519 | 19,297 | |||||||||||||||||||||||||||
Income from continuing operations before taxes, minority interest, and cumulative effect of account changes | $ | 29,433 | $ | 22,736 | $ | 25,170 | $ | 19,388 | $ | 18,929 | ||||||||||||||||||||||
Income taxes | 6,909 | 8,195 | 6,998 | 7,203 | 7,027 | 9,078 | 6,464 | 7,838 | 6,615 | 6,659 | ||||||||||||||||||||||
Minority interest, after-tax | 227 | 285 | 91 | 87 | 39 | |||||||||||||||||||||||||||
Minority interest, net of taxes | 549 | 218 | 274 | 91 | 87 | |||||||||||||||||||||||||||
Income from continuing operations | 17,046 | 17,853 | 13,448 | 13,229 | 12,231 | |||||||||||||||||||||||||||
Income from discontinued operations(2) | — | — | 1,875 | 1,055 | 1,288 | |||||||||||||||||||||||||||
Cumulative effect of accounting changes(3) | — | — | (47 | ) | (158 | ) | — | |||||||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting changes | $ | 19,806 | $ | 16,054 | $ | 17,058 | $ | 12,682 | $ | 12,183 | ||||||||||||||||||||||
Income from discontinued operations, net of taxes(1) | 4,832 | 992 | 795 | 2,641 | 2,101 | |||||||||||||||||||||||||||
Cumulative effect of accounting changes, net of taxes(2) | (49 | ) | — | — | (47 | ) | (158 | ) | ||||||||||||||||||||||||
Net Income | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 14,126 | $ | 13,519 | $ | 24,589 | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 14,126 | ||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 3.32 | $ | 3.49 | $ | 2.63 | $ | 2.61 | $ | 2.43 | $ | 3.90 | $ | 3.13 | $ | 3.34 | $ | 2.48 | $ | 2.40 | ||||||||||||
Net income | 3.32 | 3.49 | 2.99 | 2.79 | 2.69 | 4.84 | 3.32 | 3.49 | 2.99 | 2.79 | ||||||||||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||||||||||
Income from continuing operations | 3.26 | 3.42 | 2.59 | 2.55 | 2.37 | 3.82 | 3.07 | 3.27 | 2.44 | 2.35 | ||||||||||||||||||||||
Net income | 3.26 | 3.42 | 2.94 | 2.72 | 2.62 | 4.75 | 3.26 | 3.42 | 2.94 | 2.72 | ||||||||||||||||||||||
Dividends declared per common share | $ | 1.60 | $ | 1.10 | $ | 0.70 | $ | 0.60 | $ | 0.52 | $ | 1.76 | $ | 1.60 | $ | 1.10 | $ | 0.70 | $ | 0.60 | ||||||||||||
At December 31 | ||||||||||||||||||||||||||||||||
Total assets | $ | 1,484,101 | $ | 1,264,032 | $ | 1,097,590 | $ | 1,051,850 | $ | 902,610 | $ | 1,494,037 | $ | 1,484,101 | $ | 1,264,032 | $ | 1,097,590 | $ | 1,051,850 | ||||||||||||
Total deposits | 562,081 | 474,015 | 430,895 | 374,525 | 300,586 | 592,595 | 562,081 | 474,015 | 430,895 | 374,525 | ||||||||||||||||||||||
Long-term debt | 207,910 | 162,702 | 126,927 | 121,631 | 111,778 | 217,499 | 207,910 | 162,702 | 126,927 | 121,631 | ||||||||||||||||||||||
Mandatorily redeemable securities of subsidiary trusts | 6,209 | 6,057 | 6,152 | 7,125 | 4,920 | 6,264 | 6,209 | 6,057 | 6,152 | 7,125 | ||||||||||||||||||||||
Common stockholders' equity | 108,166 | 96,889 | 85,318 | 79,722 | 64,461 | 111,412 | 108,166 | 96,889 | 85,318 | 79,722 | ||||||||||||||||||||||
Total stockholders' equity | 109,291 | 98,014 | 86,718 | 81,247 | 66,206 | 112,537 | 109,291 | 98,014 | 86,718 | 81,247 | ||||||||||||||||||||||
Ratio of earnings to fixed charges and preferred stock dividends | 2.06 | x | 2.47 | x | 1.94 | x | 1.63 | x | 1.52 | x | ||||||||||||||||||||||
Return on average common stockholders' equity(6) | 17.0 | % | 19.8 | % | 18.6 | % | 19.7 | % | 22.4 | % | ||||||||||||||||||||||
Return on risk capital(7) | 34 | % | 39 | % | ||||||||||||||||||||||||||||
Return on invested capital(7) | 17 | % | 20 | % | ||||||||||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||
Return on common stockholders' equity(4) | 22.3 | % | 17.0 | % | 19.8 | % | 18.6 | % | 19.7 | % | ||||||||||||||||||||||
Return on total stockholders' equity(4) | 22.1 | 16.8 | 19.5 | 18.3 | 19.4 | |||||||||||||||||||||||||||
Return on risk capital(5) | 38 | 35 | 39 | |||||||||||||||||||||||||||||
Return on invested capital(5) | 22 | 17 | 20 | |||||||||||||||||||||||||||||
Tier 1 capital | 8.79 | % | 8.74 | % | 8.91 | % | 8.47 | % | 8.42 | % | ||||||||||||||||||||||
Total capital | 12.02 | 11.85 | 12.04 | 11.25 | 10.92 | |||||||||||||||||||||||||||
Leverage(6) | 5.35 | 5.20 | 5.56 | 5.67 | 5.64 | |||||||||||||||||||||||||||
Common stockholders' equity to assets | 7.29 | % | 7.67 | % | 7.77 | % | 7.58 | % | 7.14 | % | 7.46 | % | 7.29 | % | 7.67 | % | 7.77 | % | 7.58 | % | ||||||||||||
Total stockholders' equity to assets | 7.36 | % | 7.75 | % | 7.90 | % | 7.72 | % | 7.33 | % | 7.53 | 7.36 | 7.75 | 7.90 | 7.72 | |||||||||||||||||
Dividends declared(7) | 37.1 | 49.1 | 32.2 | 23.8 | 22.1 | |||||||||||||||||||||||||||
Ratio of earnings to fixed charges and preferred stock dividends | 1.79x | 2.00x | 2.41x | 1.89x | 1.58x | |||||||||||||||||||||||||||
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
2004 IN SUMMARY2005 in Summary
Citigroup's fundamental strengths are itsDuring 2005, we shifted our business mix more toward the distribution of financial services, with the sales of our Asset Management and Travelers Life & Annuities businesses. We reorganized our U.S. Consumer business to more closely integrate our product offerings to better meet the needs of our customers. We focused on organic investment, adding more than 200 retail bank branches and nearly 350 consumer finance branches during the year, most of them outside of the U.S.
All of these changes reflect our competitive advantages:
These strengthsadvantages combined to generate a net income of $17.05$24.6 billion in 2004.2005. Income was well diversified by bothsegment, product and region, as shown in the charts below. Return on common equity was 17% for 2004. Results in 20042005 included a $4.95$2.1 billion after-tax charge related to the 2004 second quarter WorldCom and Litigation Reserve Charge. Results also reflect a $756 million after-tax gain on sale of the Company's equity investment in Samba. Excluding the impact of the charge and the gain, net income increased 19% and return on common equity was 20%.
INCOME FROM CONTINUING OPERATIONS
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2000 | $ | 12.2 | |
2001 | $ | 13.2 | |
2002 | $ | 13.4 | |
2003 | $ | 17.9 | |
2004 | $ | 17.0 |
2004 NET INCOME BY SEGMENT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2004 NET INCOME BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
DILUTED EARNINGS PER SHARE—INCOME FROM CONTINUING OPERATIONS
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2000 | $ | 2.37 | |
2001 | $ | 2.55 | |
2002 | $ | 2.59 | |
2003 | $ | 3.42 | |
2004 | $ | 3.26 |
We continued to strengthen our business franchises through strategic acquisitions in 2004. Acquisitions during the year included the KorAm Bank, the consumer finance business of Washington Mutual, Inc., and the announced purchase of First American Bank in Texas, which is pending regulatory approval. Additionally, we maintained our focus on disciplined capital allocation, which led to the announced or completed disposition of businesses that were not part of its long-term core strategy. These included the sale of the Company's equity investment in Samba,Travelers Life & Annuities Business and a $2.1 billion after-tax gain on the sale of the Transportation Finance business of CitiCapital (resulting in an after-tax gain of approximately $100 million)Asset Management Business. Income from Continuing Operations (which excludes the gains from these transactions and the salehistorical results from these businesses) was $19.8 billion.
Income from Continuing Operations
In billions of a portion of the electronic funds transfer business (resulting in an after-tax gain of $180 million).dollars
*Excludes Corporate/Other and Discontinued Operations. |
*Excludes Alternative Investments, Corporate/Other and Discontinued Operations. |
Diluted Earnings Per Share - Income from Continuing Operations
Revenues increased 11%5% from 2003,2004, reaching $86.2$83.6 billion. North America andOur international revenues increasedoperations recorded revenue growth of 7% in 2005, including a 12% increase in International Consumer. A 10% and 18%, respectively. Revenue increases were driven by both organic growth and new acquisitions and were led by 15% growthincrease in our global consumer businesses. Revenue growth reflected double-digit growth ratesInternational Consumer loans, 23% increase in international investment product sales, 8% increase inU.S. Cards purchase sales, and 9% increase in U.S. Consumer loans drove Global Consumer volume growth. CIB revenues grew by 10%, with particularly strong performance inTransaction Services,.Smith BarneyCapital Markets and Banking finished the year ranked #1 in equity underwriting and Global Investment Management.#2 in completed mergers and acquisitions activity. Higher equity market valuations led to significantly increased results in Proprietary Investment Activities.Alternative Investments.
A challenging business environment and competitive pricing pressures during 2005 accentuated the impact of flattening global yield curves, which drove a decline in net interest revenue. This spread compression negatively impacted the Company's operating leverage ratios, particularly inU.S. Cards andCapital Markets and Banking.
Revenue growth was driven by strong increases in customer balances.Retail Banking loansbenefited from increased 25%,Consumer Finance loans increased 10%,loan volumes, including corporate loan growth of 13% andCards receivables increased 19% consumer loan growth of 4%. Corporate loans increased 16% andTransaction Services assets under custody increased 23%.9% andSmith Barney client assets increased 8% and Private Bank client volumes increased 15%16%.
4
TOTAL DEPOSITS
Total Deposits
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2000 | $ | 301 | |
2001 | $ | 375 | |
2002 | $ | 431 | |
2003 | $ | 474 | |
2004 | $ | 562 |
Operating expenses increased 33%decreased 9% from the previous year. Included in expenses were a $7.915year, primarily reflecting the absence of the $7.9 billion ($4.95 billion after-tax) charge for the WorldCom and Litigation Reserve Charge aand the $400 million ($244 million after-tax) charge related to closing the Japan Private Bank, which were both recorded in 2004. Expenses in 2005 reflected a $600 million release from the WorldCom and reserves of $196 million ($151 million after-tax) related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters.Litigation Reserve Charge. Excluding these legal and
regulatory charges,items, operating expenses increased 12% and reflected10% in 2005, reflecting increased investment spending, (3%), expenses from acquisitions and the impact of foreign exchange, (6%),and an increase in other legal expenses (2%) and higher operating expenses (1%).expenses. Investment spending included, among other things, the addition of 558 new consumer finance and retail bankingConsumer branches globally, increased advertising and marketing and investments in technology.
NET REVENUE AND OPERATING EXPENSE
Net Revenue and Operating Expense
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||
Net revenue | $ | 63.6 | $ | 67.4 | $ | 71.3 | $ | 77.4 | $ | 86.2 | |||||
Operating expense | $ | 35.8 | $ | 36.5 | $ | 37.3 | $ | 39.2 | $ | 52.0 |
The favorableDespite the negative impact of the U.S. bankruptcy law change and Hurricane Katrina, the global credit environment had a significant impact on Citigroup's 2004 results as credit reserve releases of $2.0 billion led to a decrease inremained favorable; however, total credit costs increased $1.9 billion, primarily due to the absence of $1.8 billion.
the reserve releases recorded during 2004. The effective tax rate decreased 255increased 241 basis points to 28.6%30.8% for the year, primarily reflecting the release of valuation allowances related to the utilization of foreign tax credits and reserves related to tax settlements and changes in estimates, and the impact of indefinitely invested international earnings.earnings and other items on the lower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge.
Citigroup'sDuring 2005, we maintained our focus on disciplined capital allocation and returns to our shareholders. Our equity capital base and trust-preferredtrust preferred securities grew to more than $115$118.8 billion at December 31, 2004.2005. Stockholders' equity increased by $11.3$3.2 billion during 20042005 to $109.3 billion. The Company distributed $8.3$112.5 billion, even with the distribution of $9.1 billion in dividends to common shareholders.shareholders and the repurchase of $12.8 billion of common stock during the year. Return on common equity was 22.3% for 2005.
RETURN ON COMMON EQUITY
Return on Average Common Equity
[EDGAR REPRESENTATION OF GRAPHIC DATA]
2000 | 22.4 | % | |
2001 | 19.7 | % | |
2002 | 18.6 | % | |
2003 | 19.8 | % | |
2004 | 17.0 | % |
The Company's Board of Directors increased the quarterly common dividend by 14%10% during 20042005 and by an additional 10%11% in January 2005,2006, bringing the current quarterly payout to 44 cents$0.49 per share. Citigroup maintained its "well-capitalized" position with a Tier 1 Capital Ratio of 8.79% at December 31, 2005.
TOTAL CAPITAL (TIER
Total Capital (Tier 1 AND TIERand Tier 2)
In billions of dollars
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||
Tier 1 and Tier 2 | $ | 73.0 | $ | 75.8 | $ | 78.3 | $ | 90.3 | $ | 100.9 | |||||
Tier 1 | $ | 54.5 | $ | 58.4 | $ | 59.0 | $ | 66.9 | $ | 74.4 |
During 2004, we did not achieve our expectation of double-digit income growth. The WorldCom Litigation and Reserve Charge drove a decline in net income of 5% versus 2003.
In the 2004 second quarter, the Company recorded a $4.95 billion after-tax charge for settlement of the WorldCom class action lawsuit and an increase in litigation reserves related to Enron and other pending lawsuits and legal proceedings. This charge was an important step in addressing the financial impact of resolving these matters.
In the third quarter, the Financial Services Agency of Japan (FSA) issued an administrative order that required Citigroup's Private Bank to suspend all new transactions with customers and to discontinue operations by September 30, 2005. The administrative order was the result of an inspection by the FSA, which determined that there were fundamental problems in Citibank Japan's internal controls and governance structure, principally in its Private Bank operations. We have accepted the basis for the sanctions and have placed the utmost priority on complying with the FSA's directives. In the fourth quarter, the Company recorded a $244 million after-tax charge related to closing the Japan Private Bank.
During the third and fourth quarters, the Company recorded reserves of $196 million ($151 million after-tax) related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters. These reserves now fully cover the financial terms that the SEC staff has agreed to recommend to the Commission for resolution of this matter.
In August, our European government bond trading desk executed a transaction in the European government bond market that involved large executions in various government bonds and futures contracts. We regret having executed this transaction as2005, we failed to consider its potential impact on our clients and other stakeholders, including European regulators and treasuries, and because it did not meet our standards. The U.K.'s Financial Services Authority and other European regulators are investigating this transaction and we are fully cooperating.
During 2004, the Company took numerous stepsmade progress towards the goal of improving the way we do business, including the strengthening of the independence and capabilities of our internal control and compliance structure. In the third and fourth quarter, Chuck Prince, CEO of Citigroup, personally met with more than 35,000 employees to emphasize our goal of becoming the most respected global financial services company.ensuring that all of our businesses are best in class; we grew our Global Consumer franchise; and significantly expanded our International businesses. Our Five Point Plan was a priority during 2005, and we met every deadline for implementation. We also continued to resolve our legal and regulatory issues. And we promoted a new generation of business leaders.
5
Outlook for 20052006
We enter 2005 with momentum2006 optimistic and optimism. Our primary goals for 2005 include taking stepswell-positioned to become the most respected global financial institution; growinggain from our Global Consumer franchise; growing our International businesses; and ensuring our Global Corporate and Investment Bank is best in class.competitive advantages.
ThroughoutWe are a global company with an unparalleled presence around the world. We have operations in 100 countries and customers in nearly 50 more, with 40% of our revenues in 2005 wefrom outside of the U.S. The international market for goods and services is more than twice the size of, and is growing at a faster rate than the U.S. market, leading to significant opportunities for us globally.
Our strategic initiatives for 2006 include the expansion of both our international and U.S. distribution. Our pace of opening branches and distribution points will implement many enhancementsaccelerate. We plan to transfer our expertise and market knowledge from business to business and region to region. We will continue to invest in technology and people, integrating these investments across the Company. To do each of these effectively, disciplined capital allocation is fundamental to our training, development and compensation processes designed to achieve our goal of becoming the most respected global financial institution. In 2004, we increased the independence of risk management functions, including internal control and compliance.strategic process.
We expect to continue to enhance our risk management, controlachieve growth in loans, deposits and compliance functions in 2005.
During the coming year,other customer activity as we expect to expand our global branch network, further develop our brand through advertisingadd distribution points and marketing and invest in technology to increase our competitiveness. We also expect to continue to make strategically targeted acquisitions that will extend our geographic reach and enhance our product capabilities. We will renew our focus on expense discipline and building cost advantages, and we expect to continue to apply disciplined capital management to allocate capital to our highest growth and highest return opportunities.offerings.
We anticipate that the credit environment globally will remain favorable; however, we do not expect the level of credit reserve releases in 2004 to repeat in 2005.
We also do not expect the level of tax-reserve releases and tax benefits that occurred in 2004 to repeat in 2005. Accordingly, we anticipate a higher effective tax rate in 2005, which we estimate to be more in line with the 2003 effective tax rate.
As we experienced during the second half of 2004, we expect that increasing interest rates will continue to have a negative impact on our Treasury results.
In January 2005, we announced the sale of Traveler's Life & Annuity, including substantially all of our international insurance businesses, to MetLife for approximately $11.5 billion subject to closing adjustments. The businesses included in the sale transaction had earnings of $901 million in 2004. The transaction is expected to result in an after-tax gain of approximately $2.0 billion, subject to closing adjustments, and to make available approximately $6.0 billion of Tier I Capital. We expect the transaction to close in the summer of 2005. Proceeds from the sale will be redeployed in higher growth and higher return opportunities to maximize value for our shareholders.
We plan to finalize our exit of the Japan Private Bank by the end of the 2005 third quarter, which will result in costs in connection with implementing the exit plan, and additional charges may be incurred. In addition,During 2006, we will continue to workbuild on our Shared Responsibilities and cooperate withstrive to exceed our regulators in Europe to seek a conclusion to investigations relating to the European Bond transaction.
Limited staff reductions will be made in the Global Corporate and Investment Bank in early 2005. The reductions will affect an estimated 1,400 staff and will result in an approximately $275 million pre-tax charge during the 2005 first quarter.customers' needs.
Citigroup's financial results are closely tied to the external global economic environment. Movements in interest rates and foreign exchange rates present both opportunities and risks for the Company. Weakness in the global economies,economy, credit deterioration, inflation, and geopolitical uncertainty are examples of risks that could adversely impact our earnings.
We expect revenue growth in 2006 to continue to reflect some pressure from the flat yield curve in the U.S. and many international markets, as well as a competitive pricing environment in the U.S. We look for these to be more than offset by continued strong growth in our customer businesses, particularly outside the U.S., as the investments we have made in our businesses are reflected in our results. We will continue to be disciplined in our expense management, while investing for our future. Credit is stable as we enter 2006.
Although there may be volatility in our results in any given year, over time we look for our revenues to grow at a mid to high single-digit rate, with strong expense and credit management driving earnings and earnings per share growth at a faster level. We look to augment this growth rate over time through targeted acquisitions.
A detailed review and outlook for each of our businesses isbusiness segments and products are included in the discussions that follow.follow, and the risks are more fully discussed on pages 19 to 51.
Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.95.
6
Events in 2004EVENTS IN 2005
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 95.
Sale of Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for Legg Mason's broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business inMexico, its retirement services business inLatin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business").
Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management business.
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Sale of Travelers Life & Annuity
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed the Travelers Life & Annuity's U.S. businesses and its international operations, other than Citigroup's life insurance business inMexico (which is now included withinInternational Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business").
Additional information can be found in Note 3 to the Consolidated Financial Statements on page 119.
Change in EMEA Consumer Write-off Policy
Prior to the third quarter of 2005, certain Western European consumer portfolios were granted an exception to Citigroup's global write-off policy. The exception extended the write-off period from the standard 120-day policy for personal installment loans, and was granted because of the higher recovery rates experienced in these portfolios. Citigroup recently observed lower actual recovery rates, stemming primarily from a change in bankruptcy and wage garnishment laws in Germany and, as a result, rescinded the exception to the global standard. The net charge was $332 million ($490 million pretax) resulting from the recording of $1.153 billion of write-offs and a corresponding utilization of $663 million of reserves in the 2005 third quarter. These write-offs, along with the underlying portfolio performance, caused the 90-day delinquency rate for the Consumer EMEA portfolio to decline to 1.29% at December 31, 2005, compared to 3.36% at December 31, 2004.
These write-offs did not relate to a change in the portfolio credit quality but rather to a change in environmental factors due to law changes and consumer behavior that led Citigroup to re-evaluate its estimates of future long-term recoveries and their appropriateness to the write-off exception.
A slight upward movement in net charge-offs may occur inEMEA in the near term due to the timing of the write-offs, now at 120 days, versus the longer period of time over which recoveries will be realized. The Company is in the process of adjusting its collection strategies inEMEA to reflect the revised write-off time frame.
Impact from Hurricane Katrina
The Company recorded a $222 million after-tax charge ($357 million pretax) for the estimated probable losses incurred from Hurricane Katrina. This charge consists primarily of additional credit costs inU.S. Cards,U.S. Commercial Business, U.S. Consumer Lending andU.S. Retail Distribution businesses, based on total credit exposures of approximately $3.6 billion in the Federal Emergency Management Agency (FEMA) Individual Assistance designated areas. This charge does not include an after-tax estimate of $75 million ($109 million pretax) for fees and interest due from related customers that were waived during 2005.
United States Bankruptcy Legislation
On October 17, 2005, the Bankruptcy Reform Act (or the Act) became effective. The Act imposes a means test to determine if people who file for Chapter 7 bankruptcy earn more than the median income in their state and could repay at least $6,000 of unsecured debt over five years. Bankruptcy filers who meet this test are required to enter into a repayment plan under Chapter 13, instead of canceling their debt entirely under Chapter 7. As a result of these more stringent guidelines, bankruptcy claims accelerated prior to the effective date. The incremental bankruptcy losses over the Company's estimated baseline in 2005 that was attributable to the Act inU.S. Cards business was approximately $970 million on a managed basis ($550 million in the Company's on balance sheet portfolio and $420 million in the securitized portfolio). In addition, theU.S. Retail Distribution business incurred incremental bankruptcy losses of approximately $90 million during 2005.
7
Bank and Credit Card Customer Rewards Costs
During the 2005 fourth quarter, the Company conformed its global policy approach for the accounting of rewards costs for bank and credit card customers. Conforming the global policy resulted in the write-off of $354 million after-tax ($565 million pretax) of unamortized deferred rewards costs. Previously, accounting practices for these costs varied across the Company. The revised policy requires all businesses to recognize rewards costs as incurred.
Sale of Nikko Cordial Stake
On December 13, 2005, Citigroup and Nikko Cordial agreed that Citigroup would reduce its stake in Nikko Cordial from approximately 11.2% to 4.9%. The sale resulted in an after-tax gain of $248 million ($386 million pretax). In connection with this sale, Nikko Cordial and Citigroup each contributed an additional approximately $175 million to their joint venture, Nikko Citigroup Limited.
Sale of the Merchant Acquiring Businesses
In December 2005, Citigroup sold its European merchant acquiring business to EuroConex for $127 million. This transaction resulted in a $62 million after-tax gain ($98 million pretax).
In September 2005, Citigroup sold its U.S. merchant acquiring business, Citigroup Payment Service Inc., to First Data Corporation for $70 million, resulting in a $41 million after-tax gain ($61 million pretax).
Homeland Investment Act Benefit
The Company's results from continuing operations include a $198 million tax benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas. The amount of dividends that were repatriated relating to this benefit is approximately $3.2 billion.
Copelco Litigation Settlement
In 2000, Citigroup purchased Copelco Capital, Inc., a leasing business, from Itochu International Inc. and III Holding Inc. (collectively "Itochu") for $666 million. During 2001, Citigroup filed a lawsuit asserting breach of representations and warranties, among other causes of action, under the Stock Purchase Agreement entered into between Citigroup and Itochu in March of 2000. During the 2005 third quarter, Citigroup and Itochu signed a settlement agreement that mutually released all claims, and under which Itochu paid Citigroup $185 million.
Mexico Value Added Tax (VAT) Refund
During the 2005 third quarter, Citigroup Mexico received a $182 million refund of VAT taxes from the Mexican government related to the 2003 and 2004 tax years as a result of a Mexico Supreme Court ruling. The refund was recorded as a reduction of $140 million (pretax) in other operating expense and $42 million (pretax) in other revenue.
Legal Settlements and Charges for Enron and WorldCom Class Action LitigationLitigations and Charge for Other Regulatory and Legal Matters
During the 2004 second quarter, Citigroup recordedThe Company is a charge of $7.915 billion ($4.95 billion after-tax) related to a settlement of class action litigation brought on behalf of purchasers of WorldCom securitiesdefendant in numerous lawsuits and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).
Subject to the terms of the settlement and its eventual approval by the courts, Citigroup will make a payment of approximately $2.575 billion, or $1.59 billion after-tax, to the settlement class, which consists of all persons who purchased or otherwise acquired publicly traded securities of WorldCom during the period from April 29, 1999 through and including June 25, 2002. The payment will be allocated between purchasers of WorldCom stock and purchasers of WorldCom bonds. Plaintiffs' attorneys' fees will come out of the settlement amount.
In connection with the settlement of the WorldCom class action, the Company reevaluated and increased its reserves for numerous other lawsuits and legal proceedings arising out of alleged misconduct in connection with:
During the 2004 second quarter, in connection with the settlement of the WorldCom class action, the Company re-evaluated and increased its reserves for these matters. The Company recorded a charge of $7.915 billion ($4.95 billion after-tax) relating to (i) the settlement of class action litigation brought on behalf of purchasers of WorldCom securities, and (ii) an increase in litigation reserves for the other matters described above. Subject to the terms of the WorldCom class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.57 billion pretax to the WorldCom settlement class. In addition, subject to the terms of the Enron class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.01 billion pretax to the Enron settlement class.
During the fourth quarter of 2005, in connection with an evaluation of these matters and as a result of the favorable resolution of certain WorldCom/Research litigation matters, the Company re-evaluated its reserves for these matters and released $600 million ($375 million after-tax) from this reserve. As of December 31, 2004,2005, the Company's litigation reserve for these matters, net of settlement amounts previously paid, the amountamounts to be paid upon final approval of the WorldCom and Enron class action settlement,settlements and other settlements arising out of the matters above not yet paid, and the $600 million release that was $6.64 billion on a pretax basis.recorded during the 2005 fourth quarter, was approximately $3.3 billion.
The Company believes that this reserve is adequate to meet all of its remaining exposure for these matters. However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, the novel issues presented, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. The Company will continue to defend itself vigorously in these cases, and seek to resolve them in the manner management believes is in the best interestinterests of the Company.
The Company continues to evaluate its reserves on an ongoing basis. See "Legal Proceedings"Legal Proceedings on page 141.175.
8
Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
Settlement of the Securities and Exchange Commission's Transfer Agent Investigation
On May 31, 2005, the Company completed the settlement with the Securities and Exchange Commission (SEC), disclosed by Citigroup in January 2005, resolving an investigation by the SEC into matters relating to arrangements between certainSmith Barney mutual funds (the Funds), an affiliated transfer agent, and an unaffiliated sub-transfer agent.
Under the terms of the settlement, Citigroup paid a total of $208 million, consisting of $128 million in disgorgement and $80 million in penalties. These funds, less $24 million already credited to the Funds, have been paid to the U.S. Treasury and will be distributed pursuant to a distribution plan prepared by Citigroup and to be approved by the SEC. The terms of the settlement had been fully reserved by Citigroup in prior periods.
Resolution of the 2004 Eurozone Bond Trade
As announced on June 28, 2005, Citigroup paid $7.29 million to the U.K. Financial Services Authority (FSA) during the 2005 third quarter relating to trading activity in the European government bond and bond derivative markets on August 2, 2004. The Company also relinquished to the FSA approximately $18.2 million in profits generated by the trade. In Italy, Citigroup was suspended from trading on the Multilateral Trading System (MTS) domestic electronic bond trading platform for one month beginning November 1, 2005.
Merger of Bank Holding Companies
On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp.
During the 2005 second quarter, Citigroup also consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, and preferred and common stock, and (ii) Citigroup Funding Inc. (CFI), a newly formed first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes, all of which is guaranteed by Citigroup.
As part of the funding consolidation, Citigroup unconditionally guaranteed Citigroup Global Markets Holdings Inc.'s (CGMHI) outstanding SEC-registered indebtedness. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.
Due to unified access to the capital markets and a reduction in the number of the Company's credit-rated entities, this legal vehicle simplification has resulted in more efficient management of capital and liquidity. See "Capital Resources and Liquidity" on page 83 and Note 27 to the Consolidated Financial Statements on page 159 for further discussion.
Credit Reserves
During 2005, the Company recorded a net release/utilization of its credit reserves of $227 million, consisting of a net release/utilization of $459 million in Global Consumer and Global Wealth Management, and a net build of $232 million in CIB.
The net release/utilization in Global Consumer included a utilization inEMEA of $663 million, related to write-offs of $1.153 billion in loans, and a reserve build of $260 million in the U.S. for the credit impact from Hurricane Katrina realized in the third quarter of 2005. TheEMEA utilization and corresponding write-offs were the results of the standardization of the loan write-off policy in certain Western European consumer portfolios.
The net build of $232 million in CIB was primarily composed of $204 million inCapital Markets and Banking,which included a $238 million reserve increase for unfunded lending commitments and letters of credit, and $28 million inTransaction Services, which included a $12 million increase for unfunded lending commitments and letters of credit.
During 2004, the Company recorded a net release/utilization of $2,368 million to its credit reserves, consisting of a net release/utilization of $1,266 million in Global Consumer and a net release/utilization of $1,102 million in CIB.
9
Credit Reserve Builds (Releases)
| 2005 | 2004 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||
By Product: | |||||||
U.S. Cards | $ | (170 | ) | $ | (639 | ) | |
U.S. Retail Distribution | 302 | (16 | ) | ||||
U.S. Consumer Lending | (64 | ) | (155 | ) | |||
U.S. Commercial Business | (39 | ) | (316 | ) | |||
International Cards | 72 | (103 | ) | ||||
International Consumer Finance | (9 | ) | (24 | ) | |||
International Retail Banking | (588 | ) | (12 | ) | |||
Smith Barney | 12 | — | |||||
Private Bank | 25 | — | |||||
Consumer Other | — | (1 | ) | ||||
Total Consumer | $ | (459 | ) | $ | (1,266 | ) | |
Capital Markets and Banking | 204 | (921 | ) | ||||
Transaction Services | 28 | (181 | ) | ||||
Total CIB | $ | 232 | $ | (1,102 | ) | ||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
By Region: | |||||||
U.S. | $ | 33 | $ | (1,586 | ) | ||
Mexico | 242 | (96 | ) | ||||
EMEA | (433 | ) | (16 | ) | |||
Japan | 25 | (39 | ) | ||||
Asia | (35 | ) | (165 | ) | |||
Latin America | (59 | ) | (466 | ) | |||
Total Citigroup | $ | (227 | ) | $ | (2,368 | ) | |
Allowance for Credit Losses
| Dec. 31, 2005 | Dec. 31, 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars at year end | |||||
Allowance for loan losses | $ | 9,782 | $ | 11,269 | ||
Allowance for unfunded lending commitments | 850 | 600 | ||||
Total allowance for loans and unfunded lending commitments | $ | 10,632 | $ | 11,869 | ||
Repositioning Charges
The Company recorded a $272 million after-tax ($435 million pretax) charge during the 2005 first quarter for repositioning costs. The repositioning charges were predominantly severance-related costs recorded in CIB ($151 million after-tax) and in Global Consumer ($95 million after-tax). These repositioning actions are consistent with the Company's objectives of controlling expenses while continuing to invest in growth opportunities.
Resolution of Glendale Litigation
During the 2005 first quarter, the Company recorded a $72 million after-tax gain ($114 million pretax) following the resolution ofGlendale Federal Bank v. United States, an action brought by Glendale Federal Bank, a predecessor to Citibank (West), FSB, against the United States government.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of transaction closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of the Manufactured Housing Loan Portfolio
On May 1, 2005, Citigroup completed the sale of its manufactured housing loan portfolio, consisting of $1.4 billion in loans, to 21st Mortgage Corp. The Company recognized a $109 million after-tax loss ($157 million pretax) in the 2005 first quarter related to the divestiture.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million ($157 million pretax).
Shutdown of the Private Bank in Japan and Related Charge and Other Activities in Japan
On September 29, 2005, the Company officially closed itsPrivate Bank business in Japan.
In September 2004, the Financial Services Agency of Japan (FSA) issued an administrative order against Citibank Japan. This order included a requirement that Citigroup exit all private banking operations in Japan by September 30, 2005. In connection with this required exit, the Company established a $400 million ($244 million after-tax) reserve (the Exit Plan Charge) during the 2004 fourth quarter. During 2005, the Company utilized $220 million and released $95 million of this reserve due to favorable foreign exchange translation and interest rate movements in the customers' investment accounts. The Company believes that the remaining reserve of $50 million (adjusted by $35 million for current foreign exchange translation rates) is adequate to cover any future settlements with ex-Private Bank Japan customers.
The Company'sPrivate Bank operations in Japan had total revenues, net of interest expense, of $200 million and net income of $39 million (excluding the Exit Plan Charge) during the year ended December 31, 2004 and $264 million and $83 million, respectively, for 2003.
On October 25, 2004, Citigroup announced its decision to wind down Cititrust and Banking Corporation (Cititrust), a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary. On April 22, 2005, the FSA issued an administrative order requiring Cititrust to suspend from engaging in all new trust business in 2005. Cititrust closed all customer accounts in 2005, and the Company expects to be liquidated in 2006.
10
EVENTS IN 2004
Settlement of WorldCom Class Action Litigation and Charge for Regulatory and Legal Matters
As discussed on page 5, during the 2004 second quarter, Citigroup recorded a charge of $4.95 billion after-tax ($7.915 billion pretax) related to a settlement of class action litigation brought on behalf of purchasers of WorldCom securities and an increase in litigation reserves (WorldCom and Litigation Reserve Charge).
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in The Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and GCIB.
Credit Improvement Performance
During the past two years, the world-wide credit environment has continuously improved, as evidenced by declining cash-basis loan balances and lower delinquency rates. Accordingly, the Company has reduced its Allowance for Credit Losses.
During 2004, the Company released $2.004 billion of reserves, consisting of $900 million from GCIB's reserves and $1.104 billion from Global Consumer's reserves. The GCIB releases consisted of a $737 million release inCapital Markets and Banking and a $163 million release inTransaction Services. The Global Consumer releases consisted of a $691 million net release in theCards portfolio, a $339 million net release inRetail Banking, and a $74 million net release inConsumer Finance. At December 31, 2004, the Company's total allowance for loans, leases and commitments was $11.869 billion.
During 2003, the Company released $508 million of reserves, consisting of $300 million in GCIB and $208 million in Global Consumer. At December 31, 2003, the Company's total allowance for loans, leases and commitments was $13.243 billion.
Management evaluates the adequacy of loan loss reserves by analyzing probable loss scenarios and economic and geopolitical factors that impact the portfolios. See pages 14 - 15 and pages 49 - 54 for an additional discussion of the reserve levels and credit process. See also Note 11 to Notes to Consolidated Financial Statements.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.4 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of approximately $100 million.
The Transportation Finance business is part of the Company's Global Consumer Retail Banking business and provides financing, leasing, and asset-based lending to the commercial trucking industry.
Reserve for the Securities and Exchange Commission's Transfer Agent Investigation
During the 2004 fourth quarter, the Company recorded a $131 million after-tax reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, which, combined with a $20 million after-tax reserve taken in the 2004 third quarter, fully covers the financial terms that the SEC staff has agreed to recommend to the Commission for resolution of this matter. See "Legal Proceedings" on page 141.
Shutdown of the Private Bank in Japan and Related Charge and Other Activities in Japan
The Financial Services Agency of Japan issued an administrative order against Citibank Japan in September 2004. This order requires Citigroup to exit all private banking operations in Japan by September 30, 2005. Accordingly, the Private Bank division of Citibank Japan suspended all new transactions with its customers beginning on September 29, 2004.
In connection with the exiting of private banking operations in Japan, the Company is performing a comprehensive review of the Private Bank's customers and products to develop an appropriate exit plan. During the 2004 fourth quarter, the Company recorded a $400 million ($244 million after-tax) charge related to its anticipated exit plan implementation (Exit Plan Charge). Implementation of the plan may result in additional charges in future periods.
The Company's Private Bank operations in Japan had total revenues, net of interest expense, of $200 million and net income of $39 million (excluding the Exit Plan Charge) for 2004 and $264 million and $83 million, respectively, for 2003.
On October 25, 2004, Citigroup announced that it has decided to wind down Cititrust and Banking Corporation, a licensed trust bank in Japan, after concluding that there were internal control, compliance and governance issues in that subsidiary.
Acquisition of First American Bank
On August 24, 2004, Citigroup announced it will acquire First American Bank in Texas (FAB). The closing of the transaction is subject to and pending applicable regulatory approvals. The transaction will establish Citigroup's retail branch presence in Texas, giving Citigroup more than 100 branches, $3.5 billion in assets and approximately 120,000 new customers in the state.CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all of the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total, Citigroup has acquired 99.8%99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition KorAm iswas a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion.
During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Citicorp Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Citicorp's Electronic Financial Services Inc. (EFS) for $390 million (pretax).million. EFS is a provider of government-issued benefitsbenefit payments and prepaid stored valuestored-value cards used by state and federal government agencies, as well as of stored valuestored-value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. CiticorpCitigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
2005 Subsequent Event11
Sale of Travelers Life & Annuity and Substantially All International Insurance Businesses
On January 31, 2005, the Company announced an agreement for the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife) for $11.5 billion, subject to closing adjustments.
The businesses being acquired by MetLife generated total revenues of $5.2 billion and net income of $901 million for the twelve months ended December 31, 2004. The businesses had total assets of $96 billion at December 31, 2004.
The transaction has been approved by the Boards of Directors of both companies. Under the terms of the transaction, Citigroup will receive $1.0 billion to $3.0 billion in MetLife equity securities and the balance in cash, which will result in an after-tax gain of approximately $2.0 billion, subject to closing adjustments.
The transaction sharpens the Company's focus on its long-term growth franchises. The sale proceeds will be deployed to higher return and higher growth opportunities and to maximize returns to shareholders.
The transaction encompasses Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life business in Mexico. International operations include wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China.
In connection with the transaction, Citigroup and MetLife have entered into ten-year agreements under which MetLife will make products available through certain Citigroup distribution channels.
The transaction is subject to certain domestic and international regulatory approvals, as well as other customary conditions to closing, and is expected to close during the 2005 second or third quarter.
Argentina
The restructuring of customer annuity liabilities was approved by the Argentine Ministry of Insurance on July 3, 2003. During the 2003 fourth quarter, the Company contributed $55 million of new capital to its Argentine Global Investment Management companies, primarily to fund the voluntary annuity restructuring plan. During 2004, additional capital totaling $184 million was injected principally to meet local regulatory requirements.
The insurance companies in Argentina are included in the announced sale of Travelers Life and Annuity disclosed above which was announced by the Company on January 31, 2005.
The Argentine government launched its $100 billion debt exchange offer on January 14, 2005. The exchange offer is expected to close on February 25, 2005. The Global Investment Management business in Argentina tendered all of its original U.S. dollar bonds (approximately $1.6 billion of AUMs). The Company tendered the defaulted government bonds it held for its own account on February 18, 2005. At this time, any financial impact resulting from the tender is not expected to be significant to the Company.
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 Argentina. However, the amount of any recovery would be affected by the debt exchange described above and by events described on page 11.
Certain of the above statements in this section are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.
Events inEVENTS IN 2003
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears), the eighth largest credit card portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of Sears are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of Home Depot are included in the Consolidated Financial Statements from July 2003 forward.
Common Stock Dividend Increase
On July 14, 2003, the Company's Board of Directors approved a 75% increase in the quarterly dividend on the Company's common stock to 35 cents a share from 20 cents a share. On January 20, 2004, the Company increased its quarterly dividend by 14% by declaring a 40 cent dividend on its common stock.
Settlement of Certain Legal and Regulatory Matters
On July 28, 2003, Citigroup entered into finalfinancial settlement agreements with the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank of New York (FED), and the Manhattan District Attorney's Office that resolved on a civil basis their investigations into Citigroup's structured finance work for Enron. The Company also announced that its settlement agreement with the SEC concluded that agency's investigation into certain Citigroup work for Dynegy. The agreements were reached by Citigroup (and, in the case of the agreement with the OCC, Citibank, N.A.) without admitting or denying any wrongdoing or liability, and the agreements do not establish wrongdoing or liability for the purpose of civil litigation or any other proceeding. Citigroup paid from previously established reserves an aggregate amount of $145.5 million in connection with these settlements.
On April 28, 2003, Salomon Smith Barney Inc., now named Citigroup Global Markets Inc. (CGMI), announced final agreements with the SEC, the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and the New York Attorney General (as lead state among the 50 states, the District of Columbia and Puerto Rico) to resolve on a civil basis all of their outstanding investigations into its research and IPO allocation and distribution practices (the Research Settlement). CGMI reached these final settlement agreements without admitting or denying any wrongdoing or liability. The Research Settlement does not establish wrongdoing or liability for purposes of any other proceeding. Citigroup paid from previously established reserves an aggregate amount of $300 million and committed to spend an additional $75 million to provide independent third-party research at no charge to clients in connection with these settlements.12
Impact from Argentina's Economic Changes
As a result of an improving credit environment, the Global Consumer allowance for credit losses was reduced by $100 million in 2003 and $39 million in 2004 and the Global Corporate and Investment Bank reduced allowance for credit losses by approximately $164 million in 2004.
In 2003, the Company wrote off $127 million of its government-issued compensation notes against previously established reserves. This write-off was triggered by, among other things, the government's disallowance of compensation for pesification of certain credit card and overdraft loans. While the notes were adjusted, the disallowance is still being negotiated. The initial payment of approximately $57 million due under the compensation notes was received in August 2003. Additional payments under the compensation notes totaling $119 million and $61 million were received when due in 2004 and February 2005, respectively. In 2003, the Company also recognized a $13 million impairment charge on its government Patriotic Bonds. Payments required under bank deposit Amparos (judicial orders requiring previously dollar-denominated deposits that had been re-denominated at government rates to be immediately repaid at market exchange rates) were down significantly from 2002; losses recorded in 2003, net of the $40 million reserve release, were $2 million; and losses recorded in 2004, net of a $6 million reserve release, were $25 million.
The Global Investment Management businesses in Argentina recorded pretax charges of $208 million in 2003. These charges were comprised of: $124 million in write-downs resulting from the mandatory exchange of Argentine Government Promissory Notes (GPNs) for Argentine government bonds denominated in U.S. dollars; a $44 million write-off of impaired Deferred Acquisition Costs reflecting changes in underlying cash flow estimates for the business; $20 million of losses related to the restructuring of voluntary customer annuity liability balances; and $20 million of losses related to a premium deficiency in the death and disability insurance business. Additional write-offs of impaired Deferred Acquisition Costs of $11 million were taken in 2004.
Events in 2002
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.
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 provided that, in any fiscal year in which TPC records asbestos-related income statement charges in excess of $150 million, net of any reinsurance, Citigroup would 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. During 2002 and 2003, $159 million and $361 million, respectively, were paid pursuant to this agreement.
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 and subsequent merger of TPC and the St. Paul Companies (St. Paul Travelers) on April 1, 2004, Citigroup remains a holder of approximately 6.0% 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 Balance Sheet.
Following the August 20, 2002 distribution, the results of TPC were reported by the Company separately as discontinued operations for all periods. TPC represented the primary vehicle by which Citigroup engaged in the property and casualty insurance business.
Charge for Regulatory and Legal Matters
During the 2002 fourth quarter, the Company recorded a $1.3 billion after-tax charge ($0.25 per diluted share) related to the establishment of reserves for regulatory settlements and related civil litigation.
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. 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. The Company recognized $20 million in both 2004 and 2003 of the deferred portion of the gain and $5 million in 2002.
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Notes to the Consolidated Financial Statements on page 108, contain a summary of Citigroup'sthe Company's significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of theseThese policies, as well as estimates made by management, are considered to be importantintegral to the portrayalpresentation of the Company's financial condition, sincecondition. It is important to note that they require management to make difficult, complex or subjective judgments and estimates, some of which may relate toat times, regarding matters that are inherently uncertain. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. 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, the related estimates and judgments that Management has made with the Audit and Risk Management Committee of the Board of Directors.Statements on page 108.
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 73.95.
Valuations of Financial Instruments
Investments and trading account assets and liabilities, held by the Global Corporate and Investment Bank, Global Investment Management and Proprietary Investment Activities segments, includeThe Company holds fixed maturityincome and equity securities, derivatives, investments in private equity and other financial instruments. Citigroup carriesThe Company holds its investments and trading account assets and liabilities at fair value if they are consideredon the balance sheet to be available-for-sale ormeet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading securities. For a substantial majorityand private equity investing.
Substantially all of the Company's 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, including global and regional conditions, and conditions 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 investmentsreflected at fair value with changes in value recognized in earnings.
If available, quoted market prices provide the best indication of fair 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 who 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. For derivative transactions, trading profit at inception is recognized when 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. The Company defers trade-date gains or losses on derivative transactions where the fair value is not determined based upon observable market transactions and market data. The deferral is recognized in income when the market data become observable or over the life of the transaction. Changes in assumptions could affect the fairbalance sheet. Fair values of investments and trading account assets and liabilities.
For our available-for-sale and trading portfolios amounting to assets of $489.5 billion and $414.5 billion and liabilities of $135.5 billion and $121.9 billion at December 31, 2004 and 2003, respectively, fair values wereare determined in the following ways: externally
At December 31, 20042005 and 2003,2004, respectively, approximately 96.2%94.5% and 96.5%96.2% of the available-for-sale and trading portfolios' gross assets and liabilities (prior to netting positions pursuant to FIN 39) are considered verified and approximately 3.8%5.5% and 3.5%3.8% are considered unverified. Of the unverified assets, at December 31, 20042005 and 2003,2004, respectively, approximately 66.4%60.6% and 66.0%66.4% consist of cash products, where independent quotes were not available and/or alternative procedures were not feasible, and 33.6%39.4% and 34.0%33.6% consist 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 determiningChanges in the fair values of our securities portfolios, management also reviews the length of time trading positions have been held to identify aged inventory. During 2004, the monthly average aged inventory designated as available-for-immediate-sale was approximately $7.6 billion compared with $5.4 billion in 2003. Inventory positions that are both aged and whose values are unverified amounted to $2.9 billion and less than $2.1 billion at December 31, 2004 and 2003, respectively. 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, 2004 and 2003, such valuation adjustments amounted to $83 million and $68 million, respectively.
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 $3.8 billion and $4.4 billion at December 31, 2004 and 2003, respectively. For investments in publicly traded securities held by private equity subsidiaries amounting to five positions with a fair value of approximately $0.4 billion and five positions with a fair value of approximately $0.9 billion at December 31, 2004 and 2003, respectively, fair value is 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 discounted to produce an estimate of the attainable fair value for the securities. To determine the amount of the discount, the Company uses a valuation methodology that is based on the British Venture Capital Association's guidelines. Such discounts ranged from 10% to 40% of the investments' quoted prices in 2004 and from 10% to 50% in 2003. For investments that are not publicly traded and are held by private equity subsidiaries amounting to approximately $3.5 billion for each of the years ended December 31, 2004 and 2003, 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 flow through the income statement. Changes in the valuation of available-for-sale assets generally flow through other comprehensive income, which is a component of equity on the balance sheet. A full description of the Company's related policies and investmentsprocedures can be found in Summary of Significant Accounting Policies in NoteNotes 1, 5 and 8 to the Consolidated Financial Statements. For additional information regarding the sensitivity of these instruments, see "Market Risk Management Process"Statements on page 55.pages 108, 121, and 125, respectively.
Allowance for Credit Losses
The allowanceManagement provides reserves for credit losses represents management'san 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 impactfunded loan portfolio on the credit costs in any quarter and could result in a changebalance sheet in the allowance. At December 31, 2004 and 2003, respectively, the totalform of an allowance for credit losses, which includeslosses. In addition, management has established and maintained reserves for the potential losses related to the Company's off-balance sheet exposures of unfunded lending commitments, andincluding standby letters of credit totaled $3.490 billion and $4.155 billion forguarantees. These reserves are established in accordance with Citigroup's Loan Loss Reserve Policies, as approved by the Corporate loan portfolioCompany's Board of Directors. Under these policies, the Company's Senior Risk Officer and $8.379 billion and $9.088 billion forChief Financial Officer review the Consumer loan portfolio. Attributionadequacy of the allowancecredit loss reserves each quarter with representatives from Risk Management and Financial Control for each applicable business area.
During these reviews, these above-mentioned representatives covering the business area having classifiably-managed portfolios (that is, madeportfolios where internal credit-risk ratings are assigned, which are primarily Corporate and Investment Banking, Global Consumer's commercial lending businesses, and Global Wealth Management) present recommended reserve balances for analytic purposes only,their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data includes:
During 2004, Corporate cash-basis loans decreased $1.513 billion from $3.419 billion in 2003 to $1.906 billion, and net credit losses decreased from $1.211 billion in 2003 to $130 million, reflecting overall improvement in the credit quality of the portfolio. The Company also completed the implementation of Citigroup's internal credit risk-rating standards for the Banamex loan portfolio. All of these factors resulted in a decline in the Corporate allowance, with the release during 2004 of $900 million in reserves. Although the 2004 credit environment led to benefits from loan loss releases and declines in cash-basis loans, it is unlikely these benefits will repeat in 2005.
Consumer net credit losses increased from $7.555 billion in 2003 to $8.471 billion in 2004. This increase was due to the net credit losses related to the Sears and Home Depot portfolios, which were acquired during 2003. Excluding these two portfolios, the Consumer net credit losses declined from $7.176 billion in 2003 to $5.985 billion in 2004. In addition, Consumer loans on which accrual of interest has been suspended decreased from $6.085 billion to $5.463 billion. The improvement in the overall credit performance of the Consumer portfolio resulted in a decrease of the Consumer allowance, with the net release during 2004 of $1.104 billion in reserves.
Consumer credit loss ratios for 2005 are expected to remain relatively constant to the fourth quarter 2004 levels, with some slight improvement in the North America Cards and Consumer Finance portfolios. Full-year loss ratios for 2005 are expected to improve against prior-year levels due to credit loss rates that declined during 2004.
The allowance for credit losses attributed to the Corporate portfolio is established through a process that begins with statistical estimates of probable losses inherent in theclassifiably-managed portfolio for all performing loans plus certainand de minimis non-performing loans less than $10 million. These estimates arenonperforming exposures
The statistical estimate for losses inherent in the portfolio is based on historical average default rates and historical average write-off rates. The one-standard-deviation confidence interval reflects
Next, larger-balance, non-performing, 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. For these loans, which are deemed impaired, reserves are then calculated based upon an estimate of probable losses. Consideration is given to 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 less disposal costs.
The sum of the estimated losses inherent in the total portfolio and the reserves(ii) adjustments made for significant individual non-performing credit exposures are then adjusted by management after consideringspecifically known items, such as current environmental factors and trends in portfolio indicators, including cash-basis loans, historical and forecasted write-offs, and portfolio concentrations.credit trends.
In addition, management considers the currentrepresentatives from Risk Management and Financial Control that cover business strategy and credit process, including credit limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.
A similar approach is used for determining the credit loss reserve related to unfunded lending commitments and letters of credit.
Based on this process, the allowance for credit losses attributable to the Corporate portfolio was set at $3.490 billion as of December 31, 2004, compared with $4.155 billion in 2003. These balances include the reserve for unfunded commitments and letters of credit of $600 million for both 2004 and 2003,areas which are included in other liabilities on the balance sheet.
For the Consumerhave delinquency-managed portfolios (excluding Commercial Business and KorAm), which consist of smaller-balance,containing smaller homogeneous loans including consumer mortgages, installment loans, and revolving credit cards, the loans within each portfolio are collectively evaluated for impairment in order to provide an allowance sufficient to cover all loans within that portfolio 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 methodology that estimates the losses inherent in the portfolio at the balance sheet date(primarily Global Consumer's non-commercial lending areas) present their recommended reserve
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balances based onupon historical delinquency flow rates, charge-off statistics and loss severity. This methodology is applied separately for each individual product within each different geographic region in which the product is offered.
Under this 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 result is a base calculation of inherent losses in the loan portfoliothese portfolios exist. Adjustments are also made for each applicable business within the Global Consumer segment. Management then evaluates the adequacy of the allowance for credit losses for each business relative to its base calculation after adjusting this base for factorsspecifically known items, such as economic trends, competitive factors, seasonality, portfolio acquisitions, solicitation of new loans, changes in lending policies and procedures, geographical, product, and otherchanging regulations, current environmental factors changes in bankruptcy laws, and evolving regulatory standards.credit trends.
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 periodThis evaluation process is subject to periodnumerous estimates and in compliance with the Federal Financial Institutions Examination Council (FFIEC) guidelines (excluding recent acquisitions for which we obtained temporary waivers), including bankruptcy loss recognition.judgments. 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 sharefrequency of bankruptcy losses would generally result in a corresponding increase in net credit losses. For example, a 10% increase in the Company's portion of bankruptcy losses would generally result in a similar increase in net 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 comprises the flow rate acceleration.
For the Commercial Business loan portfolio within Consumer, a statistical model, similar to the one used for the Corporate portfolio, was implemented in 2004 for evaluating the adequacy of the allowance for credit losses. Larger-balance, non-performing, non-homogeneous exposures deemed impaired are evaluated individually while the remaining Commercial Business loan portfolio is evaluated statistically by using internal creditdefault, risk ratings, loss recovery rates, the size and historical defaultdiversity of individual large credits, and loss data. Like the Corporate loan portfolio model, this estimate may be adjusted by management after considering other factors such as the portfolio trends and relevant economic indicators.
Prior to 2004, the credit loss allowance for the Commercial Business portfolio was 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 were established to provide for imprecision caused by the use of estimated loss data.
Based on these methodologies, the allowance for credit losses related to the Consumer portfolios (including Commercial Business) was set at $8.379 billion and $9.088 billion as of December 31, 2004 and 2003, respectively.
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.
Seeservicing, among other things, are all taken into account during this review. Changes in these estimates could have a direct impact on the discussionscredit costs in any quarter and could result in a change in the allowance. Changes to the reserve flow through the income statement on the lines "provision for loan losses" and "provision for unfunded lending commitments." For a further description of "Consumer Credit Risk"the loan loss reserve and "Corporate Credit Risk"related accounts, see Notes 1 and 12 to the Consolidated Financial Statements on pages 49108 and 51, respectively, for additional information.128, respectively.
Securitizations
Securitization isThe Company securitizes a processnumber of different asset classes as a means of strengthening its balance sheet and to access competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by which a legal entity issues certain securitiesthe trust to investors, which securities pay a return based on the principal and interestaccess financing. The cash flows from a poolassets in the trust service the corresponding trust securities. If the structure of loans or otherthe trust meets stringent accounting guidelines, trust assets are treated as sold and no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company's assets, with the financing activity recorded as liabilities on Citigroup's balance sheet. The Financial Accounting Standards Board (FASB) is currently working on amendments to the accounting standards governing asset transfers, securitization accounting, and fair value of financial assets. Citigroup securitizes credit card receivables, mortgages, and other loans that it originated and/or purchased and certain other financial assets. After securitizationinstruments. Upon completion of credit card receivables,these standards the Company continueswill need to maintain account relationships with customers. Citigroup alsore-evaluate its accounting and disclosures. Due to the FASB's ongoing deliberations, the Company is unable to accurately determine the effect of future amendments at this time.
The Company assists its clients in securitizing the clients'their financial assets and also packages and securitizes financial assets purchased in the financial markets. CitigroupThe Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities, and may continue to service thethese financial assets sold to the securitization entity.assets.
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 Balance Sheet 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 Balance Sheet. The second key determination to be made is whether the securitization entity must be consolidated by 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. In January 2003, the Financial Accounting Standards Board (FASB) issued a new interpretation on consolidation accounting that was adopted by the Company on July 1, 2003. Under this interpretation, FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), if securitization entities other than QSPEs meet the definition of a variable interest entity (VIE), the Company must evaluate whether it is the primary beneficiary of the entity and, if so, must consolidate it. The entity would be considered a VIE if it requires additional subordinated financial support or if the equity investors lack certain characteristics of a controlling financial interest. In December 2003, FASB issued a revised version of FIN 46 (FIN 46-R), which the Company implemented in January 2004. This revision included substantial changes from the original FIN 46, including changes in the calculation of the expected losses and expected residual returns. Its impact on the Company's Financial Statements was an increase to assets and liabilities of approximately $1.6 billion. However, mostA complete description of the Company's securitization transactions continued to meet the criteriaaccounting for sale accounting and non-consolidation.
The Company participates in securitization transactions, structured investment vehicles, and other investment funds with its own and with clients'securitized assets totaling $1,698.3 billion at December 31, 2004 and $1,158.7 billion at December 31, 2003.
Global Consumer primarily uses QSPEs to conduct its securitization activities, including credit card receivables, mortgage loans, student loans and auto loans. Securitizations completed by Global Consumer are for the Company's own account. 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, 2004 and 2003,
respectively, Global Consumer was involved with special-purpose entities (SPEs) with assets of $399.0 billion and $251.3 billion, including QSPEs with assets of $377.7 billion and $226.4 billion.
GCIB's securitization activities are conducted on behalf of the Company's clients and 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. Many of the mortgage-backed securities transactions use QSPEs, as do certain CDOs and structured financing transactions. At December 31, 2004 and 2003, respectively, GCIB was involved with SPEs with assets of $988.9 billion and $614.9 billion, including QSPEs with assets amounting to $594.3 billion and $427.5 billion.
Global Investment Management uses SPEs to create investment opportunities for clients through mutual and money market funds, unit investment trusts, and hedge funds, substantially all of which were not consolidated by the Company at December 31, 2004 and 2003. At December 31, 2004 and 2003, respectively, Global Investment Management was involved with SPEs with assets of $252.5 billion and $231.6 billion.
Global Wealth Management uses SPEs to structure investment vehicles in order to provide clients with investment alternatives and capital market solutions, substantially all of which were consolidated by the Company at December 31, 2004 and 2003. At December 31, 2004 and 2003, respectively, Global Wealth Management was involved with SPEs with assets of $3.5 billion and $4.5 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 and alternative investment structures. At December 31, 2004 and 2003, respectively, Proprietary Investment Activities was involved with SPEs with assets of $54.4 billion and $56.4 billion.
VIEs with total assets of approximately $35.6 billion and $36.9 billion were consolidated at December 31, 2004 and 2003, respectively. Additional information on the Company's securitization activities and VIEs can be found in "Off-Balance Sheet Arrangements" on page 7089 and in Note 12Notes 1 and 13 to the Consolidated Financial Statements.Statements on pages 108 and 128, respectively.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant Governmentalgovernmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.
Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.
The Company reviews these balances quarterly and as new information becomes available, the balances are adjusted, as appropriate.
SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the 2004 fourth quarter, the U.S. Congress passed and the President signed into law a new tax bill, "The American Jobs Creation Act of 2004." The Homeland Investment Act (HIA) provision of the American Jobs Creation Act of 2004 is intended to provide companies with a one-time 85% reduction in the U.S. net tax liability on cash dividends paid by foreign subsidiaries in 2005, to the extent that they exceed a baseline level of dividends paid in prior years. The provisions of the Act are complicated, and companies, including Citigroup, are awaiting clarification of several provisions from the Treasury Department. The Company is still evaluating the provision and the effects it would have on the financing of the Company's foreign operations. In accordance with FASB Staff Position FAS No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" (FSP FAS 109-2), the Company hasdid not recognizedrecognize any income tax effects of the repatriation provisions of the Act in its 2004 financial statements and will not do so untilstatements. In 2005, the above issues are resolved, sometime in 2005. The reasonably possible amounts that may be repatriated in 2005 that would be subject toCompany's results from continuing operations included a $198 million tax benefit from the HIA provision of the Act, range from $0 to $3.2 billion. The related potential income tax effect range from a tax benefit of $0 to a tax benefit of $50 million, under current law. There is a Technical Corrections Bill pending in the U.S. Congress that would amend the computation of the HIA benefit. If this bill is enacted, the range of potential tax benefits would be from a benefit of $0 to a benefit of $150 million, net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas.
See Note 1816 to Notes tothe Consolidated Financial Statements on page 139 for a further description of the Company's provision for Income Taxes and related income tax assets and liabilities.
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Legal Reserves
The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker/dealer or investment advisor. Reserves are established for legal and regulatory claims based upon the probability and estimability of losses and to fairly present, in conjunction with the disclosures of these matters in the Company's financial statements and SEC filings, management's view of the Company's exposure. The Company reviews outstanding claims with internal as well as external counsel to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available and reserves are adjusted, as appropriate. The actual cost of resolving a claim may be substantially higher, or lower, than the amount of the recorded reserve. See Note 2826 to the Consolidated Financial Statements on page 158 and the discussion of "Legal Proceedings" beginning on page 141.175.
ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDSAccounting Changes and Future Application of Accounting Standards
See Note 1 to the Consolidated Financial Statements on page 108 for a discussion of Accounting Changes and the Future Application of Accounting Standards.
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PENSIONSEGMENT, PRODUCT AND POSTRETIREMENT PLANS
The Company has several non-contributory defined benefit pension plans covering substantially all U.S. employees and has various defined benefit pension and termination indemnity plans covering employees outside the United States. The U.S.-defined benefit plan provides benefits under a cash balance formula. Employees satisfying certain age and service requirements remain covered by a prior final pay formula. The Company also offers postretirement health care and life insurance benefits to certain eligible U.S. retired employees, as well as to certain eligible employees outside the United States.
The following table shows the pension expense and contributions for Citigroup's U.S. and foreign plans:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||
| In Millions of Dollars | |||||||||||||||||
Pension Expense | $ | 196 | $ | 101 | $ | 24 | $ | 185 | $ | 158 | $ | 133 | ||||||
Company contributions(1)(2) | 400 | 500 | 500 | 524 | 279 | 695 |
Citigroup common stock comprised 1.2%, 6.45%, and 7.87% of the U.S. plan's assets at December 31, 2004, 2003, and 2002, respectively. The Citigroup U.S. Pension Plan sold approximately $500 million of Citigroup common stock in January of 2004.
The following table shows the combined postretirement expense and contributions for Citigroup's U.S. and foreign plans:
| U.S. & Non-U.S. Plans | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||
| In millions of dollars | ||||||||
Postretirement expense | $ | 75 | $ | 97 | $ | 105 | |||
Company Contributions | 216 | 166 | 226 |
All U.S. qualified plans and the funded foreign plans are generally funded to the amounts of the accumulated benefit obligations. Net pension expense for the year ended December 31, 2005 for the U.S. plans is expected to increase by approximately $30 million primarily as a result of lower discount rates. Net pension expense for the years ended December 31, 2004 and 2003 for the U.S. plans increased by $95 million and $77 million, respectively, as a result of the amortization of unrecognized net actuarial losses, lower discount rates, a lower expected return on assets assumption beginning in 2003, and for 2004, an updated mortality table. 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 73.
Expected Rate of Return
Citigroup determines its assumptions for the expected rate of return on plan assets for its U.S. pension and postretirement 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, 2004 and 2003, reflecting the performance of the equity markets. The computation of pension expense for 2004 includes $750 million of expected returns, which represents the 8.0% expected return and is equivalent to 3% of pretax earnings. This expected amount is deducted from the service cost, interest and other components of pension expense to arrive at the net pension expense. Net pension expense for 2003 and 2002 reflects deductions of $700 million and $783 million of expected returns, respectively.
The following table shows the expected versus actual rate of return on plan assets for the U.S. pension and postretirement plans:
| 2004 | 2003 | 2002 | ||||
---|---|---|---|---|---|---|---|
Expected Rate of Return(1) | 8.0 | % | 8.0 | % | 8.0 | % | |
Actual Rate of Return | 11.5 | % | 24.2 | % | (7.0 | )% |
In calculating pension expense for the U.S. plan and in determining the expected rate of return, the Company uses the calculated market-related value of plan assets. The year-end allocations are within the plans' target ranges.
The following table shows the asset allocations for the U.S. plan:
As of December 31 | 2004 | 2003 | |||
---|---|---|---|---|---|
Equities | 47 | % | 54 | % | |
Fixed income | 29 | % | 26 | % | |
Real estate and other | 24 | % | 20 | % |
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 3.25% to 10% for 2004 compared with a range of 3.25% to 10.5% for 2003, and 3.0% to 12.0% in 2002. 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 a combination of 97% fixed income to 3% equities and other investments to a combination of 78% equities and 12% fixed income and other investments at December 31, 2004, compared with an asset allocation range from 100% fixed income investments to a combination of 91% equities and 9% fixed income and other investments at December 31, 2003, and 100% fixed income to a combination of 75% equities and 25% fixed income and other investments at December 31, 2002. Pension expense for 2004 was reduced by $251 million due to the expected return, which impacted pretax earnings by 1%. Actual returns in 2004 were more than the expected returns. Pension expense for 2003 and 2002 was reduced by expected returns of $209 million and $188 million, respectively. Actual returns were higher in 2003 and were lower in 2002 than the expected returns in those years.
A one percentage-point change in the expected rates of return would have the following effects on pension expense:
| One percentage-point increase | One percentage-point decrease | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||
| In millions of dollars | |||||||||||||||||
Effect on pension expense for U.S. plans | $ | (94 | ) | $ | (88 | ) | $ | (85 | ) | $ | 94 | $ | 88 | $ | 85 | |||
Effect on pension expense for foreign plans | (118 | ) | (24 | ) | (21 | ) | 118 | 24 | 21 |
Discount Rate
The discount rates for the U.S. pension and postretirement plans were selected by reference to the Moody's Aa Long-Term Corporate Bond Yield in conjunction with a Citigroup-specific analysis using each plans' specific cash flows to confirm that the Moody's Aa index provided a good basis for selection of the discount rates. Under the analysis, the resulting plan-specific discount rates for the pension and postretirement plans were 5.76% and 5.36%, respectively. Citigroup's policy is to round up to the nearest quarter percent. Accordingly, at December 31, 2004, the Moody's Aa Long-Term Corporate Bond Yield was 5.66% and the discount rate was set at 5.75% for the pension plan and 5.50% for the postretirement plan. At December 31, 2003, the Moody's Aa Long-Term Corporate Bond Yield was 6.01% and the discount rate was set at 6.25% for both the pension and postretirement plans. At December 31, 2002, the Moody's Aa Long-Term Corporate Bond Yield was 6.52% and the discount rate was set at 6.75% for both the pension and postretirement plans.
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, 2004, the discount rates for the foreign plans ranged from 2.0% to 10.0% compared with a range of 2.0% to 10.0% at December 31, 2003, and 2.25% to 12.0% at December 31, 2002.
A one percentage-point change in the discount rates would have the following effects on pension expense:
| One percentage-point increase | One percentage-point decrease | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||
| In millions of dollars | |||||||||||||||||
Effect on pension expense for U.S. plans | $ | (140 | ) | $ | (52 | ) | $ | (5 | ) | $ | 140 | $ | 120 | $ | 70 | |||
Effect on pension expense for foreign plans | (260 | ) | (43 | ) | (41 | ) | 306 | 53 | 46 |
BUSINESS FOCUSREGIONAL NET INCOME
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
| | 2004 | 2003(1) | 2002(1) | | 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars | |||||||||||||||||||||||
Global Consumer | Global Consumer | Global Consumer | |||||||||||||||||||||||||
Cards | $ | 4,700 | $ | 3,590 | $ | 3,043 | U.S. Cards | $ | 2,754 | $ | 3,562 | $ | 2,854 | (23 | )% | 25 | % | ||||||||||
Consumer Finance | 2,388 | 1,979 | 2,258 | U.S. Retail Distribution | 1,752 | 2,019 | 1,707 | (13 | ) | 18 | |||||||||||||||||
Retail Banking | 4,628 | 4,046 | 2,897 | U.S. Consumer Lending | 1,938 | 1,664 | 1,636 | 16 | 2 | ||||||||||||||||||
Other(2) | 95 | (124 | ) | (154 | ) | U.S. Commercial Business | 729 | 765 | 525 | (5 | ) | 46 | |||||||||||||||
Total Global Consumer | 11,811 | 9,491 | 8,044 | Total U.S. Consumer(2) | $ | 7,173 | $ | 8,010 | $ | 6,722 | (10 | )% | 19 | % | |||||||||||||
Global Corporate and Investment Bank | |||||||||||||||||||||||||||
International Cards | $ | 1,373 | $ | 1,137 | $ | 725 | 21 | % | 57 | % | |||||||||||||||||
International Consumer Finance | 642 | 586 | 579 | 10 | 1 | ||||||||||||||||||||||
International Retail Banking | 2,083 | 2,157 | 1,752 | (3 | ) | 23 | |||||||||||||||||||||
Total International Consumer | $ | 4,098 | $ | 3,880 | $ | 3,056 | 6 | % | 27 | % | |||||||||||||||||
Other(3) | $ | (374 | ) | $ | 97 | $ | (113 | ) | NM | NM | |||||||||||||||||
Total Global Consumer | $ | 10,897 | $ | 11,987 | $ | 9,665 | (9 | )% | 24 | % | |||||||||||||||||
Corporate and Investment Banking | Corporate and Investment Banking | ||||||||||||||||||||||||||
Capital Markets and Banking | 5,395 | 4,642 | 3,995 | Capital Markets and Banking | $ | 5,327 | $ | 5,395 | $ | 4,642 | (1 | )% | 16 | % | |||||||||||||
Transaction Services | 1,041 | 745 | 569 | Transaction Services | 1,135 | 1,045 | 748 | 9 | 40 | ||||||||||||||||||
Other(3)(4) | (4,398 | ) | (16 | ) | (1,392 | ) | Other(4)(5) | 433 | (4,398 | ) | (16 | ) | NM | NM | |||||||||||||
Total Global Corporate and Investment Bank | 2,038 | 5,371 | 3,172 | Total Corporate and Investment Banking | $ | 6,895 | $ | 2,042 | $ | 5,374 | NM | (62 | )% | ||||||||||||||
Global Wealth Management | Global Wealth Management | Global Wealth Management | |||||||||||||||||||||||||
Smith Barney | 881 | 792 | 821 | Smith Barney | $ | 871 | $ | 891 | $ | 795 | (2 | )% | 12 | % | |||||||||||||
Private Bank(5) | 318 | 551 | 461 | Private Bank(6) | 373 | 318 | 551 | 17 | (42 | ) | |||||||||||||||||
Total Global Wealth Management | 1,199 | 1,343 | 1,282 | Total Global Wealth Management | $ | 1,244 | $ | 1,209 | $ | 1,346 | 3 | % | (10 | )% | |||||||||||||
Global Investment Management | |||||||||||||||||||||||||||
Alternative Investments | Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | ||||||||||||||||
Corporate/Other | Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | |||||||||||||||||||
Life Insurance and Annuities | 1,073 | 792 | 642 | ||||||||||||||||||||||||
Asset Management | 238 | 324 | 351 | ||||||||||||||||||||||||
Total Global Investment Management | 1,311 | 1,116 | 993 | ||||||||||||||||||||||||
Proprietary Investment Activities | 743 | 366 | (50 | ) | |||||||||||||||||||||||
Corporate/Other | (56 | ) | 166 | 7 | |||||||||||||||||||||||
Income from Continuing Operations | Income from Continuing Operations | 17,046 | 17,853 | 13,448 | Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | ||||||||||||
Income from Discontinued Operations(6) | — | — | 1,875 | ||||||||||||||||||||||||
Cumulative Effect of Accounting Change(7) | — | — | (47 | ) | |||||||||||||||||||||||
Income from Discontinued Operations(7) | Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | |||||||||||||||||||||
Cumulative Effect of Accounting Change(8) | Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||||||||||||
Total Net Income | Total Net Income | $ | 17,046 | $ | 17,853 | $ | 15,276 | Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | |||||||||
16
Citigroup Net Income—Regional View
| | 2004 | 2003(1) | 2002(1) | | 2005 | 2004(1) | 2003(1) | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars | ||||||||||||||||||||||||
North America (excluding Mexico)(2) | ||||||||||||||||||||||||||||
Consumer | $ | 7,726 | $ | 6,605 | $ | 5,478 | ||||||||||||||||||||||
U.S.(2) | U.S.(2) | |||||||||||||||||||||||||||
Corporate(3)(4) | (2,190 | ) | 2,542 | 1,011 | Global Consumer | $ | 6,799 | $ | 7,729 | $ | 6,609 | (12 | )% | 17 | % | |||||||||||||
Wealth Management | 1,169 | 1,073 | 1,071 | Corporate and Investment Banking(3)(4) | 2,950 | (2,190 | ) | 2,540 | NM | NM | ||||||||||||||||||
Investment Management | 1,015 | 1,052 | 849 | Global Wealth Management | 1,141 | 1,179 | 1,076 | (3 | ) | 10 | ||||||||||||||||||
Total North America | 7,720 | 11,272 | 8,409 | TotalU.S. | $ | 10,890 | $ | 6,718 | $ | 10,225 | 62 | % | (34 | )% | ||||||||||||||
Mexico | Mexico | Mexico | ||||||||||||||||||||||||||
Consumer | 827 | 624 | 336 | Global Consumer | $ | 1,432 | $ | 978 | $ | 785 | 46 | % | 25 | % | ||||||||||||||
Corporate | 659 | 407 | 423 | Corporate and Investment Banking | 450 | 659 | 407 | (32 | ) | 62 | ||||||||||||||||||
Wealth Management | 52 | 41 | 20 | Global Wealth Management | 44 | 52 | 41 | (15 | ) | 27 | ||||||||||||||||||
Investment Management | 153 | 162 | 110 | |||||||||||||||||||||||||
TotalMexico | $ | 1,926 | $ | 1,689 | $ | 1,233 | 14 | % | 37 | % | ||||||||||||||||||
Total Mexico | 1,691 | 1,234 | 889 | |||||||||||||||||||||||||
Latin America | Latin America | |||||||||||||||||||||||||||
Global Consumer | $ | 236 | $ | 296 | $ | 197 | (20 | )% | 50 | % | ||||||||||||||||||
Europe, Middle East and Africa (EMEA) | ||||||||||||||||||||||||||||
Consumer(5) | 1,183 | 684 | 655 | Corporate and Investment Banking | 619 | 813 | 566 | (24 | ) | 44 | ||||||||||||||||||
Global Wealth Management | 17 | 43 | 44 | (60 | ) | (2 | ) | |||||||||||||||||||||
TotalLatin America | $ | 872 | $ | 1,152 | $ | 807 | (24 | )% | 43 | % | ||||||||||||||||||
EMEA | EMEA | |||||||||||||||||||||||||||
Corporate(5) | 1,132 | 919 | 755 | Global Consumer(5) | $ | 374 | $ | 1,180 | $ | 680 | (68 | )% | 74 | % | ||||||||||||||
Wealth Management | 15 | (16 | ) | 8 | Corporate and Investment Banking(5) | 1,130 | 1,136 | 924 | (1 | ) | 23 | |||||||||||||||||
Investment Management | 7 | 20 | 11 | Global Wealth Management | 8 | 15 | (16 | ) | (47 | ) | NM | |||||||||||||||||
Total EMEA | 2,337 | 1,607 | 1,429 | TotalEMEA | $ | 1,512 | $ | 2,331 | $ | 1,588 | (35 | )% | 47 | % | ||||||||||||||
Japan | Japan | Japan | ||||||||||||||||||||||||||
Consumer | 616 | 583 | 1,031 | Global Consumer | $ | 706 | $ | 616 | $ | 583 | 15 | % | 6 | % | ||||||||||||||
Corporate | 334 | 162 | 124 | Corporate and Investment Banking | 498 | 334 | 162 | 49 | NM | |||||||||||||||||||
Wealth Management(6) | (205 | ) | 83 | 60 | Global Wealth Management(6) | (82 | ) | (205 | ) | 83 | 60 | NM | ||||||||||||||||
Investment Management | 24 | 5 | (4 | ) | ||||||||||||||||||||||||
TotalJapan | $ | 1,122 | $ | 745 | $ | 828 | 51 | % | (10 | )% | ||||||||||||||||||
Total Japan | 769 | 833 | 1,211 | |||||||||||||||||||||||||
Asia (excluding Japan) | ||||||||||||||||||||||||||||
Asia | Asia | |||||||||||||||||||||||||||
Consumer | 1,187 | 811 | 690 | Global Consumer | $ | 1,350 | $ | 1,188 | $ | 811 | 14 | % | 46 | % | ||||||||||||||
Corporate | 1,290 | 775 | 728 | Corporate and Investment Banking | 1,248 | 1,290 | 775 | (3 | ) | 66 | ||||||||||||||||||
Wealth Management | 125 | 118 | 92 | Global Wealth Management | 116 | 125 | 118 | (7 | ) | 6 | ||||||||||||||||||
Investment Management | 37 | 50 | 21 | |||||||||||||||||||||||||
TotalAsia | $ | 2,714 | $ | 2,603 | $ | 1,704 | 4 | % | 53 | % | ||||||||||||||||||
Total Asia | 2,639 | 1,754 | 1,531 | |||||||||||||||||||||||||
Alternative Investments | Alternative Investments | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | |||||||||||||||||
Corporate/Other | Corporate/Other | (667 | ) | 48 | 271 | NM | (82 | ) | ||||||||||||||||||||
Latin America | ||||||||||||||||||||||||||||
Consumer | 272 | 184 | (146 | ) | ||||||||||||||||||||||||
Corporate | 813 | 566 | 131 | |||||||||||||||||||||||||
Wealth Management | 43 | 44 | 31 | |||||||||||||||||||||||||
Investment Management | 75 | (173 | ) | 6 | ||||||||||||||||||||||||
Total Latin America | 1,203 | 621 | 22 | |||||||||||||||||||||||||
Proprietary Investment Activities | 743 | 366 | (50 | ) | ||||||||||||||||||||||||
Corporate /Other | (56 | ) | 166 | 7 | ||||||||||||||||||||||||
Income from Continuing Operations | Income from Continuing Operations | 17,046 | 17,853 | 13,448 | Income from Continuing Operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | 23 | % | (6 | )% | |||||||||||||
Income from Discontinued Operations(7) | Income from Discontinued Operations(7) | — | — | 1,875 | Income from Discontinued Operations(7) | 4,832 | 992 | 795 | NM | 25 | ||||||||||||||||||
Cumulative Effect of Accounting Change(8) | Cumulative Effect of Accounting Change(8) | — | — | (47 | ) | Cumulative Effect of Accounting Change(8) | (49 | ) | — | — | — | — | ||||||||||||||||
Total Net Income | Total Net Income | $ | 17,046 | $ | 17,853 | $ | 15,276 | Total Net Income | $ | 24,589 | $ | 17,046 | $ | 17,853 | 44 | % | (5 | )% | ||||||||||
17
Selected Revenue and Expense ItemsSELECTED REVENUE AND EXPENSE ITEMS
Revenues
Net interest revenue was $44.6$39.3 billion in 2004, up $4.82005, down $2.3 billion, or 12%6%, from 2003, which2004. This, in turn, was up $2.1$4.3 billion, or 6%12%, from 2002, reflecting2003. Increases in business volumes during 2005 were more than offset by spread compression, as the positive impactCompany's cost of a changing rate environment, business volume growth in most markets through organic growth combined withfunding increased more significantly than the impact of acquisitionsrates on interest-bearing assets. Rates on the Company's interest-earning assets were impacted during the year.year by competitive pricing (particularly inU.S. Cards andCapital Markets and Banking), as well as business mix shifts.
Total commissions, asset management and administration fees, and other fee revenues of $23.6$23.3 billion were up $1.6$1.8 billion, or 7%8%, in 2005. The 2004 amount of $21.5 billion was up $1.3 billion, or 6%, from 2003. The 2005 increase primarily reflectingreflected improved global equity markets, higher transactional volume and continued strong investment banking results. Insurance premiums of $4.0$3.1 billion in 20042005 were up 7%$406 million, or 15%, from year-ago levels2004 and up $339$271 million, or 11%, in 20032004 compared to 2002.2003. The 20042005 increase primarily represents higher business volumes compared to the prior year.volumes.
Principal transactions revenues of $3.8$6.4 billion decreased $1.4increased $2.7 billion, or 27%73%, from 2004, primarily reflecting record revenues in the fixed income and equity markets. Principal transactions revenue in 2004 decreased $1.2 billion, or 24%, from 2003, primarily reflecting decreases in Global Fixed Incomedecreased fixed income markets revenues related to fluctuation of interest rates andrate fluctuations, positioning and lower volatility in the market, partially offset by fluctuating foreign exchange rates.volatility.
Realized gains/(losses)gains from sales of investments of $831 million$2.0 billion in 20042005 were up $321 million$1.1 billion from 2003,2004, which was up $995$304 million from 2002.2003. The increase from 20032004 is primarily attributable to the absencegain of prior-year losses related to$386 million (pretax) on the write-downsale of Argentina government promissory notesNikko Cordial stock and gains in Treasury and Fixed Income Management Account Portfolios.sales of St. Paul Travelers shares over the course of the year.
Other revenue of $9.4$9.5 billion in 20042005 increased $3.1 billion$322 million from 2003,2004, which was up $533 million$3.0 billion from 2002.2003. The increase from 2004 is related to securitization and hedging gains and activity. The increase from 2003 primarily reflected the $1.2 billion gain on the sale of Samba, increased securitization gains and activities and improved investment results. The 2003 increase includes improved securitization gains and activities and stronger Private Equity results.
Operating Expenses
Operating expenses grew $12.8decreased $4.6 billion, or 33%9%, to $52.0$45.2 billion in 2004,2005, and increased $1.9$12.3 billion, or 5%33%, from 20022003 to 2003. Expense growth during 2004 was2004. The expense fluctuations were primarily related to the reserve charges taken in 2004 (a $7.9 billion pretax reserve for the WorldCom and Litigation Reserve Charge taken in the second quarter of 2004 and thea $400 million Private Bank Japan Exit Plan Charge). Expenses in 2005 reflect a $600 million release from the WorldCom and Litigation Reserve Charge. OtherPartially offsetting the absence of these items was increased expenses included investments made relatingrelated to the acquisitions of Sears, KorAm, WMF and Principal Residential Mortgage during the year, increasedhigher incentive compensation due to(driven by increased revenue, increased marketing and advertising expensesrevenue), and higher pension and insurance expenses. The increase in 2003 included investments made relating to acquisitions during the year, increased spending on sales force, marketing
Provisions for Credit Losses and advertisingfor Benefits and new business initiatives to support organic growth, higher pension and insurance costs, the cost of expensing options and higher deferred acquisition costs.
Benefits, Claims and Credit Losses
Benefits, claims, and Total provisions for credit losses and for benefits and claims were $10.0$9.0 billion, $11.9$7.1 billion and $13.5$8.9 billion in 2005, 2004 and 2003, and 2002, respectively. The 2004 charge was down $1.9 billion from 2003, which was down $1.6 billion from 2002. Policyholder benefits and claims in 20042005 decreased $94$17 million, or 2%, from 2003, primarily as a result of the absence of the pension close-out contract inLife Insurance and Annuities. The 2003 charge was up $417 million from 2002.2004. The provision for credit losses decreased $1.8increased $1.9 billion, or 23%31%, from 20032004 to $6.2$8.2 billion in 2004, reflecting continued improvement in credit quality in both consumer and corporate businesses, partially offset by the impact of acquisitions. There was a $1.9 billion decrease from 2003 to 2002 due to the improvement in the global credit environment.2005.
Global Consumer provisions for loan losses and for policyholder benefits and claims and credit losses of $7.9$9.1 billion in 20042005 were down $112up $966 million, or 1%12% from 2003,2004, reflecting decreasesincreases inInternational Retail Banking,U.S. Retail Distribution, International Cards, andConsumer FinanceU.S. Commercial Business, partially offset by increasesdecreases inU.S. Cards, International Consumer Finance andU.S. Consumer Lending. Total netNet credit losses (excluding Commercial Business) were $8.257$8.683 billion, and the related loss ratio was 2.31%2.01% in 2004,2005, as compared to $7.093$8.471 billion and 2.38%2.13% in 20032004 and $6.740$7.555 billion and 2.67%2.22% in 2002. The consumer loan delinquency ratio (90 days or more past due) decreased to 2.02% at December 31, 2004 from 2.42% at December 31, 2003 and 2.40% at December 31, 2002. See page 47 for a reconciliation of total consumer credit information.2003.
The GCIBCIB provision for credit losses in 2005 increased $933 million from 2004, which decreased $1.7 billion from 2003, which decreased $1.5 billion2003. The increase in the 2005 balance is primarily due to an increase in expected losses resulting from 2002. The decrease reflects this year's continually improvingan increase in off-balance sheet exposure and related credit environment.
quality. Corporate cash-basis loans at December 31, 2005, 2004 and 2003 and 2002 were $1.004 billion, $1.906 billion and $3.419 billion, and $3.995 billion, respectively. The decrease in cash-basis loans from 2003 reflects improved credit quality, write-offs against previously established reserves, as well as repayments. Corporate cash-basis loans at December 31, 2003 decreased $0.6 billion from December 31, 2002 primarily due to the improving credit environment.
Income Taxes
The Company's effective tax rate on continuing operations of 28.6%30.8% in 2005 increased from 28.4% in 2004. The 2005 tax provision on continuing operations included a $198 million benefit from the Homeland Investment Act provision of the American Jobs Creation Act of 2004, decreased 255 basis points from 2003,net of the impact of remitting income earned in 2005 and prior years that would otherwise have been indefinitely invested overseas, and a $65 million release due to the resolution of an audit. The 2004 tax provision on continuing operations included a $234 million benefit for the release of a valuation allowance relating to the utilization of foreign tax credits and the releases of $150 million and $147 million due to the closing of tax audits and a $47 million tax benefit due to an IRS tax ruling relating to Argentina.audits. The 20042005 effective tax rate was also reducedincreased from 20032004 because of the impact of indefinitely invested international earnings and other items on the lower level of pretax earnings in 2004 due to the impact of the WorldCom and Litigation Reserve Charge. The Company's effective tax rate on continuing operations was 31.1% in 2003 and 34.1% in 2002.2003. See additional discussion on page 1614 and in Note 1816 to the Consolidated Financial Statements.Statements on page 139.
The net income line in the following business segment and operating unit discussions excludes the cumulative effect of accounting change and income from discontinued operations. The cumulative effect of accounting change and income from discontinued operations isare disclosed within the Corporate/Other business segment. See Notes 1 and 3 to the Consolidated Financial Statements.
Statements on pages 108 and 119, respectively. Certain amounts in prior years have been reclassified to conform to the current year's presentation. Business segment and product reclassifications include the implementation of the Company's Risk Capital Methodology and allocation across its products and segments.
18
GLOBAL CONSUMER
GLOBAL CONSUMER—2004 NET INCOME
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2002 | $ | 8.0 | |
2003 | $ | 9.5 | |
2004 | $ | 11.8 |
GLOBAL CONSUMER—2004 NET INCOME BY PRODUCT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Global Consumer Net Income In billions of dollars | Global Consumer 2005 Net Income by Product* | Global Consumer 2005 Net Income by Region* | ||
---|---|---|---|---|
*Excludes Other Consumer | ||||
Citigroup's Global Consumer incomeGroup provides a wide array of $95banking, lending, insurance and investment services through a network of 7,237 branches, 6,920 ATMs, 682 Automated Lending Machines (ALMs), the Internet, telephone and mail, and the Primerica Financial Services salesforce. Global Consumer serves more than 200 million
GLOBAL CONSUMER—2004 NET INCOME BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 47,267 | $ | 40,970 | $ | 37,659 | |||
Operating expenses | 21,924 | 18,836 | 16,743 | ||||||
Provisions for benefits, claims, and credit losses | 7,926 | 8,038 | 8,459 | ||||||
Income before taxes and minority interest | 17,417 | 14,096 | 12,457 | ||||||
Income taxes | 5,547 | 4,554 | 4,373 | ||||||
Minority interest, after-tax | 59 | 51 | 40 | ||||||
Net income | $ | 11,811 | $ | 9,491 | $ | 8,044 | |||
Average risk capital(1) | $ | 22,200 | $ | 20,441 | |||||
Return on risk capital(1) | 53 | % | 46 | % | |||||
Return on invested capital(1) | 22 | % | 21 | % | |||||
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||
Revenues, net of interest expense | $ | 48,245 | $ | 47,887 | $ | 41,501 | 1 | % | 15 | % | ||||
Operating expenses | 23,318 | 22,151 | 19,051 | 5 | 16 | |||||||||
Provisions for loan losses and for benefits and claims | 9,063 | 8,097 | 8,182 | 12 | (1 | ) | ||||||||
Income before taxes and minority interest | $ | 15,864 | $ | 17,639 | $ | 14,268 | (10 | )% | 24 | % | ||||
Income taxes | 4,904 | 5,592 | 4,551 | (12 | ) | 23 | ||||||||
Minority interest, net of taxes | 63 | 60 | 52 | 5 | 15 | |||||||||
Net income | $ | 10,897 | $ | 11,987 | $ | 9,665 | (9 | )% | 24 | % | ||||
Average assets(in billions of dollars) | $ | 533 | $ | 487 | $ | 422 | 10 | % | 15 | % | ||||
Return on assets | 2.04 | % | 2.46 | % | 2.29 | % | ||||||||
Average risk capital(1) | $ | 26,857 | $ | 22,816 | $ | 21,066 | 18 | % | 8 | % | ||||
Return on risk capital(1) | 41 | % | 53 | % | 46 | % | ||||||||
Return on invested capital(1) | 18 | % | 22 | % | ||||||||||
19
GlobalU.S. CONSUMER
U.S. Consumer Net Income In billions of dollars | U.S. Consumer 2005 Net Income by Product | U.S. Consumer Average Loans In billions of dollars | ||
---|---|---|---|---|
U.S. Consumer is composed of four businesses:Cards, Retail Distribution, Consumer Lending reportedandCommercial Business.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||
Revenues, net of interest expense | $ | 30,107 | $ | 30,907 | $ | 27,287 | (3 | )% | 13 | % | ||||
Operating expenses | 13,449 | 13,214 | 11,158 | 2 | 18 | |||||||||
Provisions for loan losses and for benefits and claims | 5,600 | 5,444 | 5,628 | 3 | (3 | ) | ||||||||
Income before taxes and minority interest | $ | 11,058 | $ | 12,249 | $ | 10,501 | (10 | )% | 17 | % | ||||
Income taxes | 3,823 | 4,181 | 3,730 | (9 | ) | 12 | ||||||||
Minority interest, net of taxes | 62 | 58 | 49 | 7 | 18 | |||||||||
Net income | $ | 7,173 | $ | 8,010 | $ | 6,722 | (10 | )% | 19 | % | ||||
Average assets(in billions of dollars) | $ | 357 | $ | 327 | $ | 281 | 9 | % | 16 | % | ||||
Return on assets | 2.01 | % | 2.45 | % | 2.39 | % | ||||||||
Average risk capital(1) | $ | 13,843 | $ | 11,507 | $ | 9,818 | 20 | % | 17 | % | ||||
Return on risk capital(1) | 52 | % | 70 | % | 68 | % | ||||||||
Return on invested capital(1) | 21 | % | 25 | % | ||||||||||
20
U.S. Cards
U.S. Cards Net Income In billions of dollars | U.S. Cards Average Managed Loans In billions of dollars | U.S. Cards Managed Net Credit Losses In millions of dollars | ||
---|---|---|---|---|
U.S. Cards is the largest provider of credit cards in North America, with more than 130 million customer accounts in the United States, Canada and Puerto Rico. In addition to MasterCard (including Diners), Visa, and American Express,U.S. Cards is the largest provider of credit card services to the oil and gas industry and the leading provider of consumer private-label credit cards and commercial accounts on behalf of merchants such as The Home Depot, Sears, Federated, Dell Computer, Radio Shack, Staples and Zale Corporation.
Revenues are primarily generated from net incomeinterest revenue on receivables, interchange fees on purchase sales and other delinquency or services fees.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||
Revenues, net of interest expense | $ | 12,824 | $ | 14,207 | $ | 11,380 | (10 | )% | 25 | % | ||||
Operating expenses | 6,002 | 5,920 | 4,520 | 1 | 31 | |||||||||
Provision for loan losses | 2,567 | 2,887 | 2,400 | (11 | ) | 20 | ||||||||
Income before taxes and minority interest | $ | 4,255 | $ | 5,400 | $ | 4,460 | (21 | )% | 21 | % | ||||
Income taxes and minority interest, net of taxes | 1,501 | 1,838 | 1,606 | (18 | ) | 14 | ||||||||
Net income | $ | 2,754 | $ | 3,562 | $ | 2,854 | (23 | )% | 25 | % | ||||
Average assets (in billions of dollars) | $ | 66 | $ | 74 | $ | 52 | (11 | )% | 42 | % | ||||
Return on assets | 4.17 | % | 4.81 | % | 5.49 | % | ||||||||
Average risk capital(1) | $ | 5,774 | $ | 4,125 | $ | 3,295 | 40 | % | 25 | % | ||||
Return on risk capital(1) | 48 | % | 86 | % | 87 | % | ||||||||
Return on invested capital(1) | 20 | % | 28 | % | ||||||||||
Key indicators — on a managed basis: (in billions of dollars) | ||||||||||||||
Return on managed assets | 1.90 | % | 2.41 | % | 2.33 | % | ||||||||
Purchase sales | $ | 278.2 | $ | 257.0 | $ | 236.9 | 8 | % | 8 | % | ||||
Managed average yield(2) | 13.75 | % | 13.53 | % | 12.17 | % | ||||||||
Managed net interest margin(2) | 10.85 | % | 11.76 | % | 10.91 | % |
21
2005 vs. 2004
Revenues, net of interest expense, declined as the positive impact of 8% growth in purchase sales and the addition of the Federated portfolio in the 2005 fourth quarter was more than offset by a $545 million charge to conform accounting practices for customer rewards, net interest margin compression, lower fee revenues due to the impact of increased bankruptcy filings due to a change in law that became effective on October 17, 2005, and the impact of Hurricane Katrina. Net interest margin contracted as pricing actions in floating rate products were offset by higher cost of funds; higher payment rates resulting from the overall improved economy and a customer shift to real-estate-secured lending, which led to lower loan balances; an increased proportion of transactional activity; and a mix shift in the private label business to lower rate products.
Operating expenses remained essentially unchanged, primarily reflecting the addition of the Federated portfolio and repositioning expenses of $19 million taken in the 2005 first quarter. This was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns, as the Company invested significant resources in 2004 up $2.320 billionin the "Live Richly" and "Identity Theft" media campaigns.
Provision for loan losses declined, due to a $789 million, or 24%22%, decline in net credit losses, due to the positive credit environment and improvements in the Sears portfolio, partially offset by lower credit reserve releases in 2005 of $170 million, versus $639 million in 2004.
2004 vs. 2003
Revenues, net of interest expense, increased due to the impact of the Sears and Home Depot acquisitions, higher net interest revenue, and the benefit of increased purchase sales. The positive revenue drivers were partially offset by higher payment rates resulting from 2003,the overall improved economy.
Operating expenses increased, due primarily to the full-year impact of the Home Depot and Sears acquisitions and increased advertising and marketing expenses, including the "Live Richly" and "Identity Theft" media campaigns.
Provision for loan losses increased primarily due to the full-year impact of acquisitions and increased presence in the private label market. This was partially offset by the significantly improved credit environment, which led to loan loss reserve releases of $639 million during 2004.
22
U.S. Retail Distribution Net Income In billions of dollars | U.S. Retail Distribution 2005 Net Income by Distribution Channel | U.S. Retail Distribution Branches At December 31 | ||
U.S. Retail Distributionprovides banking, lending, investment and insurance products and services to customers through 896 Citibank branches, 2,277 CitiFinancial branches, the Primerica Financial Services (PFS) salesforce, the Internet, direct mail and telesales. Revenues are primarily derived from net interest revenue on loans and deposits, and fees on banking, insurance and investment products.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by business: | |||||||||||||||
Citibank branches | $ | 3,103 | $ | 3,065 | $ | 2,959 | 1 | % | 4 | % | |||||
CitiFinancial branches | 4,190 | 4,139 | 3,534 | 1 | 17 | ||||||||||
Primerica Financial Services | 2,222 | 2,141 | 2,088 | 4 | 3 | ||||||||||
Revenues, net of interest expense | $ | 9,515 | $ | 9,345 | $ | 8,581 | 2 | % | 9 | % | |||||
Operating expenses | 4,407 | 4,358 | 4,045 | 1 | 8 | ||||||||||
Provisions for loan losses and for benefits and claims | 2,410 | 2,017 | 1,908 | 19 | 6 | ||||||||||
Income before taxes and minority interest | $ | 2,698 | $ | 2,970 | $ | 2,628 | (9 | )% | 13 | % | |||||
Income taxes | 946 | 951 | 919 | (1 | ) | 3 | |||||||||
Minority interest, net of taxes | — | — | 2 | — | (100 | ) | |||||||||
Net income | $ | 1,752 | $ | 2,019 | $ | 1,707 | (13 | )% | 18 | % | |||||
Net income by business: | |||||||||||||||
Citibank branches | $ | 506 | $ | 515 | $ | 486 | (2 | )% | 6 | % | |||||
CitiFinancial branches | 696 | 960 | 675 | (28 | ) | 42 | |||||||||
Primerica Financial Services | 550 | 544 | 546 | 1 | — | ||||||||||
Net income | $ | 1,752 | $ | 2,019 | $ | 1,707 | (13 | )% | 18 | % | |||||
Average assets (in billions of dollars) | $ | 64 | $ | 60 | $ | 53 | 7 | % | 13 | % | |||||
Return on assets | 2.74 | % | 3.37 | % | 3.22 | % | |||||||||
Average risk capital(1) | $ | 2,977 | $ | 2,717 | $ | 2,286 | 10 | 19 | |||||||
Return on risk capital(1) | 59 | % | 74 | % | 75 | % | |||||||||
Return on invested capital(1) | 16 | % | 20 | % | |||||||||||
Key indicators:(in billions of dollars) | |||||||||||||||
Average loans | $ | 40.4 | $ | 37.8 | $ | 32.7 | 7 | % | 16 | % | |||||
Average deposits | 119.8 | 115.6 | 112.7 | 4 | 3 | ||||||||||
EOP Investment AUMs | 72.6 | 68.5 | 62.0 | 6 | 10 | ||||||||||
23
2005 vs. 2004
Revenues, net of interest expense, increased primarily due to loan and deposit growth, increased investment product sales, and the impact of the FAB acquisition, which were partially offset by a decrease in net interest margin. Net interest margin declined as increased short-term funding rates more than offset an increase in asset yields. Revenues also included a $110 million gain relating to the resolution of the Glendale litigation in the 2005 first quarter and a $20 million charge in the 2005 fourth quarter to conform accounting practices for customer rewards.
Operating expensegrowth was primarily due to higher volume-related expenses, increased investment spending driven by double-digit branch expansion, and the impact of the FAB acquisition.
Provision for loan losses and for benefits and claimsincreased due to an increase in bankruptcy filings from a change in law that became effective on October 17, 2005. This led to an approximately $93 million increase in net credit losses and a $42 million increase in loan loss reserves. In addition, the Company increased loan loss reserves by $110 million for the impact of Hurricane Katrina. Also, the reorganization of the formerConsumer Financebusiness into components of the currentU.S. Retail DistributionandU.S. Consumer Lendingbusinesses, resulted in a reallocation of loan loss reserves betweenU.S. Retail DistributionandU.S. Consumer Lending.CitiFinancial Branches increased loan loss reserves by $165 million, reflecting an increase in reserves for bankruptcy coverage in Personal Loans, while Real Estate Lending and Auto (both now inU.S. Consumer Lending) had corresponding loan loss reserve releases of $76 million and $89 million, respectively. Excluding the impact of increased bankruptcy filings and Hurricane Katrina, overall credit conditions remained favorable in 2005.
Depositgrowth reflected an increase in demand balances and rate-sensitive money market balances, as well as the impact of the FAB acquisition.Loangrowth reflected improvements in all channels and products from home equity and personal loans to increased volumes in the PFS channel.Investment product salesincreased 9% driven by increased volumes.
2004 vs. 2003
Revenues, net of interest expense, increased primarily due to strong loan and deposit growth in the Citibank and CitiFinancial Branches businesses, increased life insurance and investment fee revenues in Primerica Financial Services, and the impact of the WMF acquisition. This was partially offset by lower net funding spreads in the Citibank Branches business and lower loan volumes and higher capital funding costs in Primerica Financial Services.
Operating expensegrowth was primarily due to higher volume-related expenses, increased investment spending driven by branch expansion, and the impact of the WMF acquisition.
Provision for credit loan losses and for benefits and claimsincreased due to increased net credit losses in the CitiFinancial Branches business, primarily tied to increased volumes and the impact of the WMF acquisition, and lower loan loss reserve releases. Overall credit conditions remained favorable in 2004.
Depositgrowth reflected an increase in higher-margin demand deposits and money market accounts, which was only partially offset by a decline in time deposits.Loangrowth was primarily attributable to the impact of the WMF acquisition.
24
U.S. Consumer Lending
U.S. Consumer Lending Net Income In billions of dollars | U.S. Consumer Lending 2005 Net Income by Product | U.S. Consumer Lending Average Loans In billions of dollars | ||
U.S. Consumer Lendingprovides home mortgages and home equity loans to prime and non-prime customers, auto financing to non-prime consumers and educational loans to students. Loans are originated throughout the United States and Canada through the Citibank, CitiFinancial andSmith Barneybranch networks, Primerica Financial Services agents, third-party brokers, direct mail, the Internet and telesales. Loans are also purchased in the wholesale markets.U.S. Consumer Lendingalso provides mortgage servicing to a portfolio of mortgage loans owned by third parties. Revenues are composed of loan fees, net interest revenue and mortgage servicing fees.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by business: | |||||||||||||||
Real Estate Lending | $ | 3,558 | $ | 3,196 | $ | 3,594 | 11 | % | (11 | )% | |||||
Student Loans | 652 | 612 | 487 | 7 | 26 | ||||||||||
Auto | 1,259 | 1,253 | 1,217 | — | 3 | ||||||||||
Revenues, net of interest expense | $ | 5,469 | $ | 5,061 | $ | 5,298 | 8 | % | (4 | )% | |||||
Operating expenses | 1,700 | 1,629 | 1,651 | 4 | (1 | ) | |||||||||
Provisions for loan losses and for benefits and claims | 614 | 658 | 944 | (7 | ) | (30 | ) | ||||||||
Income before taxes and minority interest | $ | 3,155 | $ | 2,774 | $ | 2,703 | 14 | % | 3 | % | |||||
Income taxes | 1,155 | 1,052 | 1,022 | 10 | 3 | ||||||||||
Minority interest, net of taxes | 62 | 58 | 45 | 7 | 29 | ||||||||||
Net income | $ | 1,938 | $ | 1,664 | $ | 1,636 | 16 | % | 2 | % | |||||
Net income by business: | |||||||||||||||
Real Estate Lending | $ | 1,378 | $ | 1,180 | $ | 1,268 | 17 | % | (7 | )% | |||||
Student Loans | 234 | 227 | 179 | 3 | 27 | ||||||||||
Auto | 326 | 257 | 189 | 27 | 36 | ||||||||||
Net income | $ | 1,938 | $ | 1,664 | $ | 1,636 | 16 | % | 2 | % | |||||
Average assets (in billions of dollars) | $ | 189 | $ | 156 | $ | 136 | 21 | % | 15 | % | |||||
Return on assets | 1.03 | % | 1.07 | % | 1.20 | % | |||||||||
Average risk capital(1) | $ | 3,280 | $ | 2,689 | $ | 2,137 | 22 | 26 | |||||||
Return on risk capital(1) | 59 | % | 62 | % | 76 | % | |||||||||
Return on invested capital(1) | 34 | % | 30 | % | |||||||||||
Key indicators:(in billions of dollars) | |||||||||||||||
Net interest margin:(2) | |||||||||||||||
Real Estate Lending | 2.46 | % | 2.92 | % | 3.46 | % | |||||||||
Student Loans | 1.96 | 2.64 | 2.33 | ||||||||||||
Auto | 10.52 | 11.72 | 12.93 | ||||||||||||
Originations: | |||||||||||||||
Real Estate Lending | $ | 131.9 | $ | 115.3 | $ | 120.3 | 14 | % | (4 | )% | |||||
Student Loans | 10.8 | 7.8 | 6.8 | 38 | 15 | ||||||||||
Auto | 6.4 | 5.3 | 4.8 | 21 | 10 | ||||||||||
25
2005 vs. 2004
Revenues, net of interest expense, increased due to volume growth in all products, improved net servicing revenues, higher securitization and portfolio sales gains, and the benefit of the Principal Residential Mortgage, Inc. (PRMI) acquisition, partially offset by lower net interest revenue due to spread compression. The increase in net revenues was driven by the absence of a loss in the prior year due to servicing hedge ineffectiveness caused by the volatile rate environment. Average loan growth reflected a 16% increase in originations across all productsbusinesses.
Operating expensesincreased primarily due to higher volumes and the impact of the PRMI acquisition.
Provisions for loan losses and for benefits and claimsdecreased due to lower net credit losses of $136 million, primarily in the Auto and Real Estate Lending businesses, partially offset by lower loan loss reserve releases of $91 million. The lower loan loss reserve releases reflected a $378$110 million after-taxreserve build related to the estimated impact of Hurricane Katrina in the 2005 third quarter, partially offset by reserve releases of $89 million in Auto and $76 million in Real Estate Lending related to the reorganization of theU.S. Consumer Financebusinesses. The continued favorable credit environment drove a decline in the net credit loss ratio.
A 20% increase in prime mortgage originations and home equity loans drove loan growth. Non-prime mortgage originations declined 20%, reflecting the company's decision to avoid offering teaser rate and interest-only mortgages to lower FICO score customers.
2004 vs. 2003
Revenues, net of interest expense, decreased mainly due to lower securitization revenues and lower net servicing revenues. Lower hedge-related revenues, due to higher hedging costs and the impact of losses on mortgage servicing hedge ineffectiveness, resulting from the volatile rate environment, drove the decline in net servicing revenues. These declines were partially offset by the impact of higher loan volumes driven by growth in originations, and the PRMI acquisition.
Operating expenseswere down due to lower expenses in the Real Estate Lending and Auto businesses which were partially offset by a volume-driven increase in expenses in the Student Loans business.
Provisions for loan losses and for benefits and claimsdecreased due to $155 million of loan loss reserve releases in 2004, primarily in the Real Estate Lending and Auto businesses, reflecting a favorable credit environment.
26
U.S. Commercial Business
U.S. Commercial Business Net Income In billions of dollars | U.S. Commercial Business Average Loans In billions of dollars | U.S. Commercial Business Total Deposits In billions of dollars at December 31 | ||
U.S. Commercial Businessprovides equipment leasing and financing, banking services to small- and middle-market businesses ($5 million to $500 million in annual revenues) and financing for investor-owned multifamily and commercial properties. Revenues are composed of net interest revenue and fees on loans and leases.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||
Revenues, net of interest expense | $ | 2,299 | $ | 2,294 | $ | 2,028 | — | 13 | % | |||||
Operating expenses | 1,340 | 1,307 | 942 | 3 | % | 39 | ||||||||
Provision for loan losses | 9 | (118 | ) | 376 | NM | NM | ||||||||
Income before taxes and minority interest | $ | 950 | $ | 1,105 | $ | 710 | (14 | )% | 56 | % | ||||
Income taxes | 221 | 340 | 183 | (35 | ) | 86 | ||||||||
Minority interest, net of taxes | — | — | 2 | — | (100 | ) | ||||||||
Net income | $ | 729 | $ | 765 | $ | 525 | (5 | )% | 46 | % | ||||
Average assets(in billions of dollars) | $ | 38 | $ | 37 | $ | 40 | 3 | % | (8 | )% | ||||
Return on assets | 1.92 | % | 2.07 | % | 1.31 | % | ||||||||
Average risk capital(1) | $ | 1,813 | $ | 1,976 | $ | 2,100 | (8 | ) | (6 | ) | ||||
Return on risk capital(1) | 40 | % | 39 | % | 25 | % | ||||||||
Return on invested capital(1) | 27 | % | 27 | % | ||||||||||
Key indicators:(in billions of dollars): | ||||||||||||||
Average earning assets | $ | 33.0 | $ | 33.7 | $ | 36.1 | (2 | )% | (7 | )% | ||||
27
2005 vs. 2004
Revenues, net of interest expense, were essentially flat as growth in core loan and deposit balances, up 13% and 20% respectively, and the impact of the FAB acquisition were more than offset by the impact of spread compression and reduced revenues from sold and liquidating portfolios. Revenues also reflected a $162 million legal settlement benefit related to the purchase of Copelco in the 2005 third quarter, a $161 million gain on the sale of Samba. Cards net income increased $1.110 billion or 31%the CitiCapital Transportation Finance business in 2004 mainly reflecting improved credit costs, including the impact of credit reserve releases, the addition of the Sears, Home Depot and KorAm portfolios, growth in international receivables,2005 first quarter, and the benefitreclassification of certain one-time tax credits.operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense. The reclassification of operating leases increased both revenues and expenses by $123 million.
Retail BankingOperating expenses net income increased $582 million or 14% in 2004 primarily due to the impact of improved credit costs, including the impactoperating lease reclassification from revenue to expense of credit reserve releases, led by the Commercial Business in North America,$123 million and strong international growth led by Asia.Consumer Finance net income increased $409 million or 21% in 2004 primarily due to a higher net interest margin in North America, lower credit costs, the impact of the Washington Mutual Finance (WMF)FAB acquisition, and growth in Latin America and Asia, partially offset by weaknesslower expenses from the sold transportation finance businesses and a $23 million expense benefit related to the Copelco legal settlement.
Provision for loan lossesincreased primarily due to the absence of $216 million in Japanloan loss reserve releases during 2004, partially offset by lower net credit losses due to an improved credit environment and EMEA.the continued liquidation of non-core portfolios.
Net income in 2003 increased $1.447 billion or 18% from 2002, reflecting double-digitDepositand core loan growth inRetail Bankingreflected strong transaction volumes andCards that was primarily driven by balances across all business units and the impact of acquisitions and strong growth in North America including Mexico, Asia and Latin America, and wasthe FAB acquisition, partially offset by declines in Japan,the liquidating portfolio, primarily due to the impact of the sale of the CitiCapital Transportation Finance business.
2004 vs. 2003
Revenues, net of interest expense, increased primarily due to the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense of $403 million from revenue to expense. This was partially offset by the impact of the liquidation of non-core portfolios, including the prior-year sale of the Fleet Services portfolio.
Operating expensesincreased primarily due to the $403 million impact of the operating lease reclassification from revenue to expense, partially offset by lower expenses from the liquidating and sold portfolios.
Provision for loan lossesdecreased as $216 million of loan loss reserves were released during 2004, reflecting the improved credit environment and the continued liquidation of non-core portfolios.
Depositand loan volumes declined, primarily due to the liquidation and sales of non-core portfolios.
28
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 95.
During 2006, theU.S. Consumer businesses will focus on continued expansion of its customer base by opening new branches and offering a more integrated set of products and services. The businesses will also focus on maintaining tight expense control, effective credit management and productivity improvements. Revenues and credit performance will be affected by U.S. economic conditions, including the level of interest rates, bankruptcy filings and unemployment rates.
In 2006, theU.S. Consumer business is expected to operate in a stable to improving economic environment. Net interest revenue pressure is expected to continue due to the flat yield curve and competitive pricing environment but is not expected to be as pressured as in 2005. Bankruptcy filings are expected to decline significantly from 2005 levels. The credit environment is expected to be stable, in line with underlying trends in delinquency experience and a stable to improving economy. Inflation is expected to remain well-contained.
U.S. Cards—In 2006, the competitive environment is expected to remain robust and challenging.U.S. Cards expects to generate earnings growth as managed receivables increase and expenses remain controlled through improved productivity levels and opportunities of scale. Growth in managed receivables will be driven by continued weaknessbrand development, private-label expansion and new product launches. Credit costs will reflect the benefit of lower bankruptcy filings. Credit is expected to be negatively affected by conforming to industry and regulatory guidance regarding minimum payment calculations. This change will result in an increase in delinquencies and credit loss experience, which the business is working to minimize through customer solutions, credit line management, and collection strategies.
U.S. Retail Distribution—In 2006,Consumer Finance.U.S. Retail Distribution
On July 1, 2004, Citigroup acquired Principal Residential Mortgage, Inc. (PRMI),expects to generate increases in loans, deposits and accounts, which will in turn drive earnings growth. The business will significantly expand its footprint with an aggressive program of new branch openings in both the Citibank and CitiFinancial businesses. The challenging interest rate environment is expected to continue, with a servicing portfolio of $115 billion. In the 2004 second quarter, Citigroup completed the acquisition of KorAm, which added $10.0 billioncorresponding shift in deposits to lower-profit time deposits and $12.6 billion in loans, with $11.5 billion inCDs, which will affect both sales and income growth. Credit costs are expected to reflect the benefit of lower bankruptcy filings, while the underlying credit environment is expected to remain stable.
U.S. Consumer Lending—In 2006,Retail BankingU.S. Consumer Lending expects to generate earnings growth across its product lines. In Real Estate Lending, an expected decline in the level of new housing starts and $1.1 billionexisting home sales will be mitigated by an increase in the Retail Distribution network of branches, and higher sales from Primerica agents in theSmith Barney network. Results are also expected to reflect improved portfolio earnings and servicing activities. Loan volume growth is forecast in the Student Loan and Auto businesses.
U.S. Commercial Business—In 2006, earnings growth is expected from continued expansion of the core business portfolio and a stable credit environment.
29
INTERNATIONAL CONSUMER
International Consumer Net Income In billions of dollars | International Consumer 2005 Net Income by Product | International Consumer 2005 Net Income by Region | ||
---|---|---|---|---|
International Consumer is composed of three businesses:Cards, at June 30, 2004. In January 2004, Citigroup completed the acquisition of WMF, which added $3.8 billion in average loans and 427 loan offices. In November 2003, Citigroup completed the acquisition of Sears, which added $15.4 billion of private-label card receivables, $13.2 billion of bankcard receivables and 32 million accounts. In July 2003, Citigroup completed the acquisition of the Home Depot portfolio, which added $6 billion in receivables and 12 million accounts. In July 2003, Citigroup also acquired the remaining stake in Diners Club Europe, adding one million accounts and $0.6 billion of receivables. In November 2002, Citigroup completed the acquisition of GSB, which added $25 billion in deposits and $35 billion in loans, including $33 billion inRetail Banking and $2 billion inConsumer Finance. In February and May 2002, CitiFinancial Japan acquired the consumer finance businesses of Taihei Co., Ltd. (Taihei) and Marufuku Co., Ltd. (Marufuku), adding $1.1 billion in loans. These business acquisitions were accounted for as purchases; therefore, their results are included in the Global Consumer results from the dates of acquisition.
Global Consumer has divested several non-strategic businesses and portfolios as opportunities to exit became available. Certain divestitures include Global Consumer's share of Citigroup's 20% equity investment in Samba and a $900 million vendor finance leasing business in Europe in 2004, the sales of the $1.2 billion Fleet Services portfolio in the North American Commercial Business and of $1.7 billion of credit card portfolios in 2003, and the 2002 sale of the $2.0 billion mortgage portfolio in Japan Retail Banking.
The table below shows net income by region for Global Consumer:
Global Consumer Net Income—Regional View
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
North America (excluding Mexico) | $ | 7,726 | $ | 6,605 | $ | 5,478 | ||||
Mexico | 827 | 624 | 336 | |||||||
EMEA | 1,183 | 684 | 655 | |||||||
Japan | 616 | 583 | 1,031 | |||||||
Asia (excluding Japan) | 1,187 | 811 | 690 | |||||||
Latin America | 272 | 184 | (146 | ) | ||||||
Net income | $ | 11,811 | $ | 9,491 | $ | 8,044 | ||||
The increase in Global Consumer net income in 2004 reflected growth in all regions. North America (excluding Mexico) net income grew $1.121 billion or 17%, primarily reflecting the impact of acquisitions and improved credit, including higher credit reserve releases. Net income in Mexico grew $203 million or 33%, driven by improved customer volumes inCardsFinance andRetail Banking. Net income
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
Mexico | $ | 4,373 | $ | 3,607 | $ | 2,971 | 21 | % | 21 | % | |||||
Latin America | 1,110 | 979 | 864 | 13 | 13 | ||||||||||
EMEA | 5,201 | 4,735 | 3,957 | 10 | 20 | ||||||||||
Japan | 3,251 | 3,290 | 3,374 | (1 | ) | (2 | ) | ||||||||
Asia | 4,461 | 3,813 | 2,941 | 17 | 30 | ||||||||||
Revenues, net of interest expense | $ | 18,396 | $ | 16,424 | $ | 14,107 | 12 | % | 16 | % | |||||
Operating expenses | 9,520 | 8,549 | 7,604 | 11 | 12 | ||||||||||
Provisions for loan losses and for benefits and claims | 3,463 | 2,653 | 2,554 | 31 | 4 | ||||||||||
Income before taxes and minority interest | $ | 5,413 | $ | 5,222 | $ | 3,949 | 4 | % | 32 | % | |||||
Income taxes | 1,314 | 1,340 | 890 | (2 | ) | 51 | |||||||||
Minority interest, net of taxes | 1 | 2 | 3 | (50 | ) | (33 | ) | ||||||||
Net income | $ | 4,098 | $ | 3,880 | $ | 3,056 | 6 | % | 27 | % | |||||
Net income by region | |||||||||||||||
Mexico | $ | 1,432 | $ | 978 | $ | 785 | 46 | % | 25 | % | |||||
Latin America | 236 | 296 | 197 | (20 | ) | 50 | |||||||||
EMEA | 374 | 802 | 680 | (53 | ) | 18 | |||||||||
Japan | 706 | 616 | 583 | 15 | 6 | ||||||||||
Asia | 1,350 | 1,188 | 811 | 14 | 46 | ||||||||||
Net income | $ | 4,098 | $ | 3,880 | $ | 3,056 | 6 | % | 27 | % | |||||
Average assets(in billions of dollars) | $ | 167 | $ | 150 | $ | 129 | 11 | % | 16 | % | |||||
Return on assets | 2.45 | % | 2.59 | % | 2.37 | % | |||||||||
Average risk capital(1) | $ | 13,014 | $ | 11,309 | $ | 11,248 | 15 | % | 1 | % | |||||
Return on risk capital(1) | 31 | % | 34 | % | 27 | % | |||||||||
Return on invested capital(1) | 16 | % | 16 | % | |||||||||||
30
International Cards
International Cards Net Income In billions of dollars | International Cards 2005 Net Income by Region | International Cards Average Loans In billions of dollars | ||
---|---|---|---|---|
International Cards provides MasterCard-, Visa- and Diners-branded credit and charge cards, as well as private label cards and co-branded cards, to more than 26 million customer accounts in EMEA43 countries outside of the U.S. and Canada. Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency or service fees.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
Mexico | $ | 1,311 | $ | 870 | $ | 561 | 51 | % | 55 | % | |||||
Latin America | 297 | 280 | 217 | 6 | 29 | ||||||||||
EMEA | 1,277 | 1,157 | 964 | 10 | 20 | ||||||||||
Japan | 302 | 295 | 259 | 2 | 14 | ||||||||||
Asia | 1,663 | 1,472 | 1,183 | 13 | 24 | ||||||||||
Revenues, net of interest expense | $ | 4,850 | $ | 4,074 | $ | 3,184 | 19 | % | 28 | % | |||||
Operating expenses | 2,371 | 2,131 | 1,674 | 11 | 27 | ||||||||||
Provision for loan losses | 739 | 510 | 536 | 45 | (5 | ) | |||||||||
Income before taxes and minority interest | $ | 1,740 | $ | 1,433 | $ | 974 | 21 | % | 47 | % | |||||
Income taxes | 364 | 293 | 246 | 24 | 19 | ||||||||||
Minority interest, net of taxes | 3 | 3 | 3 | — | — | ||||||||||
Net income | $ | 1,373 | $ | 1,137 | $ | 725 | 21 | % | 57 | % | |||||
Net income by region: | |||||||||||||||
Mexico | $ | 564 | $ | 377 | $ | 228 | 50 | % | 65 | % | |||||
Latin America | 108 | 120 | 97 | (10 | ) | 24 | |||||||||
EMEA | 188 | 164 | 101 | 15 | 62 | ||||||||||
Japan | 75 | 100 | 58 | (25 | ) | 72 | |||||||||
Asia | 438 | 376 | 241 | 16 | 56 | ||||||||||
Net income | $ | 1,373 | $ | 1,137 | $ | 725 | 21 | % | 57 | % | |||||
Average assets(in billions of dollars) | $ | 26 | $ | 21 | $ | 17 | 24 | % | 24 | % | |||||
Return on assets | 5.28 | % | 5.41 | % | 4.26 | % | |||||||||
Average risk capital(1) | $ | 1,794 | $ | 1,240 | $ | 1,080 | 45 | 15 | |||||||
Return on risk capital(1) | 77 | % | 92 | % | 67 | % | |||||||||
Return on invested capital(1) | 34 | % | 34 | % | |||||||||||
Key indicators:(in billions of dollars) | |||||||||||||||
Purchase sales | $ | 68.7 | $ | 59.1 | $ | 45.3 | 16 | % | 30 | % | |||||
Average yield(2) | 17.82 | % | 16.74 | % | 17.16 | % | |||||||||
Net interest margin(2) | 12.34 | % | 12.79 | % | 12.85 | % | |||||||||
31
2005 vs. 2004
Revenues, net of interest expense, increased $499primarily due to growth in purchase sales and average loans, as well as the impact of the KorAm acquisition, a gain on sale of a merchant-acquiring business inEMEA of $95 million, or 73%, primarily reflectingand the $378 millionimpact of foreign currency translation. This was partially offset by the absence of a prior-year gain on the sale of SambaOrbitall (credit card processing company in Brazil) of $42 million. Volume growth was diversified across regions, led byMexico. Net interest spread compression reflected rising funding costs and a primarily fixed rate portfolio.
Operating expenses increased, primarily driven by the impact of higher expansion expenses inAsia andEMEA, integration expenses of CrediCard in the Brazil franchise, the KorAm acquisition, and the impact of foreign currency translations. A VAT refund inMexico during the 2005 third quarter partially offset expense growth.
Provision for loan losses reflected an increase in net credit losses, due primarily to volume growth inMexico, which was partially offset by declines inAsia. During 2005, loan loss reserves increased by $175 million, reflecting portfolio expansion and the absence of prior-year reserve releases of $103 million, recorded mostly inAsia andLatin America.
Mexico income increased due to higher sales volumes and average loans, as well as a tax benefit related to the Homeland Investment Act and the VAT refund.Asia income increased due to strong sales, loan balance increases, and improved net credit loss experience.EMEA income increased primarily due to the gain on the sale of a merchant-acquiring business, partially offset by increased expense related to business expansion and customer acquisition initiatives.Latin America income declined primarily due to the 2004 gain on the sale of Orbitall and the absence of 2004 credit reserve releases.Japan income declined primarily due to tax credits received in 2004.
2004 vs. 2003
Revenues, net of interest expense, increased, reflecting growth in all regions, and included the addition of KorAm and Diners Club Europe, the benefit of foreign currency translation, and the gain on the sale of Orbitall in the 2004 fourth quarter.International Cards sales grew 30%, reflecting growth inAsia,Latin America andJapan, the addition of KorAm, and the benefit of strengthening currencies.Average managed loans benefited from strengthening currencies and organic growth in bothAsia andEMEA, as well as the addition of KorAm, to grow 27%.
Operating expenses increased, reflecting growth in all regions. This included the impact of the Diners Club Europe and KorAm acquisitions, the net effect of foreign currency translation, and increased advertising and marketing expenses.
Provision for loan losses decreased, primarily due to the release of $103 million in credit reserves during 2004 as the credit environment improved. Partially offsetting this release were additional net credit losses primarily due to the acquisitions of KorAm and Diners Club Europe.
32
International Consumer Finance
International Consumer Finance Net Income In billions of dollars | International Consumer Finance 2005 Net Income by Region | International Consumer Finance Average Loans In billions of dollars | ||
---|---|---|---|---|
International Consumer Financeprovides community-based lending services through a branch network, regional sales offices and cross-selling initiatives withInternational CardsandInternational Retail Banking.As of December 31, 2005,International Consumer Financemaintained 2,137 sales points composed of 1,455 branches in more than 25 countries, and 682 Automated Loan Machines (ALMs) inJapan. International Consumer Financeoffers real-estate-secured loans, unsecured or partially secured personal loans, auto loans, and loans to finance consumer-goods purchases. Revenues are primarily derived from net interest revenue and fees on loan products.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
Mexico | $ | 184 | $ | 165 | $ | 150 | 12 | % | 10 | % | |||||
Latin America | 123 | 96 | 84 | 28 | 14 | ||||||||||
EMEA | 743 | 717 | 606 | 4 | 18 | ||||||||||
Japan | 2,475 | 2,526 | 2,664 | (2 | ) | (5 | ) | ||||||||
Asia | 294 | 178 | 107 | 65 | 66 | ||||||||||
Revenues, net of interest expense | $ | 3,819 | $ | 3,682 | $ | 3,611 | 4 | % | 2 | % | |||||
Operating expenses | 1,612 | 1,479 | 1,443 | 9 | 2 | ||||||||||
Provision for loan losses | 1,272 | 1,364 | 1,518 | (7 | ) | (10 | ) | ||||||||
Income before taxes and minority interest | $ | 935 | $ | 839 | $ | 650 | 11 | % | 29 | % | |||||
Income taxes | 293 | 253 | 71 | 16 | NM | ||||||||||
Net income | $ | 642 | $ | 586 | $ | 579 | 10 | % | 1 | % | |||||
Net income by region: | |||||||||||||||
Mexico | $ | 36 | $ | 41 | $ | 37 | (12 | )% | 11 | % | |||||
Latin America | 10 | 28 | 4 | (64 | ) | NM | |||||||||
EMEA | 36 | 126 | 134 | (71 | ) | (6 | ) | ||||||||
Japan | 505 | 362 | 392 | 40 | (8 | ) | |||||||||
Asia | 55 | 29 | 12 | 90 | NM | ||||||||||
Net income | $ | 642 | $ | 586 | $ | 579 | 10 | % | 1 | % | |||||
Average assets (in billions of dollars) | $ | 26 | $ | 26 | $ | 26 | — | — | |||||||
Return on assets | 2.47 | % | 2.25 | % | 2.23 | % | |||||||||
Average risk capital(1) | $ | 918 | $ | 1,003 | $ | 915 | (8 | )% | 10 | % | |||||
Return on risk capital(1) | 70 | % | 58 | % | 63 | % | |||||||||
Return on invested capital(1) | 18 | % | 16 | % | |||||||||||
Key indicators: | |||||||||||||||
Average yield(2) | 18.68 | % | 18.33 | % | 18.75 | % | |||||||||
Net interest margin(2) | 16.48 | % | 16.53 | % | 16.90 | % | |||||||||
Number of sales points: | |||||||||||||||
Other branches | 1,130 | 754 | 540 | ||||||||||||
Japan branches | 325 | 405 | 552 | ||||||||||||
Japan Automated Loan Machines | 682 | 512 | 372 | ||||||||||||
Total | 2,137 | 1,671 | 1,464 | ||||||||||||
NM Not meaningful
33
2005 vs. 2004
Revenues, net of interest expense,increased, driven by growth in all regions exceptJapan,mainly due to higher loan volumes.Japanrevenues declined due to lower personal and real-estate-secured loan balances, partially offset by the impact of foreign currency translation.
Operating expenseincreased, reflecting the impact of investment spending associated with the expansion of 376 branches outside ofJapanand repositioning charges inEMEAduring the 2005 first quarter of $38 million. These were partially offset by declines inJapandue to the closing of branches and the transition to ALMs.
Provision for loan lossesdeclined due to improved credit conditions, including lower bankruptcy losses inJapan of $96 million. This was partially offset by higher personal loan losses in the U.K., standardization of write-off policy in Spain and Italy, and lower credit reserve releases. The net credit loss ratio declined 61 basis points to 5.75%.
Growth inaverage loanswas mainly driven by increases in the real-estate-secured and personal-loan portfolios inEMEAandAsia,partially offset by a decline inEMEAauto loans. InJapan,average loans declined by 10%, due to the impact of higher pay-downs, reduced loan demand, and the impact of foreign currency translation.
2004 vs. 2003
Revenues, net of interest expense,increased, with growth in all regions exceptJapan.The strongest growth was inEMEAandAsia,mainly due to higher loan volumes as well as the impact of foreign currency translation. This was partially offset by a decline inJapanfrom lower personal and real-estate-secured loan volumes, as well as a decline in spreads.
Operating expensesincreased on higher investment spending for branch expansion inAsiaandEMEA,as well as the impact of foreign currency translation. This was partially offset by expense reductions from branch closings and head-count reductions inJapan.
Provision for loan lossesdecreased as favorable credit conditions continued, including lower bankruptcies inJapan,partially offset by higher personal loan losses inEMEA.
Net Incomeincreased from growth inLatin America, AsiaandMexico,primarily driven by volume growth, partially offset by declines inJapan(lower tax credits and lower revenue, partially offset by lower operating expenses and improved credit losses) andEMEA(higher net credit losses).
Growth in real-estate-secured and personal loans in bothEMEAandAsiaand the impact of strengthening currencies led to average loan growth, which was partially offset by a decline inEMEAauto loans. InJapan,average loans declined 6%, as the benefit of foreign currency translation was more than offset by increased loan pay downs and reduced loan demand.
34
International Retail Banking Net Income In billions of dollars | International Retail Banking 2005 Net Income by Region | International Retail Banking Average Loans In billions of dollars | ||
---|---|---|---|---|
International Retail Bankingdelivers a wide array of banking, lending, insurance and investment services through a network of local branches and electronic delivery systems, including ATMs, call centers and the Internet.International Retail Bankingserves more than 47 million customer accounts, composed of individuals and small businesses. Revenues are primarily derived from net interest revenue on deposits and loans, and fees on mortgage, banking, and investment products.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
Mexico | $ | 2,878 | $ | 2,572 | $ | 2,260 | 12 | % | 14 | % | |||||
Latin America | 690 | 603 | 563 | 14 | 7 | ||||||||||
EMEA | 3,181 | 2,861 | 2,387 | 11 | 20 | ||||||||||
Japan | 474 | 469 | 451 | — | 4 | ||||||||||
Asia | 2,504 | 2,163 | 1,651 | 16 | 31 | ||||||||||
Revenues, net of interest expense | $ | 9,727 | $ | 8,668 | $ | 7,312 | 12 | % | 19 | % | |||||
Operating expenses | 5,537 | 4,939 | 4,487 | 12 | 10 | ||||||||||
Provisions for loan losses and for benefits and claims | 1,452 | 779 | 500 | 86 | 56 | ||||||||||
Income before taxes and minority interest | $ | 2,738 | $ | 2,950 | $ | 2,325 | (7 | )% | 27 | % | |||||
Income taxes | 657 | 794 | 573 | (17 | ) | 39 | |||||||||
Minority interest, net of taxes | (2 | ) | (1 | ) | — | (100 | ) | — | |||||||
Net income | $ | 2,083 | $ | 2,157 | $ | 1,752 | (3 | )% | 23 | % | |||||
Net income by region: | |||||||||||||||
Mexico | $ | 832 | $ | 560 | $ | 520 | 49 | % | 8 | % | |||||
Latin America | 118 | 148 | 96 | (20 | ) | 54 | |||||||||
EMEA | 150 | 512 | 445 | (71 | ) | 15 | |||||||||
Japan | 126 | 154 | 133 | (18 | ) | 16 | |||||||||
Asia | 857 | 783 | 558 | 9 | 40 | ||||||||||
Net income | $ | 2,083 | $ | 2,157 | $ | 1,752 | (3 | )% | 23 | % | |||||
Average assets (in billions of dollars) | $ | 115 | $ | 103 | $ | 86 | 12 | % | 20 | % | |||||
Return on assets | 1.81 | % | 2.09 | % | 2.04 | % | |||||||||
Average risk capital(1) | $ | 10,303 | $ | 9,067 | $ | 9,252 | 14 | (2 | ) | ||||||
Average return on risk capital(1) | 20 | % | 24 | % | 19 | % | |||||||||
Return on invested capital(1) | 12 | % | 13 | % | |||||||||||
Key indicators:(in billions of dollars): | |||||||||||||||
Average deposits | $ | 136.3 | $ | 125.1 | $ | 107.1 | 9 | % | 17 | % | |||||
AUMs (EOP) | 120.5 | 103.4 | 77.5 | 17 | 33 | ||||||||||
Average loans | 61.7 | 53.6 | 42.5 | 15 | 26 | ||||||||||
35
2005 vs. 2004
Revenues, net of interest expense, increased, with improved deposit revenues in all regions; higher branch lending revenues inEMEA, AsiaandLatin America; higher investment revenues in all regions exceptLatin America; the benefits of foreign currency translation; and the impact of the KorAm acquisition. Average loans grew 15%, primarily inAsia, Mexico, andJapan, while average deposits grew by 9%, primarily inAsia, Mexico, andEMEA. Assets under management increased by 17%.
Operating expensesincreased due to the expansion of the distribution network in all regions exceptJapan, foreign currency translation, the impact of first quarter 2005 repositioning expenses of $70 million, and the impact of the KorAm acquisition. This was partially offset by the VAT refund of $93 million inMexico. Total branches grew by a net 131 during 2005, reflecting the opening of 183 new branches.
Provisions for loan losses and for benefits and claimsincreased as a sustained improvement in credit quality was offset by a $476 million pretax charge to standardize loan write-off policies inEMEAto the global write-off policy (see page 7) and a $127 million increase in the German credit reserves to reflect increased experience with the effects of bankruptcy law liberalization. As a result, the consumer net credit loss ratio increased to 3.05% in 2005. The standardization of the loan write-off policies resulted in a significant drop in the 90 days past-due ratio, which fell to 1.29% in 2005, compared to 3.36% in 2004 and 4.61% in 2003.
Net incomein 2005 also reflected a $61 million net tax benefit from the Homeland Investment Act.
Mexicoincome increased on strong sales and customer balance growth, as well as the VAT refund of $93 million and tax benefits from the Homeland Investment Act.Asiaincome increased, benefiting primarily from strongly improved revenues due to increased business volumes, the impact of the KorAm acquisition, and benefits from foreign currency translation.Japanincome declined due primarily to expense growth associated with the consolidation and compliance activities related to the shutdown of the Japan Private Bank.Latin Americaincome declined, driven by repositioning expenses in 2005, and the impact of investment initiatives, primarily in Brazil.EMEAincome declined, driven by the impact of the write-off policy standardization, increases in credit loss reserves in Germany, and repositioning expenses reflected in the first quarter of 2005.
2004 vs. 2003
Revenues, net of interest expense, increased, primarily due to the positive impact of foreign currency translation, the addition of KorAm and growth inAsia, EMEA, andMexico. Excluding foreign currency translation and KorAm, growth in bothAsiaandEMEAwas driven by increased investment product sales, and higher deposits and lending revenues. Higher loans and deposits, as well as the gain on the sale of a mortgage portfolio, drove growth inMexico. This was partially offset by the negative impact of foreign currency translation.
Operating expensesincreased, due to the impact of foreign currency translation, the addition of KorAm inAsia, and higher sales commissions and increased investment spending on branch and salesforce expansion.
Provisions for loan losses and for benefits and claimsincreased primarily due to higher net credit losses in EMEA, principally Germany, and inMexico, due to the absence of a prior-year $64 million credit recovery, and higher loan loss reserve builds inEMEA, partially offset by higher loan loss reserve releases in all other regions. Lower net credit losses inLatin Americabenefited from the absence of an $87 million write-down of an Argentina compensation note in 2003, which was written down against previously established reserves.
Average customer depositsgrew 17% from the prior year, primarily driven by growth inAsiaandEMEA, which included the benefits of the KorAm acquisition and foreign currency translation. The KorAm acquisition and positive foreign currency translation drove average loan growth of 26%.
36
International 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 95.
Consumer is well diversified across a number of geographies, product groups, and customer segments and monitors the economic situation in all of the countries in which it operates. In 2006, International Consumer will continue to invest aggressively to build on the competitive advantages of its existing global network of branches, offices and sales professionals. The business expects earnings growth from expanding its customer base, which is expected to drive growth in loans, deposits and investment product sales. Revenues and credit costs will be affected by global economic conditions, including the level of interest rates, the credit environment, unemployment rates, and political and regulatory developments around the world. International economies are expected to be stable to improving, with an improvement in economic activity expected in Western Europe and a self-sustaining recovery inJapan, two of International Consumer's most important markets. Citigroup's operations in Korea are currently experiencing labor actions that are impairing its ability to offer its full range of products and services. The Company is in active negotiations to reach an expeditious agreement with the union.
International Cards—In 2006, continued investment in customer acquisition in both new and existing markets is expected to drive increased purchase sales and loan volumes. The credit environment is forecast to remain stable.
International Consumer Finance—In 2006, investment in new branches and sales professionals will continue in key expansion markets. Organic growth in existing branches, coupled with new branch openings, is expected to drive revenue and earnings growth. Offerings of new loan products and services in new markets will continue, and gains in market share across several key international regions are forecast. The credit environment is expected to remain stable.
International Retail Banking—In 2006, the business will continue to invest in branch expansion, building on a strong presence in several key markets and establishing its presence in new markets. The business is expected to generate revenue and earnings growth through an expanded base of customers, as well as increases in loan and deposit balances and increased investment product sales.
37
Other Consumer
Other Consumer and the benefit of foreign currency translation, partially offset by higher credit reserve builds. Income in Japan increased by $33 million or 6% reflecting a lower provision for credit losses, primarily driven by lower bankruptcies inConsumer Finance, partially offset by the absence of a $94 million prior-year tax reserve release. Growth in Asia of $376 million or 46% was mainly due to higher investment product sales inRetail Banking, growth inCards, the impact of credit reserve releases and the addition of KorAm. The increase in Latin America of $88 million or 48% was mainly due to improvements in all products, with the increase inRetail Banking primarily driven by Argentina, including the absence of prior-year repositioning costs.
CARDS
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 18,321 | $ | 14,610 | $ | 13,637 | ||||
Operating expenses | 8,089 | 6,227 | 5,535 | |||||||
Provision for credit losses | 3,396 | 2,935 | 3,410 | |||||||
Income before taxes and minority interest | 6,836 | 5,448 | 4,692 | |||||||
Income taxes | 2,133 | 1,854 | 1,647 | |||||||
Minority interest, after-tax | 3 | 4 | 2 | |||||||
Net income | $ | 4,700 | $ | 3,590 | $ | 3,043 | ||||
Average assets(in billions of dollars) | $ | 95 | $ | 70 | $ | 63 | ||||
Return on assets | 4.95 | % | 5.13 | % | 4.83 | % | ||||
Average risk capital(1) | $ | 5,364 | $ | 4,375 | ||||||
Return on risk capital(1) | 88 | % | 82 | % | ||||||
Return on invested capital(1) | 29 | % | 35 | % | ||||||
Cards reported net income of $4.700 billion in 2004, up $1.110 billion or 31% from 2003. North America Cards reported net income of $3.939 billion, up 27% over 2003, reflecting improved credit costs, including the benefit of credit reserve releases, and the impact of the Sears and Home Depot acquisitions. International Cards income increased by 53% over 2003 to $761 million in 2004, reflecting higher revenues from receivables growth, improved credit costs, including the benefit of credit reserve releases, a lower effective tax rate, including the benefit of certain one-time tax credits, a gain on the sale of Orbitall (Credicard processing company in Brazil) and the addition of KorAm. Globally, 2003 net income of $3.590 billion was up $547 million or 18% from 2002, reflecting increased spreads, the impact of the Home Depot and Sears acquisitions, improved credit costs in North America, a lower provision for credit losses in Argentina and growth in Asia.
As shown in the following table, average managed loans grew 19% in 2004, reflecting growth of 18% in North America and 26% in International Cards. In North America, the addition of the Home Depot and Sears portfolios was partially offset by the impact of higher payment rates seen throughout the industry. The increase in International Cards reflected the benefit of strengthening currencies and growth in both Asia and EMEA, and the addition of KorAm. Average managed loans grew 8% in 2003, driven by the acquisition of Home Depot and Sears in the 2003 third and fourth quarters, respectively, international growth led by Asia and EMEA, and the benefit of strengthening currencies. Sales in 2004 were $354.7 billion, up 22% from 2003. North America sales were up 20% to $301.9 billion in 2004, with the impact of acquisitions and improved purchase sales. International Cards sales grew 33%, reflecting growth in Asia, Latin America and Japan, the addition of KorAm, and the benefit of strengthening currencies. In 2003, sales were up 5% from 2002, reflecting the impact of acquisitions and growth in EMEA, Asia and Japan.
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | |||||||||
Sales | ||||||||||
North America | $ | 301.9 | $ | 251.5 | $ | 244.9 | ||||
International | 52.8 | 39.6 | 33.4 | |||||||
Total sales | $ | 354.7 | $ | 291.1 | $ | 278.3 | ||||
Average managed loans | ||||||||||
North America | $ | 139.6 | $ | 118.0 | $ | 110.2 | ||||
International | 15.7 | 12.5 | 10.7 | |||||||
Total average managed loans | $ | 155.3 | $ | 130.5 | $ | 120.9 | ||||
Total on-balance sheet average loans | $ | 74.3 | $ | 55.9 | $ | 49.2 | ||||
Revenues, net of interest expense, of $18.321 billion in 2004 increased $3.711 billion or 25% from 2003, reflecting growth in North America of $3.128 billion or 26% and in International Cards of $583 million or 22%. Revenue growth in North America reflected the impact of acquisitions, higher net interest margin and the benefit of increased purchase sales, partially offset by higher payment rates resulting from the overall improved economy, and lower securitization-related gains. In 2004 and 2003, revenues included net securitization gains of $234 million and $342 million, respectively, with the 2003 gains primarily resulting from changes in estimates related to the timing of revenue recognition on securitized portfolios. Revenue growth in International Cards reflected growth in all regions and includes the addition of KorAm and Diners Club Europe, the benefit of foreign currency translation, and the gain on the sale of Orbitall. In 2003, revenues increased $973 million or 7% from 2002, reflecting the impact of acquisitions, net interest margin expansion, increased purchase sales, gains from the sale of non-strategic portfolios, and the benefit of foreign currency translation, partially offset by increased credit losses on securitized receivables, which are recorded as a reduction to other revenue after receivables are securitized.
Operating expenses of $8.089 billion in 2004 were up $1.862 billion or 30% from 2003, reflecting increases in North America of $1.456 billion or 30% and in International Cards of $406 million or 30%. Expense increases in North America primarily reflected the full year impact of the Home Depot and Sears acquisitions and increased advertising and marketing expenses. Expense growth in International Cards reflected increases in all regions and included the impact of the Diners Club Europe and KorAm acquisitions, the net effect of foreign currency translation and increased advertising and marketing expenses. In 2003, operating expenses were $692 million or 13% higher than 2002, reflecting the impact of acquisitions, foreign currency translation and increased investment spending, including higher advertising and marketing expenditures, costs associated with expansion into Russia and China, and repositioning costs, mainly in EMEA and Latin America.
The provision for credit losses in 2004 was $3.396 billion, compared to $2.935 billion in 2003 and $3.410 billion in 2002. The increase in the provision for credit losses in 2004 reflects the full year impact of acquisitions and increased presence in the private label card market in North America, partially offset by lower net credit losses and higher credit reserve releases of $735 million, resulting from an improved credit environment, as well as the impact of increased levels of securitized receivables. The decrease in the provision for credit losses in 2003 was mainly due to an increase in the level of securitized receivables combined with credit improvements in North America and Latin America, including a $44 million reduction in the allowance for credit losses in Argentina due to improvement in credit experience and lower portfolio volumes. The decline in 2003 was partially offset by the impact of acquisitions. In 2002, the provision for credit losses included a $206 million addition to the allowance for credit losses established in accordance with the implementation of FFIEC guidance related to past-due interest and late fees on the on-balance sheet credit card receivables in Citi Cards and a $109 million net provision for credit losses resulting from deteriorating credit in Argentina.
The securitization of credit card receivables is limited to the Citi Cards business within North America. At December 31, 2004, securitized credit card receivables were $85.3 billion compared to $76.1 billion at December 31, 2003 and $67.1 billion at December 31, 2002. There were $2.5 billion in credit card receivables held-for-sale at December 31, 2004, compared to zero credit card receivables held-for-sale at December 31, 2003, and $6.5 billion at December 31, 2002. Securitization changes Citigroup's role from that of a lender to that of a loan servicer, as receivables are removed from the balance sheet but continue to be serviced by Citigroup. As a result, securitization affects the amount of revenue and the manner in which revenue and the provision for credit losses are recorded with respect to securitized receivables.
A gain is recorded at the time receivables are securitized, representing the difference between the carrying value of the receivables removed from the balance sheet and the fair value of the proceeds received and interests retained. Interests retained from securitization transactions include interest-only strips, which represent the present value of estimated excess cash flows associated with securitized receivables (including estimated credit losses). Collections of these excess cash flows are recorded as commissions and fees revenue (for servicing fees) or other revenue. For loans not securitized these excess cash flows would otherwise be reported as gross amounts of net interest revenue, commissions and fees revenue and credit losses.
In addition to interest-only strip assets, Citigroup may retain one or more tranches of certificates issued in securitization transactions, provide escrow cash accounts or subordinate certain principal receivables to collateralize the securitization interests sold to third parties. However, Citigroup's exposure to credit losses on securitized receivables is limited to the amount of the interests retained and collateral provided.
Including securitized receivables and receivables held-for-sale, managed net credit losses were $9.219 billion in 2004 with a related loss ratio of 5.94% compared to $7.694 billion and 5.90% in 2003 and $7.169 billion and 5.93% in 2002. The increase in the ratio from the prior year was primarily driven by the impact of acquisitions and the related expansion of the private label portfolio, partially offset by the continued improvement in the credit environments in both the North America and international markets that began in 2003. The decline in the ratio in 2003 compared to 2002 was primarily driven by improvements in North America and the international markets, particularly in Hong Kong, Taiwan and Argentina, partially offset by the addition of the Sears portfolio. Loans delinquent 90 days or more were $2.944 billion or 1.78% at December 31, 2004, compared with $3.392 billion or 2.14% at December 31, 2003 and $2.397 billion or 1.84% at December 31, 2002. The decrease in delinquent loans in 2004 was primarily attributable to overall improved credit conditions in the Citi Cards business, offset slightly by the addition of the Sears portfolio. A summary of delinquency and net credit loss experience related to the on-balance sheet loan portfolio is included in the table on page 50.
CONSUMER FINANCE
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 10,761 | $ | 10,083 | $ | 9,899 | ||||
Operating expenses | 3,600 | 3,488 | 3,114 | |||||||
Provisions for benefits, claims, and credit losses | 3,506 | 3,727 | 3,294 | |||||||
Income before taxes | 3,655 | 2,868 | 3,491 | |||||||
Income taxes | 1,267 | 889 | �� | 1,233 | ||||||
Net income | $ | 2,388 | $ | 1,979 | $ | 2,258 | ||||
Average assets(in billions of dollars) | $ | 113 | $ | 105 | $ | 96 | ||||
Return on assets | 2.11 | % | 1.88 | % | 2.35 | % | ||||
Average risk capital(1) | $ | 3,722 | $ | 3,183 | ||||||
Return on risk capital(1) | 64 | % | 62 | % | ||||||
Return on invested capital(1) | 22 | % | 21 | % | ||||||
Consumer Finance reported net income of $2.388 billion in 2004, up $409 million or 21% from 2003, reflecting an increase in North America of $405 million or 28% and an increase in International Consumer Finance of $4 million or 1%. The increase in North America primarily resulted from a higher net interest margin due to higher loan volumes and a lower cost of funds, the benefit of lower credit costs due to an improved credit environment and the successful integration of WMF in 2004. The increase in International Consumer Finance primarily resulted from increases in Latin America and Asia, partially offset by declines in Japan and EMEA. Net income in 2003 of $1.979 billion decreased by $279 million or 12% from 2002, primarily reflecting continued weakness in Japan, partially offset by the acquisition of GSB in November 2002 and a $94 million release of a tax reserve in Japan, related to a settlement with tax authorities.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | ||||||||
Average loans | |||||||||
Real-estate-secured loans | $ | 58.2 | $ | 52.1 | $ | 48.0 | |||
Personal | 24.8 | 22.5 | 21.6 | ||||||
Auto | 11.6 | 11.1 | 8.4 | ||||||
Sales finance and other | 5.4 | 5.0 | 4.0 | ||||||
Total average loans | $ | 100.0 | $ | 90.7 | $ | 82.0 | |||
As shown in the preceding table, average loans grew $9.3 billion or 10% in 2004 compared to 2003, reflecting growth in North America of $8.5 billion or 12% and International Consumer Finance of $0.8 billion or 4%. North American growth reflected the addition of WMF, which contributed $3.6 billion in average loans, and growth in all
products driven by real-estate-secured and auto loans. Growth in real-estate-secured loans mainly reflected portfolio acquisitions, partially offset by a decline in cross selling of products through Primerica. Growth in the international markets was mainly driven by increases in the real-estate-secured and personal loan portfolios in both EMEA and Asia, and included the impact of strengthening currencies, partially offset by a decline in EMEA auto loans. In Japan, average loans declined by 6% from 2003 as the benefit of foreign currency translation was more than offset by the impact of higher pay-downs, reduced loan demand and tighter underwriting standards. Average loans grew 11% in 2003, resulting from acquisitions, growth in real-estate-secured loans, the impact of funding auto loan volumes internally and strengthening currencies in the international markets.
As shown in the following table, the average net interest margin ratio of 9.95% in 2004 declined 22 basis points from 2003, reflecting compression in both the North American and international markets. In North America, higher volumes and the benefit of lower cost of funds were more than offset by lower yields reflecting the lower interest rate environment and the repositioning of portfolios towards higher credit quality. The average net interest margin ratio for International Consumer Finance was 15.80% in 2004, declining 23 basis points from the prior year, primarily driven by a mix shift to lower yielding products in EMEA and lower receivables in Japan, partially offset by a change in recording adjustments and refunds of interest in Japan. From the 2003 second quarter to the 2004 second quarter, a portion of adjustments and refunds of interest charged to customer accounts were treated as reductions in net interest margin. For all other periods presented, such adjustments and refunds of interest were accounted for in net credit losses. If all adjustments and refunds of interest were accounted for in net credit losses, the average net interest margin ratio for International Consumer Finance would have been 16.07% in 2004 and 16.49% in 2003. The average net interest margin ratio of 10.17% in 2003 declined 55 basis points from 2002 primarily reflecting compression in the international markets, driven primarily by Japan and partially offset by margin expansion in Europe. The compression of net interest margin in Japan reflected a decline in higher-yielding personal loans combined with the change in treatment of adjustments and refunds of interest as discussed above.
| 2004 | 2003 | 2002 | ||||
---|---|---|---|---|---|---|---|
Average net interest margin ratio | |||||||
North America | 8.34 | % | 8.43 | % | 8.41 | % | |
International | 15.80 | % | 16.03 | % | 18.01 | % | |
Total | 9.95 | % | 10.17 | % | 10.72 | % | |
Revenues, net of interest expense, of $10.761 billion in 2004 increased $678 million or 7% from 2003. The increase in revenues, net of interest expense, reflected growth of $622 million or 9% in North America, and growth of $56 million or 2% in International Consumer Finance. Revenue growth in North America was primarily driven by the WMF acquisition, growth in receivables and a lower cost of funds, partially offset by the impact of lower yields and declines in insurance related revenues. The increase in revenue for International Consumer Finance was primarily due to the benefit of foreign exchange and higher volumes in all regions excluding Japan. A decline in Japan revenues was driven by lower personal and real estate loan volumes, as well as a decline in yields. Revenues of $10.083 billion in 2003 increased $184 million or 2% from 2002, reflecting higher revenues in North America of $519 million or 9%, primarily due to receivable growth, including the addition of the GSB auto portfolio, partially offset by lower insurance revenues. Declines in International Consumer Finance revenues of $335 million or 9% resulted from lower volumes and spreads in Japan, offset by the timing of acquisitions in 2002, the net effect of foreign currency translation and growth in Asia.
Operating expenses of $3.600 billion in 2004 increased $112 million or 3% from 2003, reflecting increases of $91 million or 4% in North America and $21 million or 2% in International Consumer Finance. The increase in operating expenses in North America was due to the addition of the WMF portfolio, while the increase in International Consumer Finance reflected the impact of foreign currency translation in Japan and EMEA. Excluding foreign currency translation, a decline in expenses was driven by expense savings from branch closings and headcount reductions which occurred during 2003 in Japan, partially offset by higher 2004 investment expenses including branch expansion in Asia (primarily India) and EMEA. Operating expenses of $3.488 billion in 2003 increased $374 million or 12% from 2002, reflecting increases of $218 million or 12% in North America and $156 million or 13% in International Consumer Finance. The increase in North America resulted from increased volumes, the addition of the GSB auto portfolio and increased staffing, collection and compliance costs. The increase in International Consumer Finance resulted from the impact of foreign currency translation, additional costs in Japan attributable to actions taken to restructure the business and the timing of acquisitions in 2002, partially offset by expense savings from branch closings and headcount reductions in Japan.
The provisions for benefits, claims, and credit losses were $3.506 billion in 2004, down from $3.727 billion in 2003, primarily reflecting lower net credit losses in North America and Japan, and higher credit reserve releases of $89 million, partially offset by the WMF acquisition. The decline in North American credit losses excluding the impact of WMF was driven by the overall improvement in the credit environment, while the decline in Japan was driven by lower bankruptcy losses. Net credit losses and the related loss ratio were $3.431 billion and 3.43% in 2004, compared to $3.517 billion and 3.88% in 2003, and $3.026 billion and 3.69% in 2002. In North America, net credit losses were $2.065 billion and the related loss ratio was 2.63% in 2004, compared to $2.059 billion and 2.94% in 2003 and $1.865 billion and 3.00% in 2002. The decrease in the net credit loss ratio in 2004 was driven by improvements in all products, the result of better overall credit conditions in the market and the shift to better credit quality portfolios, partially offset by the impact of WMF. The decrease in the net credit loss ratio in 2003 was mainly driven by improvements in the real-estate-secured and auto portfolios, which were partially offset by increased loss rates in the personal loan portfolio. Net credit losses in International Consumer Finance were $1.366 billion and the related loss ratio was 6.32% in 2004, compared to $1.458 billion and 7.02% in 2003 and $1.161 billion and 5.88% in 2002. The decrease in the net credit loss ratio in 2004 was driven by improved credit conditions, including lower bankruptcy losses in Japan, partially offset by higher personal loan losses in EMEA. Adjusting the net credit loss ratios for the change in treatment of adjustments and refunds of interest in Japan, as discussed above, would have resulted in International Consumer Finance net credit loss ratios of 6.60% and 7.48% in 2004 and 2003, respectively. The increase in the net credit loss ratio in 2003 was primarily due to increased bankruptcy and contractual losses in Japan.
Loans delinquent 90 days or more were $2.014 billion or 1.90% of loans at December 31, 2004, compared to $2.221 billion or 2.36% at December 31, 2003 and $2.197 billion or 2.48% at December 31, 2002. The decrease in the delinquency ratio in 2004 was due to improvements in all regions.
RETAIL BANKING
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 17,669 | $ | 16,218 | $ | 13,981 | ||||
Operating expenses | 9,883 | 8,865 | 7,702 | |||||||
Provisions for benefits, claims, and credit losses | 1,024 | 1,376 | 1,755 | |||||||
Income before taxes and minority interest | 6,762 | 5,977 | 4,524 | |||||||
Income taxes | 2,078 | 1,884 | 1,589 | |||||||
Minority interest, after-tax | 56 | 47 | 38 | |||||||
Net income | $ | 4,628 | $ | 4,046 | $ | 2,897 | ||||
Average assets(in billions of dollars) | $ | 264 | $ | 232 | $ | 187 | ||||
Return on assets | 1.75 | % | 1.74 | % | 1.55 | % | ||||
Average risk capital(1) | $ | 13,114 | $ | 12,883 | ||||||
Return on risk capital(1) | 35 | % | 31 | % | ||||||
Return on invested capital(1) | 18 | % | 16 | % | ||||||
Retail Banking reported net income of $4.628 billion in 2004, up $582 million or 14% from 2003. The increase in Retail Banking reflected growth in both North America and International Retail Banking net income of $229 million or 8% and $353 million or 29%, respectively. Growth in North America was driven by improved credit costs, including higher credit reserve releases, and higher revenues due to growth in customer volumes, partially offset by a decline in net servicing revenues in Prime Home Finance, higher expenses due to increased investment spending and the impact of the continued liquidation of non-core portfolios in the Commercial Business. The increase in International Retail Banking income primarily reflected growth in Asia, which included the impact of the KorAm acquisition, the benefit of strengthening currencies and a lower effective tax rate partially due to non-recurring tax benefits. Net income of $4.046 billion in 2003 grew $1.149 billion or 40% from 2002, reflecting growth in both North America and International Retail Banking net income of $829 million or 42% and $320 million or 36%, respectively. The growth in North America was driven by the GSB acquisition, strong growth in customer volumes including mortgage originations as well as loan and deposit balances and improved credit costs in Mexico and the Commercial Business. The growth in International Retail Banking net income reflected improvements in Argentina and growth in Asia and EMEA, which more than offset a 2002 gain on the sale of a mortgage portfolio in Japan.
| 2004 | 2003 | 2002 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | |||||||||||
Average customer deposits | ||||||||||||
North America | $ | 115.7 | $ | 112.2 | $ | 90.9 | ||||||
Bank Deposit Program balances(1) | 41.6 | 41.2 | 38.0 | |||||||||
Total North America | 157.3 | 153.4 | 128.9 | |||||||||
International | 103.2 | 86.2 | 78.8 | |||||||||
Total average customer deposits | $ | 260.5 | $ | 239.6 | $ | 207.7 | ||||||
Average loans | ||||||||||||
North America | $ | 131.8 | $ | 114.0 | $ | 84.6 | ||||||
North America—Liquidating | 5.7 | 8.9 | 13.0 | |||||||||
International | 47.1 | 36.0 | 34.3 | |||||||||
Total average loans | $ | 184.6 | $ | 158.9 | $ | 131.9 | ||||||
As shown in the preceding table,Retail Banking grew average customer deposits and average loans in 2004. Average customer deposit growth of 3% in North America primarily reflected increases in higher-margin demand accounts in Retail Distribution, the Commercial Business and Mexico, and money market accounts in Retail Distribution, partially offset by declines in Retail Distribution time deposits, Prime Home Finance mortgage escrow deposits and the impact of a weakening peso in Mexico. Average loan growth of 12% in North America reflected increases in Prime Home Finance, Student Loans, Retail Distribution and Mexico, partially offset by a decline in the Commercial Business that was led by a continued reduction in the liquidating portfolios, including the sale of the $1.2 billion Fleet Services portfolio at the end of the 2003 third quarter. In the international markets, average customer deposits grew 20% from the prior year, primarily driven by growth in Asia and EMEA, which included the benefits of the KorAm acquisition and foreign currency translation. Average loans in International Retail Banking grew 31% primarily due to the impact of the KorAm acquisition and positive foreign currency translation. Retail Banking North America growth in average customer deposits and average loans in 2003 was largely driven by the acquisition of GSB, as well as organic growth. International Retail Banking average customer deposit growth in 2003 occurred in all regions except Latin America, and benefited from the impact of foreign currency translation, while average loan growth was driven by the impact of foreign currency translation and growth in installment loans, primarily in Germany.
As shown in the following table, revenues, net of interest expense, of $17.669 billion in 2004 increased $1.451 billion or 9% from 2003. Revenues in North America grew $418 million or 4% in 2004, primarily due to the impact of loan and deposit growth and increased investment product sales, partially offset by a decline in net servicing revenues in Prime Home Finance, the impact of the liquidation of non-core portfolios in the Commercial Business and lower net funding spreads. Retail Distribution revenues grew $105 million or 4% due to the impact of higher loan and deposit volumes, partially offset by lower net funding spreads. The Commercial Business revenues grew $268 million or 13% due to the reclassification of operating leases from loans to other assets and the related operating lease depreciation expense from revenue to expense, and was partially offset by the impact of the liquidation of non-core portfolios, including the prior-year sale of the $1.2 billion Fleet Services portfolio. The reclassification increased both revenues and expenses by $403 million pretax in 2004. Prime Home Finance revenues decreased $366 million or 20% mainly due to lower net servicing revenues and lower securitization revenues. The decline in net servicing revenues was driven by lower hedge-related revenues, that were the result of higher hedging costs, and the impact of losses on mortgage servicing hedge ineffectiveness resulting from the volatile rate environment. The lower securitization revenues included a one-time decrease in revenues of $35 million from the adoption of SAB 105. These declines were partially offset by the impact of higher loan volumes and the impact of the PRMI acquisition. Student loan revenues grew $125 million or 26% due to the impact of higher net interest revenue, driven by growth in average loans and originations, higher securitization-related gains and the absence of a prior-year write-down of the purchase premium of certain student loans. Primerica revenues grew $53 million or 3% due to increased life insurance and investment fee revenues, partially offset by the impact of lower loan volumes and higher capital funding costs.
Revenues in Mexico increased $233 million or 13% driven by the impact of higher loans and deposits, and the gain on sale of a mortgage portfolio, partially offset by the negative impact of foreign currency translation. The comparison to the prior year was also impacted by the absence of an $85 million write-down in 2003 of the Fobaproa investment security and revised estimates of reserves related to certain investments. International Retail Banking revenues increased $1.033 billion or 21%, primarily reflecting the positive impact of foreign currency translation, the addition of KorAm and growth in Asia and EMEA. Excluding foreign currency translation and KorAm, growth in both Asia and EMEA was driven by increased investment product sales, and higher deposit and lending revenues. Revenues of $16.218 billion in 2003 grew $2.237 billion or 16% from 2002, reflecting the acquisition of GSB and growth in Prime Home Finance, Primerica and Mexico for North America, and growth in all international regions except Japan, which declined due to a $65 million gain on sale of the $2.0 billion mortgage portfolio in 2002.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | |||||||||
Retail Distribution | $ | 3,066 | $ | 2,961 | $ | 2,611 | |||
Commercial Business | 2,295 | 2,027 | 2,006 | ||||||
Prime Home Finance | 1,507 | 1,873 | 935 | ||||||
Student Loans | 612 | 487 | 417 | ||||||
Primerica Financial Services | 2,141 | 2,088 | 2,017 | ||||||
Mexico | 2,025 | 1,792 | 1,723 | ||||||
North America | 11,646 | 11,228 | 9,709 | ||||||
EMEA | 2,857 | 2,387 | 1,954 | ||||||
Japan | 471 | 451 | 496 | ||||||
Asia | 2,164 | 1,652 | 1,457 | ||||||
Latin America | 531 | 500 | 365 | ||||||
International | 6,023 | 4,990 | 4,272 | ||||||
Total revenues, net of interest expense | $ | 17,669 | $ | 16,218 | $ | 13,981 | |||
Operating expenses of $9.883 billion in 2004 increased $1.018 billion or 11% from 2003, reflecting increases of $631 million or 10% in North America and $387 million or 14% in International Retail Banking. In North America, growth was mainly driven by the impact of the operating lease reclassification in the Commercial Business of $403 million, higher volume-related expenses and increased investment spending in Retail Distribution, higher staff-related and legal costs in Mexico and the impact of the PRMI acquisition. The increase in International Retail Banking expenses reflects the impact of foreign currency translation, the addition of KorAm in Asia, higher sales commissions and increased investment spending, including costs associated with branch and sales-force expansion. Operating expenses in 2003 were up $1.163 billion or 15% compared to 2002, primarily reflecting the impact of acquisitions, other volume-related increases, higher investment spending, as well as repositioning costs in Latin America and EMEA.
The provisions for benefits, claims, and credit losses were $1.024 billion in 2004, down from $1.376 billion in 2003 and $1.755 billion in 2002, reflecting a lower provision for credit losses. The decrease in the provision for credit losses in 2003 reflected both releases in credit reserves and lower net credit losses. Higher credit reserve releases reflected improvement in credit experience in all regions except EMEA, which increased credit reserves, primarily driven by Germany. The decrease in net credit losses in 2004 was mainly due to lower credit costs in the North America Commercial Business excluding Mexico, which benefited from the liquidation of non-core portfolios; Latin America, which benefited from the absence of an $87 million write-down of an Argentine compensation note in the prior year (which was written down against previously established reserves); North America (excluding Mexico) and Asia. These declines were partially offset by higher credit losses in EMEA, primarily due to Germany, and the absence of a prior-year $64 million credit recovery in Mexico. The decrease in the provisions in 2003 compared to 2002 was mainly due to lower credit costs in Mexico and the Commercial Business, and a net $57 million reduction in the credit reserve in Argentina that was essentially offset by additions to the credit reserve in Germany. In 2002, the provision for credit losses included a $108 million provision related to Argentina. Net credit losses (excluding the Commercial Business) were $693 million and the related loss ratio was 0.48% in 2004, compared to $614 million and 0.52% in 2003 and $644 million and 0.71% in 2002. The improvement in the net credit loss ratio (excluding the Commercial Business) in 2004 was mainly due to an improved credit environment, which resulted in lower net credit losses in North America (excluding Mexico) and Asia and the absence of the $87 million write-down of the Argentina compensation note in 2003. An increase in EMEA was primarily due to Germany. Commercial Business net credit losses were $214 million and the related loss ratio was 0.53% in 2004, compared to $462 million and 1.09% in 2003 and $712 million and 1.76% in 2002. The decline in Commercial Business net credit losses was mainly due to improvements in North America (excluding Mexico) and, in the 2003 comparison, a recovery in Mexico.
Loans delinquent 90 days or more (excluding the Commercial Business) were $4.094 billion or 2.47% of loans at December 31, 2004, compared to $3.802 billion or 3.07% at December 31, 2003 and $3.647 billion or 3.18% at December 31, 2002. The increase in delinquent loans in 2004 primarily resulted from increases in Prime Home Finance, reflecting the impact of a GNMA portfolio that was purchased in the PRMI acquisition, and increases in Germany including the impact of foreign currency translation. The decline in the 90 days delinquency ratio was driven by improved credit conditions across all markets except Japan. The increase in delinquent loans in 2003 was primarily due to the impact of foreign currency translation combined with increases in Germany and was partly offset by declines in Prime Home Finance, Asia and Argentina.
Cash-basis loans in the Commercial Business were $735 million or 1.78% of loans at December 31, 2004, compared to $1.350 billion or 3.38% at December 31, 2003 and $1.299 billion or 2.90% at December 31, 2002. Cash-basis loans improved in 2004 primarily due to broad-based declines in all products and regions, led by North America (excluding Mexico), where the business continued to work through the liquidation of non-core portfolios. The increase in cash-basis loans in 2003 primarily reflected increases in the vehicle leasing and transportation portfolios in the North America (excluding Mexico) Commercial Business and was offset in part by improvements and foreign currency translation in Mexico.
Average assets of $264 billion in 2004 increased $32 billion or 14% from 2003, which, in turn, increased $45 billion from 2002. The increase in 2004 primarily reflected growth in average loans in the Prime Home Finance and Student Loan businesses, the impact of the KorAm and PRMI acquisitions and the impact of foreign currency translation, partially offset by reductions in the Commercial Business due to continued liquidation and sales of non-core portfolios. The increase in 2003 primarily reflected the impact of acquisitions combined with growth in loans.
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 516 | $ | 59 | $ | 142 | ||||
Operating expenses | 352 | 256 | 392 | |||||||
Income before tax benefits | 164 | (197 | ) | (250 | ) | |||||
Income tax benefits | 69 | (73 | ) | (96 | ) | |||||
Net income (loss) | $ | 95 | $ | (124 | ) | $ | (154 | ) | ||
Other Consumer—which includes certain treasury and other unallocated staff functions and global marketing marketing.
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | (258 | ) | $ | 556 | $ | 107 | |||
Operating expenses | 349 | 388 | 289 | |||||||
Income (loss) before tax benefits | $ | (607 | ) | $ | 168 | $ | (182 | ) | ||
Income taxes (benefits) | (233 | ) | 71 | (69 | ) | |||||
Net income (loss) | $ | (374 | ) | $ | 97 | $ | (113 | ) | ||
Revenuesandexpensesreflect offsets to certain line-items reported in other programs—reportedGlobal Consumer operation segments.
Thenet incomedecline was primarily due to the absence of $95a $378 million in 2004 and lossesafter-tax gain related to the sale of $124 million and $154 million in 2003 and 2002, respectively. IncludedSamba in the 2004 results weresecond quarter, and the gain2005 first quarter loss on the sale of Sambaa Manufactured Housing Loan portfolio of $378$109 million after-tax, and a $22 million after-tax release of reserves related to unused travelers checks in a non-core business, partially offset by the absence of a $14 million after-tax write-down of assets in a non-core business.business in the 2004 fourth quarter and lower legal costs. Excluding these items, the increase in lossesimpact of the Samba gain, the decline in 2004 was primarily due to lower treasury results, including the impact of higher capital funding costs, the $14 million after-tax write-down of assets in the 2004 fourth quarter, and higher staff-related, global marketing and legal costs. Included in the 2002 results was a $52 million after-tax gain resulting from the disposition of an equity investment in EMEA, a $25 million after-tax release of a reserve related to unused travelers checks in a non-core business, and gains from the sales of buildings in Asia. Excluding these items, the reduction in losses in 2003 was primarily due to prior-year legal costs in connection with settlements reached during 2002 and lower global marketing costs.
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.38
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 73.
During 2005, the Global Consumer businesses will continue to 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 2004,Cards reported record income of $4.7 billion, an increase of 31% over 2003, while benefiting from the 2003 acquisitions of the Home Depot and Sears and the 2004 acquisition of KorAm. In 2005,Cards expects to deliver strong earnings growth as managed receivables continue to grow and expenses remain controlled through improved productivity levels and scale opportunities. In 2005, Citi Cards expects continued income and managed receivables growth through continued brand development, private-label expansion, new product launches, and organic growth, despite the continuation of a challenging competitive environment. Consistent with changes in industry practice based on regulatory guidance, during 2005, Citi Cards will change the minimum payment calculation for its credit card accounts. This change is likely to result in an increase in delinquencies and credit loss experience. In Mexico, the Company will continue to leverage the expertise and experience of the global Cards franchise, with increased sales and loan volumes and productivity improvements. InternationalCards is also expecting strong earnings growth in 2005 with a focus on expanding the revenue base through growth in sales, receivables, and accounts while continuing to invest in both new and existing markets.
Consumer Finance—In 2004, Consumer Finance reported record income of $2.4 billion, an improvement of 21% from 2003, largely reflecting organic growth, the 2004 acquisition of the Washington Mutual Finance Corporation portfolio, and strong international growth outside of Japan. In North America, CitiFinancial expects to deliver income growth through growth in receivables by expanding customer reach and a continued focus on expense management. In the international markets, growth in 2005 will continue to be impacted by the challenging operating environment in Japan. The Japan business regained stability in 2004, as loss rates improved, expenses were reduced through repositioning, and the pressure on loan volumes eased. In 2005, Japan is expected to continue to improve, as loss rates and expenses remain well controlled, and customer volumes show moderate growth. In other international markets, important growth opportunities are anticipated as we continue to focus on gaining market share through branch expansion and other organic activities in both new and established markets including India, Mexico, Poland, Brazil, South Korea, Indonesia, and Thailand.
Retail Banking—In 2004, Retail Banking reported record income of $4.6 billion, an increase of 14% from 2003, reflecting strong customer volumes, improved loss rates, and the acquisition of KorAm, partially offset by reduced earnings in the North America Prime Home Finance business in line with market conditions. In 2005, Retail Banking expects to deliver growth in core businesses driven by the benefits of investment spending, continuing to expand our footprint through branch expansion, the 2005 acquisition of First American Bank, which is pending regulatory approval, and by penetration into select markets, such as the growing Hispanic banking market.
In 2005, Retail Distribution will continue to enhance its franchise by emphasizing increased sales productivity in the financial centers, deeper customer relationships through cross-selling and wealth management initiatives, and further investments in technology that drive cost efficiencies and improve customer satisfaction. The Commercial Business will continue to expand in serving the needs of small businesses and professionals, through lending, banking, and leasing activities. Prime Home Finance is expected to achieve growth by continuing to leverage Citigroup distribution channels while aligning the cost structure of the business to reflect lower mortgage origination volumes. The Student Loans business will continue to benefit from the strong Citi brand and best-in-class sales platforms and technology. 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 expects to drive growth through new loan, deposit, and investment products while continuing to improve operating margins. The international markets are expected to build upon the investments in both new and established markets and deliver strong results through a continued focus on distribution channels, product innovation, and customer support.
GLOBAL CORPORATE AND INVESTMENT BANKBANKING
GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2002 | $ | 3.2 | |
2003 | $ | 5.4 | |
2004 | $ | 2.0 |
GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME BY PRODUCT*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Net Income In billions of dollars | |||
2005 Net Income by Product* | 2005 Net Income by Region* |
GLOBAL CORPORATE AND INVESTMENT BANK—2004 NET INCOME BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
*Excludes Other Corporate and Investment Banking income of $433 million. | |||
*Excludes Other Corporate and Investment Banking income of $433 million. |
Corporate and Investment Banking (CIB) provides corporations, governments, institutions and investors in approximately 100 countries with a broad range of Sambafinancial products and $4.95 billion after-tax charge related to the Worldcomservices. CIB includesCapital Markets and Litigation Reserve Charge
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 21,774 | $ | 20,021 | $ | 19,165 | |||
Operating expenses | 20,525 | 11,455 | 12,093 | ||||||
Provision for credit losses | (975 | ) | 732 | 2,255 | |||||
Income before taxes and minority interest | 2,224 | 7,834 | 4,817 | ||||||
Income taxes | 93 | 2,426 | 1,620 | ||||||
Minority interest, after-tax | 93 | 37 | 25 | ||||||
Net income | $ | 2,038 | $ | 5,371 | $ | 3,172 | |||
Average risk capital(1) | $ | 19,045 | $ | 16,264 | |||||
Return on risk capital(1) | 11 | % | 33 | % | |||||
Return on invested capital(1) | 8 | % | 25 | % | |||||
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
U.S. | $ | 9,901 | $ | 8,961 | $ | 8,878 | 10 | % | 1 | % | |||||
Mexico | 777 | 770 | 708 | 1 | 9 | ||||||||||
Latin America | 1,415 | 1,318 | 1,591 | 7 | (17 | ) | |||||||||
EMEA | 6,849 | 6,512 | 5,741 | 5 | 13 | ||||||||||
Japan | 1,224 | 817 | 520 | 50 | 57 | ||||||||||
Asia | 3,697 | 3,408 | 2,594 | 8 | 31 | ||||||||||
Revenues, net of interest expense | $ | 23,863 | $ | 21,786 | $ | 20,032 | 10 | % | 9 | % | |||||
Operating expenses | 14,133 | 20,530 | 11,460 | (31 | ) | 79 | |||||||||
Provision for credit losses | (42 | ) | (975 | ) | 732 | 96 | NM | ||||||||
Income before taxes and minority interest | $ | 9,772 | $ | 2,231 | $ | 7,840 | NM | (72 | )% | ||||||
Income taxes | 2,818 | 96 | 2,429 | NM | (96 | ) | |||||||||
Minority interest, net of taxes | 59 | 93 | 37 | (37 | )% | NM | |||||||||
Net income | $ | 6,895 | $ | 2,042 | $ | 5,374 | NM | (62 | )% | ||||||
Net income by region: | |||||||||||||||
U.S. | $ | 2,950 | $ | (2,190 | ) | $ | 2,540 | NM | NM | ||||||
Mexico | 450 | 659 | 407 | (32 | )% | 62 | % | ||||||||
Latin America | 619 | 813 | 566 | (24 | ) | 44 | |||||||||
EMEA | 1,130 | 1,136 | 924 | (1 | ) | 23 | |||||||||
Japan | 498 | 334 | 162 | 49 | NM | ||||||||||
Asia | 1,248 | 1,290 | 775 | (3 | ) | 66 | |||||||||
Net income | $ | 6,895 | $ | 2,042 | $ | 5,374 | NM | (62 | )% | ||||||
Average risk capital(1) | $ | 21,226 | $ | 19,047 | $ | 16,266 | 11 | % | 17 | % | |||||
Return on risk capital(1) | 32 | % | 11 | % | 33 | % | |||||||||
Return on invested capital(1) | 24 | % | 8 | % | |||||||||||
NM Not meaningful.
39
Global CorporateCapital Markets and Investment Bank (GCIB)Banking
Capital Markets and Banking Net Income In billions of dollars | Capital Markets and Banking 2005 Net Income by Region | Capital Markets and Banking 2005 Net Income by Region | ||
Capital Markets and Banking reported net incomeoffers a wide array of $2.038 billion, $5.371 billion,investment and $3.172 billion in 2004, 2003,commercial banking services and 2002, respectively. The 2004 period reflects a decrease of $4.382 billion in Other Corporate, primarily reflecting the $4.95 billion (after-tax) WorldComproducts, including investment banking and Litigation Reserve Charge, offset by an increase of $753 million or 16% inadvisory services, debt and equity trading, institutional brokerage, foreign exchange, structured products, derivatives, and lending.Capital Markets and Banking revenue is generated primarily from fees for investment banking and $296 million or 40% inTransaction Services. The increase in 2003 netadvisory services, fees and spread on structured products, foreign exchange and derivatives, fees and interest on loans, and income reflects increases of $1.376 billion in Other Corporate, primarily reflecting the absence of a $1.3 billion after-tax charge in 2002 relatedearned on principal transactions.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||||
Revenues, net of interest expense, by region: | |||||||||||||||
U.S. | $ | 8,860 | $ | 8,116 | $ | 8,061 | 9 | % | 1 | % | |||||
Mexico | 586 | 594 | 580 | (1 | ) | 2 | |||||||||
Latin America | 896 | 883 | 1,099 | 1 | (20 | ) | |||||||||
EMEA | 5,093 | 4,393 | 4,388 | 16 | — | ||||||||||
Japan | 1,140 | 744 | 456 | 53 | 63 | ||||||||||
Asia | 2,395 | 2,376 | 1,861 | 1 | 28 | ||||||||||
Revenues, net of interest expense | $ | 18,970 | $ | 17,106 | $ | 16,445 | 11 | % | 4 | % | |||||
Operating expenses | 11,501 | 9,959 | 8,910 | 15 | 12 | ||||||||||
Provision for credit losses | (61 | ) | (777 | ) | 738 | 92 | NM | ||||||||
Income before taxes and minority interest | $ | 7,530 | $ | 7,924 | $ | 6,797 | (5 | )% | 17 | % | |||||
Income taxes | 2,145 | 2,440 | 2,118 | (12 | ) | 15 | |||||||||
Minority interest, net of taxes | 58 | 89 | 37 | (35 | ) | NM | |||||||||
Net income | $ | 5,327 | $ | 5,395 | $ | 4,642 | (1 | )% | 16 | % | |||||
Net income by region: | |||||||||||||||
U.S. | $ | 2,422 | $ | 2,502 | $ | 2,424 | (3 | )% | 3 | % | |||||
Mexico | 376 | 544 | 349 | (31 | ) | 56 | |||||||||
Latin America | 466 | 621 | 437 | (25 | ) | 42 | |||||||||
EMEA | 810 | 486 | 709 | 67 | (31 | ) | |||||||||
Japan | 485 | 322 | 150 | 51 | NM | ||||||||||
Asia | 768 | 920 | 573 | (17 | ) | 61 | |||||||||
Net income | $ | 5,327 | $ | 5,395 | $ | 4,642 | (1 | )% | 16 | % | |||||
Average risk capital(1) | $ | 19,898 | $ | 17,666 | $ | 14,785 | 13 | % | 19 | % | |||||
Return on risk capital(1) | 27 | % | 31 | % | 31 | % | |||||||||
Return on invested capital(1) | 20 | % | 24 | % | |||||||||||
NM Not meaningful.
40
2005 vs. 2004
Revenues, net of reserves for regulatory settlementsinterest expense, increased, driven by growth across all products. Equity Markets revenues increased, driven by growth in cash trading, alternative execution and related civil litigation, $647 million or 16% inCapital Markets and Banking, and $176 million or 31% inTransaction Services. The increase in the average risk capital is due largely to the impact on operational risk capital of the WorldCom and Litigation Reserve Charge and the acquisition of KorAm.
Capital Markets and Banking net income of $5.395 billion in 2004 increased $753 million or 16% compared to 2003, primarily due to a lower provision for credit losses as well as an increase in Lending,derivatives products. Fixed Income Markets revenue increases reflected growth in interest rate products, commodity derivatives, foreign exchange, and Equity Markets revenues. The increase in expensessecuritized markets. Investment Banking revenue growth was driven by increased advisory fees on strong growth in completed M&A transactions and growth in equity underwriting. Lending revenue growth was mainly due to hedging gains in credit derivatives. Revenues also include a $386 million pretax gain on the sale of Nikko Cordial shares.
Operating expenses increased due to higher incentive compensation, including repositioning costs of $212 million pretax (in the impact of recent acquisitions, higher legal reserves, and2005 first quarter), increased investment spending on strategic growth initiatives. Net incomeinitiatives, and the impact of $4.642 billionthe acquisitions of Knight and Lava Trading. Expenses included a $160 million pretax charge to increase reserves for previously disclosed legal matters recorded in 2003 increased $647 million or 16% compared to 2002, primarily reflecting a lowerthe 2005 fourth quarter.
The provision for credit losses increases increased, reflecting an increase to loan loss reserves in Fixed Income Markets2005 and the absence of prior-year redenomination lossesloan loss reserve releases recorded in Argentina, partially offset by mark-to-market losses on credit derivatives (which serve as an economic hedge for the loan portfolio) as credit spreads tightened.
Transaction Services net income of $1.041 billion in 2004 increased $296 million or 40% from 2003, primarily due to higher revenue reflecting growth in assets under custody and liability balances, improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lowerprior year. The provision for credit losses partially offset by higher expenses.in 2005 included $289 million to increase loan loss reserves for increases in off-balance sheet exposure, and a slight decline in credit quality.
Transaction ServicesNet income net income of $745 million in 2003 increased $176 million or 31% from 2002,theU.S. decreased primarily due to a loweran increased provision for credit losses,losses.
The negative impact of a flat yield curve on revenues and the benefitabsence of lower taxes due toloan loss reserve releases recorded in the application of APB 23 indefinite investment criteria and business consolidation, as well as lower expenses resulting from expense control initiatives.prior year caused a decline in Mexican net income.
GCIB Net Income—Regional View
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
North America (excluding Mexico) | $ | (2,190 | ) | $ | 2,542 | $ | 1,011 | ||
Mexico | 659 | 407 | 423 | ||||||
EMEA | 1,132 | 919 | 755 | ||||||
Japan | 334 | 162 | 124 | ||||||
Asia (excluding Japan) | 1,290 | 775 | 728 | ||||||
Latin America | 813 | 566 | 131 | ||||||
Net income | $ | 2,038 | $ | 5,371 | $ | 3,172 | |||
GCIBLatin America net income decreased primarily due to the absence of loan loss reserve releases recorded in 2004 primarilyand a decline in revenues from completed corporate finance transactions. Credit quality in Argentina and Brazil improved.
EMEA net income increased as a result of the WorldComstrong revenues across all businesses and Litigation Reserve Charge in North America (excluding Mexico), partially offset by increases in Asia (excluding Japan), Mexico, Latin America, EMEA and Japan. Asia (excluding Japan) net incomelower credit provisions. Revenues increased $515 million in 2004 primarily due to increases in Fixed Income (mainlyMarkets, Equity Markets, Investment Banking, and Lending, on higher volumes and growth in global distressed debt trading and strong foreign exchange trading results), Transaction Services Cash Management revenues, loan loss reserve releases as a result of improving credit quality and the acquisition of KorAm. Mexico netcustomer activity.
Net income inJapanincreased $252 million in 2004 primarily due to loan loss reserve releases resulting from improving credit quality. Latin America net income increased $247 millionstrong growth in 2004 primarily due to loan loss reserve releases resulting from improving credit quality, partially offset by strong prior-year trading gains in Brazil. EMEA net income increased $213 million in 2004 primarily due to the $378Equity Markets and Fixed Income Markets revenues and a $248 million after-tax gain on the sale of Samba, a lower provision for credit losses reflecting the absence of prior-year credit losses related to exposure to Parmalat, strong revenue growth in Transaction Services and current period credit recoveries, partially offset by an increase in legal reserves. Japan net income increased $172 million in 2004, primarily driven by increases in Fixed Income and Investment Banking revenue, a gain on the partial sale of Nikko Cordial shares and a lower provision for credit losses due to loan loss reserve releases.recorded in the 2005 fourth quarter.
CAPITAL MARKETS AND BANKING Net income in
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 17,106 | $ | 16,445 | $ | 15,744 | |||
Operating expenses | 9,959 | 8,910 | 7,671 | ||||||
Provision for credit losses | (777 | ) | 738 | 2,046 | |||||
Income before taxes and minority interest | 7,924 | 6,797 | 6,027 | ||||||
Income taxes | 2,440 | 2,118 | 2,008 | ||||||
Minority interest, after-tax | 89 | 37 | 24 | ||||||
Net income | $ | 5,395 | $ | 4,642 | $ | 3,995 | |||
Average risk capital(1) | $ | 17,666 | $ | 14,785 | |||||
Return on risk capital(1) | 30 | % | 31 | % | |||||
Return on invested capital(1) | 24 | % | 24 | % | |||||
Capital Markets and BankingAsia reported net income of $5.395 billion in 2004, an increase of $753 million or 16% from 2003,decreased primarily due to a lower provision for credit losses as well as an increase in Lending, Fixed Income and Equity Markets revenues. Net income of $4.642 billion in 2003 increased $647 million or 16% compared to 2002, primarily due to a lower provision for credit losses, increases in Fixed Income Markets revenues, mainly in global distressed debt trading and Investment Banking, partially offset by declines in Lending and Equity Markets.foreign exchange trading.
2004 vs. 2003
Revenues, net of interest expense of $17.106 billion, increased in 2004 increased $661 million or 4% from 2003. The increase in revenues in 2004 was primarily driven by increases inour Lending, Fixed Income Markets, and Equity Markets. Lending increased primarily due to the absence of prior-year losses in credit derivatives (which serve as an economic hedge for the loan portfolio) and the acquisition of KorAm. Fixed Income Markets increasedMarkets' increase was driven primarily due toby higher trading in commodities, distressed debt and mortgage trading, partially offset by declines in interest rate and foreign exchange trading. The Equity Markets increase primarily reflectsreflected increases in cash trading, including the impact of the Lava Trading acquisition and higher derivatives, partially offset by declines in convertibles. Investment Banking wasrevenues were flat, reflecting lower debt underwriting offset by growth in equity underwriting and advisory and other fees, primarily M&A.
Revenues, net of interest expense, of $16.445 billion in 2003 increased $701 million or 4% from 2002. Revenue growth in 2003 was driven by increases in Fixed Income Markets and Investment Banking, partially offset by declines in Lending and Equity Markets. Fixed Income Markets increased primarily due to higher debt trading as companies took advantage of the low interest rate environment. Investment Banking increased primarily reflecting strong debt underwriting volumes, partially offset by lower Equity underwriting volumes and advisory and other fees, primarily lower M&A. Lending declined primarily reflecting mark-to-market losses on credit derivatives as credit spreads tightened, partially offset by the absence of 2002 redenomination losses and write-downs of sovereign securities in Argentina. Equity Markets declined primarily due to lower business volumes and declines in derivatives.
Operating expenses of $9.959 billion in 2004 increased, $1.049 billion or 12% from 2003, primarily due to higher compensation and benefits expense, (primarily reflecting a higher incentive compensation accrual), increased legal reserves, increased investment spending on strategic growth initiatives and the acquisitions of KorAm and Lava Trading. Operating expenses increased $1.239 billion or 16% in 2003 compared to 2002, primarily due to increased compensation and benefits expense, which is impacted by the revenue and credit performance of the business. The increase in 2003 also reflects costs associated with the repositioning of the Company's business in Latin America (primarily severance-related) and higher legal fees.
The provision for credit losses was ($777) million in 2004, down, $1.515 billion from 2003, primarily due to lower credit losses in the power and energy industry in Argentina and in Brazil, and due to prior-year losses recorded on Parmalat, as well asand loan loss reserve releases as a result of improving credit quality globally. The
Net income in theU.S. increased primarily due to a lower provision for credit losses, decreased $1.308 billionas well as increases in 2003,Lending, Fixed Income Markets and Equity Markets revenues.
Mexico net income increased primarily due to the absence of prior-year provisions for Argentina and exposures in the energy and telecommunications industries, as well asloan loss reserve releases reflecting improvedresulting from improving credit trends,quality.
Latin America net income increased primarily due to loan loss reserve releases on improving credit quality, partially offset by the provisionabsence of $338strong prior-year Fixed Income Markets revenues in Brazil.
InEMEA, declines in Fixed Income Markets and relatively flat advisory and other revenues, as well as increased expenses from legal reserves, higher investment spending, and compensation and benefits, drove flat results.
Net income inJapan increased, driven by increases in Fixed Income Markets and Investment Banking revenues, a gain on the partial sale of Nikko Cordial shares worth $20 million pretax, and a lower provision for credit losses relateddue to exposure to Parmalat.loan loss reserve releases.
Cash-basis loans were $1.794 billion, $3.263 billion, and $3.423 billion at December 31, 2004, 2003, and 2002, respectively. Cash-basis loans net of write-offs decreased $1.469 billion from December 31, 2003, Net income inAsia increased primarily due to decreases related to borrowers in the telecommunications and power and energy industries and charge-offs against reserves as well as paydowns from corporate borrowers in Argentina, Mexico, Australia, Hong Kong, and New Zealand, partially offset by increases in Korea reflectingFixed Income Markets (mainly in global distressed debt trading and foreign exchange trading), loan loss reserve releases as a result of improving credit quality, and the acquisition of KorAm. The decrease
41
Transaction Services
Transaction Services Net Income In billions of dollars | Transaction Services 2005 Net Income by Region | Transaction Services 2005 Net Revenue by Type | ||
Transaction Services is composed of Cash Management, Trade Services and Global Securities Services (GSS). Cash Management and Trade Services provide comprehensive cash management and trade finance for corporations and financial institutions worldwide. GSS provides custody and fund services to investors such as insurance companies and pension funds, clearing services to intermediaries such as broker/dealers, and depository and agency/trust services to multinational corporations and governments globally. Revenue is generated from fees for transaction processing, net interest revenue on Trade Services loans and deposits in 2003 is primarily due to decreases to corporate borrowersCash Management and GSS, and fees on assets under custody in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by the reclassification of cash-basis loans ($248 million) in Mexico from Transaction Services to Capital Markets and Banking and increases in exposure to Parmalat and to the energy industry.
TRANSACTION SERVICESGSS.
| | 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | ||||||||||||||||||||||
Revenues, net of interest expense, by region: | Revenues, net of interest expense, by region: | |||||||||||||||||||||||
U.S. | $ | 1,039 | $ | 827 | $ | 829 | 26 | % | — | % | ||||||||||||||
Mexico | 191 | 176 | 128 | 9 | 38 | |||||||||||||||||||
Latin America | 519 | 435 | 492 | 19 | (12 | ) | ||||||||||||||||||
EMEA | 1,756 | 1,535 | 1,353 | 14 | 13 | |||||||||||||||||||
Japan | 84 | 73 | 64 | 15 | 14 | |||||||||||||||||||
| 2004 | 2003 | 2002 | Asia | 1,302 | 1,032 | 733 | 26 | 41 | |||||||||||||||
| In millions of dollars | |||||||||||||||||||||||
Revenues, net of interest expense | $ | 4,066 | $ | 3,588 | $ | 3,638 | Revenues, net of interest expense | $ | 4,891 | $ | 4,078 | $ | 3,599 | 20 | % | 13 | % | |||||||
Operating expenses | 2,841 | 2,556 | 2,583 | Operating expenses | 3,316 | 2,846 | 2,561 | 17 | 11 | |||||||||||||||
Provision for credit losses | (198 | ) | (6 | ) | 209 | Provision for credit losses | 19 | (198 | ) | (6 | ) | NM | NM | |||||||||||
Income before taxes and minority interest | 1,423 | 1,038 | 846 | Income before taxes and minority interest | $ | 1,556 | $ | 1,430 | $ | 1,044 | 9 | % | 37 | % | ||||||||||
Income taxes | 378 | 293 | 276 | Income taxes | 420 | 381 | 296 | 10 | 29 | |||||||||||||||
Minority interest, after-tax | 4 | — | 1 | |||||||||||||||||||||
Minority interest, net of taxes | Minority interest, net of taxes | 1 | 4 | — | (75 | ) | — | |||||||||||||||||
Net income | Net income | $ | 1,135 | $ | 1,045 | $ | 748 | 9 | % | 40 | % | |||||||||||||
Net income by region: | Net income by region: | |||||||||||||||||||||||
U.S. | $ | 95 | $ | 84 | $ | 132 | 13 | % | (36 | )% | ||||||||||||||
Mexico | 74 | 115 | 58 | (36 | ) | 98 | ||||||||||||||||||
Latin America | 153 | 192 | 129 | (20 | ) | 49 | ||||||||||||||||||
EMEA | 320 | 272 | 215 | 18 | 27 | |||||||||||||||||||
Japan | 13 | 12 | 12 | 8 | — | |||||||||||||||||||
Asia | 480 | 370 | 202 | 30 | 83 | |||||||||||||||||||
Net income | $ | 1,041 | $ | 745 | $ | 569 | Net income | $ | 1,135 | $ | 1,045 | $ | 748 | 9 | % | 40 | % | |||||||
Average risk capital(1) | $ | 1,379 | $ | 1,479 | Average risk capital(1) | $ | 1,328 | $ | 1,380 | $ | 1,481 | (4 | )% | (7 | )% | |||||||||
Return on risk capital(1) | 75 | % | 50 | % | Return on risk capital(1) | 85 | % | 76 | % | 51 | % | |||||||||||||
Return on invested capital(1) | 46 | % | 34 | % | Return on invested capital(1) | 47 | % | 46 | % | |||||||||||||||
Key indicators: | Key indicators: | |||||||||||||||||||||||
Liability balances(average in billions of dollars) | Liability balances(average in billions of dollars) | $ | 145 | $ | 121 | $ | 100 | 20 | % | 21 | % | |||||||||||||
Assets under custody at year end(in trillions of dollars) | Assets under custody at year end(in trillions of dollars) | 8.6 | 7.9 | 6.4 | 9 | 23 | ||||||||||||||||||
NM Not meaningful.
42
2005 vs. 2004
Transaction ServicesRevenues reported ,net income of $1.041 billioninterest expense, increased, reflecting growth in 2004, up $296 million or 40% from 2003,Cash Management and Global Securities Services. Average liability balances grew 20%, primarily due to higherincreases inAsia, EMEA and theU.S., reflecting positive flow from new and existing customers. Average liability balances reached $155 billion in the fourth quarter.
Cash Management revenue reflectingincreased mainly due to growth in liability balances, improved spreads, and increased fees from new sales. Revenue growth was at a double-digit rate across all regions.
Global Securities Services revenue increased, primarily reflecting growth inLatin America, Asia and theU.S.; higher assets under custody and fees; and the impact of acquisitions. Assets under custody reached $8.6 trillion, an increase of $0.7 trillion, or 9%, on strong momentum from record sales, equity markets, and the inclusion of ABN Amro and Unisen assets under custody. This was partially offset by a strengthened U.S. dollar and a slowdown in fixed income markets.
Trade Services revenue increased, due to growth inAsia andEMEA, partially offset by spread compression inMexico andLatin America.
The change inthe provision for credit losses was attributable to a reserve release of $163 million in 2004; this compared to reserve increases of $18 million in 2005.
Operating expenses increased on higher business volumes, acquisitions, and investments in growth opportunities.
Net income in theU.S. increased, due to growth in liability balances, improved spreads, and an increase in assets under custody, partially offset by higher expenses due to acquisitions and continued investment spending.
Mexico net income decreased, due primarily to loan loss reserve releases in 2004. Adjusting for the reserve releases in 2004, net income momentum was strong.
Latin America net income decreased, due primarily to the impact of loan loss reserve releases in 2004.
EMEA net income increased, mainly due to increases in liability balances and assets under custody, which drove strong revenues in Cash Management and Global Securities Services.
Asia net income rose in 2005, driven by new sales, increased fees from higher customer volumes, the impact of the KorAm acquisition, and growth in liability balances.
Japan net income increased, mainly due to increases in liability balances and assets under custody.
Cash-basis loans, which in theTransaction Services businesses are primarily trade finance receivables, were $81 million and $112 million at December 31, 2005 and 2004, respectively. The decrease of $31 million in 2005 was primarily due to a decline in Brazil.
2004 vs. 2003
Revenues, net of interest expense, increased, reflecting growth in Cash Management and Global Securities Services, offset by declines in Trade Services.
Cash Management revenue increased, mainly due to growth in liability balances (primarily inAsia andEMEA and the acquisition of KorAm), improved spreads, a benefit from foreign currency translation and the impact of KorAm, and a lower provision for credit losses,increased fees. This was partially offset by higher expenses. Net income of $745 million in 2003 increased $176 million or 31% from 2002, primarily due to a lower provision for credit losses, the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, business consolidation, and lower expenses resulting from expense control initiatives.
As shown in the following table, average liability balances of $121 billion grew 21% compared to 2003, primarily due to increases in Asia and Europe reflecting positive flow and the impact of the KorAm acquisition. Assets under custody reached $7.9 trillion, an increase of $1.5 trillion or 23% compared to 2003, primarily reflecting market appreciation, a benefit from foreign currency translation, and incremental net sales.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
Liability balances(average in billions) | $ | 121 | $ | 100 | $ | 85 | |||
Assets under custody(EOP in trillions) | $ | 7.9 | $ | 6.4 | $ | 5.1 | |||
Revenues, net of interest expense, increased $478 million or 13% to $4.066 billion in 2004, reflecting growth in Cash and Global Securities Services, offset by declines in Trade. Revenue in Cash Management increased $309 million or 15% from 2003, mainly due to growth in liability balances, improved spreads, the impact of the KorAm acquisition and a benefit from foreign currency translation and increased fees. Revenue in Global Securities Services increased $186 million or 19% from 2003, primarily reflecting higher assets under custody and fees and the impact of acquisitions, partially offset by a prior-year gain on the sale of interest in a European market exchange. Trade revenue decreased $15 million or 3% from 2003, primarily due to lower spreads. Revenues, net of interest expense, were $3.588 billion in 2003, down $50 million or 1% from 2002, driven by declines in Trade and Global Securities Services, offset by increases in Cash Management. Revenue in Trade decreased $71 million or 11% from 2002 primarily due to lower spreads reflecting the low interest rate environment in 2003, price compression and decreased asset levels. Revenue in Global Securities Services decreased $10 million or 1%, mainly due to lower market capitalization and declines in depository receipt issuance activity. Cash Management revenue increased $31 million or 2% primarily due to increased business volumes reflecting higher liability balances, and a benefit from foreign exchange currency translation. The 2003 and 2004 periods included gains on the early termination of intracompany deposits (which were offset inCapital Markets and Banking). in 2003.
Operating expensesGlobal Securities Services revenue increased, $285 million or 11%primarily reflecting higher fees on a $1.5 trillion increase in 2004 to $2.841 billion,assets under custody from market appreciation, foreign translation benefits, incremental net sales, and the impact of acquisitions. These improvements were partially offset by a prior-year gain on the sale of interest in a European market exchange.
Trade Services revenue decreased, primarily due to lower spreads.
Operating expenses increased on the impact of foreign currency translation and higher business volumes, including the effect of acquisitions, as well as increased compensation and benefits costs. Operating expenses of $2.556 billion in 2003 decreased $27 million or 1% from $2.583 billion in 2002, primarily reflecting expense control initiatives. The decrease in operating expenses in 2003 was partially offset by costs associated with the repositioning of the Company's business in Latin America, investment spending related to higher business volumes and integration costs associated with new business relationships.
The provision for credit losses was ($198) million, ($6) million, and $209 million in 2004, 2003, and 2002, respectively. The provision for credit losses decreased, by $192 million from 2003, primarily due to a loan loss reserve releasesrelease of $163 million in 2004 as a result of improving credit quality and current period net credit recoveries inLatin America. The provision for credit losses decreased by $215 million from 2002, primarily due to prior-year write-offs in Argentina and reserve releases reflecting improved credit trends. The reduction in credit costs was partially offset by 2003 provisions for selected borrowers in Brazil and Parmalat.America.
Cash-basis loans, whichNet income in theTransaction ServicesU.S. decreased, due to loan loss reserve releases in 2003, increased investment spending, divestitures, increases in expenses, and gains on the early termination of intracompany deposits (which were offset inCapital Markets and Banking) in 2003.
Mexico net income increased, due primarily to loan loss reserve releases in 2004 and increases in fee revenue.
Latin America net income increased, due primarily to loan loss reserve releases in 2004.
EMEA net income increased, due to increases in liability balances, growth in assets under custody, and the impact of acquisitions.
Asia net income rose, due to increases in liability balances and a benefit from the impact of KorAm.
Japan net income was flat at $12 million. Growth in liability balances and assets under custody were offset by higher business are primarily trade finance receivables,and investment spending, including the Nikko Cititrust joint venture.
Cash-basis loans were $112 million $156 million, and $572$156 million at December 31, 2004 2003, and 2002,2003, respectively. The decrease in cash-basis loans of $44 million in 2004 was primarily due to charge-offs in Argentina and Poland. Cash-basis loans decreased $416 million
43
Other CIB includes offsets to certain line items reported in 2003, primarily due to a reclassification of cash-basis loans ($248 million) in Mexico fromTransaction Services toCapital Markets and Banking, along with charge-offs in Argentina and Poland.
OTHER CORPORATE
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 602 | $ | (12 | ) | $ | (217 | ) | ||
Operating expenses | 7,725 | (11 | ) | 1,839 | ||||||
Loss before income taxes (benefits) | (7,123 | ) | (1 | ) | (2,056 | ) | ||||
Income taxes (benefits) | (2,725 | ) | 15 | (664 | ) | |||||
Net income (loss) | $ | (4,398 | ) | $ | (16 | ) | $ | (1,392 | ) | |
Other Corporate—which includes intra-GCIB segment eliminations,other CIB segments, certain one-time non-recurring items and tax amounts not allocated to GCIB products—reportedCIB products.
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||
Revenues, net of interest expense | $ | 2 | $ | 602 | $ | (12 | ) | |||
Operating expenses | (684 | ) | 7,725 | (11 | ) | |||||
Income (loss) before income taxes (benefits) | $ | 686 | $ | (7,123 | ) | $ | (1 | ) | ||
Income taxes (benefits) | 253 | (2,725 | ) | 15 | ||||||
Net income (loss) | $ | 433 | $ | (4,398 | ) | $ | (16 | ) | ||
2005 vs. 2004:
Net income of $433 million in 2005, compared to a net loss of $4.398 billion in 2004, comparedis primarily the result of the $4.95 billion after-tax WorldCom and Litigation Reserve Charge recorded in 2004 and the release of WorldCom/ Research litigation reserves of $375 million after-tax in the 2005 fourth quarter. Results in 2004 included a $378 million after-tax gain on the sale of Samba recorded inEMEA. Results in 2005 included a $120 million after-tax insurance recovery related to a netWorldCom and Enron legal matters recorded in the 2005 fourth quarter.
2004 vs. 2003:
Net loss of $16 million in 2003, reflecting$4.398 billion included the $4.95 billion after-tax WorldCom and Litigation Reserve Charge, partially offset by a $378 million after-tax gain on the sale of Samba and a $120 million after-tax insurance recovery related to WorldCom and Enron legal matters. The net loss of $1.392 billionrecorded in 2002 was primarily a result of a $1.3 billion after-tax charge related to the establishment of reserves for regulatory settlements and related civil litigation.EMEA.
44
GLOBAL CORPORATE AND INVESTMENT BANK OUTLOOKCorporate and Investment Banking 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 73.95.
GCIBCIB 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 the approximately 100 countries in which the businesses operate.business operates. Global economic and market events can have both positive and negative effects on the revenue and credit performance of the businesses.
LossesAs we enter the year, the credit environment is stable; however, 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-definednarrowly defined business or loan type.
Limited staff reductions will be made in the Global Corporate and Investment Bank in early 2005. The reductions will affect an estimated 1,400 staff and will result in an approximately $275 million pre-tax charge during the 2005 first quarter.
Capital Markets and Banking in 2004 reported strong Lending and Fixed Income Markets results driven by improving credit trends and a favorable interest rate environment, while Equity Markets benefited from increased capital markets volumes. Additionally, our international business platform benefited from the acquisition of KorAm in Asia.
In 2005, our2006,Capital Markets and& Banking initiatives will continue to focus on product offerings that targetthe delivery of financial solutions tailored to clients' needs and the targeting of client segments with strong growth and profitability prospects. The Company'sbusiness intends to leverage its position in flow products and client relationships to increase its share of higher-margin structured products, for which continued demand is expected. Building on the momentum of 2005,Capital Markets and Banking will continue to leverage the acquisitions of Lava Trading, and Knight Trading's derivativederivatives markets businesses and the more recently announced electronic communications network, to grow the Equity Markets business. The business in the past year have been key steps in that direction, strengthening ourhas initiated a multi-year build out of structured products capabilities in equities, derivatives,rates, currencies and principal trading. The businesscredit, which should become a platform for future growth. Banking will continue to invest in distressed assets, where it can provide a valuable service to corporate clients, particularly in Asia, by helping them find solutions to their debt burdens. In banking,build on the business will continue to pursue profitable market share gains with a focus on M&Asuccessful launch last year of the National Corporate Bank and equities and will also take steps to broaden its client base. It has not addressed a large number of potential customersNational Investment Bank in the U.S. and continue to expand its client base in Europe and the $500 million to $2.5 billion revenue range or foremerging markets, particularly the rapidly expanding small and medium enterprises (SME) business segment. In parallel, leveraging the CIB's global network, client teams will seek to further strengthen client relationships and increase market share and revenues.
In 2006,Transaction Services will work to grow revenues and earnings organically while funding strategic investments. The recent investments in funds services, cross-border payments and liquidity management will drive some of this growth. The recent U.S. interest rate increases are expected to have a positive impact on revenue; however, this may be partially offset by industry-wide spread compression, especially in trade financing. Global Securities Services is well positioned to capitalize on the momentum in the global capital markets, especially in emerging markets. The GCIB has formed specific organizations with dedicated senior leadership, staff and funding to pursue these opportunities effectively.
Transaction Services has demonstrated significant growth over the past year and will continue to invest in its Funds Services business. Deals such as Forum Financial and ABN Amro's custody business have increased Citigroup's ability to service its hedge fund and mutual fund clients and significantly broadened its Funds Services business. The Company has an initiative to launch its correspondent clearing in the North American market by leveraging its existing infrastructure to service client needs.45
GLOBAL WEALTH MANAGEMENT
GLOBAL WEALTH MANAGEMENT—2004 NET INCOME
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2002 | $ | 1.3 | |
2003 | $ | 1.3 | |
2004 | $ | 1.2 |
GLOBAL WEALTH MANAGEMENT—2004 NET INCOME BY PRODUCT
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Net Income In billions of dollars | |||
2005 Net Income by Product | 2005 Net Income by Region* |
GLOBAL WEALTH MANAGEMENT—2004 NET INCOME BY REGION*
[EDGAR REPRESENTATION OF GRAPHIC DATA]
*Excludes Japan loss of $82 million. |
Global Wealth Management is composed of the exit plan implementation forSmith Barney Private Client businesses (including Citigroup Wealth Advisors outside the U.S.), CitigroupPrivate Bank operations in Japan.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 8,511 | $ | 7,840 | $ | 7,566 | |||
Operating expenses | 6,665 | 5,750 | 5,562 | ||||||
Provision for credit losses | (5 | ) | 12 | 24 | |||||
Income before taxes | 1,851 | 2,078 | 1,980 | ||||||
Income taxes | 652 | 735 | 698 | ||||||
Net income | $ | 1,199 | $ | 1,343 | $ | 1,282 | |||
Average risk capital(1) | $ | 1,877 | $ | 1,866 | |||||
Return on risk capital(1) | 64 | % | 72 | % | |||||
Return on invested capital(1)ul] | 52 | % | 70 | % | |||||
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||
Revenues, net of interest expense by region: | |||||||||||||||
U.S. | $ | 7,628 | $ | 7,241 | $ | 6,596 | 5 | % | 10 | % | |||||
Mexico | 124 | 138 | 117 | (10 | ) | 18 | |||||||||
Latin America | 203 | 227 | 212 | (11 | ) | 7 | |||||||||
EMEA | 295 | 291 | 260 | 1 | 12 | ||||||||||
Japan | (6 | ) | 200 | 264 | NM | (24 | ) | ||||||||
Asia | 440 | 432 | 398 | 2 | 9 | ||||||||||
Revenues, net of interest expense | $ | 8,684 | $ | 8,529 | $ | 7,847 | 2 | % | 9 | % | |||||
Operating expenses | 6,696 | 6,666 | 5,753 | — | 16 | ||||||||||
Provision for loan losses | 29 | (5 | ) | 12 | NM | NM | |||||||||
Income before taxes | $ | 1,959 | $ | 1,868 | $ | 2,082 | 5 | % | (10 | )% | |||||
Income taxes | 715 | 659 | 736 | 8 | (10 | ) | |||||||||
Net income | $ | 1,244 | $ | 1,209 | $ | 1,346 | 3 | % | (10 | )% | |||||
Net income by region: | |||||||||||||||
U.S. | $ | 1,141 | $ | 1,179 | $ | 1,076 | (3 | )% | 10 | % | |||||
Mexico | 44 | 52 | 41 | (15 | ) | 27 | |||||||||
Latin America | 17 | 43 | 44 | (60 | ) | (2 | ) | ||||||||
EMEA | 8 | 15 | (16 | ) | (47 | ) | NM | ||||||||
Japan | (82 | ) | (205 | ) | 83 | 60 | NM | ||||||||
Asia | 116 | 125 | 118 | (7 | ) | 6 | |||||||||
Net income | $ | 1,244 | $ | 1,209 | $ | 1,346 | 3 | % | (10 | )% | |||||
Average risk capital(1) | $ | 2,113 | $ | 1,907 | $ | 1,896 | 11 | % | 1 | % | |||||
Return on risk capital(1) | 59 | % | 63 | % | 71 | % | |||||||||
Return on invested capital(1) | 46 | % | 52 | % | |||||||||||
46
Global Wealth ManagementSmith Barney reported net income of $1.199 billion in 2004, a decrease of $144 million or 11% from 2003, reflecting a decline inPrivate Bank, partially offset by double-digit growth in
Smith Barney Net Income In billions of dollars | Smith Barney Total Assets Under Fee-Based Management In billions of dollars at December 31 | Smith Barney Financial Advisors At December 31 | ||
Smith Barney.Private Bank net income provides investment advice, financial planning and brokerage services to affluent individuals, companies, and non-profits through a network of $318 millionmore than 13,000 Financial Advisors in 2004 decreased $233 million or 42% compared to 2003, reflecting a $288 million declinemore than 600 offices primarily in Japan mainly due to a $244 million after-tax charge associated with the closure ofPrivate Bank operations in Japan, as well as a decline in transactional revenue. Excluding Japan,Private Bank income grew $55 million or 12%, driven by growth in recurring fee-based and net interest revenues, a lower effective tax rate and improved credit costs, which were partially offset by higher incentive compensation costs.U.S.Smith Barney net incomegenerates revenue from managing client assets, acting as a broker for clients in the purchase and sale of $881 million insecurities, financing customers' securities transactions and other borrowing needs through lending, and through the sale of mutual funds.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||||
Revenues, net of interest expense | $ | 6,825 | $ | 6,485 | $ | 5,851 | 5 | % | 11 | % | ||||
Operating expenses | 5,405 | 5,016 | 4,570 | 8 | 10 | |||||||||
Provision for loan losses | 12 | — | 1 | — | (100 | ) | ||||||||
Income before taxes | $ | 1,408 | $ | 1,469 | $ | 1,280 | (4 | )% | 15 | % | ||||
Income taxes | 537 | 578 | 485 | (7 | ) | 19 | ||||||||
Net income | $ | 871 | $ | 891 | $ | 795 | (2 | )% | 12 | % | ||||
Average risk capital(1) | $ | 938 | $ | 1,156 | $ | 1,269 | (19 | )% | (9 | )% | ||||
Return on risk capital(1) | 93 | % | 77 | % | 63 | % | ||||||||
Return on invested capital(1) | 59 | % | 57 | % | ||||||||||
Key indicators: (in billions of dollars) | ||||||||||||||
Total assets under fee-based management | $ | 321 | $ | 240 | $ | 209 | 34 | % | 15 | % | ||||
Total client assets | $ | 1,130 | $ | 978 | $ | 912 | 16 | 7 | ||||||
Financial advisors | 13,414 | 12,138 | 12,207 | 11 | (1 | ) | ||||||||
Annualized revenue per financial advisors (in thousands of dollars) | $ | 556 | $ | 536 | $ | 473 | 4 | 13 | ||||||
47
2005 vs. 2004 increased $89 million or 11% compared to 2003, primarily driven by increases in asset-based revenue and transactional revenue, partially offset by increased marketing expenses, legal and compliance charges and continued investment in new client offerings.
Net incomeRevenues, net of $1.343 billion in 2003 increased $61 million or 5% from 2002, reflecting double-digit growth inPrivate Bankinterest expense, partially offset by a decline inSmith Barney.Private Bank net income of $551 million in 2003 increased $90 million or 20% from 2002, primarily due to a $459 million increase in asset-based revenue. Lower client trading volumes drove a decline in transactional revenue, which decreased by $119 million.
Operating expensesincreased, investment managementprimarily due to higher production-related compensation as a result of increased revenue. The increase also included repositioning charges of $28 million pretax in the first quarter of 2005, higher legal costs, and capital markets activity combined withintegration costs related to the acquisition of the Legg Mason retail brokerage business.
Provision for loan loss increased, primarily reflecting the impact of growth in lending revenues, partially offset by increased incentive compensation associated with the higher revenues.tailored loans.
On December 1, 2005,Smith Barney net incomecompleted the acquisition of $792 millionLegg Mason's private client business, which added 124 branches, approximately $100 billion of assets under management and more than 1,200 financial advisors, primarily in 2003 decreased $29 million or 4% from 2002,the Mid-Atlantic and Southeastern states. These branches and financial advisors were converted toSmith Barney's operating platform during the 2006 first quarter.
Total assets under fee-based management increased, reflecting organic growth and the addition of Legg Mason. Total client assets, including assets under fee-based management, increased primarily due to lower earnings on capital, a higher effective tax rateequity market values, the acquisition of Legg Mason and increased legal, advertising and marketing costs.positive net flows of $28 billion.
2004 vs. 2003
The table below shows net income by region for Global Wealth Management:
Global Wealth Management Net Income—Regional View
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
North America (excluding Mexico) | $ | 1,169 | $ | 1,073 | $ | 1,071 | |||
Mexico | 52 | 41 | 20 | ||||||
EMEA | 15 | (16 | ) | 8 | |||||
Japan | (205 | ) | 83 | 60 | |||||
Asia (excluding Japan) | 125 | 118 | 92 | ||||||
Latin America | 43 | 44 | 31 | ||||||
Net income | $ | 1,199 | $ | 1,343 | $ | 1,282 | |||
Global Wealth Management net income decreased $144 million in 2004 from the prior year, primarily due to the decline in Japan, partially offset by growth in North America, EMEA, Mexico and Asia. The Japan net loss of $205 million in 2004 represented a $288 million decrease in income from 2003, due to thePrivate Bank closure. North America net income of $1.169 billion increased $96 million from 2003, reflecting higherSmith Barney results of $89 million, primarily driven by strong asset-based revenue growth, partially offset by higher operating expenses and higherPrivate Bank results of $7 million, which were primarily driven by strong banking and lending volumes, as well as a lower effective tax rate, and partially offset by higher employee-related costs and net interest margin compression. EMEA net income of $15 million in 2004 increased $31 million from 2003, primarily driven by growth in fee income as well as transactional revenues and improved credit costs. Mexico net income of $52 million in 2004 increased $11 million from 2003, resulting from higher transactional revenue and higher fee income. Asia net income of $125 million increased $7 million from 2003, primarily reflecting higher fee-based and net interest revenue, partially offset by higher employee-related costs driven by investments in bankers and product specialists.
SMITH BARNEY
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 6,467 | $ | 5,844 | $ | 5,865 | |||
Operating expenses | 5,015 | 4,567 | 4,555 | ||||||
Provision for credit losses | — | 1 | 6 | ||||||
Income before taxes | 1,452 | 1,276 | 1,304 | ||||||
Income taxes | 571 | 484 | 483 | ||||||
Net income | $ | 881 | $ | 792 | $ | 821 | |||
Average risk capital(1) | $ | 1,126 | $ | 1,239 | |||||
Return on risk capital(1) | 78 | % | 64 | % | |||||
Return on invested capital(1) | 58 | % | 48 | % | |||||
Smith Barney reported net income of $881 million in 2004 compared to $792 million in 2003 and $821 million in 2002. The $89 million or 11% increase during 2004, primarily due to increases in both asset-based revenue and transactional revenue, was partially offset by increased marketing, legal and compliance expenses and continued investment in new client offerings. Net income in 2003 declined $29 million or 4% compared to 2002, primarily due to lower earnings on capital, a higher effective tax rate and increased legal, advertising and marketing costs.
Revenues, net of interest expense, increased $623 million in 2004 to $6.467 billion, primarily due to increases in both asset-based fee revenue, reflecting higher assets under fee-based management, and transactional revenue, reflecting equity market appreciation driving trading. Revenues, net of interest expense, decreased $21 million
Operating expenses increased, primarily reflecting higher marketing, legal and compliance costs, as well as continued investment in 2003 to $5.844 billion, primarily due to lower earnings on capital and decreasesnew client offerings.
The increase in asset-based revenue, reflecting declines in fees from managed accounts and lower net interest revenue on security-based lending, partially offset by increased transactional revenue. The decrease in managed account revenue reflects a change in client asset mix during 2003.
Totaltotal assets under fee-based management were $240 billion, $209 billion, and $158 billion as of December 31, 2004, 2003, and 2002, respectively. The increase in 2004 and 2003 was primarily due to positive net flows and higher equity market values. Total client assets, including assets under fee-based management, of $1.156 trillion in 2004, increased $88 billion or 8% from $1.068 trillion in 2003, which in turn increased $177 billion from 2002. The increase in 2004 and 2003 was primarily due to higher equity market values and positive net flows of $24 billion.
Citigroup Investment Research
Citigroup Investment Research provides independent client-focused research to individuals and $28 billion, respectively. Balancesinstitutions around the world. The majority of expense for this organization is charged to the Global Equities business in Smith Barney's Bank Deposit Program totaled $43 billion in 2004, which increased slightly from 2003.Capital Markets and Banking andSmith Barney had 12,138 financial consultants as.
48
Private Bank Net Income In billions of dollars | Private Bank 2005 Net Income by Region* | Private Bank Client Business Volumes Under Management In billions of dollars at December 31 | ||
---|---|---|---|---|
*Excludes Japan loss of $82 million. |
Private Bankprovides personalized wealth management services for high-net-worth clients in 33 countries and territories. These services include comprehensive investment management (investment funds management, capital markets solutions, and trust, fiduciary and custody services), investment finance (credit services including real estate financing, commitments and letters of December 31, 2004, compared with 12,207 as of December 31, 2003,credit) and 12,690 as of December 31, 2002. Annualized revenue per financial consultant of $534,000 in 2004 increased 13% from $472,000 in 2003, which in turn increased 3% from $459,000 in 2002.
The following table details trends in total assets under fee-based management, total client assetsbanking services (deposit, checking and annualized revenue per financial consultant:
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | ||||||||
Consulting group and internally managed accounts | $ | 156 | $ | 137 | $ | 106 | |||
Financial consultant managed accounts | 84 | 72 | 52 | ||||||
Total assets under fee-based management(1) | 240 | 209 | 158 | ||||||
Smith Barney assets | 978 | 912 | 762 | ||||||
Other investor assets within Citigroup Global Markets | 178 | 156 | 129 | ||||||
Total Smith Barney assets(1) | $ | 1,156 | $ | 1,068 | $ | 891 | |||
Annualized revenue per financial consultant(in thousands of dollars) | $ | 534 | $ | 472 | $ | 459 | |||
Operating expenses increased $448 million in 2004 to $5.015 billion from $4.567 billion in 2003, which in turn increased $12 million from $4.555 billion in 2002. The increase in 2004 and 2003 primarily reflects higher legal and advertising and marketing costssavings accounts, as well as continued investment expenses.
PRIVATE BANKcash management and other traditional banking services).
| | 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | ||||||||||||||||||||||
Revenues, net of interest expense, by region: | Revenues, net of interest expense, by region: | |||||||||||||||||||||||
U.S. | $ | 803 | $ | 756 | $ | 745 | 6 | % | 1 | % | ||||||||||||||
Mexico | 124 | 138 | 117 | (10 | ) | 18 | ||||||||||||||||||
Latin America | 203 | 227 | 212 | (11 | ) | 7 | ||||||||||||||||||
EMEA | 295 | 291 | 260 | 1 | 12 | |||||||||||||||||||
Japan | (6 | ) | 200 | 264 | NM | (24 | ) | |||||||||||||||||
| 2004 | 2003 | 2002 | Asia | 440 | 432 | 398 | 2 | 9 | |||||||||||||||
| In millions of dollars | |||||||||||||||||||||||
Revenues, net of interest expense | $ | 2,044 | $ | 1,996 | $ | 1,701 | Revenues, net of interest expense | $ | 1,859 | $ | 2,044 | $ | 1,996 | (9 | )% | 2 | % | |||||||
Operating expenses | 1,650 | 1,183 | 1,007 | Operating expenses | 1,291 | 1,650 | 1,183 | (22 | ) | 39 | ||||||||||||||
Provision for credit losses | (5 | ) | 11 | 18 | ||||||||||||||||||||
Provision for loan losses | Provision for loan losses | 17 | (5 | ) | 11 | NM | NM | |||||||||||||||||
Income before taxes | 399 | 802 | 676 | Income before taxes | $ | 551 | $ | 399 | $ | 802 | 38 | % | (50 | )% | ||||||||||
Income taxes | 81 | 251 | 215 | Income taxes | 178 | 81 | 251 | NM | (68 | ) | ||||||||||||||
Net income | $ | 318 | $ | 551 | $ | 461 | Net income | $ | 373 | $ | 318 | $ | 551 | 17 | % | (42 | )% | |||||||
Client business volumes under management(in billions of dollars) | $ | 224 | $ | 195 | $ | 170 | ||||||||||||||||||
Net income by region: | Net income by region: | |||||||||||||||||||||||
U.S. | $ | 270 | $ | 288 | $ | 281 | (6 | )% | 2 | % | ||||||||||||||
Mexico | 44 | 52 | 41 | (15 | ) | 27 | ||||||||||||||||||
Latin America | 17 | 43 | 44 | (60 | ) | (2 | ) | |||||||||||||||||
EMEA | 8 | 15 | (16 | ) | (47 | ) | NM | |||||||||||||||||
Japan | (82 | ) | (205 | ) | 83 | 60 | NM | |||||||||||||||||
Asia | 116 | 125 | 118 | (7 | ) | 6 | ||||||||||||||||||
Net income | Net income | $ | 373 | $ | 318 | $ | 551 | 17 | % | (42 | )% | |||||||||||||
Average risk capital(1) | $ | 751 | $ | 627 | Average risk capital(1) | $ | 1,175 | $ | 751 | $ | 627 | 56 | % | 20 | % | |||||||||
Return on risk capital(1) | 42 | % | 88 | % | Return on risk capital(1) | 32 | % | 42 | % | 88 | % | |||||||||||||
Return on invested capital(1) | 40 | % | 85 | % | Return on invested capital(1) | 29 | % | 40 | % | |||||||||||||||
Key indicators: (in billions of dollars) | Key indicators: (in billions of dollars) | |||||||||||||||||||||||
Client assets under fee-based management | $ | 52 | $ | 52 | $ | 42 | — | % | 24 | % | ||||||||||||||
Other client activity | 174 | 172 | 153 | 1 | 12 | |||||||||||||||||||
Total client business volumes | Total client business volumes | $ | 226 | $ | 224 | $ | 195 | 1 | % | 15 | % | |||||||||||||
49
2005 vs. 2004
Private BankRevenues, net of interest expense reported net income of $318 million in 2004, down $233 million or 42% from 2003, reflecting a $288 million decline in Japan. The decline in Japan reflected a $244 million after-tax charge associated with, decreased due to the closure of the business,JapanPrivate Bankbusiness. Revenue inJapanincluded losses of $82 million from foreign exchange and interest rate hedges on anticipated client settlements for which reserves were established in the 2004 fourth quarter.
U.S.revenue increased, primarily driven by increased banking spreads and growth in lending volumes, combined with growth in fee income from discretionary and custody assets. Growth in theU.S.was negatively impacted by net interest revenue compression.
Mexicorevenue decreased as well aslower client transactional activity was partially offset by increased banking volumes.
Latin Americarevenue decreased, primarily driven by lower client transactional activity, a decline in transactionalfee income from discretionary and trust assets, and net interest revenue (see page 9). Excluding Japan, income grew $55 million or 12%compression.
EMEArevenue increased, primarily driven by growth in recurring fee-basedfee income from discretionary assets and growth in banking volumes.
Asiarevenue increased, reflecting higher banking volumes and increased fee income from discretionary, trust and custody assets.
Operating expensesdecreased, primarily due to a $400 million pretax exit plan charge inJapanrecorded in the fourth quarter of 2004. Increased expenses in other regions reflected higher employee-related costs, including investments in front office sales and support.
Provision for loan lossesincluded net interest revenues,recoveries inAsiaandEurope, net write-offs in theU.S.and increases in the allowance for loan losses. The allowance reflected an increase inJapanand changes in the application of environmental factors for all regions. Net credit recoveries were (0.02%) of average loans outstanding in both 2005 and 2004.
Client business volumesincreased $2 billion in 2005, as a lower effective tax rate and improved credit costs which were partiallydecline of $14 billion inJapanwas offset by higher incentive compensation costs. Net incomegrowth of $551 million in 2003 was up $90 million or 20% from 2002, primarily reflecting increased investment management and capital markets activity, lending activity, and a lower provision for credit losses, partially offset by higher expenses, reflecting incentive
compensation expense associated with higher revenues and higher other employee-related costs, and the impact of narrowing interest rate spreads.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In billions of dollars at year-end | ||||||||
Client Business Volumes: | |||||||||
Proprietary Managed Assets | $ | 44 | $ | 35 | $ | 32 | |||
Other Assets under Fee-Based Management | 8 | 7 | 8 | ||||||
Banking and Fiduciary Deposits | 49 | 45 | 38 | ||||||
Investment Finance | 42 | 37 | 33 | ||||||
Other, principally Custody Accounts | 81 | 71 | 59 | ||||||
Total | $ | 224 | $ | 195 | $ | 170 | |||
Client business volumes were $224 billion at the end of the year, up $29$16 billion, or 15% from $195 billion at the end of 2003. Double-digit growth8%, in client business volumesother regions.Growth was led by an increase of $3 billion in custody assets, which were higher in all regions except Japan. Proprietary managedtheU.S.andLatin America, offsetting the decline inJapan. Managed assets increased $9 billion or 26%were flat due to the decline inJapan, offset predominantly in the U.S., reflectingby the impact of positive net flows. flows in theU.S.Investment finance volumes which include loans, letters of credit, and commitments, increased $5 billion or 14%,were flat, reflecting the decline inJapanoffset by growth in real-estate-secured loans in theU.S. and increased margin lending in the international business, excluding Japan. Banking and fiduciary deposits grew $4decreased $1 billion, or 9%, with double-digit growth in the U.S. Asiaand EMEA, partially Europeoffset by a $1 billion or 19%the decline in Japan. Client business volumes were $195 billion at the end ofJapan.
2004 vs. 2003 up 15% from $170 billion in 2002, reflecting increases in other (principally custody) accounts of $12 billion, banking and fiduciary deposits of $7 billion, investment finance volumes of $4 billion and assets under fee-based management of $2 billion.
Revenues, net of interest expense were $2.044 billion, increased, as a $64 million decline in 2004, up $48 million or 2% from 2003 asJapanwas offset by combined growth of $112 million, or 6%, in Asia, North America (including Mexico), EMEAother regions.
U.S.revenue increased, primarily driven by strong growth in banking and Latin America lending volumes, combined with growth in fee income from discretionary, custody and trust assets. Growth in theU.S.was negatively impacted by net interest revenue compression as increased funding costs were partially offset by a $64 million or 24% declinethe benefit of changes in Japan. In Asia, the mix of deposits and liabilities.
Mexicorevenue increased, $34 million or 9%,primarily due to increased client transactional activity and fee income from discretionary, custody and trust assets.
Revenue increased inLatin Americaprimarily reflecting growth in banking and lending volumes.
EMEArevenue increased, primarily driven by growth in fee income from discretionary and trust assets as well as increased transactional revenue.
Revenue inJapandeclined as the business began to wind down resulting in lower transactional revenues.
Asiarevenue increased, reflecting broad-based increases in recurring fee-based and net interest revenue that were partially offset by a decline in client transactional activity and lower performance fees. Revenue in North America increased $32 million or 4%, primarily driven by strong growth in banking and lending volumes in the U.S. and increased client transaction activity in Mexico, combined with growth in fee income from discretionary, custody and trust assets in both the U.S. and Mexico. Growth in North America was negatively impacted by net interest margin compression as increased funding costs, including lower revenue from treasury activities, was partially offset by the benefit of changes in the mix of deposits and liabilities. In EMEA, revenue grew $31 million or 12%, primarily driven by growth in fee income from discretionary and trust assets as well as increased transactional revenue.
Revenue growth of $15 million or 7% in Latin AmericaOperating expensesincreased, primarily reflected growth in banking and lending volumes. In Japan, revenue declined $64 million or 24% mainly due to lower transactional revenues. Revenues, net of interest expense, were $1.996 billion in 2003, up $295 million or 17% from 2002, primarily driven by revenue increases from investment management and capital markets activity, as well as lending and banking activities, partially offset by the impact of a narrowing of interest rate spreads.
Operating expenses of $1.650 billion in 2004 were up $467 million or 39% from 2003. Operating expenses in 2004 included the $400 million exit plan chargepretax Exit Plan Charge in Japan.Japan recorded in the fourth quarter of 2004. Excluding the exit plan charge,Exit Plan Charge, expenses increased $67 million, or 6%, primarily reflecting increases in incentive compensation resulting from corresponding increases in revenue, as well as higher staff costs that were driven by investments in bankers and product specialists. Offsetting the growth in expenses was the absence of prior-year repositioning costs in Europe. Operating expenses were $1.183 billion in 2003, up $176 million or 17% from 2002, primarily reflecting increased incentive compensation associated with higher revenues, incremental repositioning costs in EMEA, and increased salary and benefits costs due to a change in employee mix of front-end sales staff.
The provisionProvision for credit losses reflected netincluded recoveries of $5 million in 2004 compared to net provisions of $11 million in 2003 and $18 million in 2002. The improvement in 2004 reflected net recoveries in Japan,Asia, the U.S.U.S., and Europe. The improvement in 2003 primarily reflected an improvement in credit experience in North America and Asia, partially offset by higher net write-offs in Japan. Net credit write-offs / (recoveries) in 2004 were (0.02%) of average loans outstanding compared with 0.05% in both 2003 and 2002. Loans 90 days or more past due at year-end 2004 were $127 million or 0.33% of total loans outstanding, compared with $121 million or 0.35% at the end of 2003.Europe.
The decline in the effective tax rate in 2004 as compared to the prior year was primarily driven by the impact of the $400 million pretax ($244 million after-tax) Japan exit planExit Plan implementation charge.
GLOBAL WEALTH MANAGEMENT OUTLOOKClient business volumesincreased $29 billion in 2004, led by an increase in custody assets, which were higher in all regions exceptJapan. Managed assets increased $10 billion predominantly in theU.S., reflecting the impact of positive net flows. Investment finance volumes increased $5 billion, on growth in real-estate-secured loans in theU.S.and increased margin lending in the international business, excludingJapan. Banking and fiduciary deposits grew $4 billion with double-digit growth in theU.S.andEMEA, partially offset by a $1 billion, or 19%, decline inJapan.
50
Global Wealth 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 73.95.
Smith Barney—In 2004,2006,Smith Barney delivered industry-leading profit margins primarily dueexpects to increased revenues reflecting higher client assetssee continued asset and trading volumes and a continued emphasis on expense management. Inrevenue growth resulting from the 2005 the focus forSmith Barney will be on franchise growth through customer acquisition, selected recruiting and training of experienced Financial Consultants and continued investmentinvestments in its wealth management platform, including financial planning,as well as from the acquisition of the Legg Mason private client business.
Investments are expected to continue in 2006 and will include expanded fee-based services (wealth management, advisory, and liability management among others) as well as selective recruiting and fee-based services.training of financial advisors.
In Global EquityCitigroup Investment Research, major initiatives include strategically expanding research coverage in targeted sectors, continuing expense management, as well asand refining the scope and management structure of ourthe global research platform.
Private Bank—The strategy ofPrivate Bank consists of four major components: integrated client solutions, innovative product capabilities, a focus on key markets worldwide, and a leveraging of the global reach of Citigroup. These components have enabledPrivate Bank to offer top-tier capabilities and investment solutions to the wealthiest families around the world by drawing upon the vast resources of Citigroup's businesses. During uncertain and complex economic and geopolitical times, the stability, globality, balance sheet strength and broad product capabilities of Citigroup provide—In 2006, thePrivate Bank with a competitive and sustainable advantage over its peer group.
Exiting the private banking operations in Japan will impact the operating and financial performance of thePrivate Bank in 2005. Costs will continue to be incurred in connection with implementing the exit plan and additional charges may be taken. ThePrivate Bankwill continue to focus on expansion in geographic markets, includingadding onshore offices and bankers in India, South KoreaBrazil, China, Mexico, the United Kingdom and select cities in North America; build-outAmerica. Moreover, thePrivate Bankwill continue to invest in building out new product capabilities;capabilities, maintain and expand successful partnerships with other Citigroup entities, worldwide; and develop and attract a talented sales force that will focus on expanding our client base and strengthening relationships with existing clients.its team of bankers.
In 2006, thePrivate Bankexpects its market-leading regionsgrowth in recurring fee-based revenue and transactional revenue to continue their strong performancebe partially offset by a decline in 2005.
GLOBAL INVESTMENT MANAGEMENTnet interest revenue due to the flat-yield-curve environment. Investments in origination, product and onshore market build-outs will negatively affect net income growth, as the associated revenues will trail the costs in the near term.
51
GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOMEALTERNATIVE INVESTMENTS
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| In billions of dollars | ||
---|---|---|---|
2002 | $ | 1.0 | |
2003 | $ | 1.1 | |
2004 | $ | 1.3 |
GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOME BY PRODUCT
[EDGAR REPRESENTATION OF GRAPHIC DATA]
Alternative Investments Net Income In billions of dollars | Alternative Investments Capital Under Management In billions of dollars at December 31 | Alternative Investments 2005 Revenue by Type | ||
---|---|---|---|---|
GLOBAL INVESTMENT MANAGEMENT—2004 NET INCOME BY REGION
[EDGAR REPRESENTATION OF GRAPHIC DATA]
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 7,422 | $ | 6,645 | $ | 5,813 | |||
Operating expenses | 2,459 | 1,936 | 1,690 | ||||||
Provisions for benefits, claims, and credit losses | 3,089 | 3,162 | 2,726 | ||||||
Income before taxes and minority interest | 1,874 | 1,547 | 1,397 | ||||||
Income taxes | 553 | 419 | 403 | ||||||
Minority interest, after-tax | 10 | 12 | 1 | ||||||
Net income | $ | 1,311 | $ | 1,116 | $ | 993 | |||
Average risk capital(1) | $ | 4,697 | $ | 4,480 | |||||
Return on risk capital(1) | 28 | % | 25 | % | |||||
Return on invested capital(1) | 16 | % | 22 | % | |||||
Alternative Investments(AI) manages capital on behalf of Citigroup, as well as for third-party institutional and high-net-worth investors. AI is an integrated alternative investment platform that manages a wide range of products across five asset classes, including private equity, hedge funds, real estate, structured products and managed futures. AI's business model is to enable its 12 investment centers to retain entrepreneurial qualities required to capitalize on evolving opportunities, while benefiting from the intellectual, operational and financial resources of Citigroup.
| 2005 | 2004 | 2003 | % Change 2005 vs. 2004 | % Change 2004 vs. 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars in millions | ||||||||||||||
Net realized and net change in unrealized gains | $ | 2,582 | $ | 1,039 | $ | 520 | NM | 100 | % | ||||||
Fees, dividends and interest | 509 | 269 | 418 | 89 | % | (36 | ) | ||||||||
Other | (1 | ) | 122 | 83 | NM | 47 | |||||||||
Total proprietary investment activities revenues | $ | 3,090 | $ | 1,430 | $ | 1,021 | NM | 40 | % | ||||||
Client revenues(1) | 340 | 273 | 258 | 25 | % | 6 | |||||||||
Total revenues, net of interest expense | $ | 3,430 | $ | 1,703 | $ | 1,279 | NM | 33 | % | ||||||
Operating expenses | 633 | 462 | 393 | 37 | % | 18 | |||||||||
Provision for loan losses | (2 | ) | — | — | — | — | |||||||||
Income before taxes and minority interest | $ | 2,799 | $ | 1,241 | $ | 886 | NM | 40 | % | ||||||
Income taxes | $ | 950 | $ | 398 | $ | 309 | NM | 29 | % | ||||||
Minority interest, net of taxes | 412 | 75 | 175 | NM | (57 | ) | |||||||||
Net income | $ | 1,437 | $ | 768 | $ | 402 | 87 | % | 91 | % | |||||
Average risk capital(2) | $ | 4,264 | $ | 3,669 | $ | 3,945 | 16 | % | (7 | )% | |||||
Return on risk capital(2) | 33 | % | 21 | % | 10 | % | |||||||||
Return on invested capital(2) | 31 | % | 19 | % | |||||||||||
Key indicators: (in billions of dollars) | |||||||||||||||
Capital under management: | |||||||||||||||
Client | $ | 25.4 | $ | 20.4 | $ | 20.5 | 25 | % | — | ||||||
Proprietary | 12.2 | 8.1 | 7.4 | 51 | 9 | % | |||||||||
Total | $ | 37.6 | $ | 28.5 | $ | 27.9 | 32 | % | 2 | % | |||||
52
Global Investment Managementreported net income of $1.311 billion in 2004, which was up $195 million or 17% from 2003. TheLife InsuranceProprietary Portfolioof Alternative Investments consists of private equity, single- and Annuities net income of $1.073 billion in 2004 increased $281 million compared to 2003, reflecting a $184 million increase in International Insurance Manufacturing (IIM) to $163 million, and a $97 million or 12% increase in Travelers Life and Annuity (TLA) to $910 million. The increase in IIM's income was driven by the absence of realized investment losses and other actions in Argentina in the 2003 third quarter and a tax ruling confirming the deductibility of those losses in the 2004 third quarter, as well as earnings from higher business volumes. The increase in TLA's income reflects earnings from higher business volumes, improved retained investment margins and after-tax reserve releases from the settlement of litigation, partially offset by higher operating expenses driven by the increased business volumes and greater amortization of deferred acquisition costs (DAC) as well as lower tax benefits from the separate account dividends received deduction (DRD).Asset Management net income of $238 million in 2004 was down $86 million or 27% from 2003, primarily reflecting increased legal expenses and the establishment of a reserve related to the expected resolution of the previously-disclosed SEC investigation into transfer agent matters and the termination of the contract to manage assets formulti-manager hedge funds, real estate, St. Paul Travelers partially offsetCompanies Inc. (St. Paul) common shares, MetLife, Inc. (MetLife) common shares, and Legg Mason, Inc. (Legg Mason) common and preferred shares. Private equity, which constitutes the largest proprietary investments on both a direct and indirect basis, is in the form of equity and mezzanine debt financing in companies across a broad range of industries worldwide, including in developing economies. Such investments include Citigroup Venture Capital International Brazil, LP (CVC/Brazil, formerly CVC/Opportunity Equity Partners, LP), which has invested primarily in companies privatized by the absencegovernment of impairments of a DAC asset relating toBrazil in the retirement services business in Argentina of $42 million and of Argentina Government Promissory Notes (GPNs) of $9 million, the absence of a loss on the sale of an El Salvador retirement services business of $10 million, and the impact of positive market action and the cumulative impact of positive net flows.mid-1990s.
Global Investment Management net incomeTheClient Portfoliois composed of $1.116 billion in 2003 increased $123 million or 12% from 2002.Life Insurancesingle- and Annuities net income of $792 million in 2003 increased $150 million compared to 2002, reflecting a $232 million or 40% increase in TLA to $813 million, partially offset by a decrease of $82 million in IIM. The increase in TLA's income was primarily driven by higher net realized insurance investment portfolio gains of $236 million, earnings from higher business volumes, and lower taxes, partially offset by higher DAC amortization and reduced investment yields. The IIM net loss of $21 million in 2003 represented a decrease in income of $82 million from 2002, driven by impairments of Argentina GPNs of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million, partially offset by increases in Asia of $24 million and Mexico of $24 million.Asset Management net income of $324 million in 2003 was down $27 million or 8% from 2002, primarily reflecting the impact of impairments in Argentina and reduced fee revenues, partially offset by the cumulative impact of positive net flows, lower expenses and lower capital funding costs in Mexico.
The table below shows net income by region for Global Investment Management:
Global Investment Management Net Income—Regional View
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
North America (excluding Mexico) | $ | 1,015 | $ | 1,052 | $ | 849 | ||||
Mexico | 153 | 162 | 110 | |||||||
EMEA | 7 | 20 | 11 | |||||||
Japan | 24 | 5 | (4 | ) | ||||||
Asia (excluding Japan) | 37 | 50 | 21 | |||||||
Latin America | 75 | (173 | ) | 6 | ||||||
Net income | $ | 1,311 | $ | 1,116 | $ | 993 | ||||
Global Investment Managementnet income increased $195 million in 2004 from the prior year, with increases in Latin America and Japan being partially offset by declines in all other regions. Latin America net income of $75 million in 2004 increased $248 million from 2003, resulting from higherLife Insurance and Annuities results of $184 million (primarily driven by the absence of realized investment losses and other actions from Argentina in 2003 of $134 millionmulti-manager hedge funds, real estate, managed futures, private equity, and a tax ruling confirming the deductibilityvariety of those losses in the 2004 third quarter of $47 million) and higherAsset Management results of $64 million (mainly reflecting the absence of impairments of a DAC asset in Argentina of $42 million and of Argentina GPNs of $9 million, and the absence of a loss on the sale of an El Salvador retirement services business of $10 million). Japan net income of $24 million in 2004 increased $19 million from 2003, primarily reflecting an increase of $16 million inLife Insurance and Annuities from higher business volumes. North America (excluding Mexico) net income of $1.015 billion in 2004 decreased $37 million from 2003, primarily driven by increased legal expenses inAsset Management, partially offset by the increase in income reported by TLA. Asia net income in 2004 of $37 million decreased $13 million from 2003, primarily related to the absence of an $18 million tax benefit arising from the application of APB 23 indefinite investment criteria inLife Insurance and Annuities. EMEA net income of $7 million in 2004 represented a decrease in income of $13 million from 2003, primarily related to the transfer of CAI Institutional performance fees to North America beginning in 2004 and higher expenses inAsset Management. Mexico net income of $153 million in 2004 decreased $9 million from 2003, primarily due to lower results inAsset Management (the impact of higher tax rates, partially offset by lower capital funding costs and higher business volumes).
LIFE INSURANCE AND ANNUITIES
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 5,598 | $ | 5,012 | $ | 4,115 | |||
Provision for benefits and claims | 3,089 | 3,162 | 2,726 | ||||||
Operating expenses | 1,043 | 788 | 501 | ||||||
Income before taxes | 1,466 | 1,062 | 888 | ||||||
Income taxes | 393 | 270 | 246 | ||||||
Net income | $ | 1,073 | $ | 792 | $ | 642 | |||
Average risk capital(1) | $ | 3,999 | $ | 3,743 | |||||
Return on risk capital(1) | 27 | % | 21 | % | |||||
Return on invested capital(1) | 21 | % | 16 | % | |||||
Life Insurance and Annuities comprises Travelers Life and Annuity (TLA) and International Insurance Manufacturing (IIM).
Life Insurance and Annuities reported net income of $1.073 billion in 2004, a $281 million or 35% increase from $792 million in 2003. The $281 million increase consisted of higher earnings of $184 million in IIM and $97 million in TLA. The $281 million increase reflects the absence of certain asset impairments and other actions taken in Argentina in the 2003 third quarter and a tax ruling confirming the deductibility of those losses in the 2004 third quarter, as well as earnings from higher business volumes and fees in both businesses and higher retained investment margins in TLA. These increases were partially offset by higher operating expenses driven by the increased business volumes and greater amortization of DAC, including a $21 million after-tax adjustment to universal life DAC amortization and deferred revenue, as well as lower tax benefits related to the separate account dividends received deduction (DRD). Net income was $792 million in 2003, a $150 million or 23% increase from $642 million in 2002. The $150 million increase was driven by a $232 million increase in TLA, partially offset by an $82 million decrease in IIM. The $150 million increase reflects lower net realized insurance investment portfolio losses of $187 million, earnings from higher business volumes, and the impact of lower taxes. These increases were partially offset by certain asset impairments and other actions taken in Argentina, an increase in benefits and claims related to business volume growth, an increase in operating expenses driven by higher DAC amortization, and the impact of lower retained investment margins.
TLA's net income was $910 million in 2004 versus $813 million in 2003. This $97 million or 12% increase was driven by earnings from business volume growth, improved retained investment margins and $17 million after-tax reserve releases from the settlement of litigation. These increases were partially offset by higher operating expenses driven by an $87 million after-tax increase in DAC amortization, which included a $25 million after-tax adjustment to universal life DAC amortization related to a change in the pattern of estimated gross profits and a $30 million DRD tax benefit relating to prior periods in 2004 versus a $51 million DRD tax benefit relating to prior periods in 2003. TLA's net income was $813 million in 2003 as compared to $581 million in 2002, an increase of $232 million. The $232 million increase primarily resulted from higher net realized insurance investment portfolio gains of $236 million, largely resulting from the absence of prior-year impairments relating to investments in WorldCom Inc. and the energy sector. The 2003 results included a decline of $17 million, which resulted from increased DAC amortization and reduced investment yields, partially offset by higher business volumes and fee revenues and higher tax benefits related to adjustments to the separate account DRD of $51 million.
The following table shows TLA's total invested asset balances by type as of December 31, and the associated net investment income and yields for the years ending December 31:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Fixed maturities | $ | 47,272 | $ | 41,976 | $ | 37,569 | ||||
Equity investments | 1,645 | 1,678 | 1,487 | |||||||
Real estate | 2,390 | 2,308 | 2,411 | |||||||
Trading Securities | 1,407 | 1,750 | 1,531 | |||||||
Total invested assets | $ | 52,714 | $ | 47,712 | $ | 42,998 | ||||
Net investment income (NII) | $ | 2,913 | $ | 2,637 | $ | 2,570 | ||||
Investment yield | 6.52 | % | 6.48 | % | 7.02 | % |
TLA's NII of $2.913 billion in 2004 increased $276 million or 10% over 2003 including a $259 million increase driven by higher business volumes and the $5.002 billion growth in invested assets. The balance of the increase was attributed to favorable equity and real estate returns, partially offset by lowerleveraged fixed income ratesproducts (credit structures). Products are distributed to investors directly by AI and lower risk arbitrage returns. Real estate is primarily comprised of mortgage loan investments and real estate joint ventures. TLA's NII of $2.637 billion in 2003 increased $67 million or 3% over 2002 despite overall rate deterioration, and was driven by increased volumes resulting from the $4.714 billion increase in the invested asset base, as well as risk arbitrage activity. The rate deterioration was driven by lower fixed income yields, which suffered from the lower interest rate environment and prior-year credit issues.
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, and traditional life and health insurance products are amortized in relation to anticipated premiums as per SFAS 60.
The following is a roll forward of capitalized DAC by type:
| Deferred and payout annuities | UL and COLI | Other | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||
Balance Dec. 31, 2002 | $ | 1,391 | $ | 592 | $ | 112 | $ | 2,095 | |||||
Deferred expenses and other | 343 | 222 | 23 | 588 | |||||||||
Amortization expense | (220 | ) | (35 | ) | (20 | ) | (275 | ) | |||||
Balance Dec. 31, 2003 | 1,514 | 779 | 115 | 2,408 | |||||||||
Deferred expenses and other | 449 | 349 | 20 | 818 | |||||||||
Amortization expense | (279 | ) | (54 | ) | (21 | ) | (354 | ) | |||||
Pattern of estimated gross profit adjustment | — | (39 | ) | — | (39 | ) | |||||||
Underlying lapse and expense adjustment | (17 | ) | — | — | (17 | ) | |||||||
Balance Dec. 31, 2004 | $ | 1,667 | $ | 1,035 | $ | 114 | $ | 2,816 | |||||
DAC capitalization increased $230 million or 39% in 2004 over 2003 driven by the $127 million or 57% increase in UL and COLI, and the $106 million or 31% increase in deferred and payout annuities, which is consistent with the increase in premiums and deposits for those lines of business. The increase in amortization expense in 2004 was primarily driven by business volume growth in deferred annuities and UL, and also included an adjustment for a change in the pattern of the estimated gross profits in the UL business and an increase in deferred annuities DAC amortization due to changes in underlying lapse and expense assumptions.
IIM's net income of $163 million in 2004 represented an increase in income of $184 million, primarily resulting from the absence of realized investment losses and other actions from Argentina in 2003 of $134 million and a tax ruling confirming the deductibility of those losses in the 2004 third quarter of $47 million. Earnings from higher business volumes in IIM operations in Japan and Asia were partially offset by the absence of an $18 million tax benefit arising from the application of APB 23 indefinite investment criteria in Asia as well as a $13 million dividend from a non-strategic equity investment in the prior year. IIM's net income included earnings from operations in Mexico of $54 million in both 2004 and 2003.
IIM's net loss of $21 million in 2003 represented a decrease in income of $82 million from net income of $61 million in 2002, primarily resulting from a decrease in Latin America of $140 million, partially offset by increases in Asia of $24 million and in Mexico of $24 million. The $140 million decrease in Latin America was primarily driven by impairments of GPNs of $114 million and the impact of certain liability restructuring actions taken in the Argentina voluntary annuity business of $20 million. The GPN impairment was the result of an Argentine government decree, which required the mandatory exchange (the Exchange) of existing GPNs to Argentine government bonds denominated in U.S. dollars. Upon the Exchange, the assets were considered impaired and written down to fair market value based on prevailing market prices on the decree date. Certain GPNs, which were held in general accounts, were considered impaired through recognition as an insurance investment portfolio loss ($56 million). The impact of these items on the 2003 decline in income was partially offset by an Amparos charge recorded by the Company in 2002 relating to Siembra's voluntary annuity business in the amount of $21 million. See "Impact from Argentina's Economic Changes" on page 11 and "Argentina" on page 10 for a further discussion of these actions. The $24 million increase in Asia was driven by the benefit of lower taxes due to the application of APB 23 indefinite investment criteria, while the $24 million increase in Mexico was the result of higher business volumes and the impact of a lower tax rate.
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 are not included in revenues. Combined net written premiums and deposits is a non-GAAP financial measure that management uses to measure business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies.
The following table shows combined net written premiums and deposits, which is a non-GAAP financial measure, by product line, for the three years ended December 31:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Retail annuities | ||||||||||
Fixed | $ | 583 | $ | 544 | $ | 1,294 | ||||
Variable | 4,980 | 4,002 | 4,081 | |||||||
Individual payout | 106 | 56 | 58 | |||||||
Total retail annuities(1) | 5,669 | 4,602 | 5,433 | |||||||
Institutional annuities(2) | 8,005 | 7,402 | 6,292 | |||||||
Individual life insurance | ||||||||||
Direct periodic premiums and deposits | 1,001 | 826 | 771 | |||||||
Single premium deposits | 745 | 405 | 285 | |||||||
Reinsurance | (163 | ) | (139 | ) | (113 | ) | ||||
Total individual life insurance(3) | 1,583 | 1,092 | 943 | |||||||
Total | $ | 15,257 | $ | 13,096 | $ | 12,668 | ||||
Retail annuities net written premiums and deposits increased $1.067 billion or 23% to $5.669 billion in 2004. These increases were primarily driven by strong variable annuity sales due to improved equity market conditions in 2004 versus 2003, and sales of a guaranteed minimum withdrawal benefit feature product. Net written premiums and deposits decreased 15% to $4.602 billion in 2003 from $5.433 billion in 2002, primarily driven by a 58% decline in fixed annuity sales due to competitive pressures and market perception of fixed rate policies. Variable annuity sales declined slightly in 2003, primarily driven by the continuation in the first half of 2003 of the weak equity market conditions from 2002. The sales decline in the first half of the year was partially offset by an increase in sales in the second half of the year as equity market conditions improved.
Retail annuity account balances and benefit reserves were $37.945 billion at December 31, 2004, up from $33.828 billion at December 31, 2003, and $28.448 billion at December 31, 2002. The $4.117 billion or 12% increase in account balances and benefit reserves reflects $2.304 billion of market appreciation and $1.994 billion in net sales from the increased variable annuity sales and good in-force retention. The $5.380 billion or 19% increase from 2002 to 2003 was driven by $4.142 billion in market appreciation of variable annuity investments and $1.321 billion of net sales from good in-force policy retention.
Institutional annuities net written premiums and deposits of $8.005 billion (excluding the Company's employee pension plan deposits) grew $603 million or 8% over 2003 reflecting $6.740 of variable and fixed guaranteed investment contract (GIC) sales in 2004 versus $6.072 billion in 2003. The prior year sales included a total of $1.0 billion in two separate transactions to one customer. This $1.0 billion sale in 2003 drove the 18% or $1.110 billion increase to $7.402 billion over the $6.292 billion of 2002 sales. Institutional annuities account balances and benefit reserves were $27.880 billion, $25.170 billion and $22.301 billion at December 31, 2004, 2003, and 2002, respectively, reflecting the continued strong GIC sales.
Net written premiums and deposits for the individual life insurance business were $1.583 billion in 2004, representing a 45% increase over $1.092 billion in 2003. This increase was driven by an 84% increase in single premium deposits primarily from new universal life sales by the independent agent and high-end estate planning channels and a 21% increase in direct periodic premiums and deposits. Net written premiums and deposits for the individual life insurance business were $1.092 billion in 2003, a 16% increase over 2002. This increase was driven by a 42% increase in single premium sales and a 7% increase in direct periodic premiums and deposits. Life insurance in force was $101.019 billion as of December 31, 2004, a 13% increase from $89.294 billion at December 31, 2003, which in turn increased 9% from $81.983 billion at December 31, 2002.
International Insurance Manufacturing
The majority of the annuity business and a substantial portion of the life business written by IIM are accounted for as investment contracts, such that the premiums are considered deposits and are not included in revenues. Combined net written premiums and deposits is a non-GAAP financial measure which management uses to measure business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies.
IIM net written premiums and deposits (which include 100% of net written premiums and deposits for the Company's joint ventures in Japan and Hong Kong) were $6.671 billion in 2004 (including $5.870 billion of deposits), an increase of $2.672 billion from $3.999 billion in 2003 (including $3.505 billion of deposits). The $2.672 billion increase consisted of annuity products net written premiums and deposits up $1.982 billion from $3.378 billion in 2003 and life products net written premiums and deposits up $690 million from $621 million in 2003. The annuity products increase reflects substantial sales growth in Japan through the company's joint venture with Mitsui Sumitomo Insurance and strong sales in Australia driven by the timing of a tax law change. The life products increase reflects strong Variable Universal Life sales in Mexico, increased sales of Endowment and Unit Linked products in Hong Kong and higher credit insurance sales in the United Kingdom.
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Revenues, net of interest expense | $ | 1,824 | $ | 1,633 | $ | 1,698 | |||
Operating expenses | 1,416 | 1,148 | 1,189 | ||||||
Income before taxes and minority interest | 408 | 485 | 509 | ||||||
Income taxes | 160 | 149 | 157 | ||||||
Minority interest, after-tax | 10 | 12 | 1 | ||||||
Net income | $ | 238 | $ | 324 | $ | 351 | |||
Assets under management(in billions of dollars)(1)(2) | $ | 514 | $ | 521 | $ | 463 | |||
Average risk capital(3) | $ | 698 | $ | 737 | |||||
Return on risk capital(3) | 34 | % | 44 | % | |||||
Return on invested capital(3) | 9 | % | 11 | % | |||||
Investments held by investment company subsidiaries (including CVC Brazil) are carried at fair value with the net change in unrealized gains and 2002, respectively,losses recorded in income. Certain private equity investments in companies located in developing economies that are not held in investment company subsidiaries are either carried at cost or accounted for by the equity method, with unrealized losses recognized in income for other-than-temporary declines in value. Investments classified as available-for-sale are carried at fair value with the net change in unrealized gains and losses recorded in equity as accumulated other charges in equity from nonowner sources. All other investment activities are primarily carried at fair value, with the net change in unrealized gains and losses recorded in income.
The ownership of St. Paul Travelers (formerly Travelers Property and Casualty Corp. (TPC)) assets, whichAsset Management manages on a third-party basis following the August 2002 distribution by Citigroup to its stockholders of a majority portion of its remaining ownership interest in TPC.
Asset Management reported net income of $238 million in 2004, a decline of $86 million or 27% compared to 2003. The decrease is primarilyshares was a result of increased legal expenses and the establishmentApril 1, 2004 merger of a reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, as well as the termination of the contract to manage assets forTravelers Property Casualty Corp. (TPC) with The St. Paul Travelers, partially offset by the absence of impairments of a DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina GPNs of $9 million, the absence of a loss on theCompanies. The sale of an El Salvador retirement services business of $10 million, the impact of positive market action and the cumulative impact of positive net flows. Net income of $324 million in 2003 was down $27 million or 8% compared to 2002, primarily reflecting impairments of the DAC asset relating to the retirement services business in Argentina of $42 million and of Argentina GPNs of $9 million, a loss on the sale of an El Salvador retirement services business of $10 million, reduced fee revenues in CAM due to changes in product mix and revenue sharing agreements with internal Citigroup distributors, and the cumulative impact of outflows of U.S. Retail Money Market Funds. Partially offsetting these declines were the cumulative impact of positive net flows, lower expenses and lower capital funding costs in Mexico.
The following table is a roll forward of assets under management by business as of December 31:
Assets Under Management
| 2004 | 2003 | |||||
---|---|---|---|---|---|---|---|
| In billions of dollars | ||||||
Retail and Private Bank | |||||||
Balance, beginning of year | $ | 231 | $ | 205 | |||
Net flows excluding U.S. retail money market funds | 4 | 5 | |||||
U.S. retail money market fund flows | (4 | ) | (4 | ) | |||
Market action/other | 8 | 25 | |||||
Balance, end of year | 239 | 231 | |||||
Institutional | |||||||
Balance, beginning of year | 185 | 164 | |||||
Long-term product flows | (2 | ) | 9 | ||||
Liquidity flows | 8 | (2 | ) | ||||
Net flows | 6 | 7 | |||||
Market action/other | 11 | 14 | |||||
Balance, end of year | 202 | 185 | |||||
Retirement Services | 14 | 12 | |||||
Other(1) | 59 | 93 | |||||
Total assets under management(2) | $ | 514 | $ | 521 | |||
Assets under management (AUMs) fell to $514 billion as of December 31, 2004, down $7 billion or 1% from $521 billion in 2003, primarily reflecting the termination of the contract to manage $36 billion of assets for St. Paul Travelers, and the net outflows of U.S. Retail Money Market Funds of $4 billion. The decline in assets was partially offset by the positive market action/other of $19 billion (which includes the impact of FX and the addition of $3 billion in assets from the acquisition of KorAm) and net flows, excluding U.S. Retail Money Market funds, of $10 billion. Retail and Private Bank client assets were $239 billion as of December 31, 2004, up $8 billion or 3% from $231 billion in 2003. Institutional client assets of $202 billion as of December 31, 2004 were up $17 billion or 9% compared to a year ago. Retirement Services assets of $14 billion as of December 31, 2004, increased $2 billion or 17% from 2003. The decline in Other assets of $34 billion reflects the termination of the St. Paul Travelers contract.
Revenues, net of interest expense, increased $191 million or 12% to $1.824 billion in 2004. This compared to $1.633 billion in 2003, which was down $65 million or 4% from 2002. The increase in 2004 primarily reflects the impact of positive market action, including the impact of FX, the cumulative impact of positive net flows and the absence of impairments of Argentina GPNs of $9 million. These increases were partially offset by the termination of the contract to manage assets for St. Paul Travelers, a change in the presentation of certain revenue sharing arrangements which decreased both revenue and expense by $16 million, and the impact of outflows of U.S. Retail
Money Market funds. The decrease in 2003 was primarily due to the impact of reduced fee revenues in CAM, the impact of increased insurance costs on fees earned in a retirement services business in Argentina, the loss on sale of the El Salvador retirement services business, outflows of U.S. Retail Money Market funds, and the impairment of the Argentina GPNs. Partially offsetting these declines were the cumulative impact of positive net flows, lower capital funding costs in Mexico, higher performance fees in CAI Institutional, the absence of a prior-year pesification loss in Argentina, and an increase related to certain assets consolidated under FIN 46-R. These consolidated assets incurred FX movements on the euro, creating $17 million in gains in 2003 (offset in minority interest).
Operating expenses of $1.416 billion in 2004 increased $268 million or 23% from 2003 primarily driven by higher expenses related to legal matters and the reserve established related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters, as well as higher employee compensation expenses, partially offset by the absence of the DAC impairment in Argentina of $42 million and the impact of a change in the presentation of certain fee-sharing arrangements which decreased both revenue and expense by $16 million. Operating expenses of $1.148 billion in 2003 decreased $41 million or 3% from 2002. The decrease in 2003 primarily reflected expense management, the change in presentation of certain fee-sharing arrangements, and the absence of 2002 first quarter restructuring charges in Argentina (LARS), for which the remaining reserve was released in 2003, partially offset by the DAC impairment in Argentina of $42 million and the impact of higher expenses related to legal matters of $24 million.
Minority interest, after-tax, of $10 million in 2004 decreased $2 million from 2003. The $11 million increase from 2002 to 2003 is primarily due to the impact of consolidating certain assets under FIN 46-R.
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 73.
Life Insurance and Annuities—See discussion on the announced sale of substantially all of theCitigroup's Life Insurance and Annuities business to MetLife, Inc. on page 9.July 1, 2005, included $1.0 billion in MetLife equity securities in the sale proceeds. The investment in Legg Mason resulted from the sale of Citigroup's Asset Management business to Legg Mason, Inc. on December 1, 2005, which included $2.298 billion, a combination of Legg Mason common and preferred equity securities in the sale proceeds. The St. Paul, MetLife and Legg Mason equity securities are classified on Citigroup's Consolidated Balance Sheet as Investments (available-for-sale).
St. Paul, MetLife and Legg Mason Equity Securities
Company | Type of Ownership | Shares owned on December 31, 2005 | Sale Restriction | Market Value as of December 31, 2005 ($ millions) | Pretax Unrealized Gain (Loss) as of December 31, 2005 ($ millions) | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
St. Paul Travelers Companies, Inc. | Common stock representing approximately 1.8% ownership | 12.3 million | To comply with the terms of an IRS private letter ruling on the spin-off of TPC, Citigroup must sell all shares by August 20, 2007 | $ | 549 | $ | 244 | |||||
MetLife, Inc. | Common stock representing approximately 3.0% ownership | 22.4 million | May be sold in private offerings until July 1, 2006. Thereafter, may be sold publicly | $ | 1,099 | $ | 99 | |||||
Legg Mason, Inc. | Common stock representing approximately 4.7% ownership 13.3 shares (convertible into 13.3 million shares of common stock upon sale to non-affiliate) Non-voting convertible preferred stock representing approximately 10.0% ownership | 5.4 million | May be sold in private offerings after receipt and may be sold publicly after March 1, 2006 | $ | 2,243 | $ | (55) | |||||
Total | $ | 3,891 | $ | 288 | ||||||||
53
2005 vs. 2004
Asset Management—TheAsset Management business experienced a decline in net income in 2004. Revenues were strong due to positive market action and positive net flows; however, expenses increased, reflecting a reserve related to the expected resolution of the previously disclosed SEC investigation of transfer agent matters. The assets under management declined reflecting the termination of the contract to manage assets for St. Paul Travelers.
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 2005, 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, the expansion of third-party distribution in key geographies, and an emphasis on penetration of the institutional pension segment.
Federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund and variable insurance product industries. As a result of publicity relating to widespread perceptions of industry abuses, there have been numerous proposals for legislative and regulatory reforms, including mutual fund governance, new disclosure requirements concerning mutual fund share classes, commission breakpoints, revenue sharing, advisory fees, market timing, late trading, portfolio pricing, annuity products, hedge funds, and other issues. It is difficult to predict at this time whether changes resulting from new laws and regulations will affect the industries or our investment management businesses, and, if so, to what degree.
PROPRIETARY INVESTMENT ACTIVITIES
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | 1,663 | $ | 1,222 | $ | 247 | ||||
Operating expenses | 462 | 393 | 238 | |||||||
Provision for credit losses | — | — | 31 | |||||||
Income (loss) before taxes and minority interest | 1,201 | 829 | (22 | ) | ||||||
Income taxes | 383 | 288 | 5 | |||||||
Minority interest, after-tax | 75 | 175 | 23 | |||||||
Net income (loss) | $ | 743 | $ | 366 | ($ | 50 | ) | |||
Average risk capital(1) | $ | 3,669 | $ | 3,945 | ||||||
Return on risk capital(1) | 20 | % | 9 | % | ||||||
Return on invested capital(1) | 18 | % | 7 | % | ||||||
Proprietary Investment ActivitiesreportedTotal proprietary revenues, net of interest expense, were composed of $1.663revenues from private equity of $2.6 billion, other investment activity of $458 million and hedge funds of $69 million. Private equity revenue increased $1.2 billion, primarily driven by gains realized through the sale of portfolio investments. The Company's investment in CVC/Brazil is subject to a variety of unresolved matters involving some of its portfolio companies, which could affect future valuation of these companies.* Other investment activities revenue increased $364 million, due to realized gains from the sale of a portion of Citigroup's investment in St. Paul shares, while hedge fund revenue increased $57 million due to a higher net change in unrealized gains on a substantially increased asset base. Client revenues increased $67 million, reflecting increased management fees from 25% growth in client capital under management.
Operating expensesincreased due primarily to increased performance-driven compensation and higher investment spending in hedge funds and real estate.
Minority interest, net of tax, increased, primarily due to private equity gains related to underlying investments held by consolidated legal entities. The impact of minority interest is reflected in fees, dividends, and interest, and net realized gains/(losses) consistent with cash proceeds received by minority interest.
Proprietary capital under managementincreased $4.1 billion, primarily driven by the MetLife and Legg Mason shares acquired during 2005, as well as the funding of proprietary investments in hedge funds and real estate, partially offset by the sale of a portion of Citigroup's holdings of St. Paul shares.
Client capital under managementincreased $5.0 billion due to inflows from institutional and high-net-worth clients, and the reclassification of $1.4 billion in assets for the former Travelers Life & Annuities business, following the July 1, 2005 sale to MetLife.
2004 whichvs. 2003
Total proprietary revenues, net of interest expensewere composed of $1.3 billion for private equity, $12 million for hedge funds and $94 million for other investment activity. Private equity revenues increased $441 million or 36% from 2003, reflecting higher Private Equity results of $418 million and higher Other Investment Activities revenues of $23 million. The higher Private Equity results were primarily due to net unrealized gains onfrom investments in Citigroup Venture Capital (CVC) Equity Partners Fund,managed by the U.S. and investments in Europe,international investment teams as compared to net unrealized losses in 2003,2003. Other investment activity revenue increased $60 million, reflecting sales in 2004 of St. Paul shares. Partially offsetting these increases, hedge fund revenues decreased $69 million as well as higher net realizeda result of a lower change in unrealized gains partially offset by lower mark-to-market gains on public securities. Revenues, net of interest expense, of $1.222 billion in 2003, increased $975 million from 2002 reflecting higher Private Equity results of $1.362 billion, primarily from higher mark-to-market gains on public securities, lower net unrealized losses, higher fee revenues and lower capital funding costs, partially offset by lower Other Investment Activities revenues of $387 million. The decline in Other Investment Activities was driven by the absence of the 2002 gain on the sale of 399 Park Avenue of $527 million, partially offset by higher fee revenues in CAI and dividends from Travelers Property Casualty Corp. (TPC) shares.2004 versus 2003.
Operating expenses of $462 million in 2004 increased, $69 million or 18% from 2003, primarily reflecting higher formulaic incentive compensation within Emerging Markets and CAI. Operating expenses of $393 million in 2003 increased $155 million or 65% from the prior year, primarily reflecting increased expenses in CAI of $96 million and in Private Equity of $65 million. The increase in CAI expenses resulted from the full-year impact of CAI's contract with TPC, whereby CAI managed TPC's investments following the August 20, 2002 distribution, as well as from client business growth and higher levels of performance-driven incentive compensation. The $65 million increase in Private Equity expenses resulted from higher performance-based compensation and business growth. The decrease in the provision for credit losses of $31 million in 2003 from 2002 primarily relates to the absence of Private Equity loan write-offs that occurred in 2002.
Minority interest, after-tax,net of $75 million in 2004tax, decreased, $100 million from 2003, primarily due to the absence of prior-year dividends and a mark-to-market valuation on the recapitalization of ana private equity investment held by a consolidated legal entity.
Proprietary capital under managementincreased, primarily driven by growth in hedge funds, partially offset by a decrease in private equity.
54
CORPORATE/OTHER
Corporate/Other includes net treasury results, unallocated corporate expenses, offsets to certain line-item reclassifications reported in 2003 increased $152 million from 2002, primarily due to the impactbusiness segments (inter-segment eliminations), the results of dividendsdiscontinued operations, the cumulative effect of accounting change and a mark-to-market valuation on the recapitalization of an investment held within the CVC Equity Partners Fund in 2003.unallocated taxes.
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | (580 | ) | $ | (270 | ) | $ | 935 | ||
Operating expenses | 383 | (27 | ) | 843 | ||||||
Provisions for loan losses and for benefits and claims | (2 | ) | — | (2 | ) | |||||
Income (loss) from continuing operations before taxes and minority interest and cumulative effect of accounting change | $ | (961 | ) | $ | (243 | ) | $ | 94 | ||
Income tax benefits | (309 | ) | (281 | ) | (187 | ) | ||||
Minority interest, net of taxes | 15 | (10 | ) | 10 | ||||||
Income (loss) from continuing operations before cumulative effect of accounting change | $ | (667 | ) | $ | 48 | $ | 271 | |||
Income from discontinued operations | 4,832 | 992 | 795 | |||||||
Cumulative effect of accounting change | (49 | ) | — | — | ||||||
Net income | $ | 4,116 | $ | 1,040 | $ | 1,066 | ||||
See Note 5 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 two main investment classifications of Proprietary Investment Activities.2005 vs. 2004
Private Equityincludes equity and mezzanine debt financing, on both a direct and an indirect basis, in companies primarily located in the United States and Western Europe, including investments made by CVC Equity Partners Fund, investments in companies located in developing economies, CVC/Opportunity Equity Partners, LP (Opportunity), and the investment portfolio related to the Banamex acquisition in August 2001. Opportunity is a third-party managed fund investing in companies that were privatized by the government of Brazil in the mid-1990s. The remaining investments in the Banamex portfolio were liquidated during 2003.
Private equity investments held in investment company subsidiaries and Opportunity are carried at fair value with net unrealized gains and losses recorded in income. Direct investments in companies located in developing economies are principally carried at cost with impairments recognized in income for "other than temporary" declines in value.
As of December 31, 2004 and 2003, Private Equity included assets of $5.858 billion and $5.610 billion, respectively, with the portfolio primarily invested in industrial, consumer goods, communication, and technology companies. The increase in the portfolio of $248 million from 2003 relates primarily to the impact of net unrealized gains in 2004. On a regional basis as of December 31, 2004, Private Equity included assets of $2.664 billion in North America (including Mexico), $2.010 billion in EMEA, $892 million in Latin America, $287 million in Asia, and $5 million in Japan. As of December 31, 2003, Private Equity included assets of $2.535 billion in North America (including Mexico), $1.790 billion in EMEA, $961 million in Latin America, $317 million in Asia, and $7 million in Japan.
Revenues, net of interest expense for Private Equity, are composed of the following:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Net realized gains(1) | $ | 452 | $ | 388 | $ | 180 | ||||
Public mark-to-market | (44 | ) | 258 | (209 | ) | |||||
Net unrealized gains (losses)(2) | 517 | (240 | ) | (670 | ) | |||||
Other(3) | 399 | 500 | 243 | |||||||
Revenues, net of interest expense | $ | 1,324 | $ | 906 | $ | (456 | ) | |||
Revenues, net of interest expense, of $1.324 billion in 2004 increased $418 million from 2003, primarily reflecting higher net unrealized gains of $757 million and higher net realized gains of $64 million, partially offset by lower public mark-to-market results of $302 million and lower other revenues of $101 million resulting from decreased dividends and fees. The higher net unrealized gains were driven by lower net impairments in emerging market investments and higher net valuations in CVC Equity Partners Fund, Emerging Markets and Europe. The increase in the CVC Equity Partners Fund was due to a valuation adjustment in an underlying German investment. The Emerging Markets improvements were primarily from the Opportunity Fund investment, driven by the absence of prior year losses, and improvements in an Asian private equity fund. The Europe results reflect improved performance in many of the underlying investments, an improving European private equity market, and the impact of foreign exchange. The lower public mark-to-market results were primarily due to an investment in an Indian software company, reflecting a general decline in public market values in the Indian software sector. The lower Other revenues were primarily driven by lower dividends and fees in the CVC Equity Partners Fund.
Revenues, net of interest expense, of $906 million in 2003 increased $1.362 billion from 2002, primarily relating to higher net mark-to-market gains on public securities of $467 million, lower net unrealized losses of $430 million, higher other revenues of $257 million, and higher net realized gains on sales of investments of $208 million. The higher net mark-to-market gains on public securities primarily resulted from the improved equity market conditions that existed in 2003. The lower net unrealized losses were driven by valuation adjustments on Emerging Market investments, lower impairments on other Private Equity investments, and higher valuation revenues in 2003 from the recapitalization of certain Private Equity investments held within the CVC Equity Partners Fund. The lower net unrealized losses in Emerging Markets included $264 million in lower impairments in Argentina and lower other Latin America impairments, partially offset by lower revenues on the Opportunity fund investment of $210 million. Other revenues increased $257 million due to higher dividends and fees, largely the result of the recapitalization of certain Private Equity investments and from an investment that had an initial public offering, all of which are held within the CVC Equity Partners Fund, as well as the impact of lower capital funding costs. The increase in net realized gains on sales of investments of $208 million was driven by higher sales of venture capital and emerging market investments, including the liquidation of the remaining Banamex holdings.
Other Investment Activities includes CAI, various proprietary investments, including Citigroup's ownership interest in The St. Paul Travelers Companies' (formerly TPC) 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. On April 1, 2004, the merger of TPC and the St. Paul Companies was completed. Existing shares of TPC common stock were converted to 0.4334 shares of common stock of the St. Paul Travelers Companies (St. Paul). As of December 31, 2004, the Company held approximately 39.8 million shares or approximately 6.0% of St. Paul's outstanding equity securities. The St. Paul common stock position is classified as available-for-sale. As of December 31, 2004, Other Investment Activities included assets of $3.009 billion, including $1.482 billion in St. Paul shares, $1.135 billion in hedge funds, $163 million in the LDC Debt/Refinancing portfolios, and $229 million in other assets. As of December 31, 2003, total assets of Other Investment Activities were $2.909 billion, including $1.693 billion in St. Paul shares, $692 million in hedge funds, the majority of which represented money managed for TPC, $365 million in the LDC Debt/Refinancing portfolios, and $159 million in other assets.
The major components of Other Investment Activities revenues, net of interest expense, are as follows:
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
LDC Debt/Refinancing portfolios | $ | 1 | $ | 7 | $ | 11 | |||
Hedge fund investments | 12 | 80 | 70 | ||||||
Other(1) | 326 | 229 | 622 | ||||||
Revenues, net of interest expense | $ | 339 | $ | 316 | $ | 703 | |||
Revenues, net of interest expense, of $339 million in 2004 increased $23 million from 2003, primarily relating to higher other revenues of $97 million, partially offset by lower hedge fund results of $68 million. The higher other revenues reflected higher revenues of $47 million from investment activity relating to Citigroup's ownership interest in St. Paul, a $33 million increase in CAI revenues and higher revenues of $17 million from real estate investments. Revenues, net of interest expense, of $316 million in 2003 decreased, $387 million from the prior year due to the absence of a $527 million gain in 2002 from the sale of 399 Park Avenue, partially offset by a $96 million increase in CAI revenues due to improved investment performance and business growth and a $50 million increase in revenue from TPC shares, including dividends and net realized gains.
Proprietary Investment Activities results may fluctuate in the future as a result of market and asset-specific factors.
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Revenues, net of interest expense | $ | (447 | ) | $ | 744 | $ | 858 | |||
Operating expenses | (61 | ) | 798 | 972 | ||||||
Provisions for benefits, claims, and credit losses | (1 | ) | (3 | ) | (22 | ) | ||||
Loss from continuing operations before taxes, minority interest, and cumulative effect of accounting change | (385 | ) | (51 | ) | (92 | ) | ||||
Income tax benefits | (319 | ) | (227 | ) | (101 | ) | ||||
Minority interest, after-tax | (10 | ) | 10 | 2 | ||||||
Income (loss) from continuing operations | (56 | ) | 166 | 7 | ||||||
Income from discontinued operations | — | — | 1,875 | |||||||
Cumulative effect of accounting change | — | — | (47 | ) | ||||||
Net income (loss) | $ | (56 | ) | $ | 166 | $ | 1,835 | |||
Corporate/Other reported a net loss of $56 million in 2004, a decrease in income of $222 million, which was primarily due to lower net treasury results, partially offset by the gain on the sale of EFS, which resulted in an after-tax gain of $180 million in the 2004 first quarter. Net income of $166 million in 2003 was down $1.669 billion from 2002, primarily due to the absence of the prior-year gain on sale of EFS and lower treasury results, partially offset by higher intersegment eliminations. Higher short-term interest rates, partially offset by lower funding balances, drove a decline in treasury results.
Operating expensesincreased, primarily due to higher intersegment eliminations and unallocated employee-related costs, increased staffing and technology costs, and increased Citigroup Foundation contributions. These were partially offset by a reserve release associated with the shutdown of the Private Bank in Japan.
Income tax benefitsincreased, due to the higher pretax loss in the current year, offset by the $147 million tax reserve release due to the closing of a tax audit in 2004.
Discontinued operations represent the operations in the Company's Sale of the Asset Management Business to Legg Mason, Inc., and the Sale of the Life Insurance and Annuities Business. For 2005, income from discontinued operations of $1.875 billion, partially offset by increased tax benefits of $126included a $2,082 million, andafter-tax gain from the absenceSale of the impactAsset Management Business, as well as a $2,120 million, after-tax gain from the cumulative effectSale of accounting change of $47 million in the prior year.Life Insurance and Annuities Business. See Note 3 to the Consolidated Financial Statements on page 119.
2004 vs. 2003
Revenues, net of interest expense of ($447) million in 2004,, decreased, $1.191 billion from 2003, primarily due to lower net treasury results, lower intersegment eliminations and the absence of the prior-year revenues earned in the EFS business, partially offset by the gain on the sale of EFS. The treasury decrease resulted from increased funding costs, due to both higher interest rates as well as higher debt levels, and the absence of the prior-year gain on the sale of a convertible bond. Revenues, net of interest expense, of $744 million in 2003 decreased $114 million from 2002, primarily due to lower intersegment eliminations, partially offset by higher net treasury results. The treasury increase resulted from a gain on the sale of a convertible bond and favorable interest rate positioning, partially offset by lower realized gains on fixed income investments.
Operating expenses of ($61) million in 2004 decreased, $859 million from 2003, primarily due to lower intersegment eliminations, the absence of prior-year operating expensesexpense in EFS and lower employee-related costs. Operating expenses of $798 million in 2003 decreased $174 million from 2002, primarily due to lower intersegment eliminations, partially offset by higher unallocated corporate costs and a $50 million pretax expense for the contribution of appreciated venture capital securities to the Citigroup Foundation. The increase in unallocated corporate costs included higher insurance, employee-related, and legal costs. The Citigroup Foundation contributions had minimal impact on Citigroup's earnings after related tax benefits.
Income tax benefitsof $319$281 million in 2004 included the impact of a $147 million tax reserve release due to the closing of a tax audit. Income tax benefits of $227 million in 2003 included the impact ofaudit, compared with a tax reserve release of $200 million in 2003 that had been held at the legacy Associates' businesses and was deemed to be in excess of expected tax liabilities. Income tax benefits
55
The following discussion sets forth certain risks that the Company believes could cause its actual future results to differ materially from expected results.
Economic conditions. The profitability of $101 millionCitigroup's businesses may be affected by global and local economic conditions, such as the liquidity of the global financial markets, the level and volatility of interest rates and equity prices, investor sentiment, inflation, and the availability and cost of credit.
The Company generally maintains large trading portfolios in 2002 included the tax benefit resultingfixed income, currency, commodity and equity markets and has significant investment positions, including investments held by its private equity business. The revenues derived from the loss incurred onvalues of these portfolios are directly affected by economic conditions.
The credit quality of Citigroup's on-balance sheet assets and off-balance sheet exposures is also affected by economic conditions, as more loan delinquencies would likely result in a higher level of charge-offs and increased provisions for credit losses, adversely affecting the saleCompany's earnings. The Company's consumer businesses are particularly affected by factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, changes in consumer spending and the number of personal bankruptcies.
Credit, market and liquidity risk. As discussed above, the Company's earnings may be impacted through its market risk and credit risk positions and by changes in economic conditions. In addition, Citigroup's earnings are dependent upon the extent to which management can successfully manage its positions within the global markets. In particular environments, the Company may not be able to mitigate its risk exposures as effectively as desired, and may have unwanted exposures to certain risk factors.
The Company's earnings are also dependent upon its ability to properly value financial instruments. In certain illiquid markets, judgmental estimates of value may be required. The Company's earnings are also dependent upon how effectively it assesses the cost of credit and manages its portfolio of risk concentrations. In addition to the direct impact of the Associates propertysuccessful management of these risk factors, management effectiveness is taken into consideration by the rating agencies, which determine the Company's own credit ratings and casualty operations to TPC, which was spun-offthereby establish the Company's cost of funds.
Competition. Merger activity in the 2002 third quarter.financial services industry has produced companies that are capable of offering a wide array of financial products and services at competitive prices. Globalization of the capital markets and financial services industries exposes Citigroup to competition both at the global and local level. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products. Citigroup's ability to grow its businesses, and therefore its earnings, is affected by these competitive pressures.
Discontinued operations (see Note 3 Country risk. Citigroup's international revenues are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, and tax policies. In addition, revenues from the Consolidated Financial Statements) includes the operationstrading of TPC through August 20, 2002. Income from discontinued operationsinternational securities and investment in 2002 also included 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 billioninternational securities may be subject to negative fluctuations as a result of the TPC IPO of 231 million shares of its class A common stock.
above factors. The 2002 cumulative effect of accounting change of $47 million reflected the 2002 impact of adopting SFAS 142 relating to goodwillthese fluctuations could be accentuated because certain international trading markets, particularly those in emerging market countries, are typically smaller, less liquid and indefinite-lived intangible assets. Seemore volatile than U.S. trading markets.
For geographic distributions of net income, see page 17. For a discussion of international loans, see Note 111 to the Consolidated Financial Statements foron page 126 and "Country and Cross-Border Risk Management Process" on page 75.
Operational risk. Citigroup is exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and record-keeping errors, and computer/telecommunications systems malfunctions. Given the high volume of transactions at Citigroup, certain errors may be repeated or compounded before they are discovered and rectified. In addition, the Company's necessary dependence upon automated systems to record and process its transaction volume may further detailsincrease the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, epidemics, computer viruses, and electrical/ telecommunications outages), which may give rise to losses in service to customers and/or monetary loss to the Company. All of these risks are also applicable where the Company relies on outside vendors to provide services to it and its customers.
U.S. fiscal policies. The Company's businesses and earnings are affected by the fiscal policies adopted by regulatory authorities of the cumulativeUnited States. For example, in the United States, policies of the Federal Reserve Board directly influence the rate of interest paid by commercial banks on their interest-bearing deposits and also may affect the value of financial instruments held by the Company. In addition, such changes in fiscal policy may affect the credit quality of the Company's customers. The actions of the Federal Reserve Board directly impact the Company's cost of funds for lending, capital raising and investment activities.
Reputational and legal risk. Various issues may give rise to reputational risk and cause harm to the Company and its business prospects. These issues include appropriately dealing with potential conflicts of interest; legal and regulatory requirements; ethical issues; money laundering laws; privacy laws; information security policies; and sales and trading practices. Failure to address these issues appropriately could also give rise to additional legal risk to the Company, which could increase the number of litigation claims and the amount of damages asserted against the Company, or subject the Company to regulatory enforcement actions, fines and penalties.
56
Certain regulatory considerations. As a worldwide business, Citigroup and its subsidiaries are subject to extensive regulation, new legislation and changing accounting standards and interpretations thereof. Legislation is introduced, including tax legislation, from time to time in Congress, in the states and in foreign jurisdictions that may change banking and financial services laws and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. The Company cannot determine whether such legislation will be enacted and the ultimate effect of accounting change.that would have on the Company's results.
57
MANAGING GLOBAL RISK
The Citigroup risk management framework recognizes the diversity of Citigroup's global business activities by balancing strong corporate oversight with well-defined independent risk management functions within each business.
The risk management framework is grounded on the following six principles, which apply universally across all businesses and all risk types:
The Citigroup Senior Risk Officer is responsible for for:
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. As noted above,for overseeing the independent risk managers report directly to the Citigroup Senior Risk Officer, however they remain accountable, on a day-to-day basis,in their business, and for appropriately meeting and responding to the needs and issues of their business unit, and for overseeing the risks present.
The following sections summarize the processes for managing credit, market, operational and country risks within Citigroup's major businesses.business.
RISK CAPITAL
In 2004, the Company implemented methodologies to quantify risk capital requirements within and across Citigroup businesses.
Risk capital is defined at Citigroup as the amount of capital required to absorb potential unexpected economic losses resulting from extremely severe events over a one-year time period.
Risk capital facilitates both the quantificationquantifies or is a metric of risk levels and the tradeoff of risk and return. The risk capital calculated for each business approximates the amount of tangible equity that would typically be ascribed. Risk capital is used in the calculation of return on risk capital (RORC) and return on invested capital (ROIC) measures that are used infor assessing business performance and allocating Citigroup's balance sheet and risk takingrisk-taking capacity.
RORC, calculated as annualized net income divided by average risk capital, compares business income with the capital required to absorb the risks. This is similaranalogous to a return on tangible equity calculation. It is used to assess businesses' operating performance and to determine incremental allocation of capital for organic growth.
ROIC is calculated using income adjusted to exclude a net internal funding cost Citigroup levies on the intangible assets of each business. This adjusted annualized income is divided by the sum of each business'sbusiness' average risk capital and intangible assets (excluding mortgage servicing rights, which are captured in risk capital). ROIC thus compares business income with the total invested capital—risk capital and intangible assets created through acquisitions—assets—used to generate that income. ROIC is used to assess returns on potential acquisitions and divestitures, and to compare long-term performance of businesses with differing proportions of organic and acquired growth.
Methodologies to measure risk capital are jointly developed by risk management, the financial division and Citigroup businesses, and approved by the Citigroup Senior Risk Officer and Citigroup Chief Financial Officer. It is expected, due to the evolving nature of risk capital, that these methodologies will continue to be refined.
The drivers of "economic losses" are risks, which can be broadly categorized as credit risk (including cross-border risk), market risk, operational risk, and insurance risk:
These risks are measured and aggregated within businesses and across Citigroup to facilitate the understanding of the Company's exposure to extreme downside events and any changes in its level or its composition.
At December 31, 2005, 2004 and 2003, risk capital for Citigroup was comprisedcomposed of the following risk types:
| 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | In billions of dollars | |||||||||||||||
Credit risk | $ | 33.2 | $ | 28.7 | $ | 36.1 | $ | 33.2 | $ | 28.7 | |||||||
Market risk | 16.0 | 16.8 | 13.5 | 16.0 | 16.8 | ||||||||||||
Operational risk | 8.1 | 6.1 | 8.1 | 8.1 | 6.1 | ||||||||||||
Insurance risk | 0.2 | 0.3 | 0.2 | 0.2 | 0.3 | ||||||||||||
Intersector diversification(1) | (5.3 | ) | (5.2 | ) | (4.7 | ) | (5.3 | ) | (5.2 | ) | |||||||
Total Citigroup | $ | 52.2 | $ | 46.7 | $ | 53.2 | $ | 52.2 | $ | 46.7 | |||||||
Return on risk capital | 34 | % | 39 | % | 38 | % | 35 | % | 39 | % | |||||||
Return on invested capital | 17 | % | 20 | % | 22 | 17 | 20 | ||||||||||
The increase in Citigroup's risk capital duringversus December 31, 2004 was primarily driven by anincreased volumes in the credit portfolio, as well as a $1.6 billion increase in operational and credit risk partiallyinU.S. Cards due to risk measurement methodology refinements. This was offset by lowera decrease in market risk as defined above. Operationaldue mostly to the divestitures of the Life Insurance & Annuities and Asset Management businesses.
Average risk capital, return on risk capital and return on invested capital are provided for each segment and product and are disclosed on pages 19—52.
The increase in average risk capital in 2005 was driven by increases across Citigroup businesses. The $1.6 billion increase inU.S. Cards was driven by refinements in risk capital methodologies. The increases inU.S. Consumer Lending andInternational Cards were due primarily to portfolio growth. The increase inInternational Retail Banking was due to portfolio growth and the acquisition of KorAm in mid-2004.
58
Average risk capital in CIB increased primarily as a result$2.2 billion, or 11%, due to the impact in mid-2004 on operational risk of the WorldCom and Litigation Reserve Charge. Credit risk capital rose primarily due to theCharge, as well as credit portfolio growth and acquisition of KorAm, and increased volumesoffset by a sell-down of the investment in Nikko Cordial. Average risk capital in thePrivate Bank increased $0.4 billion, or 57%, due largely to an increase in operational risk. Average risk capital forAlternative Investments increased by $0.6 billion, or 16%, due to higher asset balances.
Citigroup implements updates to risk capital methodologies in the first quarter of each year. To evaluate the impact of the refinements, risk capital as of year-end is calculated under both existing and revised methodologies. For 2006, Citigroup will be updating the methodologies for credit portfolio.risk, market risk for non-trading positions, and operational risk. Measured under the revised methodologies, the total risk capital as of December 31, 2005 was $55.0 billion ($1.8 billion, or 3%, higher than what was measured under existing methodologies). The increase is due to higher market risk, as measured under the revised models, offset by lower credit risk and greater intersector diversification. RORC and ROIC for the 2006 first quarter will be measured using average risk capital based on the revised methodologies.
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 obligations. Credit risk arises in many of the Company's business activities, including including:
The credit risk management process at Citigroup relies on corporate-wide standardscorporate oversight to ensure appropriate consistency and integrity, with business-specific policies and practices to ensure applicability and ownership.applicability.
Total Loans
At December 31, 2005
Consumer Credit—90 Days or More Past Due
In millions of dollars at December 31
Corporate Credit—Cash-Basis Loans
In millions of dollars at December 31
Allowance for Credit Losses
In millions of dollars at December 31
59
LOANS OUTSTANDING
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | ||||||||||||||||
Consumer loans | |||||||||||||||||
In U.S. offices: | |||||||||||||||||
Mortgage and real estate | $ | 161,832 | $ | 129,507 | $ | 121,178 | $ | 80,099 | $ | 73,166 | |||||||
Installment, revolving credit, and other | 134,784 | 136,725 | 113,620 | 100,801 | 95,643 | ||||||||||||
Lease financing | 6,030 | 8,523 | 12,027 | 13,206 | 12,993 | ||||||||||||
302,646 | 274,755 | 246,825 | 194,106 | 181,802 | |||||||||||||
In offices outside the U.S.: | |||||||||||||||||
Mortgage and real estate | 39,601 | 28,743 | 26,564 | 28,688 | 24,988 | ||||||||||||
Installment, revolving credit, and other | 93,523 | 76,718 | 65,343 | 57,681 | 56,557 | ||||||||||||
Lease financing | 1,619 | 2,216 | 2,123 | 2,143 | 2,092 | ||||||||||||
134,743 | 107,677 | 94,030 | 88,512 | 83,637 | |||||||||||||
437,389 | 382,432 | 340,855 | 282,618 | 265,439 | |||||||||||||
Unearned income | (2,163 | ) | (2,500 | ) | (3,174 | ) | (4,644 | ) | (5,390 | ) | |||||||
Consumer loans—net | 435,226 | 379,932 | 337,681 | 277,974 | 260,049 | ||||||||||||
Corporate loans | |||||||||||||||||
In U.S. offices: | |||||||||||||||||
Commercial and industrial | 14,437 | 15,207 | 22,041 | 15,997 | 19,594 | ||||||||||||
Lease financing | 1,879 | 2,010 | 2,017 | 4,473 | 812 | ||||||||||||
Mortgage and real estate(1) | 100 | 95 | 2,573 | 2,784 | 3,490 | ||||||||||||
16,416 | 17,312 | 26,631 | 23,254 | 23,896 | |||||||||||||
In offices outside the U.S.: | |||||||||||||||||
Commercial and industrial | 77,052 | 62,884 | 67,456 | 72,515 | 68,069 | ||||||||||||
Mortgage and real estate | 3,928 | 1,751 | 1,885 | 1,874 | 1,720 | ||||||||||||
Loans to financial institutions | 12,921 | 12,063 | 8,583 | 10,163 | 9,559 | ||||||||||||
Lease financing | 2,485 | 2,859 | 2,784 | 2,036 | 2,024 | ||||||||||||
Governments and official institutions | 1,100 | 1,496 | 3,081 | 4,033 | 1,952 | ||||||||||||
97,486 | 81,053 | 83,789 | 90,621 | 83,324 | |||||||||||||
113,902 | 98,365 | 110,420 | 113,875 | 107,220 | |||||||||||||
Unearned income | (299 | ) | (291 | ) | (296 | ) | (455 | ) | (247 | ) | |||||||
Corporate loans—net | 113,603 | 98,074 | 110,124 | 113,420 | 106,973 | ||||||||||||
Total loans—net of unearned income | 548,829 | 478,006 | 447,805 | 391,394 | 367,022 | ||||||||||||
Allowance for credit losses—on drawn exposures | (11,269 | ) | (12,643 | ) | (11,101 | ) | (9,688 | ) | (8,561 | ) | |||||||
Total loans—net of unearned income and allowance for credit losses | $ | 537,560 | $ | 465,363 | $ | 436,704 | $ | 381,706 | $ | 358,461 | |||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | ||||||||||||||||
Consumer loans | |||||||||||||||||
In U.S. offices: | |||||||||||||||||
Mortgage and real estate | $ | 192,108 | $ | 161,832 | $ | 129,507 | $ | 121,178 | $ | 80,099 | |||||||
Installment, revolving credit, and other | 127,789 | 134,784 | 136,725 | 113,620 | 100,801 | ||||||||||||
Lease financing | 5,095 | 6,030 | 8,523 | 12,027 | 13,206 | ||||||||||||
$ | 324,992 | $ | 302,646 | $ | 274,755 | $ | 246,825 | $ | 194,106 | ||||||||
In offices outside the U.S.: | |||||||||||||||||
Mortgage and real estate | $ | 39,619 | $ | 39,601 | $ | 28,743 | $ | 26,564 | $ | 28,688 | |||||||
Installment, revolving credit, and other | 90,466 | 93,523 | 76,718 | 65,343 | 57,681 | ||||||||||||
Lease financing | 866 | 1,619 | 2,216 | 2,123 | 2,143 | ||||||||||||
$ | 130,951 | $ | 134,743 | $ | 107,677 | $ | 94,030 | $ | 88,512 | ||||||||
$ | 455,943 | $ | 437,389 | $ | 382,432 | $ | 340,855 | $ | 282,618 | ||||||||
Unearned income | (1,323 | ) | (2,163 | ) | (2,500 | ) | (3,174 | ) | (4,644 | ) | |||||||
Consumer loans—net | $ | 454,620 | $ | 435,226 | $ | 379,932 | $ | 337,681 | $ | 277,974 | |||||||
Corporate loans | |||||||||||||||||
In U.S. offices: | |||||||||||||||||
Commercial and industrial | $ | 22,366 | $ | 14,437 | $ | 15,207 | $ | 22,041 | $ | 15,997 | |||||||
Lease financing | 1,952 | 1,879 | 2,010 | 2,017 | 4,473 | ||||||||||||
Mortgage and real estate | 29 | 100 | 95 | 2,573 | 2,784 | ||||||||||||
$ | 24,347 | $ | 16,416 | $ | 17,312 | $ | 26,631 | $ | 23,254 | ||||||||
In offices outside the U.S.: | |||||||||||||||||
Commercial and industrial | $ | 80,116 | $ | 77,052 | $ | 62,884 | $ | 67,456 | $ | 72,515 | |||||||
Mortgage and real estate | 5,206 | 3,928 | 1,751 | 1,885 | 1,874 | ||||||||||||
Loans to financial institutions | 16,889 | 12,921 | 12,063 | 8,583 | 10,163 | ||||||||||||
Lease financing | 1,797 | 2,485 | 2,859 | 2,784 | 2,036 | ||||||||||||
Governments and official institutions | 882 | 1,100 | 1,496 | 3,081 | 4,033 | ||||||||||||
$ | 104,890 | $ | 97,486 | $ | 81,053 | $ | 83,789 | $ | 90,621 | ||||||||
$ | 129,237 | $ | 113,902 | $ | 98,365 | $ | 110,420 | $ | 113,875 | ||||||||
Unearned income | (354 | ) | (299 | ) | (291 | ) | (296 | ) | (455 | ) | |||||||
Corporate loans—net | $ | 128,883 | $ | 113,603 | $ | 98,074 | $ | 110,124 | $ | 113,420 | |||||||
Total loans—net of unearned income | $ | 583,503 | $ | 548,829 | $ | 478,006 | $ | 447,805 | $ | 391,394 | |||||||
Allowance for credit losses—on drawn exposures | (9,782 | ) | (11,269 | ) | (12,643 | ) | (11,101 | ) | (9,688 | ) | |||||||
Total loans—net of unearned income and allowance for credit losses | $ | 573,721 | $ | 537,560 | $ | 465,363 | $ | 436,704 | $ | 381,706 | |||||||
OTHER REAL ESTATE OWNED
AND OTHER REPOSSESSED ASSETS
| 2004 | 2003 | 2002 | 2001 | 2000 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||||||||||||||||||||
Other real estate owned(1) | ||||||||||||||||||||||||||||||
Consumer | $ | 320 | $ | 437 | $ | 495 | $ | 393 | $ | 366 | $ | 279 | $ | 320 | $ | 437 | $ | 495 | $ | 393 | ||||||||||
Corporate | 126 | 105 | 75 | 147 | 189 | 150 | 126 | 105 | 75 | 147 | ||||||||||||||||||||
Corporate/Other | — | — | — | 8 | 8 | — | — | — | — | 8 | ||||||||||||||||||||
Total other real estate owned | $ | 446 | $ | 542 | $ | 570 | $ | 548 | $ | 563 | $ | 429 | $ | 446 | $ | 542 | $ | 570 | $ | 548 | ||||||||||
Other repossessed assets | $ | 93 | $ | 151 | $ | 230 | $ | 439 | $ | 292 | $ | 62 | $ | 93 | $ | 151 | $ | 230 | $ | 439 | ||||||||||
60
DETAILS OF CREDIT LOSS EXPERIENCE
| | 2004 | 2003 | 2002 | 2001 | 2000 | | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars at year end | ||||||||||||||||||||||||||||||
Allowance for credit losses at beginning of year | $ | 12,643 | $ | 11,101 | $ | 9,688 | $ | 8,561 | $ | 8,453 | ||||||||||||||||||||||||
Allowance for loan losses at beginning of year | Allowance for loan losses at beginning of year | $ | 11,269 | $ | 12,643 | $ | 11,101 | $ | 9,688 | $ | 8,561 | |||||||||||||||||||||||
Provision for credit losses | ||||||||||||||||||||||||||||||||||
Consumer | 7,205 | 7,316 | 7,714 | 5,947 | 4,997 | |||||||||||||||||||||||||||||
Corporate | (972 | ) | 730 | 2,281 | 853 | 342 | ||||||||||||||||||||||||||||
Provision for loan losses | Provision for loan losses | |||||||||||||||||||||||||||||||||
Consumer | $ | 8,224 | $ | 7,205 | $ | 7,316 | $ | 7,714 | $ | 5,947 | ||||||||||||||||||||||||
Corporate | (295 | ) | (972 | ) | 730 | 2,281 | 853 | |||||||||||||||||||||||||||
6,233 | 8,046 | 9,995 | 6,800 | 5,339 | $ | 7,929 | $ | 6,233 | $ | 8,046 | $ | 9,995 | $ | 6,800 | ||||||||||||||||||||
Gross credit losses | Gross credit losses | Gross credit losses | ||||||||||||||||||||||||||||||||
Consumer(1) | Consumer(1) | Consumer(1) | ||||||||||||||||||||||||||||||||
In U.S. offices | 6,937 | 5,783 | 5,826 | 4,991 | 3,827 | In U.S. offices | $ | 5,922 | $ | 6,937 | $ | 5,783 | $ | 5,826 | 4,991 | |||||||||||||||||||
In offices outside the U.S. | 3,304 | 3,270 | 2,865 | 2,132 | 1,973 | In offices outside the U.S. | 4,664 | 3,304 | 3,270 | 2,865 | 2,132 | |||||||||||||||||||||||
Corporate | Corporate | Corporate | ||||||||||||||||||||||||||||||||
Mortgage and real estate | Mortgage and real estate | Mortgage and real estate | ||||||||||||||||||||||||||||||||
In U.S. offices | — | — | 5 | 13 | 10 | In U.S. offices | — | — | — | 5 | 13 | |||||||||||||||||||||||
In offices outside the U.S. | 6 | 27 | 23 | 3 | 22 | In offices outside the U.S. | — | 6 | 27 | 23 | 3 | |||||||||||||||||||||||
Governments and official institutions outside the U.S. | Governments and official institutions outside the U.S. | — | 111 | — | — | — | Governments and official institutions outside the U.S. | — | — | 111 | — | — | ||||||||||||||||||||||
Loans to financial institutions | Loans to financial institutions | Loans to financial institutions | ||||||||||||||||||||||||||||||||
In U.S. offices | — | — | — | 10 | — | In U.S. offices | — | — | — | — | 10 | |||||||||||||||||||||||
In offices outside the U.S. | 3 | 13 | 4 | — | — | In offices outside the U.S. | 10 | 3 | 13 | 4 | — | |||||||||||||||||||||||
Commercial and industrial | Commercial and industrial | Commercial and industrial | ||||||||||||||||||||||||||||||||
In U.S. offices | 52 | 383 | 825 | 572 | 149 | In U.S. offices | 78 | 52 | 383 | 825 | 572 | |||||||||||||||||||||||
In offices outside the U.S. | 571 | 939 | 1,018 | 567 | 277 | In offices outside the U.S. | 287 | 571 | 939 | 1,018 | 567 | |||||||||||||||||||||||
10,873 | 10,526 | 10,566 | 8,288 | 6,258 | $ | 10,961 | $ | 10,873 | $ | 10,526 | $ | 10,566 | $ | 8,288 | ||||||||||||||||||||
Credit recoveries | Credit recoveries | Credit recoveries | ||||||||||||||||||||||||||||||||
Consumer(1) | Consumer(1) | Consumer(1) | ||||||||||||||||||||||||||||||||
In U.S. offices | 1,079 | 763 | 729 | 543 | 544 | In U.S. offices | $ | 1,061 | $ | 1,079 | $ | 763 | $ | 729 | $ | 543 | ||||||||||||||||||
In offices outside the U.S. | 691 | 735 | 510 | 423 | 404 | In offices outside the U.S. | 842 | 691 | 735 | 510 | 423 | |||||||||||||||||||||||
Corporate(2) | Corporate(2) | Corporate(2) | ||||||||||||||||||||||||||||||||
Mortgage and real estate | Mortgage and real estate | Mortgage and real estate | ||||||||||||||||||||||||||||||||
In U.S. offices | — | — | 1 | 1 | 9 | In U.S. offices | — | — | — | 1 | 1 | |||||||||||||||||||||||
In offices outside the U.S. | 3 | 1 | — | 1 | 1 | In offices outside the U.S. | 5 | 3 | 1 | — | 1 | |||||||||||||||||||||||
Governments and official institutions outside the U.S. | Governments and official institutions outside the U.S. | 1 | — | 2 | — | 1 | Governments and official institutions outside the U.S. | 55 | 1 | — | 2 | — | ||||||||||||||||||||||
Loans to financial institutions | Loans to financial institutions | Loans to financial institutions | ||||||||||||||||||||||||||||||||
In U.S. offices | 6 | — | — | — | — | In U.S. offices | — | 6 | — | — | — | |||||||||||||||||||||||
In offices outside the U.S. | 35 | 12 | 6 | 9 | 9 | In offices outside the U.S. | 15 | 35 | 12 | 6 | 9 | |||||||||||||||||||||||
Commercial and industrial | Commercial and industrial | Commercial and industrial | ||||||||||||||||||||||||||||||||
In U.S. offices | 100 | 34 | 147 | 154 | 27 | In U.S. offices | 104 | 100 | 34 | 147 | 154 | |||||||||||||||||||||||
In offices outside the U.S. | 357 | 215 | 168 | 129 | 69 | In offices outside the U.S. | 473 | 357 | 215 | 168 | 129 | |||||||||||||||||||||||
2,272 | 1,760 | 1,563 | 1,260 | 1,064 | $ | 2,555 | $ | 2,272 | $ | 1,760 | $ | 1,563 | $ | 1,260 | ||||||||||||||||||||
Net credit losses | Net credit losses | Net credit losses | ||||||||||||||||||||||||||||||||
In U.S. offices | 5,804 | 5,369 | 5,779 | 4,888 | 3,406 | In U.S. offices | $ | 4,835 | $ | 5,804 | $ | 5,369 | $ | 5,779 | $ | 4,888 | ||||||||||||||||||
In offices outside the U.S. | 2,797 | 3,397 | 3,224 | 2,140 | 1,788 | In offices outside the U.S. | 3,571 | 2,797 | 3,397 | 3,224 | 2,140 | |||||||||||||||||||||||
8,601 | 8,766 | 9,003 | 7,028 | 5,194 | ||||||||||||||||||||||||||||||
Total | Total | $ | 8,406 | $ | 8,601 | $ | 8,766 | $ | 9,003 | $ | 7,028 | |||||||||||||||||||||||
Other—net(3) | Other—net(3) | 994 | 2,262 | 421 | 1,355 | (37 | ) | Other—net(3) | $ | (1,010 | ) | $ | 994 | $ | 2,262 | $ | 421 | $ | 1,355 | |||||||||||||||
Allowance for credit losses at end of year | $ | 11,269 | $ | 12,643 | $ | 11,101 | $ | 9,688 | $ | 8,561 | ||||||||||||||||||||||||
Allowance for loan losses at end of year | Allowance for loan losses at end of year | $ | 9,782 | $ | 11,269 | $ | 12,643 | $ | 11,101 | $ | 9,688 | |||||||||||||||||||||||
Allowance for unfunded lending commitments(4) | Allowance for unfunded lending commitments(4) | 600 | 600 | 567 | 450 | 450 | Allowance for unfunded lending commitments(4) | $ | 850 | $ | 600 | $ | 600 | $ | 567 | $ | 450 | |||||||||||||||||
Total allowance for loans, leases, and unfunded lending commitments | $ | 11,869 | $ | 13,243 | $ | 11,668 | $ | 10,138 | $ | 9,011 | ||||||||||||||||||||||||
Total allowance for loans and unfunded lending commitments | Total allowance for loans and unfunded lending commitments | $ | 10,632 | $ | 11,869 | $ | 13,243 | $ | 11,668 | $ | 10,138 | |||||||||||||||||||||||
Net consumer credit losses | Net consumer credit losses | $ | 8,471 | $ | 7,555 | $ | 7,452 | $ | 6,157 | $ | 4,852 | Net consumer credit losses | $ | 8,683 | $ | 8,471 | $ | 7,555 | $ | 7,452 | $ | 6,157 | ||||||||||||
As a percentage of average consumer loans | As a percentage of average consumer loans | 2.13 | % | 2.22 | % | 2.55 | % | 2.33 | % | 2.03 | % | As a percentage of average consumer loans | 2.01 | % | 2.13 | % | 2.22 | % | 2.55 | % | 2.33 | % | ||||||||||||
Net corporate credit losses | $ | 130 | $ | 1,211 | $ | 1,551 | $ | 871 | $ | 342 | ||||||||||||||||||||||||
Net corporate credit losses/(recoveries) | Net corporate credit losses/(recoveries) | $ | (277 | ) | $ | 130 | $ | 1,211 | $ | 1,551 | $ | 871 | ||||||||||||||||||||||
As a percentage of average corporate loans | As a percentage of average corporate loans | 0.11 | % | 1.17 | % | 1.44 | % | 0.76 | % | 0.35 | % | As a percentage of average corporate loans | NM | 0.11 | % | 1.17 | % | 1.44 | % | 0.76 | % | |||||||||||||
61
CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS
| 2004 | 2003 | 2002 | 2001 | 2000 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||||||||||||||||||||
Corporate cash-basis loans | ||||||||||||||||||||||||||||||
Corporate cash-basis loans(1) | ||||||||||||||||||||||||||||||
Collateral dependent (at lower of cost or collateral value) | $ | 7 | $ | 8 | $ | 64 | $ | 365 | $ | 108 | $ | 6 | $ | 7 | $ | 8 | $ | 64 | $ | 365 | ||||||||||
Other | 1,899 | 3,411 | 3,931 | 2,522 | 1,436 | 998 | 1,899 | 3,411 | 3,931 | 2,522 | ||||||||||||||||||||
Total | $ | 1,906 | $ | 3,419 | $ | 3,995 | $ | 2,887 | $ | 1,544 | $ | 1,004 | $ | 1,906 | $ | 3,419 | $ | 3,995 | $ | 2,887 | ||||||||||
Corporate cash-basis loans(2)(3) | ||||||||||||||||||||||||||||||
Corporate cash-basis loans(1) | ||||||||||||||||||||||||||||||
In U.S. offices | $ | 254 | $ | 640 | $ | 887 | $ | 678 | $ | 293 | $ | 81 | $ | 254 | $ | 640 | $ | 887 | $ | 678 | ||||||||||
In offices outside the U.S. | 1,652 | 2,779 | 3,108 | 2,209 | 1,251 | 923 | 1,652 | 2,779 | 3,108 | 2,209 | ||||||||||||||||||||
Total | $ | 1,906 | $ | 3,419 | $ | 3,995 | $ | 2,887 | $ | 1,544 | $ | 1,004 | $ | 1,906 | $ | 3,419 | $ | 3,995 | $ | 2,887 | ||||||||||
Corporate renegotiated loans(4) | ||||||||||||||||||||||||||||||
Renegotiated loans (includes Corporate and Commercial Business Loans) | ||||||||||||||||||||||||||||||
In U.S. offices | $ | 63 | $ | 107 | $ | 115 | $ | 263 | $ | 305 | $ | 22 | $ | 63 | $ | 107 | $ | 115 | $ | 263 | ||||||||||
In offices outside the U.S. | 20 | 33 | 55 | 74 | 94 | 10 | 20 | 33 | 55 | 74 | ||||||||||||||||||||
Total | $ | 83 | $ | 140 | $ | 170 | $ | 337 | $ | 399 | $ | 32 | $ | 83 | $ | 140 | $ | 170 | $ | 337 | ||||||||||
Consumer loans on which accrual of interest had been suspended | ||||||||||||||||||||||||||||||
In U.S. offices | $ | 2,485 | $ | 3,127 | $ | 3,114 | $ | 3,101 | $ | 2,158 | $ | 2,307 | $ | 2,485 | $ | 3,127 | $ | 3,114 | $ | 3,101 | ||||||||||
In offices outside the U.S. | 2,978 | 2,958 | 2,792 | 2,266 | 1,626 | 1,713 | 2,978 | 2,958 | 2,792 | 2,266 | ||||||||||||||||||||
Total | $ | 5,463 | $ | 6,085 | $ | 5,906 | $ | 5,367 | $ | 3,784 | $ | 4,020 | $ | 5,463 | $ | 6,085 | $ | 5,906 | $ | 5,367 | ||||||||||
Accruing loans 90 or more days delinquent(5)(6) | ||||||||||||||||||||||||||||||
Accruing loans 90 or more days delinquent(4) (5) | ||||||||||||||||||||||||||||||
In U.S. offices | $ | 3,153 | $ | 3,298 | $ | 2,639 | $ | 1,822 | $ | 1,247 | $ | 2,886 | $ | 3,153 | $ | 3,298 | $ | 2,639 | $ | 1,822 | ||||||||||
In offices outside the U.S. | 401 | 576 | 447 | 776 | 385 | 391 | 401 | 576 | 447 | 776 | ||||||||||||||||||||
Total | $ | 3,554 | $ | 3,874 | $ | 3,086 | $ | 2,598 | $ | 1,632 | $ | 3,277 | $ | 3,554 | $ | 3,874 | $ | 3,086 | $ | 2,598 | ||||||||||
FOREGONE INTEREST REVENUE ON LOANS(1)LOANS(1)
| In U.S. offices | In non-U.S. offices | 2004 Total | | | In U.S. Offices | In non-U.S. Offices | 2005 Total | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | | | In millions of dollars | ||||||||||||||||||
Interest revenue that would have been accrued at original contractual rates(2) | $ | 423 | $ | 577 | $ | 1,000 | Interest revenue that would have been accrued at original contractual rates(2) | $ | 253 | $ | 477 | $ | 730 | |||||||||
Amount recognized as interest revenue(2) | 60 | 210 | 270 | Amount recognized as interest revenue(2) | 28 | 187 | 215 | |||||||||||||||
Foregone interest revenue | $ | 363 | $ | 367 | $ | 730 | Foregone interest revenue | $ | 225 | $ | 290 | $ | 515 | |||||||||
62
CONSUMER CREDIT RISK
Within Global Consumer, business-specificindependent credit risk management is responsible for establishing the Global Consumer Credit Policy, approving business-specific policies and procedures, are derived from the followingmonitoring business risk management framework:
Approval policies for a product or business are tailored to internal audit ratings, profitability, and credit risk managementportfolio performance.
CONSUMER PORTFOLIO REVIEW
Citigroup's consumer loan portfolio is well diversified by both customerproduct and product. Consumer loans comprise 79% 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 70% originated in the United States and 30% originated from offices outside the United States. Mortgage and real estate loans constitute 46% of the total consumer loan portfolio; and installment, revolving credit and other consumer loans and leases constitute 54% of the portfolio.location.
Consumer Loans by Type At December 31, 2005 | Consumer Loans by Geography At December 31, 2005 | |
In the Consumer portfolio, credit loss experience is often expressed in terms of annualized net credit losses as a percentage of average loans. Pricing and credit policies reflect the loss experience of each particular product 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. TheFor specific write-off criteria, are set according to loan product and country (seesee Note 1 to the Consolidated Financial Statements).Statements on page 108.
Commercial Business which is included withinRetail Banking, includes loans and leases made principally to small- and middle-market businesses. Commercial Business loans which comprise 9%7% of the total consumer loan portfolio,portfolio. These are placed on a non-accrual 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. Commercial Business non-accrual loans are not strictly determined on a delinquency basis; therefore, they have been presented as a separate component in the consumer credit disclosures.
The following table summarizes delinquency and net credit loss experience in both the managed and on-balance sheet consumer loan portfolios, in terms of loans 90 days or more past due, net credit losses, and as a percentage of related loans. The table also summarizeswell as the accrual status of the Commercial Business loans as a percentage of related loans. The managed loan portfolio includes credit card receivables held-for-sale and securitized and the table reconciles to a held basis, the comparable GAAP measure.credit card receivables. Only North AmericaU.S. Cards from a product view and North AmericaU.S. from a regional view are impacted. Although a managed basis presentation is not in conformity with GAAP, the Company believes it providesmanaged credit statistics provide a representation of performance and key indicators of the credit card business that is consistent with the way management reviews operating performance and allocates resources. For example, theU.S. Cards business considers both on-balance sheet and securitized cardsbalances (together, theirits managed portfolio), when determining compensation, capital allocation and general management decisions.decisions and compensation. Furthermore, investors utilizeuse information about the credit quality of the entire managed portfolio, as the results of both the heldon-balance sheet and securitized portfolios impact the overall performance of theU.S. Cards business. For a further discussion of managed basismanaged-basis reporting, see theU.S. Cards business on page 2221 and Note 1213 to the Consolidated Financial Statements.Statements on page 128.
63
Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios
| Total loans | 90 Days or More Past Due(1) | Average loans | Net Credit Losses(1) | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2004 | 2003 | 2002 | 2004 | 2004 | 2003 | 2002 | ||||||||||||||||||||
| In millions of dollars, except total and average loan amounts in billions | |||||||||||||||||||||||||||
Product View: | ||||||||||||||||||||||||||||
Cards | $ | 165.7 | $ | 2,944 | $ | 3,392 | $ | 2,397 | $ | 155.3 | $ | 9,219 | $ | 7,694 | $ | 7,169 | ||||||||||||
Ratio | 1.78 | % | 2.14 | % | 1.84 | % | 5.94 | % | 5.90 | % | 5.93 | % | ||||||||||||||||
North America Cards | 147.8 | $ | 2,667 | 3,133 | 2,185 | 139.6 | $ | 8,658 | 7,171 | 6,669 | ||||||||||||||||||
Ratio | 1.80 | % | 2.18 | % | 1.85 | % | 6.20 | % | 6.08 | % | 6.05 | % | ||||||||||||||||
International Cards | 17.9 | $ | 277 | 259 | 212 | 15.7 | $ | 561 | 523 | 500 | ||||||||||||||||||
Ratio | 1.55 | % | 1.76 | % | 1.78 | % | 3.57 | % | 4.19 | % | 4.68 | % | ||||||||||||||||
Consumer Finance | 105.8 | $ | 2,014 | 2,221 | 2,197 | 100.0 | $ | 3,431 | 3,517 | 3,026 | ||||||||||||||||||
Ratio | 1.90 | % | 2.36 | % | 2.48 | % | 3.43 | % | 3.88 | % | 3.69 | % | ||||||||||||||||
North America Consumer Finance | 82.8 | $ | 1,525 | 1,683 | 1,786 | 78.4 | $ | 2,065 | 2,059 | 1,865 | ||||||||||||||||||
Ratio | 1.84 | % | 2.32 | % | 2.64 | % | 2.63 | % | 2.94 | % | 3.00 | % | ||||||||||||||||
International Consumer Finance | 23.0 | $ | 489 | 538 | 411 | 21.6 | $ | 1,366 | 1,458 | 1,161 | ||||||||||||||||||
Ratio | 2.13 | % | 2.50 | % | 1.98 | % | 6.32 | % | 7.02 | % | 5.88 | % | ||||||||||||||||
Retail Banking | 165.5 | $ | 4,094 | 3,802 | 3,647 | 144.5 | $ | 693 | 614 | 644 | ||||||||||||||||||
Ratio | 2.47 | % | 3.07 | % | 3.18 | % | 0.48 | % | 0.52 | % | 0.71 | % | ||||||||||||||||
North America Retail Banking | 115.4 | $ | 2,515 | 2,299 | 2,419 | 101.9 | $ | 131 | 139 | 268 | ||||||||||||||||||
Ratio | 2.18 | % | 2.60 | % | 2.90 | % | 0.13 | % | 0.17 | % | 0.45 | % | ||||||||||||||||
International Retail Banking | 50.1 | $ | 1,579 | 1,503 | 1,228 | 42.6 | $ | 562 | 475 | 376 | ||||||||||||||||||
Ratio | 3.15 | % | 4.24 | % | 3.91 | % | 1.32 | % | 1.42 | % | 1.20 | % | ||||||||||||||||
Private Bank(2) | 39.0 | $ | 127 | 121 | 174 | 36.9 | $ | (5 | ) | 18 | 14 | |||||||||||||||||
Ratio | 0.33 | % | 0.35 | % | 0.56 | % | (0.02 | )% | 0.05 | % | 0.05 | % | ||||||||||||||||
Other Consumer | 1.3 | — | — | 1 | 1.1 | (2 | ) | — | 10 | |||||||||||||||||||
Managed loans (excluding Commercial Business)(3) | $ | 477.3 | $ | 9,179 | $ | 9,536 | $ | 8,416 | $ | 437.8 | $ | 13,336 | $ | 11,843 | $ | 10,863 | ||||||||||||
Ratio | 1.92 | % | 2.31 | % | 2.30 | % | 3.05 | % | 3.18 | % | 3.36 | % | ||||||||||||||||
Securitized receivables (all in North America Cards) | (85.3 | ) | (1,296 | ) | (1,421 | ) | (1,285 | ) | (77.9 | ) | (4,865 | ) | (4,529 | ) | (3,760 | ) | ||||||||||||
Credit card receivables held-for-sale(4) | (2.5 | ) | (32 | ) | — | (121 | ) | (3.1 | ) | (214 | ) | (221 | ) | (363 | ) | |||||||||||||
On-balance sheet loans (excluding Commercial Business) | $ | 389.5 | $ | 7,851 | $ | 8,115 | $ | 7,010 | $ | 356.8 | $ | 8,257 | $ | 7,093 | $ | 6,740 | ||||||||||||
Ratio | 2.02 | % | 2.42 | % | 2.40 | % | 2.31 | % | 2.38 | % | 2.67 | % | ||||||||||||||||
| | Cash-Basis Loans | | Net Credit Losses | ||||||||||||||||||||||||
Commercial Business Groups(5) | $ | 41.2 | $ | 735 | $ | 1,350 | $ | 1,299 | $ | 40.1 | $ | 214 | $ | 462 | $ | 712 | ||||||||||||
Ratio | 1.78 | % | 3.38 | % | 2.90 | % | 0.53 | % | 1.09 | % | 1.76 | % | ||||||||||||||||
Total Consumer Loans(6) | $ | 430.7 | $ | 396.9 | 8,471 | 7,555 | 7,452 | |||||||||||||||||||||
Regional View: | ||||||||||||||||||||||||||||
North America (excluding Mexico) | $ | 360.7 | $ | 6,327 | $ | 6,794 | $ | 6,135 | $ | 333.3 | $ | 10,735 | $ | 9,322 | $ | 8,623 | ||||||||||||
Ratio | 1.75 | % | 2.14 | % | 2.18 | % | 3.22 | % | 3.27 | % | 3.55 | % | ||||||||||||||||
Mexico | 8.8 | $ | 433 | 388 | 355 | 7.9 | $ | 118 | 55 | 195 | ||||||||||||||||||
Ratio | 4.93 | % | 5.65 | % | 5.43 | % | 1.49 | % | 0.82 | % | 2.85 | % | ||||||||||||||||
EMEA | 39.3 | $ | 1,781 | 1,669 | 1,253 | 35.2 | $ | 850 | 617 | 440 | ||||||||||||||||||
Ratio | 4.53 | % | 4.90 | % | 4.47 | % | 2.41 | % | 2.04 | % | 1.77 | % | ||||||||||||||||
Japan | 16.1 | $ | 308 | 355 | 258 | 16.8 | $ | 1,210 | 1,331 | 1,035 | ||||||||||||||||||
Ratio | 1.91 | % | 2.04 | % | 1.46 | % | 7.22 | % | 7.91 | % | 5.71 | % | ||||||||||||||||
Asia (excluding Japan) | 49.1 | $ | 299 | 286 | 340 | 41.6 | $ | 413 | 398 | 393 | ||||||||||||||||||
Ratio | 0.61 | % | 0.86 | % | 1.19 | % | 0.99 | % | 1.30 | % | 1.42 | % | ||||||||||||||||
Latin America | 3.3 | $ | 31 | 44 | 75 | 3.0 | $ | 10 | 120 | 177 | ||||||||||||||||||
Ratio | 0.93 | % | 1.50 | % | 2.48 | % | 0.34 | % | 4.10 | % | 5.08 | % | ||||||||||||||||
Managed loans (excluding Commercial Business(3) | $ | 477.3 | $ | 9,179 | $ | 9,536 | $ | 8,416 | $ | 437.8 | $ | 13,336 | $ | 11,843 | $ | 10,863 | ||||||||||||
Ratio | 1.92 | % | 2.31 | % | 2.30 | % | 3.05 | % | 3.18 | % | 3.36 | % | ||||||||||||||||
| Total Loans | 90 Days or More Past Due(1) | Average Loans | Net Credit Losses(1) | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2005 | 2004 | 2003 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||||||
| In millions of dollars, except total and average loan amounts in billions | ||||||||||||||||||||||||||
Product View: | |||||||||||||||||||||||||||
U.S.: | |||||||||||||||||||||||||||
U.S. Cards | $ | 45.4 | $ | 1,161 | $ | 1,271 | $ | 1,670 | $ | 46.9 | $ | 2,737 | $ | 3,526 | $ | 2,388 | |||||||||||
Ratio | 2.56 | % | 2.25 | % | 2.55 | % | 5.83 | % | 6.30 | % | 5.76 | % | |||||||||||||||
U.S. Retail Distribution | 42.3 | 818 | 814 | 806 | 40.4 | 1,404 | 1,330 | 1,221 | |||||||||||||||||||
Ratio | 1.94 | % | 2.06 | % | 2.34 | % | 3.48 | % | 3.51 | % | 3.74 | % | |||||||||||||||
U.S. Consumer Lending | 181.4 | 2,624 | 2,888 | 2,902 | 167.5 | 673 | 809 | 966 | |||||||||||||||||||
Ratio | 1.45 | % | 1.86 | % | 2.34 | % | 0.40 | % | 0.58 | % | 0.82 | % | |||||||||||||||
U.S. Commercial Business | 33.6 | 170 | 188 | 339 | 31.3 | 48 | 198 | 467 | |||||||||||||||||||
Ratio | 0.51 | % | 0.58 | % | 1.02 | % | 0.15 | % | 0.62 | % | 1.30 | % | |||||||||||||||
International: | |||||||||||||||||||||||||||
International Cards | 24.1 | 469 | 345 | 302 | 22.5 | 667 | 613 | 558 | |||||||||||||||||||
Ratio | 1.95 | % | 1.61 | % | 1.79 | % | 2.97 | % | 3.33 | % | 3.86 | % | |||||||||||||||
International Consumer Finance | 21.8 | 442 | 494 | 543 | 22.3 | 1,284 | 1,386 | 1,477 | |||||||||||||||||||
Ratio | 2.03 | % | 2.13 | % | 2.50 | % | 5.75 | % | 6.36 | % | 7.05 | % | |||||||||||||||
International Retail Banking | 60.4 | 779 | 2,086 | 2,051 | 61.7 | 1,882 | 615 | 458 | |||||||||||||||||||
Ratio | 1.29 | % | 3.36 | % | 4.61 | % | 3.05 | % | 1.15 | % | 1.08 | % | |||||||||||||||
Private Bank(2) | 39.3 | 79 | 127 | 121 | 38.5 | (8 | ) | (5 | ) | 18 | |||||||||||||||||
Ratio | 0.20 | % | 0.33 | % | 0.35 | % | (0.02 | )% | (0.02 | )% | 0.05 | % | |||||||||||||||
Other Consumer Loans | 2.3 | 47 | — | — | 1.7 | (4 | ) | (1 | ) | 2 | |||||||||||||||||
On-Balance Sheet Loans(3) | $ | 450.6 | $ | 6,589 | $ | 8,213 | $ | 8,734 | $ | 432.8 | $ | 8,683 | $ | 8,471 | $ | 7,555 | |||||||||||
Ratio | 1.46 | % | 1.91 | % | 2.32 | % | 2.01 | % | 2.13 | % | 2.22 | % | |||||||||||||||
Securitized receivables (all in U.S. Cards) | $ | 96.2 | $ | 1,314 | $ | 1,296 | $ | 1,421 | $ | 89.2 | $ | 5,326 | $ | 4,865 | $ | 4,529 | |||||||||||
Credit card receivables held-for-sale(4) | — | — | 32 | — | 0.4 | 28 | 214 | 221 | |||||||||||||||||||
Managed Loans(5) | $ | 546.8 | $ | 7,903 | $ | 9,541 | $ | 10,155 | $ | 522.4 | $ | 14,037 | $ | 13,550 | $ | 12,305 | |||||||||||
Ratio | 1.45 | % | 1.84 | % | 2.25 | % | 2.69 | % | 2.84 | % | 2.97 | % | |||||||||||||||
Regional View: | |||||||||||||||||||||||||||
U.S. | $ | 330.4 | $ | 4,872 | $ | 5,216 | $ | 5,786 | $ | 310.7 | $ | 4,860 | $ | 5,862 | $ | 5,052 | |||||||||||
Ratio | 1.47 | % | 1.70 | % | 2.10 | % | 1.56 | % | 2.05 | % | 2.05 | % | |||||||||||||||
Mexico | 14.8 | 624 | 563 | 580 | 13.3 | 284 | 100 | 12 | |||||||||||||||||||
Ratio | 4.21 | % | 4.65 | % | 6.10 | % | 2.13 | % | 0.95 | % | 0.12 | % | |||||||||||||||
EMEA | 35.9 | 499 | 1,785 | 1,669 | 37.9 | 2,132 | 877 | 641 | |||||||||||||||||||
Ratio | 1.39 | % | 4.44 | % | 4.67 | % | 5.62 | % | 2.40 | % | 2.02 | % | |||||||||||||||
Japan | 11.6 | 182 | 308 | 355 | 13.7 | 1,016 | 1,210 | 1,331 | |||||||||||||||||||
Ratio | 1.56 | % | 1.91 | % | 2.04 | % | 7.43 | % | 7.22 | % | 7.91 | % | |||||||||||||||
Asia | 54.0 | 376 | 309 | 298 | 53.6 | 404 | 413 | 397 | |||||||||||||||||||
Ratio | 0.70 | % | 0.58 | % | 0.87 | % | 0.75 | % | 0.93 | % | 1.26 | % | |||||||||||||||
Latin America | 3.9 | 36 | 32 | 46 | 3.6 | (13 | ) | 9 | 122 | ||||||||||||||||||
Ratio | 0.93 | % | 0.94 | % | 1.49 | % | (0.38 | )% | 0.30 | % | 3.92 | % | |||||||||||||||
On-Balance Sheet Loans(3) | $ | 450.6 | $ | 6,589 | $ | 8,213 | $ | 8,734 | $ | 432.8 | $ | 8,683 | $ | 8,471 | $ | 7,555 | |||||||||||
Ratio | 1.46 | % | 1.91 | % | 2.32 | % | 2.01 | % | 2.13 | % | 2.22 | % | |||||||||||||||
Securitized receivables (all in U.S. Cards) | 96.2 | 1,314 | 1,296 | 1,421 | 89.2 | 5,326 | 4,865 | 4,529 | |||||||||||||||||||
Credit card receivables held-for-sale(4) | — | — | 32 | — | 0.4 | 28 | 214 | 221 | |||||||||||||||||||
Managed Loans(5) | $ | 546.8 | $ | 7,903 | $ | 9,541 | $ | 10,155 | $ | 522.4 | $ | 14,037 | $ | 13,550 | $ | 12,305 | |||||||||||
Ratio | 1.45 | % | 1.84 | % | 2.25 | % | 2.69 | % | 2.84 | % | 2.97 | % | |||||||||||||||
Consumer Loan Balances, Net of Unearned Income
| End of Period | Average | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||
| In billions of dollars | ||||||||||||||||||
Total managed(1) (including the Commercial Business) | $ | 518.5 | $ | 452.0 | $ | 410.3 | $ | 477.9 | $ | 414.2 | $ | 364.1 | |||||||
Securitized receivables (all in North America Cards) | (85.3 | ) | (76.1 | ) | (67.1 | ) | (77.9 | ) | (71.4 | ) | (65.2 | ) | |||||||
Credit card receivables held-for-sale(2) | (2.5 | ) | — | (6.5 | ) | (3.1 | ) | (3.2 | ) | (6.5 | ) | ||||||||
On-balance sheet(3) (including Commercial Business) | $ | 430.7 | $ | 375.9 | $ | 336.7 | $ | 396.9 | $ | 339.6 | $ | 292.4 | |||||||
64
Consumer Loan Balances, Net of Unearned Income
| End of Period | Average | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||
| In billions of dollars | |||||||||||||||||
On-balance sheet(1) | $ | 450.6 | $ | 430.7 | $ | 375.9 | $ | 432.8 | $ | 396.9 | $ | 339.6 | ||||||
Securitized receivables (all inU.S. Cards) | 96.2 | 85.3 | 76.1 | 89.2 | 77.9 | 71.4 | ||||||||||||
Credit card receivables held-for-sale(2) | — | 2.5 | — | 0.4 | 3.1 | 3.2 | ||||||||||||
Total managed(3) | $ | 546.8 | $ | 518.5 | $ | 452.0 | $ | 522.4 | $ | 477.9 | $ | 414.2 | ||||||
Total delinquencies 90 days or more past due (excluding
Citigroup's total allowance for loans, leases and unfunded lending commitments of $11.869$10.632 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 $6.922 billion at December 31, 2005, $8.379 billion at December 31, 2004 and $9.088 billion at December 31, 2003 and $7.021 billion at December 31, 2002.2003. The decrease in the allowance for credit losses from 20032004 of $1.457 billion included:
Offsetting these reductions in the allowance for credit losses was the impact of reserve builds of $660 million, primarily related to the estimated credit losses incurred with Hurricane Katrina; increased reserves inEMEA, primarily related to Germany; increased reserves inMexico; and the impact of the change in bankruptcy legislation onU.S. Retail Distribution. The decrease in the allowance for credit losses in 2004 was primarily due to the impact of reserve releases of $1.182$1.171 billion in 2004 related to improving credit conditions, in North America, Latin America, Asia and Japan. Offsetting this decrease inpartially offset by the allowance for credit losses were additionsaddition of $274 million and $148 million associated with the acquisitions of KorAm and WMF, respectively, the impact of reserve builds of $78 million, primarily related to Germany and the impact of foreign currency translation. The increase in the allowance for credit losses in 2003 was primarily due to an addition of $2.1 billion associated with the acquisition of Sears and the impact of foreign currency translation, partially offset by the write-off of Argentine compensation notes in the 2003 third quarter.respectively.
On-balance sheet consumer loans of $430.7$450.6 billion increased $54.8$19.9 billion, or 15%5%, from December 31, 2003,2004, primarily driven by growth in mortgage and other real-estate-secured loans in Prime Home Finance,theU.S. Consumer FinanceLending andPrivate Bank businesses and growth in student loans. Credit card receivables declined on securitization activities and higher payment rates by customers. In the U.S., Commercial Business loans continued to decline in both 2005 and 2004, reflecting the continued liquidation and sale of non-core portfolios; a decline of approximately $4.3 billion resulting from the 2005 first quarter sale of CitiCapital's transportation portfolio, was partially offset by an increase of $2.4 billion from the FAB acquisition. Loans inJapan also declined, mainly reflecting continued contraction in theInternational Consumer Finance portfolio. Growth in mortgage and other real-estate-secured loans, the addition of the KorAm and WMF portfolios, and the impact of strengthening currencies. Growth in student loans in North America and margin lending inPrivate Bank also contributed tocurrencies drove the growth in consumer loans. Credit card receivables declined, primarily due to the impact of higher securitization levels and higher payment rates by customers. In the North America Commercial Business (excluding Mexico), loans continued to decline in both 2004 and 2003, reflecting the continued liquidation of non-core portfolios, a $2.0 billion reclassification of operating leases from loans to other assets in 2004 and a decline of approximately $1.2 billion resulting from the 2003 sale of the Fleet Services portfolio. Loans in Japan also declined mainly reflecting continued contraction in theConsumer Finance portfolio. The increase in 2003 was primarily driven by the addition of the Sears and Home Depot portfolios, combined with the impact of strengthening currencies and growth in mortgage and other real-estate-secured loans.2004.
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.
Consumer credit loss ratios for 2005 are expected to remain relatively constant to the fourth quarter 2004 levels. Full-year loss ratios for 2005and net credit losses in 2006 are expected to improve against prior-year levels due to the following:
This is expected to be partially offset by additional credit losses in U.S. Cards from the full year impact of adopting the U.S. regulator's mandated change in the minimum payment due balance calculation plus the increase in the losses recognized from the resolution of disputed interest charges by CitiFinancial Japan.
65
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:
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 presentsrepresents the corporate credit portfolio, before consideration of collateral, by maturity at December 31, 2004.2005. The Corporate portfolio is broken out by direct outstandings which(which include drawn loans, overdrafts, interbank placements, banker's acceptances, certain investment securities and leases,leases) and unfunded commitments which(which include unused commitments to lend, letters of credit and financial guarantees.
| Within 1 Year | Greater than 1 Year but Within 5 | Greater than 5 Years | Total Exposure | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | |||||||||||
Direct outstandings | $ | 131 | $ | 41 | $ | 13 | $ | 185 | ||||
Unfunded commitments | 148 | 99 | 13 | 260 | ||||||||
Total | $ | 279 | $ | 140 | $ | 26 | $ | 445 | ||||
Credit Exposure Arising from Derivatives and Foreign Exchange
The following table summarizes the components of derivatives receivables, representing the fair value of the derivative contracts before taking into account the effects of legally enforceable master netting agreements at December 31, 2004 and 2003. The fair value represents the cost to replace the contracts at current market rates should the counterparty default.guarantees).
Type of DerivativeCorporate Credit Portfolio
| 2004 | 2003 | ||||
---|---|---|---|---|---|---|
| In millions of dollars | |||||
Interest rate | $ | 190,655 | $ | 163,446 | ||
Foreign exchange | 83,040 | 72,239 | ||||
Credit derivatives | 4,722 | 2,101 | ||||
Equity | 11,150 | 7,564 | ||||
Commodity and other | 7,047 | 4,945 | ||||
Total | $ | 296,614 | $ | 250,295 | ||
Legally enforceable master netting agreements are in place which permit the Company to net receivables and payables with the same counterparty across different underlying derivative contracts. The amount of netting under these agreements at December 31, 2004 and 2003 was $232.9 billion and $186.1 billion, respectively. In addition, the Company obtained cash collateral from counterparties that further served to reduce exposure. After taking into account the benefit of netting and collateral, derivatives receivables recorded on the balance sheet as Trading Account Assets at December 31, 2004 and 2003 were $57.5 billion and $55.3 billion, respectively.
The Company's credit exposure on derivatives and foreign exchange contracts is primarily to professional counterparties in the financial sector, with 78% arising from transactions with banks, investment banks, governments and central banks, and other financial institutions.
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 following table presents the global derivatives portfolio by internal obligor credit rating at December 31, 2004 and 2003, as a percentage of credit exposure:
| 2004 | 2003 | |||
---|---|---|---|---|---|
AAA/AA/A | 79 | % | 78 | % | |
BBB | 12 | % | 12 | % | |
BB/B | 8 | % | 8 | % | |
Unrated | 1 | % | 2 | % |
The following table presents the global derivative portfolio by industry of the obligor as a percentage of credit exposure:
| 2004 | 2003 | |||
---|---|---|---|---|---|
Financial institutions | 70 | % | 70 | % | |
Governments | 8 | % | 9 | % | |
Corporations | 22 | % | 21 | % | |
| Due Within 1 Year | Greater than 1 Year but Within 5 Years | Greater than 5 Years | Total Exposure | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars at December 31, 2005 | ||||||||||||
Direct outstandings | $ | 106 | $ | 56 | $ | 22 | $ | 184 | |||||
Unfunded lending commitments | 194 | 131 | 7 | 332 | |||||||||
Total | $ | 300 | $ | 187 | $ | 29 | $ | 516 | |||||
| Due Within 1 Year | Greater than 1 Year but Within 5 Years | Greater than 5 Years | Total Exposure | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars at December 31, 2004 | ||||||||||||
Direct outstandings | $ | 131 | $ | 41 | $ | 13 | $ | 185 | |||||
Unfunded lending commitments | 148 | 99 | 13 | 260 | |||||||||
Total | $ | 279 | $ | 140 | $ | 26 | $ | 445 | |||||
Portfolio Mix
The corporate credit portfolio is geographically diverse byacross counterparty, industry and region. The following table shows direct outstandings and unfunded commitments by region:
| Dec. 31, 2004 | Dec. 31, 2003 | Dec. 31, 2005 | Dec. 31, 2004 | ||||||
---|---|---|---|---|---|---|---|---|---|---|
North America | 42 | % | 41 | % | ||||||
U.S. | 47 | % | 42 | % | ||||||
EMEA | 29 | % | 30 | % | 26 | 29 | ||||
Japan | 3 | % | 3 | % | 2 | 3 | ||||
Asia | 15 | % | 14 | % | 15 | 15 | ||||
Latin America | 4 | % | 5 | % | 4 | 4 | ||||
Mexico | 7 | % | 7 | % | 6 | 7 | ||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||
It is corporate credit policy to maintainThe maintenance of accurate and consistent risk ratings across the corporate credit portfolio. Thisportfolio facilitates the comparison of credit exposuresexposure across all lines of business, geographic regionregions and product. All internal risk ratings must be derived in accordance with the applicable Business' Risk Rating Policy. Independent Risk Management must approve any exception to the policy. The 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.products.
Obligor risk ratings reflect an estimated probability of default for an obligor, and are derived primarily through the use of statistical models which(which are validated periodically,periodically), 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 or collateral or structure.are taken into account.
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, 20042005 and 2003,2004, as a percentage of the total portfolio:
| Direct Outstandings and Unfunded Commitments | Direct Outstandings and Unfunded Commitments | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2005 | 2004 | ||||||
AAA/AA/A | 54 | % | 54 | % | 54 | % | 54 | % | ||
BBB | 29 | % | 27 | % | 29 | 29 | ||||
BB/B | 15 | % | 16 | % | 15 | 15 | ||||
CCC or below | 1 | % | 2 | % | 1 | 1 | ||||
Unrated | 1 | % | 1 | % | 1 | 1 | ||||
Total | 100 | % | 100 | % | ||||||
100 | % | 100 | % | |||||||
66
The corporate credit portfolio is diversified by industry, with a concentration only to the financial sector, which includesincluding banks, other financial institutions, investmentinvestments banks, and government 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:portfolio.
| Direct Outstandings and Unfunded Commitments | Direct Outstandings and Unfunded Commitments | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2005 | 2004 | ||||||
Government and central banks | 10 | % | 14 | % | 8 | % | 10 | % | ||
Other financial institutions | 8 | % | 9 | % | 8 | 8 | ||||
Banks | 7 | % | 6 | % | 7 | 7 | ||||
Investment banks | 6 | % | 5 | % | 5 | 6 | ||||
Utilities | 5 | % | 5 | % | 5 | 5 | ||||
Petroleum | 5 | 4 | ||||||||
Insurance | 4 | % | 5 | % | 4 | 4 | ||||
Agricultural and food preparation | 4 | % | 4 | % | ||||||
Agriculture and food preparation | 4 | 4 | ||||||||
Telephone and cable | 4 | % | 4 | % | 4 | 4 | ||||
Petroleum | 4 | % | 3 | % | ||||||
Industrial machinery and equipment | 3 | % | 3 | % | 3 | 3 | ||||
Autos | 2 | % | 3 | % | 2 | 2 | ||||
Freight transportation | 2 | % | 2 | % | 2 | 2 | ||||
Global information technology | 2 | % | 2 | % | 2 | 2 | ||||
Chemicals | 2 | % | 2 | % | 2 | 2 | ||||
Retail | 2 | % | 2 | % | 2 | 2 | ||||
Metals | 2 | % | 2 | % | 2 | 2 | ||||
Other industries(1) | 33 | % | 29 | % | 35 | 33 | ||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||
Credit Risk Mitigation
As part of its overall risk management activities, the Company makes use ofuses 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,credit-worthy, independent third parties. Beginning in the fourth quarter of 2003, the results of the mark-to-market and any realized gains or losses on credit derivatives are reflected in the Principal Transactions line on the Consolidated Statement of Income. At December 31, 2005 and 2004, and 2003, $27.3$40.7 billion and $11.1$27.3 billion, respectively, of credit risk exposure was economically hedged. The reported amounts of direct outstandings and unfunded commitments in this report do not reflect the impact of these hedging transactions. At December 31, 20042005 and 2003,2004, the credit protection was economically hedging underlying credit exposure with the following risk rating distribution:
Rating of Hedged Exposure
| 2004 | 2003 | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|---|---|
AAA/AA/A | 48 | % | 32 | % | 48 | % | 48 | % | ||
BBB | 43 | % | 57 | % | 43 | 43 | ||||
BB/B | 8 | % | 10 | % | 6 | 8 | ||||
CCC or below | 1 | % | 1 | % | 3 | 1 | ||||
Total | 100 | % | 100 | % | ||||||
100 | % | 100 | % | |||||||
At December 31, 20042005 and 2003,2004, the credit protection was economically hedging underlying credit exposure with the following industry distribution:
Industry of Hedged Exposure
| 2004 | 2003 | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Utilities | 11 | % | 14 | % | 10 | % | 11 | % | ||
Telephone and cable | 8 | 7 | ||||||||
Agriculture and food preparation | 7 | % | 8 | % | 7 | 7 | ||||
Autos | 7 | 6 | ||||||||
Other financial institutions | 6 | 7 | ||||||||
Petroleum | 6 | 3 | ||||||||
Industrial machinery and equipment | 7 | % | 5 | % | 5 | 7 | ||||
Other financial institutions | 7 | % | 11 | % | ||||||
Telephone and cable | 7 | % | 9 | % | ||||||
Autos | 6 | % | 7 | % | ||||||
Natural gas distribution | 5 | 4 | ||||||||
Airlines | 5 | % | 3 | % | 4 | 5 | ||||
Chemicals | 4 | % | 3 | % | 4 | 4 | ||||
Global information technology | 4 | % | 5 | % | ||||||
Natural gas distribution | 4 | % | 3 | % | ||||||
Pharmaceuticals | 4 | % | 1 | % | 4 | 4 | ||||
Retail | 4 | % | 3 | % | 4 | 4 | ||||
Insurance | 4 | 2 | ||||||||
Global information technology | 3 | 4 | ||||||||
Forest products | 3 | 3 | ||||||||
Metals | 3 | 3 | ||||||||
Investment banks | 3 | 2 | ||||||||
Business services | 3 | % | 4 | % | 2 | 3 | ||||
Banks | 3 | % | 4 | % | 2 | 3 | ||||
Petroleum | 3 | % | 4 | % | ||||||
Forest products | 3 | % | 2 | % | ||||||
Freight transportation | 3 | % | 2 | % | 2 | 3 | ||||
Metals | 3 | % | 1 | % | ||||||
Entertainment | 2 | % | 2 | % | 2 | 2 | ||||
Insurance | 2 | % | 2 | % | ||||||
Investment banks | 2 | % | 3 | % | ||||||
Other(1) | 6 | % | 4 | % | ||||||
Other industries(1) | 6 | 6 | ||||||||
Total | 100 | % | 100 | % | ||||||
100 | % | 100 | % | |||||||
Credit Exposure Arising from Derivatives and Foreign Exchange
Citigroup uses derivatives as both an end-user for asset/liability management and in its client businesses. In CIB, Citigroup enters into derivatives for trading purposes or to enable customers to transfer, modify or reduce their interest rate, foreign exchange and other market risks. In addition, Citigroup uses derivatives and other instruments, primarily interest rate and foreign exchange products, as an end-user to manage interest rate risk relating to specific groups of interest-sensitive assets and liabilities. In addition, foreign exchange contracts are used to hedge non-U.S. dollar denominated debt, net capital exposures and foreign exchange transactions.
The following tables summarize by derivative type the notionals, receivables and payables held for trading and asset/liability management hedge purposes as of December 31, 2005 and December 31, 2004. See Note 22 to the Consolidated Financial Statements on page 152.
67
CITIGROUP DERIVATIVES
Notionals
| Trading Derivatives(1) | Asset/Liability Management Hedges(2) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of December 31 | |||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
| In millions of dollars | ||||||||||||
Interest rate contracts | |||||||||||||
Swaps | $ | 12,677,814 | $ | 10,184,941 | $ | 403,576 | $ | 256,193 | |||||
Futures and forwards | 2,090,844 | 1,921,691 | 18,425 | 26,958 | |||||||||
Written options | 1,949,501 | 1,778,861 | 5,166 | 6,373 | |||||||||
Purchased options | 1,633,983 | 1,552,763 | 53,920 | 73,413 | |||||||||
Foreign exchange contracts | |||||||||||||
Swaps | $ | 563,888 | $ | 508,294 | $ | 37,418 | $ | 30,412 | |||||
Futures and forwards | 1,508,754 | 1,529,520 | 53,757 | 48,147 | |||||||||
Written options | 249,725 | 252,507 | — | 11 | |||||||||
Purchased options | 253,089 | 250,459 | 808 | 11 | |||||||||
Equity contracts | |||||||||||||
Swaps | $ | 70,188 | $ | 56,744 | $ | — | $ | 10 | |||||
Futures and forwards | 14,487 | 26,122 | — | 160 | |||||||||
Written options | 213,383 | 166,747 | — | — | |||||||||
Purchased options | 193,248 | 141,022 | — | 1,148 | |||||||||
Commodity and other contracts | |||||||||||||
Swaps | $ | 20,486 | $ | 14,969 | $ | — | $ | — | |||||
Futures and forwards | 10,876 | 11,163 | — | — | |||||||||
Written options | 9,761 | 7,925 | — | — | |||||||||
Purchased options | 12,240 | 10,303 | — | — | |||||||||
Credit derivatives | $ | 1,030,745 | $ | 585,540 | $ | — | $ | — | |||||
Mark-to-Market (MTM) Receivables/Payables
| Derivatives Receivables—MTM | Derivatives Payable—MTM | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of December 31 | |||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
| In millions of dollars | ||||||||||||||
Trading Derivatives(1) | |||||||||||||||
Interest rate contracts | $ | 192,761 | $ | 190,655 | $ | 188,182 | $ | 186,391 | |||||||
Foreign exchange contracts | 42,749 | 83,040 | 41,474 | 72,410 | |||||||||||
Equity contracts | 18,633 | 11,150 | 32,313 | 29,390 | |||||||||||
Commodity and other contracts | 7,332 | 7,047 | 6,986 | 11,489 | |||||||||||
Credit derivative | 8,106 | 4,728 | 9,279 | 4,701 | |||||||||||
Total | $ | 269,581 | $ | 296,620 | $ | 278,234 | $ | 304,381 | |||||||
Less: Netting agreements, cash collateral and market value adjustments | (222,167 | ) | (239,136 | ) | (216,906 | ) | (239,895 | ) | |||||||
Net Receivables/Payables | $ | 47,414 | $ | 57,484 | $ | 61,328 | $ | 64,486 | |||||||
Asset/Liability Management Hedges(2) | |||||||||||||||
Interest rate contracts | $ | 3,775 | $ | 4,742 | $ | 1,615 | $ | 2,541 | |||||||
Foreign exchange contracts | 1,385 | 1,268 | 1,137 | 1,655 | |||||||||||
Equity contracts | — | 204 | — | 7 | |||||||||||
Total | $ | 5,160 | $ | 6,214 | $ | 2,752 | $ | 4,203 | |||||||
68
The Company's credit exposure on derivatives and foreign exchange contracts is primarily to professional counterparties in the financial sector, with 79% arising from transactions with banks, investments banks, governments and central banks, and other financial institutions.
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 following table presents the global derivatives portfolio by internal obligor credit rating at December 31, 2005 and 2004, as a percentage of credit exposure:
| 2005 | 2004 | |||
---|---|---|---|---|---|
AAA/AA/A | 80 | % | 79 | % | |
BBB | 11 | 12 | |||
BB/B | 8 | 8 | |||
CCC or below | — | — | |||
Unrated | 1 | 1 | |||
Total | 100 | % | 100 | % | |
The following table presents the global derivatives portfolio by industry of the obligor as a percentage of credit exposure:
| 2005 | 2004 | |||
---|---|---|---|---|---|
Financial institutions | 67 | % | 70 | % | |
Governments | 12 | 8 | |||
Corporations | 21 | 22 | |||
Total | 100 | % | 100 | % | |
For asset/liability management hedges, a derivative must be highly effective in accomplishing the hedge objective of offsetting either changes in the fair value or cash flows of the hedged item for the risk being hedged. Any ineffectiveness present in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes the changes in the value of the hedged item that are unrelated to the risks being hedged. Similarly, the assessment of effectiveness may exclude changes in the fair value of a derivative related to time value which, if excluded, is recognized in current earnings. See Note 22 to the Consolidated Financial Statements on page 152.
69
GLOBAL CORPORATE PORTFOLIO REVIEW
Corporate loans are identified as impaired and placed on a non-accrual basis (cash-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, exceptmore; the exception is when the loan is well secured and in the process of collection. 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, less disposal costs.
The following table summarizes corporate cash-basis loans and net credit losses:losses.
| 2004 | 2003 | 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||
Corporate cash-basis loans(1) | |||||||||||
Capital Markets and Banking | $ | 1,794 | $ | 3,263 | $ | 3,423 | |||||
Transaction Services | 112 | 156 | 572 | ||||||||
Total corporate cash-basis loans | $ | 1,906 | $ | 3,419 | $ | 3,995 | |||||
Net credit losses | |||||||||||
Capital Markets and Banking | $ | 148 | $ | 1,191 | $ | 1,349 | |||||
Transaction Services | (18 | ) | 23 | 165 | |||||||
Smith Barney(2) | — | — | 6 | ||||||||
Investment Activities(3) | — | (3 | ) | 31 | |||||||
Total net credit losses | $ | 130 | $ | 1,211 | $ | 1,551 | |||||
Corporate allowance for credit losses | $ | 2,890 | $ | 3,555 | $ | 4,080 | |||||
Corporate allowance for credit losses on unfunded lending commitments(4) | 600 | 600 | 567 | ||||||||
Total corporate allowance for loans, leases and unfunded lending commitments | $ | 3,490 | $ | 4,155 | $ | 4,647 | |||||
As a percentage of total corporate loans(5) | 2.54 | % | 3.62 | % | 3.70 | % | |||||
| 2005 | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||
Corporate cash-basis loans | |||||||||||
Capital Markets and Banking | $ | 923 | $ | 1,794 | $ | 3,263 | |||||
Transaction Services | 81 | 112 | 156 | ||||||||
Total corporate cash-basis loans(1) | $ | 1,004 | $ | 1,906 | $ | 3,419 | |||||
Net credit losses (recoveries) | |||||||||||
Capital Markets and Banking | $ | (268 | ) | $ | 148 | $ | 1,191 | ||||
Transaction Services | (9 | ) | (18 | ) | 23 | ||||||
Alternative Investments | — | — | (3 | ) | |||||||
Total net credit losses (recoveries) | $ | (277 | ) | $ | 130 | $ | 1,211 | ||||
Corporate allowance for loan losses | $ | 2,860 | $ | 2,890 | $ | 3,555 | |||||
Corporate allowance for credit losses on unfunded lending commitments(2) | 850 | 600 | 600 | ||||||||
Total corporate allowance for loans and unfunded lending commitments | $ | 3,710 | $ | 3,490 | $ | 4,155 | |||||
As a percentage of total corporate loans(3) | 2.22 | % | 2.54 | % | 3.62 | % | |||||
Corporate cash-basisCash-basis loans were $1.906 billion, $3.419 billion and $3.995 billion aton December 31, 2004, 2003 and 2002, respectively. Cash-basis loans2005 decreased $1.513 billion$902 million from December 31, 2003 due to a $1.469 billion2004; $871 million of the decrease was inCapital Markets and Banking and a $44$31 million decreasewas inTransaction Services.Capital Markets and Bankingdecreased primarily due to declines in charge-offs in North America,Poland, Mexico and Europe.Transaction Services decreased primarily due to reductions in corporate borrowers in India and Mexico.
Cash-basis loans decreased $1.513 billion in 2004 due to decreases of $1.469 million inCapital Markets and Banking and $44 million inTransaction Services. Capital Markets and Banking primarily reflected declining charge-offs in the U.S., Argentina and Mexico, partially offset by the addition of KorAm.Transaction Services decreased primarily due to decreases in corporate borrowers in Poland and Argentina.
Cash-basis loans decreased $576 million in 2003 due to decreases inCapital Markets and Banking andTransaction Services.Capital Markets and Banking primarily reflects decreases to corporate borrowers in Argentina and New Zealand, as well as reductions in the telecommunications industry, partially offset by a reclassification of cash-basis loans ($248 million) in Mexico fromTransaction Services and increases related to Parmalat and the energy industry.Transaction Servicesdecreased primarily due to the reclassification of cash-basis loans ($248 million) in Mexico toCapital Markets and Banking and charge-offs in Argentina and Poland.
Total corporate Other Real Estate Owned (OREO) was $150 million, $126 million $105 million and $75$105 million at December 31, 2005, 2004, 2003 and 2002,2003, respectively. The $21$24 million increase in 20042005 from 20032004 reflects net foreclosures in the North AmericaU.S. real estate portfolio.
Total corporate loans outstanding at December 31, 20042005 were $114$129 billion as compared to $98$114 billion and $110$98 billion at December 31, 20032004 and 2002,2003, respectively.
Total corporate net credit recovery of $277 million in 2005 decreased $407 million compared to 2004, primarily due to improvements in the overall credit environment, and the absence of losses taken in prior years. Total corporate net credit losses of $130 million in 2004 decreased $1.081 billion compared to 2003 primarily due to improvements in the overall credit environment, and the absence of the exposure to Parmalat. Total corporate net credit losses of $1.211 billion in 2003 decreased $340 million compared to 2002 primarily due to the absence of prior-year net credit losses in Argentina and exposures in the energy and telecommunications industries, reflecting improvements in the overall credit environment, partially offset by $345 million of credit losses related to Parmalat and credit losses to corporate borrowers in Poland.
Citigroup's allowance for credit losses for loans, leases and lending commitments of $11.869$10.632 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 $3.710 billion at December 31, 2005, compared to $3.490 billion at December 31, 2004 compared toand $4.155 billion at December 31, 2003, and $4.647 billionrespectively. The $220 million increase in the total allowance at December 31, 2002. The allowance attributed to corporate loans and leases as a percentage of corporate loans was 2.54% at2005 from December 31, 2004 as comparedprimarily reflects reserve builds of $85 million due to 3.62%increases in expected losses during the year and 3.70% at December 31, 2003 and 2002, respectively.the deterioration of the credit quality of the underlying portfolios. The $665 million decrease in the total allowance at December 31, 2004 from December 31, 2003 primarily reflects reserve releasesrelease of $900 million due to continued improvement in the portfolio, partially offset by the addition of KorAm. The $492 million decrease in the total allowance at December 31, 2003 from December 31, 2002 primarily reflects reserve releases of $300 million due to continued improvement in the portfolio. 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. Although the 2004 credit environment led to benefits from loan loss releases and declines in cash-basis loans, it is unlikely these benefits will repeat in 2005. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.
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LOAN MATURITIES AND FIXED/VARIABLE PRICING
| Due Within 1 Year | Over 1 Year but Within 5 Years | Over 5 Years | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year-end | ||||||||||||
Corporate Maturities of the corporate loan portfolio | |||||||||||||
In U.S. offices | |||||||||||||
Commercial and Industrial loans | $ | 4,647 | $ | 7,113 | $ | 2,677 | $ | 14,437 | |||||
Mortgage and real estate | 32 | 49 | 19 | 100 | |||||||||
Lease financing | 604 | 924 | 348 | 1,876 | |||||||||
In offices outside the U.S. | 62,861 | 27,830 | 6,798 | 97,489 | |||||||||
Total corporate loans | $ | 68,144 | $ | 35,916 | $ | 9,842 | $ | 113,902 | |||||
Fixed/variable pricing of corporate loans with maturities due after one year with maturities(1) | |||||||||||||
Loans at fixed interest rates | $ | 11,086 | $ | 4,098 | |||||||||
Loans at floating or adjustable interest rates | 24,830 | 5,744 | |||||||||||
Total | $ | 35,916 | $ | 9,842 | |||||||||
| Due Within 1 Year | Over 1 Year but Within 5 Years | Over 5 Years | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||||
Corporate loan portfolio maturities | |||||||||||||
In U.S. offices: | |||||||||||||
Commercial and industrial loans | $ | 16,278 | $ | 3,150 | $ | 2,937 | $ | 22,365 | |||||
Mortgage and real estate | 21 | 4 | 4 | 29 | |||||||||
Lease financing | 1,421 | 275 | 257 | 1,953 | |||||||||
In offices outside the U.S. | 63,357 | 32,831 | 8,702 | 104,890 | |||||||||
Total corporate loans | $ | 81,077 | $ | 36,260 | $ | 11,900 | $ | 129,237 | |||||
Fixed/variable pricing of corporate loans with maturities due after one year(1) | ||||||
Loans at fixed interest rates | $ | 11,567 | $ | 5,065 | ||
Loans at floating or adjustable interest rates | 24,693 | 6,835 | ||||
Total | $ | 36,260 | $ | 11,900 | ||
MARKET RISK MANAGEMENT PROCESS
Market risk at Citigroup—like credit 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 managed through corporate-wide standardsthe risk that an entity may be unable to meet a financial commitment to a customer, creditor, or investor when due. Liquidity risk is discussed in the "Capital Resources and business policiesLiquidity" on page 83. Price risk is the earnings risk from changes in interest rates, foreign exchange rates, equity and procedures.commodity prices, and in their implied volatilities. Price risk arises in non-trading portfolios, as well as in trading portfolios.
Market risks are measured in accordance with established standards to ensure consistency across businesses and the ability to aggregate like risksrisk at the Citigroup-level.Citigroup level. Each business is required to establish, and have approved bywith approval from 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 "Capital Resources and Liquidity" section on page 62. 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.
Non-Trading Portfolios
Interest rate risk inCitigroup's non-trading portfolios is inherent in many client-related activities, primarily lendingare managed using a common set of standards that define, measure, limit and deposit taking, to both corporations and individuals. Interest rate risk arises from these client activities as a function of a number of factors. These include the timing of rate resetting and maturity between assets and liabilities, the change in the profile for those assets and liabilities whose maturity changes in response to changes inreport market interest rates, changes in the shape of the yield curve and changes in the spread between various market rate indices among other factors.
risk. The exposure generated by client-related activities is activelyrisks are managed by business treasury units throughout Citigroup. The treasury units manage exposure to the key factors within limits approved by independent market risk management, primarily by altering the repricing characteristics of the portfolio either directly through on-balance sheet instruments or through the use of off-balance sheet instruments including derivatives and by modifying product pricing strategies.
To ensure consistency across businesses, Citigroup's non-trading portfolios are managed under a single set of standards for defining, measuring, limiting and reporting market risk. While business risk management is directly responsible for employing appropriate risk management techniques that are appropriate for each specific portfolio,management. In addition, there are a number of Citigroup-wide reporting metrics both earnings-based and valuation-based, that are common to all business units.units, which enable Citigroup to aggregate and compare non-trading risks across businesses. The metrics measure the change in either income or value of the Company's positions under various rate scenarios that are different from the market expectations.
TheCitigroup's primary focus is providing financial products for its customers. Loans and deposits are tailored to the customer's requirements in terms of maturity and whether the rate is fixed or floating and, if it is floating, how often the rate resets and according to which market index. These customer transactions result in a risk exposure for Citigroup. This exposure may be related to differences in the timing of maturities, and/or rate resetting for assets and liabilities, or it may be due to different positions resetting based on different indices. In some instances it may also be indirectly related to interest rate changes. For example, mortgage prepayment rates vary not only as a result of interest rate changes, but also with the absolute level of rates relative to the rate on the mortgage itself.
One function of Treasury at Citigroup is to understand the risks that arise from customer transactions and to manage them so that unexpected changes in the markets do not adversely impact Citigroup's Net Interest Revenue (NIR). Various market factors are considered, including the market's expectation of future interest rates and any different expectations for rate indices (LIBOR, treasuries, etc.). In order to manage these risks effectively, Citigroup may modify customer pricing, enter into transactions with other institutions that may have opposite risk positions and enter into off-balance sheet transactions, including derivatives.
NIR is a function of the size of the balance and the rate that is earned or paid on that balance. NIR in any period is the result of customer transactions and the related contractual rates from prior periods, as well as new transactions in the current period; it may be impacted by changes in rates on floating rate assets and liabilities. Due to the long-term nature of the portfolio, NIR will vary from quarter to quarter even in the absence of changes in interest rates.
Citigroup's principal measure of earnings measurerisk to earnings from non-trading portfolios due to interest rates changes is Interest Rate Exposure (IRE). IRE is calculated for all non-trading portfolios for all currencies where Citigroup has significant interestmeasures the change in expected NIR in each currency that results solely from unanticipated changes in market rates of interest; scenarios are run assuming unanticipated instantaneous parallel rate exposure. IRE is calculatedchanges, as well as more gradual rate changes. Other factors such as changes in volumes, spreads, margins, and the pretax earnings impact of an instantaneous, parallel increaseprior period pricing decisions can also change current period interest income, but are not captured by IRE. While IRE assumes that businesses make no additional changes in pricing or decreasebalances in response to the yield curve. In order to stress test the portfolios, IRE is calculated for +/-50 basis points (bps), +/-100 bpsunanticipated rate changes, in practice businesses may alter their portfolio mix, customer pricing and +/-200 bps rate shocks for each currency. IRE is supplemented withhedge positions, which could significantly impact reported NIR.
Citigroup employs additional measurements, including stress testing the impact on earnings and equity forof non-linear interest rate movements and
71
on the value of the balance sheet; analysis of portfolio duration basis risk, spread risk,and volatility, risk,particularly as they relate to mortgages and cost-to-close.
IRE is interpreted asmortgage-backed securities; and the potential impact of the change in income that would result from the instantaneous change in rates on a static portfolio at a point in time. This is a measure of exposure, not a simulation of income or forecasted income. It assumes no additional changes in rates or positions, although in practice, business treasurers may react to a change or expected change in rates by altering their portfolio mix, repricing characteristics, hedge positions and customer pricing which could significantly impact reported earnings. IRE is used as an indicative measure of exposure to a severe rate change, and not as a predictor of changes in reported earnings.
The table below illustrates the impact to Citigroup's pretax earnings over a one-year and five-year time horizon from an instantaneous 100 bps increase and a 100 bps decrease in the yield curves applicable to various currencies, the primary scenarios evaluated by senior management. The five-year horizon amounts are discounted back to current amounts.spread between different market indices.
Citigroup Interest Rate Exposure (Impact on Pretax Earnings)(1)
| December 31, 2004 | December 31, 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase | Decrease | Increase | Decrease | |||||||||
| In millions of dollars | ||||||||||||
U.S. dollar | |||||||||||||
Twelve months and less | $ | (462 | ) | $ | 279 | $ | (793 | ) | $ | 266 | |||
Discounted five year | 325 | (1,580 | ) | 558 | (2,739 | ) | |||||||
Mexican peso | |||||||||||||
Twelve months and less | $ | 46 | $ | (46 | ) | $ | 55 | $ | (55 | ) | |||
Discounted five year | 206 | (208 | ) | 226 | (226 | ) | |||||||
Euro | |||||||||||||
Twelve months and less | $ | (89 | ) | $ | 89 | $ | (86 | ) | $ | 86 | |||
Discounted five year | 120 | (121 | ) | 32 | (32 | ) | |||||||
Japanese yen | |||||||||||||
Twelve months and less | $ | 36 | NM | (2) | $ | 65 | NM | (2) | |||||
Discounted five year | 89 | NM | (2) | 142 | NM | (2) | |||||||
Pound sterling | |||||||||||||
Twelve months and less | $ | 22 | $ | (22 | ) | $ | 31 | $ | (31 | ) | |||
Discounted five year | 178 | (181 | ) | 142 | (142 | ) |
The exposures in the table below represent the approximate change in NIR for the next 12 months based on current balances and pricing that would result from unanticipated rate change scenarios of an instantaneous 100bp change and a gradual 100bp (25bp per quarter) change in interest rates.
| December 31, 2005 | December 31, 2004 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 100 bps Increase | 100 bps Decrease | 100 bps Increase | 100 bps Decrease | |||||||||
| In millions of dollars | ||||||||||||
U.S. dollar | |||||||||||||
100 bp instantaneous change | $ | (155 | ) | $ | 284 | $ | (462 | ) | $ | 279 | |||
100 bp gradual change | $ | (73 | ) | $ | 66 | NA | NA | ||||||
Mexican peso | |||||||||||||
100 bp instantaneous change | $ | 63 | $ | (64 | ) | $ | 46 | $ | (46 | ) | |||
100 bp gradual change | $ | 34 | $ | (34 | ) | NA | NA | ||||||
Euro | |||||||||||||
100 bp instantaneous change | $ | (40 | ) | $ | 40 | $ | (89 | ) | $ | 89 | |||
100 bp gradual change | $ | (19 | ) | $ | 19 | NA | NA | ||||||
Japanese yen | |||||||||||||
100 bp instantaneous change | $ | (16 | ) | NM | $ | 36 | NM | ||||||
100 bp gradual change | $ | (11 | ) | NM | NA | NA | |||||||
Pound sterling | |||||||||||||
100 bp instantaneous change | $ | 3 | $ | (3 | ) | $ | 22 | $ | (22 | ) | |||
100 bp gradual change | $ | 9 | $ | (9 | ) | NA | NA | ||||||
The changes in U.S. dollar Interest Rate Exposure from the prior year reflect changes in the aggregate asset/liability mix, changes in actual and projected pre-payments for mortgages and mortgage-related investments, the impact on stockholders' equity of retained earnings net of the WorldCom and Litigation Reserve Charge in 2004, as well as Citigroup's view of prevailing interest rates.
The table below reflects the estimated decrease in the fair value of financial instruments held in the insurance companies as of December 31, 2004 and 2003, as a result of a 100 bps increase in interest rates.
| 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||
Assets | ||||||||
Investments | $ | (2,387 | ) | $ | (2,226 | ) | ||
Liabilities | ||||||||
Long-term debt | $ | (5 | ) | $ | (8 | ) | ||
Contractholder funds | (1,102 | (996 | ) | |||||
A significant portion of the insurance companies' liabilities (insurance policy and claims reserves) are not financial instruments and are excluded from the above sensitivity analysis. The corresponding changes in the fair values of the insurance policy and claim reserves are decreases of $756 million and $681 million at December 31, 2004 and 2003, respectively. Furthermore, the analysis does not change the economics of asset-liability matching risk mitigation strategies employed by the insurance businesses. The durations of invested assets are closely matched with the related insurance liabilities, diminishing the exposure to interest rate generated volatility. Including insurance policy and claim liabilities, along with the aforementioned duration matching techniques, significantly decreases the impact implied in the above table.
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 of these is discussed in greater detail below. 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.products.
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 1one 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 most cases, limited, for all relevant risks taken in a trading portfolio.
Value-at-Risk (VAR) 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-RiskVAR method incorporates the factor sensitivities of the trading portfolio with the volatilities and correlations of those factors. Citigroup's Value-at-RiskVAR is based on the volatilities of, and correlations between, approximately 250,000 market risk factors, including factors that track the specific issuer risk in debt and equity securities.
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 utilizeuse the information to make judgments as to the ongoing appropriateness of exposure levels and limits.
Risk Capitalcapital for market risk in trading portfolios is based on an annualized value-at-riskVAR figure, with adjustments for intra-day trading activity.
Total revenuerevenues of the trading business consistsconsist of customer revenue, which includes spreads from customer flow and positions taken to facilitate customer orders,orders; proprietary trading activities in both cash and derivative transactions,transactions; and net interest revenue. All trading positions are marked-to-market with the result reflected in earnings. Even if a desk experiences a mark-to-market loss equivalent to its value-at-risk, its daily profit and loss could still be positive, primarily due to customer flow revenue. In 2004,2005, negative trading-related revenue was(net losses) were recorded for 1334 of 253 trading days. Of the 1334 days on which negative revenue (net losses) was recorded, only fournine were greater than $30 million. The following histogram of total daily revenue or loss captures trading volatility and shows the number of days in which the Company's trading-related revenues fell within particular ranges.
72
Histogram of Daily Trading-Related Revenue
Revenue—Twelve Months Ended December 31, 20042005
Citigroup periodically performs extensive back-testing of many hypothetical test portfolios as one check on the accuracy of its Value-at-Risk (VAR). Back-testing is the process in which the daily Value-at-RiskVAR of a test portfolio is compared to the ex-post daily change in the market value of its transactions. Back-testing is conducted to ascertain if in fact we are measuring potential market loss atconfirm the validity of the 99% confidence level. Alevel that daily market value losslosses in excess of a 99% confidence level Value-at-Risk should occur, on average, only 1% of the time. The VAR calculation for the hypothetical test portfolios, with different degrees of risk concentration, meets this statistical criteria.
New and/or complex products in the global corporate and investment banking business are required to be reviewed and approved by the Capital Markets Approval Committee (CMAC). The CMAC is responsible for ensuring that 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.
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-RiskVAR in the trading portfolios was $93 million at December 31, 2005 and $116 million at December 31, 2004 and $83 million at December 31, 2003.2004. Daily exposures averaged $101$109 million in 20042005 and ranged from $80$78 million to $212$157 million.
The following table summarizes Value-at-Risk to Citigroup in the trading portfolios as of December 31, 20042005 and 2003,2004, along with the averages:
| Dec. 31, 2004 | 2004 Average | Dec. 31, 2003 | 2003 Average | December 31, 2005 | 2005 Average | December 31, 2004 | 2004 Average | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In million of dollars | ||||||||||||||||||||||||
Interest rate | $ | 103 | $ | 96 | $ | 83 | $ | 79 | $ | 83 | $ | 100 | $ | 103 | $ | 96 | ||||||||||
Foreign exchange | 22 | 16 | 14 | 21 | 17 | 14 | 22 | 16 | ||||||||||||||||||
Equity | 32 | 29 | 17 | 15 | 50 | 40 | 32 | 29 | ||||||||||||||||||
Commodity | 15 | 16 | 13 | 8 | 8 | 15 | 15 | 16 | ||||||||||||||||||
Covariance adjustment | (56 | ) | (56 | ) | (44 | ) | (43 | ) | (65 | ) | (60 | ) | (56 | ) | (56 | ) | ||||||||||
Total—All market risk factors, including general and specific risk | $ | 116 | $ | 101 | $ | 83 | $ | 80 | $ | 93 | $ | 109 | $ | 116 | $ | 101 | ||||||||||
Specific risk component | $ | 9 | $ | 9 | $ | 8 | $ | 7 | $ | 12 | $ | 6 | $ | 9 | $ | 9 | ||||||||||
Total—General market factors only | $ | 107 | $ | 92 | $ | 75 | $ | 73 | $ | 81 | $ | 103 | $ | 107 | $ | 92 | ||||||||||
The specific risk component represents the level of issuer-specific risk embedded in the Value-at-Risk,VAR, arising from both debt and equity securities. Citigroup's specific risk model conforms with the 4x multiplier4x-multiplier treatment approved by the Federal Reserve and is subject to extensive hypothetical back testingback-testing (performed on an annual basis), including many portfolios with position concentrations.
The table below provides the range of Value-at-RiskVAR in the trading portfolios that was experienced during 20042005 and 2003:2004:
| 2004 | 2003 | 2005 | 2004 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Low | High | Low | High | Low | High | Low | High | ||||||||||||||||
| In millions of dollars | In millions of dollars | ||||||||||||||||||||||
Interest rate | $ | 76 | $ | 133 | $ | 55 | $ | 107 | $ | 62 | $ | 155 | $ | 76 | $ | 133 | ||||||||
Foreign exchange | 8 | 29 | 11 | 34 | 9 | 23 | 8 | 29 | ||||||||||||||||
Equity | 15 | 180 | 7 | 87 | 27 | 63 | 15 | 180 | ||||||||||||||||
Commodity | 8 | 22 | 2 | 32 | 5 | 24 | 8 | 22 | ||||||||||||||||
73
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 risksrisk associated with business practices or market conduct that the Company may undertake with respect to activities in a fiduciary role, as principal, as well as agent, or through a special-purpose vehicle.
The management of operationalundertake. Operational risk is continuing to evolve into a distinct disciplineinherent in Citigroup's global business activities and, as with its ownother risk types, is managed through an overall framework with checks and balances that include recognized ownership of the risk by the businesses, independent risk management structure, tools,oversight, and process, much like creditindependent review by Audit Risk and market risk.Review (ARR).
Policy
The Citigroup Self-Assessment and Operational Risk Framework (the Framework) includes the Citigroup Risk and Control Self-Assessment Policy and the Citigroup Operational Risk Policy, which define Citigroup's approach to operational risk management.
The Citigroup Operational Risk Policy (the Policy) codifies the core governing principles for operational risk management and provides thea framework to identify, evaluate, control, measure, monitor, and reportfor operational risks in a consistent manner across the Company. Each major business segment must establish its own operational risk procedures, consistent with the corporate policy, and an approved operational risk governance structure. The Framework requires each business to identify its key operational risks as well as the controls established to mitigate those risks and to ensure compliance with laws, regulations, regulatory administrative actions, and Citigroup policies. It also requires that all businesses collect and report their operational risk losses in accordance with Policy definitions into a standardized database.
Citigroup's Framework includes the following core operational risk principles, which apply to all of Citigroup's businesses (certain newly acquired businesses are granted temporary exemptions to this policy):
The Policy and its requirements facilitate the aggregation of operational risks across products and businesses and promote effective communication of those risks to management. Information about the businesses' operational risks and losses is reported regularly to Senior Management and to the Citigroup Board of Directors. This includes information about the allocation of risk capital for operational risk to each business. Risk capital is calculated based on an estimate of the operational loss potential for each major line of business adjusted for the quality of its control environment. Citigroup's methodologies for calculating capital continue to evolve to accommodate use of the increasing amounts of data that are becoming available as a product of the Framework. Citigroup's Framework facilitates the Company's response to the requirements of emerging regulatory guidance on operational risk, including those related to Basel 2 capital calculations.
Risk and Control Self-Assessmentlosses.
A formal governance structure has beenis established through the Risk and Control Self-Assessment (RCSA) Policy (RCSA Policy) to provide direction, oversight, and monitoring of Citigroup's RCSA programs. The RCSA Policy incorporates standards for risk and control self-assessmentassessment that are applicable to all businesses and staff functions; it establishes RCSA as the process whereby risks that are inherent in a business' strategy, objectives, and activities are identified and the effectiveness of the key controls over those risks are evaluated and monitored. RCSA is based on COSO (The Committee of Sponsoring OrganizationsThe objective of the Treadway Commission) principles, which have been adopted aspolicy is to establish a consistent approach to assessing relevant risks and the minimum standards for all internaloverall control reviews that comply withenvironment across Citigroup. RCSA processes facilitate Citigroup's adherence to regulatory requirements, including Sarbanes-Oxley, FDICIA, or operational risk requirements. The policy requires, on a quarterly basis, businessesthe International Convergence of Capital Measurement and staff functions to perform an RCSA that includes documentationCapital Standards (Basel II), and other corporate initiatives, including Operational Risk Management and alignment of the control environment and policies, assessing the risks and controls, testing commensuratecapital assessments with risk level, corrective action tracking for control breakdowns or deficiencies and periodic reporting, including reporting to Senior Management and the Audit Committee.management objectives. The entire process is subject to audit by Citigroup's Audit and Risk Review, withand the results of RCSA are included in periodic management reporting, including reporting to Senior Management and the Audit and Risk Committee.
Reporting
The Operational Risk Policy and its requirements facilitate the effective communication of operational risks both within and across businesses. Information about the businesses' operational risk, historical losses, and the control environment is reported by each major business segment and functional area, and summarized for Senior Management Committeeand the Citigroup Board of Directors.
Measurement and Basel II
Risk Capital (RC) requirements are calculated for operational risk and the Framework is intended to ensure that relevant information is captured by the businesses to support advanced capital modeling and management. An enhanced version of the Board.RC model for operational risk has been developed and is being implemented across the major business segments as a step toward readiness for Basel II capital calculations. The calculation, which is aimed at qualification as an "Advanced Measurement Approach" (AMA) under Basel II, uses a combination of internal and external loss data to support statistical modeling of capital requirement estimates, which are then adjusted modestly to reflect more qualitative data about the operational risk and control environment.
Information Security and Continuity of Business
In the fall of 2004, Citigroup created the function of Chief Information Technology Risk Officer to enhance risk management practices between information security and continuity of business. This is an important step in Citigroup's strategyenabled the Company to better manage and aggregate risk on an enterprise-wide basis.
During 2005, Citigroup created a strategic framework for Information Security technology initiatives, and the Company began implementing enhancements to various Information Security programs across its businesses covering Information Security Risk Management, Security Incident Response and Electronic Transportable Media. The Company also implemented tools to increase the effectiveness of its data protection and entitlement management programs. Additional monthly Information Security metrics were established to better assist the Information Technology Risk Officer in managing enterprise-wide risk. The Information Security Program complies with the Gramm-Leach-Bliley Act and other regulatory guidance. During 2004, the Citigroup Information Security Office conducted an end-to-end review of Company-wide risk management processes for mitigating, monitoring, and responding to information security risk.
During 2004,2005, Citigroup began implementing a new business continuity program that improves risk analysis and provides robust support for business resiliency. The Corporate Office of Business Continuity, with the support of senior management, continued to coordinate global preparedness and mitigate business continuity risks by reviewing and testing recovery procedures. The Corporate Office of Business Continuity with the support of the Global Senior Continuity of Business Committee monitors compliance with all internal and external regulatory standards to enhance Citigroup's resilience in the financial markets.
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COUNTRY AND CROSS-BORDER RISK MANAGEMENT PROCESS
Country Risk
The Citigroup Country Risk Committee 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 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-borderCross-border outstandings are reported by assigning externally guaranteed outstandingsexternal guarantees to the country of the guarantor andguarantor. For outstandings for whichwith tangible liquid collateral, is held outside of the obligor's country tothey are reflected in the country in whichwhere 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 represent 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.
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The table below shows all countries wherein which total FFIEC cross-border outstandings exceed 0.75% of total Citigroup assets for the periods presented:
| December 31, 2004 | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| December 31, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | Investments in Local Franchises | | | | | | | | | | December 31, 2005 | December 31, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cross-Border Claims on Third Parties | | | | | Cross-Border Claims on Third Parties | Investments in Local Franchises | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Net Investments in Local Franchises(2) | | | | | Total Cross- Border Out- standings | | Total Cross- Border Out- standings | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trading and Short-Term Claims(1) | Resale Agreements | All Other | Total | Local Country Assets | Local Country Liabilities | Total Cross-Border Outstandings | Commitments(3) | Total Cross-Border Outstandings | Commitments(3) | Trading and Short- Term Claims(1) | Resale Agree- ments | All Other | Total | Local Country Assets | Local Country Liabilities | Net Investments in Local Franchises(2) | Commit- ments(3) | Commit- ments | ||||||||||||||||||||||||||||||||||||||||||||||
| In billions of dollars | In billions of dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United Kingdom | $ | 6.2 | $ | 23.3 | $ | 3.4 | $ | 32.9 | $ | 37.4 | $ | 72.4 | $ | — | $ | 32.9 | $ | 82.2 | $ | 32.4 | $ | 28.3 | $ | 7.9 | $ | 12.3 | $ | 0.6 | $ | 20.8 | $ | 49.0 | $ | 71.7 | — | $ | 20.8 | $ | 103.8 | $ | 32.9 | $ | 82.2 | ||||||||||||||||||||||
Germany | 18.2 | 1.7 | 2.0 | 21.9 | 22.9 | 19.8 | 3.1 | 25.0 | 19.7 | 21.7 | 14.5 | 9.9 | 2.7 | 2.2 | 14.8 | 19.8 | 21.1 | — | 14.8 | 25.0 | 25.0 | 19.7 | |||||||||||||||||||||||||||||||||||||||||||
France | 9.0 | 6.9 | 1.4 | 17.3 | 0.4 | 0.6 | — | 17.3 | 19.4 | 14.8 | 7.9 | 7.8 | 4.9 | 2.2 | 14.9 | 0.4 | 0.6 | — | 14.9 | 33.5 | 17.3 | 19.4 | |||||||||||||||||||||||||||||||||||||||||||
South Korea | 2.2 | 0.3 | 0.2 | 2.7 | 46.9 | 34.7 | 12.2 | 14.9 | 2.2 | 4.8 | 0.2 | 2.7 | — | 0.1 | 2.8 | 45.4 | 33.4 | 12.0 | 14.8 | 5.2 | 14.9 | 2.2 | |||||||||||||||||||||||||||||||||||||||||||
Netherlands | 10.3 | 1.0 | 1.6 | 12.9 | — | 0.9 | — | 12.9 | 4.9 | 8.4 | 3.7 | 12.3 | 1.1 | 2.4 | 15.8 | 0.1 | 0.7 | — | 15.8 | 9.2 | 12.9 | 4.9 | |||||||||||||||||||||||||||||||||||||||||||
Canada | 4.1 | 0.9 | 1.5 | 6.5 | 14.8 | 9.3 | 5.5 | 12.0 | 2.6 | 10.2 | 2.2 | 3.3 | 0.7 | 0.3 | 4.3 | 14.1 | 9.3 | 4.8 | 9.1 | 2.9 | 12.0 | 2.6 | |||||||||||||||||||||||||||||||||||||||||||
Italy | 6.1 | 1.4 | 0.4 | 7.9 | 3.6 | 1.0 | 2.6 | 10.5 | 2.7 | 14.2 | 2.3 | 8.4 | 0.8 | 0.6 | 9.8 | 2.6 | 1.5 | 1.1 | 10.9 | 3.0 | 10.5 | 2.7 | |||||||||||||||||||||||||||||||||||||||||||
Japan | 2.0 | 3.2 | 1.2 | 6.4 | 30.6 | 43.4 | — | 6.4 | 0.8 | 11.7 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Australia | 1.3 | 0.3 | 0.8 | 2.4 | 19.1 | 19.7 | — | 2.4 | 0.6 | 8.2 | 0.2 |
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, 2005, 2004, 2003, and 2002,2003, respectively, were (in billions): the United Kingdom ($13.2, $14.6,13.7, $13.2, and $9.9)$14.6), Germany ($39.1, $41.4,20.0, $39.1, and $26.5)$41.4), France ($16.2, $17.5,13.4, $16.2, and $11.7)$17.5), South Korea ($15.1, $4.1,15.0, $15.1, and $4.1), the Netherlands ($14.9, $10.0,17.5, $14.9, and $7.8)$10.0), Canada ($13.0, $11.5,10.4, $13.0, and $7.3)$11.5), Italy ($14.0, $18.7,18.8, $14.0, and $20.3), Japan ($7.9, $11.9, and $9.3), and Australia ($4.3, $9.8, and $3.4)$18.7).
Cross-border commitments (in billions) at December 31, 20022003 were $26.3$28.3 for the United Kingdom, $10.9$14.5 for Germany, $5.9$7.9 for France, $0.3$0.2 for South Korea, $4.1$3.7 for the Netherlands, $2.1$2.2 for Canada $1.6and $2.3 for Italy, $0.4 for Japan, and $0.2 for Australia.Italy.
The sector percentage allocation for bank, public and private cross-border claims, respectively, on third parties under FFIEC guidelines at December 31, 20042005 was: the United Kingdom (28%(27%, 21%, and 52%), Germany (30%, 35%, and 35%), France (34%, 18%, and 54%), Germany (35%, 48%, and 17%), France (23%, 39%, and 38%), South Korea (24%(15%, 16%, and 69%), the Netherlands (13%, 23%, and 53%), the Netherlands (23%, 23%, and 54%64%), Canada (14%(20%, 19%29%, and 67%), Italy (9%, 58%, and 33%), Japan (4%, 54%, and 42%51%), and Australia (13%Italy (3%, 44%74%, and 43%23%).
The following table shows cross-border outstandings to our 10 largest non-OECDemerging market countries for the current period:
| December 31, 2004 | | | | | | | | | | December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| December 31, 2003 | Cross-Border Claims on Third Parties | Investments in Local Franchises | | | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | Investments in Local Franchises | | Trading and Short- Term Claims(1) | Resale Agree- ments | All Other | Total | Local Country Assets | Local Country Liabilities | Net Investments in Local Franchises(2) | Total Cross- Border Out- standings | Commit- ments(3) | Total Cross- Border Out- standings | Commit- ments | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cross-Border Claims on Third Parties | | | | In billions of dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | Net Investments in Local Franchises(2) | | | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Trading and Short-Term Claims(1) | Resale Agreements | All Other | Total | Local Country Assets | Local Country Liabilities | Total Cross-Border Outstandings | Commitments(3) | Total Cross-Border Outstandings | Commitments(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In billions of dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taiwan | $ | 1.8 | $ | 5.1 | $ | 0.3 | $ | 7.2 | $ | 9.1 | $ | 12.5 | $ | — | $ | 7.2 | $ | 0.9 | $ | 6.4 | $ | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||
Mexico | $ | 1.9 | $ | — | $ | 3.7 | $ | 5.6 | $ | 56.9 | $ | 54.6 | $ | 2.3 | $ | 7.9 | $ | 0.9 | $ | 7.4 | $ | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||
Brazil | 2.3 | 1.0 | 1.2 | 4.5 | 5.7 | 4.1 | 1.6 | 6.1 | 0.2 | 5.5 | 0.1 | 1.5 | 0.9 | 1.6 | 4.0 | 8.4 | 5.2 | 3.2 | 7.2 | 0.3 | 6.1 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||
India | 2.1 | — | 0.9 | 3.0 | 8.5 | 6.2 | 2.3 | 5.3 | 0.3 | 3.9 | 0.4 | 3.8 | — | 0.6 | 4.4 | 10.5 | 8.4 | 2.1 | 6.5 | 0.7 | 5.3 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||
Thailand | 0.2 | 0.7 | — | 0.9 | 2.9 | 2.1 | 0.8 | 1.7 | 0.2 | 1.5 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
China | 1.1 | 3.5 | 0.3 | 4.9 | 3.8 | 4.6 | — | 4.9 | 0.3 | 3.7 | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taiwan | 1.3 | 2.8 | 0.3 | 4.4 | 8.3 | 12.4 | — | 4.4 | 1.0 | 7.2 | 0.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hong Kong | 2.0 | 0.1 | 0.2 | 2.3 | 11.2 | 24.7 | — | 2.3 | 0.2 | 1.5 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Egypt | 1.4 | — | 0.1 | 1.5 | 1.1 | 1.2 | — | 1.5 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Turkey | 1.0 | — | 0.2 | 1.3 | 1.7 | 1.5 | 0.2 | 1.5 | 0.7 | 1.4 | 0.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Chile | 0.2 | — | 0.7 | 0.9 | 3.4 | 2.7 | 0.7 | 1.6 | 0.1 | 1.6 | 0.2 | 0.3 | — | 0.5 | 0.8 | 3.5 | 2.9 | 0.6 | 1.4 | 0.1 | 1.6 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
Hong Kong | 1.4 | — | 0.1 | 1.5 | 11.4 | 23.7 | — | 1.5 | 0.1 | 1.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Singapore | 1.2 | 0.1 | 0.1 | 1.4 | 15.9 | 25.8 | — | 1.4 | 0.5 | 1.2 | 0.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Malaysia | 0.5 | 0.1 | 0.1 | 0.7 | 8.7 | 8.2 | 0.5 | 1.2 | 0.1 | 0.9 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Russia | 0.4 | 0.3 | 0.4 | 1.1 | 1.8 | 1.7 | 0.1 | 1.2 | 0.3 | 1.5 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Colombia | 0.7 | — | 0.2 | 0.9 | 1.4 | 1.2 | 0.2 | 1.1 | 0.1 | 0.8 | 0.1 | 1.0 | — | 0.1 | 1.1 | 1.4 | 1.2 | 0.2 | 1.3 | 0.1 | 1.1 | 0.1 |
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BALANCE SHEET REVIEW
General
At December 31, 2004, total assets were $1.5 Trillion, an increase of $220.1 billion or 17% from the prior year. At December 31, 2004, total assets were primarily composed of loans (net of unearned income) of $548.8 billion or 37% of total assets, trading assets of $280.2 billion or 19% of total assets, investments of $213.2 billion or 14% of total assets, and federal funds sold and securities borrowed or purchased under agreements to resell of $200.7 billion or 14% of total assets. Total average interest-earning assets were $1,195.5 billion compared to $1,007.1 billion in 2003. Supporting this asset growth was an $88.1 billion or 19% increase in total deposits, a $43.3 billion or 20% increase in debt, a $28.4 billion or 16% increase in federal funds purchased and securities loaned or sold under agreements to repurchase, a $13.6 billion or 11% increase in trading account liabilities, and a $10.4 billion or 18% increase in contractholder funds and separate and variable accounts. In addition, at December 31, 2004, total stockholders' equity increased $11.3 billion to $109.3 billion, up 12% from the prior year. See "Capital Resources and Liquidity" on page 62 for further discussions on capital and liquidity.
| 2005 | 2004 | Increase (Decrease) | % Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | |||||||||||
Assets | ||||||||||||
Loans, net of unearned income and allowance for loan losses | $ | 574 | $ | 538 | $ | 36 | 7 | % | ||||
Trading account assets | 296 | 280 | 16 | 6 | ||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 217 | 201 | 16 | 8 | ||||||||
Investments | 181 | 213 | (32 | ) | (15 | ) | ||||||
All other assets | 226 | 252 | (26 | ) | (10 | ) | ||||||
Total assets | $ | 1,494 | $ | 1,484 | $ | 10 | 1 | % | ||||
Liabilities | ||||||||||||
Deposits | $ | 593 | $ | 562 | $ | 31 | 6 | % | ||||
Federal funds purchased and securities loaned or sold under repurchase agreements | 242 | 210 | 32 | 15 | ||||||||
Brokerage payables | 71 | 50 | 21 | 42 | ||||||||
Short-term borrowings and long-term debt | 284 | 265 | 19 | 7 | ||||||||
Trading account liabilities | 121 | 135 | (14 | ) | (10 | ) | ||||||
Other liabilities | 70 | 153 | (83 | ) | (54 | ) | ||||||
Total liabilities | $ | 1,381 | $ | 1,375 | $ | 6 | — | % | ||||
Stockholders' equity | $ | 113 | $ | 109 | $ | 4 | 4 | % | ||||
Total liabilities and stockholders' equity | $ | 1,494 | $ | 1,484 | $ | 10 | 1 | % | ||||
Factors Affecting Assets and Liabilities
2005
On December 1, 2005, Citigroup completed the exchange of its asset management business for Legg Mason's broker-dealer business, approximately $2 billion of Legg Mason's common and preferred shares, and approximately $500 million in cash that was obtained via a lending facility provided by CIB. This exchange resulted in a decrease of approximately $1 billion in assets sold and an increase to Citigroup's total assets of approximately $6 billion on the business acquired.
On October 24, 2005, Citigroup completed the first phase in acquiring the credit card portfolio of Federated Department Stores, Inc. This resulted in an increase of more than $3 billion in the Company's total assets.
On July 1, 2005, Citigroup completed the sale of the Life Insurance & Annuities Business to MetLife. This transaction resulted in a decrease of $93 billion in the Company's total assets and $84 billion in insurance-related liabilities.
On March 31, 2005, Citigroup completed its acquisition of First American Bank in Texas. This acquisition resulted in an increase in the Company's total assets and deposits of more than approximately $4 billion and $3 billion, respectively.
During the 2005 year, Citigroup repurchased 278 million shares of common stock in open market repurchases. This resulted in a decrease of $13 billion in stockholders' equity, which was offset by an increase of $15 billion in retained earnings.
See Notes 2 and 3 to the Consolidated Financial Statements on pages 118 and 119, respectively.
2004
On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm for $2.7approximately $3 billion. This transaction resulted in an increase in assets and deposits of $37 billion and $22 billion, respectively, at June 30, 2004. See Note 2 to the Consolidated Financial Statements.
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25approximately $1 billion in cash. The acquisition included 427 WMF offices locatedcash, resulting in 26 states, andan increase to total assets of $3.8 billion. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward. See Note 2 to the Consolidated Financial Statements.
2003
On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears). This transaction resulted in an increase in assets at December 31, 2003 of approximately $32.4 billion, primarily composed of $28.6 billion in credit card receivables and $5.8 billion in intangible assets and goodwill, slightly offset by the addition of $2.1 billion in credit loss reserves. The transaction also resulted in an increase in long-term debt of approximately $10.0$4 billion. See Note 2 to the Consolidated Financial Statements.Statements on page 118.
Loans
The increase in total loans represented significant growth in the consumer loan portfolio (net of unearned income) of $19 billion primarily due to acquisitions, increases in loan originations due to the favorable interest rate environment, and the impact of foreign currency translation. These increases were partially offset by an increase in securitization of private label cards during the year, write-offs of loans for the estimated losses incurred from Hurricane Katrina, and the impact of U.S. Bankruptcy legislation. The 4% increase in the consumer loan portfolio was composed of a $30 billion, or 15%, increase in mortgage and real estate loans, slightly offset by a $9 billion, or 4%, decrease in installment and revolving credit, and a $2 billion, or 22%, decrease in lease financing. Allowance for consumer loan losses was $7 billion, which decreased $1 billion from prior year. During 2005, average consumer loans (net of unearned income) of $437 billion yielded an average rate of 9.0%, compared to $401 billion and 9.2% in the prior year.
In July 2003, Citigroup completedaddition, there was a $15 billion increase in the corporate loan portfolio (net of unearned income) reflected by the increase in existing loan portfolios and the acquisition of new portfolios, as well as the impact of foreign currency translation. The Home Depot private-label13% increase in the corporate portfolio (Home Depot)was driven by increases of $11 billion, or 12%, which added $6.0in commercial and industrial loans, $4 billion, or 31%, in receivablesloans to financial institutions, and 12 million accounts. See$1 billion, or 30%, in mortgage and real estate loans. These increases were partially offset by a $1 billion, or 14%, decrease in lease financing and a slight decrease in governments and official institutions. The allowance for
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corporate loan losses balance of $3 billion was relatively flat from the prior year. Average corporate loans of $120 billion yielded an average rate of 6.6% in 2005, compared to $108 billion and 6.6% in the prior year.
For further information, see "Loans Outstanding" on page 60 and Note 211 to the Consolidated Financial Statements.
Assets
Cash and Due from Banks
At December 31, 2004, the balance was $23.6 billion, an increase of $2.4 billion from the prior year. Net cash used in operating and investing activities of continuing operations was $2.4 billion and $79.2 billion, respectively, while net cash provided by financing activities of continuing operations was $83.3 billion. The effect of exchange rate changesStatements on cash and cash equivalents was $731 million in 2004 and $579 million in 2003.
Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell
At December 31, 2004, the balance was $200.7 billion, an increase of $28.6 billion from the prior year, attributable to increases in deposits paid for securities borrowed of $21.0 billion, and resales and federal funds sold of $7.6 billion. Resale agreements increased primarily to cover trading liability positions. The increase in securities borrowed related to conduit and prime brokerage activities. Average domestic federal funds sold and securities borrowed or purchased under agreements to resell were $129.5 billion yielding 2.3% in 2004, compared to $105.4 billion and 2.1% in 2003, while average foreign balances were $73.8 billion yielding 2.6% in 2004, compared to $64.5 billion and 2.9% in 2003. Average federal funds sold and securities borrowed or purchased under agreements to resell represented 17% of total average interest-earning assets during 2004. See Note 6 to the Consolidated Financial Statements.page 126.
Trading Account Assets (Liabilities)
At December 31, 2004, the balance was $280.2 billion, anThe increase of $44.8 billion or 19% from the prior year. The increasein trading account assets was attributable to portfolio growth of $32.8 billion in equity securities, $7.4 billion in corporate and other debt securities, $6.9$12 billion in mortgage loans and collateralized mortgage securities (CMS), $5.8$6 billion in other (primarily gold and silver contracts), $5.3 billion in foreign governmentequity securities, and $4.7$5 billion in state and municipal securities, $3 billion in corporate and other debt securities, and $6 billion in other. These increases were partially offset by decreases in revaluation gains of $20.3$10 billion (primarily from foreign exchange contracts as the U.S. dollar strengthened, offset by gains from interest rate contracts on the flattening of the yield curve) and decreases in trading inventory of $6 billion in foreign government securities.
Trading account liabilities of $121 billion decreased $14 billion from the prior year. The 10% decrease included an $11 billion decrease in securities sold, not yet purchased, and a $3 billion decrease in revaluation losses (primarily lower losses on foreign exchange contracts offset by increased gains in interest rate contracts). The decrease in securities sold was attributable to a decrease of $9 billion in debt securities and a decrease of $2 billion in U.S. Treasury securities. Additionally, there was a $2.2 billion increase in revaluation gains (primarily interest rate and FX contracts). See Note 8 to the Consolidated Financial Statements.Statements on page 125.
Federal Funds Sold (Purchased) and Securities Borrowed (Loaned) or Purchased (Sold) Under Agreements
to Resell (Repurchase)
The increase in both accounts was primarily due to higher levels of proprietary inventory, which are funded in a secured manner (mainly with repurchase agreements). In addition, increased levels of matched activities also contributed to the higher levels of funding assets and liabilities. See Note 6 to the Consolidated Financial Statements on page 124.
Investments
At December 31, 2004, the balance was $213.2 billion, an increase of $30.4 billion from the prior year. The Company wasInvestments are primarily invested in fixed maturity securities, including mortgage-backed securities, U.S. Treasury and federal agencies securities, state and municipal securities, foreign government securities, and U.S. corporate and other debt securities. The increasedecline in the overall investment portfolio was primarily due to growth in fixed maturitythe sale of TLA investment assets of approximately $49 billion. This was partially offset by securities of $28.2 billion. Average investments represented 17% of total interest-earning assets at December 31, 2004. The average rate earned on these investments in 2004 was 4.6%, compared to 4.3%obtained in the prior year.Legg Mason and MetLife transactions as well as the impact of favorable market conditions and foreign exchange movements. See Note 5 to the Consolidated Financial Statements.
Loans
Total loans outstanding (net of unearned income) at December 31, 2004 were $548.8 billion compared to $478.0 billion in the prior year, an increase of $70.8 billion or 15%. Total average loans comprised 43% of total interest-earning assets in 2004, compared to 44% in the prior year.
The increase represents significant growth in the consumer loan portfolio of $55.3 billion reflecting acquisitions, an increase in loan originations during the year due to the favorable interest rate environment, and the impact of FX. The 15% increase in the consumer loan portfolio was composed of a $43.2 billion or 27% increase in mortgage and real estate loans, and a $14.9 billion or 7% increase in installment, revolving credit, and other, slightly offset by a $3.1 billion or 29% decrease in lease financing. For more information, see "Loans Outstanding"Statements on page 46.
In addition, there was a $15.5 billion increase in the corporate loan portfolio. The 16% increase in the Corporate portfolio was driven by increases of $13.4 billion or 17% in commercial and industrial loans, $2.2 billion in mortgage and real estate loans, and $0.9 billion or 7% in loans to financial institutions. These increases are partially offset by a $0.5 billion or 10% decrease in lease financing and a $0.4 billion or 26% decrease in governments and official institutions. For further information, see "Loans Outstanding" on page 46.
During 2004, average consumer loans of $401.3 billion yielded an average rate of 9.2%, compared to $341.4 billion and 9.3% in the prior year. Average corporate loans of $109.4 billion yielded an average rate of 6.7% in 2004, compared to $103.8 billion and 6.2% in the prior year. See Note 10 to the Consolidated Financial Statements.
Total loans held-for-sale, included in other assets at December 31, 2004, were $11.4 billion compared to $9.2 billion in the prior year, an increase of $2.2 billion or 24%. The increase is attributable to an increase in credit cards of $2.5 billion, partially offset by a decrease in mortgages of $0.3 billion.
Liabilities121.
Deposits
The Company's largest source of funding is derived from its large, geographically diverse deposit base. At December 31, 2004, totalAverage deposits were $562.1increased $50 billion to $513 billion in 2005, yielding an increaseaverage rate of $88.1 billion or 19% from2.6%, compared to 1.9% in the prior year. ThisThe 2005 increase in deposits was driven mainly by increases in corporate and retail andbanking deposits, slightly offset by a decline in private banking deposits.mainly due to the shutdown of the Private Bank in Japan.
The growth in corporate interest-bearing deposits, held bymainly in the Transaction Services business primarily reflectsEurope and Asia regions, reflected the effectsaddition of organic growth, acquisition growth (KorAm)new clients, higher balances in existing customer accounts, the impact of acquisitions, increased interest rate, transactional volumes and the impact of foreign currency translation.
The increase in retail deposits resulted primarily from growth in higher-margin demandmoney market accounts and time deposits in the consumer businesses in North America, Asia,the U.S., EMEA, and Japan, as well asMexico. In U.S. deposit balances grew in interest-bearing time deposits, CDs and money market accounts, driven by marketing of new and existing products, competitive interest rates, and the acquisition of First American Bank. In Europe and Mexico, deposit balances benefited from deposit growth marketing programs, branch expansion, and the impact of foreign currency translation. Private banking deposit growth resulted from increases in banking and fiduciary deposits.exchange rates. Interest-bearing foreign deposits comprise 61%60% of total deposits, interest-bearing domestic deposits comprise 29%, and both non-interest-bearing domestic deposits and non-interest-bearing foreign deposits comprise 5%11% of total deposits. AverageFor more information on deposits, increased $70.2see "Capital Resources and Liquidity" on page 83.
Brokerage Payables
The increase in brokerage payables consisted of increases in payables to customers of $17 billion and payables to $464.3brokers of $4 billion. Generally, the balance in brokerage payables fluctuates based upon investment security inventory levels, trade activity and the timing of settlement of trades, resulting in fails to deliver. In addition to these factors, the balance was also impacted by $3 billion on the acquisition of the broker/dealer business from Legg Mason in 2005. Total average brokerage payables were $55 billion in 2004 yielding an average rate of 1.9%,2005, compared to 1.8% in the prior year.
Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase
At December 31, 2004, federal funds purchased and securities loaned or sold under agreements to repurchase increased $28.4 billion or 16% to $209.6 billion, compared to $181.2 billion at the prior year end. This increase is attributable to increases of $22.3$43 billion in federal funds purchased and repurchase agreements and an increase of $6.1 billion in deposits received for securities loaned. Average volume in 2004 increased to $214.1 billion yielding 2.7%, compared to $180.2 billion and 2.7% in 2003.2004. See Note 67 to the Consolidated Financial Statements.
Trading Account Liabilities
At December 31, 2004, trading account liabilities of $135.5 billion increased $13.6 billion from the prior year. The 11% increase includes a $7.7 billion increase in securities sold, not yet purchased, and a $5.9 billion increase in revaluation losses (primarilyStatements on foreign exchange derivative transactions). The increase in securities sold is attributable to an increase of $6.9 billion in debt securities and an increase of $0.8 billion in U.S. Treasury securities. See Note 8 to the Consolidated Financial Statements.page 125.
Debt
At December 31, 2004, total CitigroupThe Company's debt was $264.7 billion, composed of long-term debt of $207.9$217 billion and short-term borrowings of $31.0$67 billion at December 31, 2005, which increased $9 billion and investment banking and brokerage borrowings of $25.8$10 billion, up 20%respectively, from $221.3 billion in the prior year.
The long-term debt balance at December 31, 2005 included $188 billion of senior notes; $23 billion of subordinated notes, with maturities ranging from 2006 to 2098; and $6 billion of junior subordinated notes relating to trust preferred securities.
Citigroup's average long-term debt outstanding during 2005 was $212 billion.
During 2004,2005, the Company continued to taketook advantage of low interest ratesthe flattened yield curve and the positive credit environment to extend the maturities of new borrowings. This $43.3 billion increaseborrowings and issued/acquired additional debt from 2003 includes increases of $45.2 billion in long-term debt and $3.3 billion in investment banking and brokerage borrowings, partially offset by a $5.2 billion decrease in short-term borrowings.
The long-term debt balance at December 31, 2004 includes $181.4 billion of senior notes, $19.1 billion of subordinated notes, with maturities ranging from 2005 to 2098, and $6.4 billion of junior subordinated notes relating to trust preferred securities. During 2004,new acquisitions. U.S. dollar- and non-U.S. dollar-denominated fixed and variable rate senior debt increased by $35.6$6 billion, and subordinated debt increased by $3.2$3 billion. AverageThe increase in long-term debt outstanding during 2004 was $188.4 billion.used to fund growth in the mortgage loan portfolio.
The 15%18% increase in investment banking and brokerage borrowings in 2004 includes a $3.6 billion increase in other short-term and bank borrowings and a $0.3 billion decrease in commercial paper.
The 14% decrease in short-term borrowings in 2004 includes a decrease2005 included an increase of $6.8$8 billion in commercial paper, partially offset byand an increase of $1.6$2 billion in other funds borrowed. The increase was used to fund both trading and non-trading activities.
For more information on debt, see Note 1315 to the Consolidated Financial Statements on page 136 and "Capital Resources and Liquidity" beginning on page 62.83.
78
AVERAGE BALANCES AND INTEREST RATES—ASSETS(1)(2)(3)(4)
| Average Volume | Interest Revenue | % Average Rate | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||
| In millions of dollars | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||
In U.S. offices | $ | 4,128 | $ | 3,921 | $ | 2,256 | $ | 110 | $ | 35 | $ | 22 | 2.66 | % | 0.89 | % | 0.98 | % | ||||||||
In offices outside the U.S.(5) | 2,801 | 2,126 | 1,737 | 26 | 28 | 24 | 0.93 | 1.32 | 1.38 | |||||||||||||||||
Total | $ | 6,929 | $ | 6,047 | $ | 3,993 | $ | 136 | $ | 63 | $ | 46 | 1.96 | % | 1.04 | % | 1.15 | % | ||||||||
Deposits at interest with banks(5) | $ | 30,430 | $ | 25,583 | $ | 19,344 | $ | 1,718 | $ | 525 | $ | 810 | 5.65 | % | 2.05 | % | 4.19 | % | ||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell(6) | ||||||||||||||||||||||||||
In U.S. offices | $ | 154,578 | $ | 129,538 | $ | 105,425 | $ | 7,041 | $ | 2,979 | $ | 2,156 | 4.55 | % | 2.30 | % | 2.05 | % | ||||||||
In offices outside the U.S.(5) | 74,728 | 73,829 | 64,471 | 2,561 | 1,884 | 1,879 | 3.43 | 2.55 | 2.91 | |||||||||||||||||
Total | $ | 229,306 | $ | 203,367 | $ | 169,896 | $ | 9,602 | $ | 4,863 | $ | 4,035 | 4.19 | % | 2.39 | % | 2.37 | % | ||||||||
Brokerage receivables | ||||||||||||||||||||||||||
In U.S. offices | $ | 31,414 | $ | 28,715 | $ | 26,884 | $ | 1,107 | $ | 650 | $ | 483 | 3.52 | % | 2.26 | % | 1.80 | % | ||||||||
In offices outside the U.S.(5) | 11,483 | 8,814 | 5,531 | 641 | 230 | 245 | 5.58 | 2.61 | 4.43 | |||||||||||||||||
Total | $ | 42,897 | $ | 37,529 | $ | 32,415 | $ | 1,748 | $ | 880 | $ | 728 | 4.07 | % | 2.34 | % | 2.25 | % | ||||||||
Trading account assets(7)(8) | ||||||||||||||||||||||||||
In U.S. offices | $ | 154,716 | $ | 125,597 | $ | 93,567 | $ | 5,365 | $ | 4,326 | $ | 3,230 | 3.47 | % | 3.44 | % | 3.45 | % | ||||||||
In offices outside the U.S.(5) | 80,367 | 70,458 | 45,802 | 2,408 | 2,013 | 1,541 | 3.00 | 2.86 | 3.36 | |||||||||||||||||
Total | $ | 235,083 | $ | 196,055 | $ | 139,369 | $ | 7,773 | $ | 6,339 | $ | 4,771 | 3.31 | % | 3.23 | % | 3.42 | % | ||||||||
Investments(1) | ||||||||||||||||||||||||||
In U.S. offices | ||||||||||||||||||||||||||
Taxable | $ | 77,000 | $ | 70,861 | $ | 71,966 | $ | 2,696 | $ | 2,163 | $ | 2,233 | 3.50 | % | 3.05 | % | 3.10 | % | ||||||||
Exempt from U.S. income tax | 10,852 | 8,582 | 7,432 | 566 | 540 | 502 | 5.22 | 6.29 | 6.75 | |||||||||||||||||
In offices outside the U.S.(5) | 81,309 | 74,665 | 59,134 | 4,234 | 3,650 | 2,648 | 5.21 | 4.89 | 4.48 | |||||||||||||||||
Total | $ | 169,161 | $ | 154,108 | $ | 138,532 | $ | 7,496 | $ | 6,353 | $ | 5,383 | 4.43 | % | 4.12 | % | 3.89 | % | ||||||||
Loans (net of unearned income)(9) | ||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||
In U.S. offices | $ | 306,396 | $ | 283,659 | $ | 245,013 | $ | 24,979 | $ | 24,053 | $ | 20,844 | 8.15 | % | 8.48 | % | 8.51 | % | ||||||||
In offices outside the U.S.(5) | 130,550 | 117,476 | 96,217 | 14,238 | 12,650 | 10,866 | 10.91 | 10.77 | 11.29 | |||||||||||||||||
Total consumer loans | $ | 436,946 | $ | 401,135 | $ | 341,230 | $ | 39,217 | $ | 36,703 | $ | 31,710 | 8.98 | % | 9.15 | % | 9.29 | % | ||||||||
Corporate loans | ||||||||||||||||||||||||||
In U.S. offices | $ | 19,200 | $ | 16,030 | $ | 21,111 | $ | 1,134 | $ | 918 | $ | 1,033 | 5.91 | % | 5.73 | % | 4.89 | % | ||||||||
In offices outside the U.S.(5) | 101,262 | 91,644 | 80,890 | 6,837 | 6,175 | 5,209 | 6.75 | 6.74 | 6.44 | |||||||||||||||||
Total corporate loans | $ | 120,462 | $ | 107,674 | $ | 102,001 | $ | 7,971 | $ | 7,093 | $ | 6,242 | 6.62 | % | 6.59 | % | 6.12 | % | ||||||||
Total loans | $ | 557,408 | $ | 508,809 | $ | 443,231 | $ | 47,188 | $ | 43,796 | $ | 37,952 | 8.47 | % | 8.61 | % | 8.56 | % | ||||||||
Other interest-earning assets | $ | 10,050 | $ | 12,921 | $ | 14,258 | $ | 518 | $ | 1,014 | $ | 938 | 5.15 | % | 7.85 | % | 6.58 | % | ||||||||
Total interest-earning assets | $ | 1,281,264 | $ | 1,144,419 | $ | 961,038 | $ | 76,179 | $ | 63,833 | $ | 54,663 | 5.95 | % | 5.58 | % | 5.69 | % | ||||||||
Non-interest-earning assets(7) | 151,492 | 162,581 | 140,110 | |||||||||||||||||||||||
Total assets from discontinued operations | 51,270 | 96,734 | 81,966 | |||||||||||||||||||||||
Total assets | $ | 1,484,026 | $ | 1,403,734 | $ | 1,183,114 | ||||||||||||||||||||
79
AVERAGE BALANCES AND INTEREST RATES—LIABILITIES AND EQUITY,
AND NET INTEREST REVENUE(1)(2)(3)(4)
| Average Volume | Interest Revenue | % Average Rate | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||
| In millions of dollars | |||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||
In U. S. offices | ||||||||||||||||||||||||||
Savings deposits(5) | $ | 133,604 | $ | 125,659 | $ | 115,614 | $ | 2,411 | $ | 1,077 | $ | 992 | 1.80 | % | 0.86 | % | 0.86 | % | ||||||||
Other time deposits | 35,754 | 30,544 | 26,390 | 743 | 676 | 425 | 2.08 | 2.21 | 1.61 | |||||||||||||||||
In offices outside the U.S.(6) | 343,647 | 306,633 | 251,295 | 10,348 | 7,037 | 5,384 | 3.01 | 2.29 | 2.14 | |||||||||||||||||
Total | $ | 513,005 | $ | 462,836 | $ | 393,299 | $ | 13,502 | $ | 8,790 | $ | 6,801 | 2.63 | % | 1.90 | % | 1.73 | % | ||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase(7) | ||||||||||||||||||||||||||
In U.S. offices | $ | 173,674 | $ | 145,326 | $ | 122,480 | $ | 7,450 | $ | 3,053 | $ | 2,216 | 4.29 | % | 2.10 | % | 1.81 | % | ||||||||
In offices outside the U.S. (6) | 71,921 | 66,806 | 56,057 | 4,118 | 2,821 | 2,639 | 5.73 | 4.22 | 4.71 | |||||||||||||||||
Total | $ | 245,595 | $ | 212,132 | $ | 178,537 | $ | 11,568 | $ | 5,874 | $ | 4,855 | 4.71 | % | 2.77 | % | 2.72 | % | ||||||||
Brokerage payables | ||||||||||||||||||||||||||
In U.S. offices | $ | 48,902 | $ | 38,457 | $ | 31,608 | $ | 544 | $ | 94 | $ | 48 | 1.11 | % | 0.24 | % | 0.15 | % | ||||||||
In offices outside the U.S.(6) | 5,737 | 4,923 | 1,720 | 23 | 15 | 4 | 0.40 | 0.30 | 0.23 | |||||||||||||||||
Total | $ | 54,639 | $ | 43,380 | $ | 33,328 | $ | 567 | $ | 109 | $ | 52 | 1.04 | % | 0.25 | % | 0.16 | % | ||||||||
Trading account liabilities(8)(9) | ||||||||||||||||||||||||||
In U.S. offices | $ | 34,935 | $ | 37,233 | $ | 24,603 | $ | 86 | $ | 70 | $ | 48 | 0.25 | % | 0.19 | % | 0.20 | % | ||||||||
In offices outside the U.S. (6) | 38,737 | 39,669 | 38,455 | 40 | 29 | 15 | 0.10 | 0.07 | 0.04 | |||||||||||||||||
Total | $ | 73,672 | $ | 76,902 | $ | 63,058 | $ | 126 | $ | 99 | $ | 63 | 0.17 | % | 0.13 | % | 0.10 | % | ||||||||
Short-term borrowings | ||||||||||||||||||||||||||
In U.S. offices | $ | 45,440 | $ | 47,599 | $ | 44,580 | $ | 2,255 | $ | 1,252 | $ | 725 | 4.96 | % | 2.63 | % | 1.63 | % | ||||||||
In offices outside the U.S. (6) | 12,391 | 13,251 | 7,788 | 750 | 523 | 408 | 6.05 | 3.95 | 5.24 | |||||||||||||||||
Total | $ | 57,831 | $ | 60,850 | $ | 52,368 | $ | 3,005 | $ | 1,775 | $ | 1,133 | 5.20 | % | 2.92 | % | 2.16 | % | ||||||||
Long-term debt | ||||||||||||||||||||||||||
In U.S. offices | $ | 180,167 | $ | 161,700 | $ | 162,253 | $ | 6,756 | $ | 4,429 | $ | 3,525 | 3.75 | % | 2.74 | % | 2.17 | % | ||||||||
In offices outside the U.S. (6) | 31,843 | 26,650 | 13,546 | 1,152 | 928 | 321 | 3.62 | 3.48 | 2.37 | |||||||||||||||||
Total | $ | 212,010 | $ | 188,350 | $ | 175,799 | $ | 7,908 | $ | 5,357 | $ | 3,846 | 3.73 | % | 2.84 | % | 2.19 | % | ||||||||
Mandatorily redeemable securities of subsidiary trusts(10) | $ | — | $ | — | $ | 6,300 | $ | — | $ | — | $ | 434 | — | % | — | % | 6.89 | % | ||||||||
Total interest-bearing liabilities | $ | 1,156,752 | $ | 1,044,450 | $ | 902,689 | $ | 36,676 | $ | 22,004 | $ | 17,184 | 3.17 | % | 2.11 | % | 1.90 | % | ||||||||
Demand deposits in U.S. offices | 4,807 | 4,348 | 7,382 | |||||||||||||||||||||||
Other non-interest bearing liabilities(8) | 165,380 | 166,251 | 108,455 | |||||||||||||||||||||||
Total liabilities from discontinued operations | 46,011 | 87,489 | 73,498 | |||||||||||||||||||||||
Total liabilities | $ | 1,379,950 | $ | 1,302,538 | $ | 1,092,024 | ||||||||||||||||||||
Total stockholders' equity(11) | $ | 111,076 | $ | 101,196 | $ | 91,090 | ||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,484,026 | $ | 1,403,734 | $ | 1,183,114 | ||||||||||||||||||||
Net interest revenue as a percentage of average interest-earning assets(12) | ||||||||||||||||||||||||||
In U.S. offices | $ | 769,148 | $ | 679,929 | $ | 587,941 | $ | 21,649 | $ | 25,456 | $ | 22,729 | 2.81 | % | 3.74 | % | 3.87 | % | ||||||||
In offices outside the U.S.(6) | 512,116 | 464,490 | 373,097 | 17,854 | 16,373 | 14,750 | 3.49 | % | 3.52 | 3.95 | ||||||||||||||||
Total | $ | 1,281,264 | $ | 1,144,419 | $ | 961,038 | $ | 39,503 | $ | 41,829 | $ | 37,479 | 3.08 | % | 3.66 | % | 3.90 | |||||||||
80
ANALYSIS OF CHANGES IN INTEREST REVENUE(1)(2)(3)
| 2005 vs. 2004 | 2004 vs. 2003 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to Change in: | | Increase (Decrease) Due to Change in: | | |||||||||||||||
| Average Volume | Average Rate | Net Change(2) | Average Volume | Average Rate | Net Change(2) | |||||||||||||
| In millions of dollars | ||||||||||||||||||
Cash and due from banks | $ | 10 | $ | 63 | $ | 73 | $ | 20 | $ | (3 | ) | $ | 17 | ||||||
Deposits at interest with banks(4) | $ | 116 | $ | 1,077 | $ | 1,193 | $ | 210 | $ | (495 | ) | $ | (285 | ) | |||||
Federal funds sold and securities borrowed or purchased under agreements to resell | |||||||||||||||||||
In U.S. offices | $ | 669 | $ | 3,393 | $ | 4,062 | $ | 533 | $ | 290 | $ | 823 | |||||||
In offices outside the U.S.(4) | 23 | 654 | 677 | 254 | (249 | ) | 5 | ||||||||||||
Total | $ | 692 | $ | 4,047 | $ | 4,739 | $ | 787 | $ | 41 | $ | 828 | |||||||
Brokerage receivables | |||||||||||||||||||
In U.S. offices | $ | 66 | $ | 391 | $ | 457 | $ | 35 | $ | 132 | $ | 167 | |||||||
In offices outside the U.S.(4) | 86 | 325 | 411 | 110 | (125 | ) | (15 | ) | |||||||||||
Total | $ | 152 | $ | 716 | $ | 868 | $ | 145 | $ | 7 | $ | 152 | |||||||
Trading account assets(5) | |||||||||||||||||||
In U.S. offices | $ | 1,010 | $ | 29 | $ | 1,039 | $ | 1,103 | $ | (7 | ) | $ | 1,096 | ||||||
In offices outside the U.S.(4) | 293 | 102 | 395 | 732 | (260 | ) | 472 | ||||||||||||
Total | $ | 1,303 | $ | 131 | $ | 1,434 | $ | 1,835 | $ | (267 | ) | $ | 1,568 | ||||||
Investments(1) | |||||||||||||||||||
In U.S. offices | $ | 300 | $ | 259 | $ | 559 | $ | 2 | $ | (34 | ) | $ | (32 | ) | |||||
In offices outside the U.S.(4) | 337 | 247 | 584 | 743 | 259 | 1,002 | |||||||||||||
Total | $ | 637 | $ | 506 | $ | 1,143 | $ | 745 | $ | 225 | $ | 970 | |||||||
Loans—consumer | |||||||||||||||||||
In U.S. offices | $ | 1,878 | $ | (952 | ) | $ | 926 | $ | 3,277 | $ | (68 | ) | $ | 3,209 | |||||
In offices outside the U.S.(4) | 1,424 | 164 | 1,588 | 2,309 | (525 | ) | 1,784 | ||||||||||||
Total | $ | 3,302 | $ | (788 | ) | $ | 2,514 | $ | 5,586 | $ | (593 | ) | $ | 4,993 | |||||
Loans—corporate | |||||||||||||||||||
In U.S. offices | $ | 186 | $ | 30 | $ | 216 | $ | (273 | ) | $ | 158 | $ | (115 | ) | |||||
In offices outside the U.S.(4) | 649 | 13 | 662 | 716 | 250 | 966 | |||||||||||||
Total | $ | 835 | $ | 43 | $ | 878 | $ | 443 | $ | 408 | $ | 851 | |||||||
Total loans | $ | 4,137 | $ | (745 | ) | $ | 3,392 | $ | 6,029 | $ | (185 | ) | $ | 5,844 | |||||
Other interest-earning assets | $ | (195 | ) | $ | (301 | ) | $ | (496 | ) | $ | (94 | ) | $ | 170 | $ | 76 | |||
Total interest revenue | $ | 6,852 | $ | 5,494 | $ | 12,346 | $ | 9,677 | $ | (507 | ) | $ | 9,170 | ||||||
81
ANALYSIS OF CHANGES IN INTEREST EXPENSE
AND NET INTEREST REVENUE(1)(2)(3)
| 2005 vs. 2004 | 2004 vs. 2003 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to Change in: | | Increase (Decrease) Due to Change in: | | |||||||||||||||
| Average Volume | Average Rate | Net Change(2) | Average Volume | Average Rate | Net Change(2) | |||||||||||||
| In millions of dollars | ||||||||||||||||||
Deposits | |||||||||||||||||||
In U.S. offices | $ | 159 | $ | 1,242 | $ | 1,401 | $ | 150 | $ | 186 | $ | 336 | |||||||
In offices outside the U.S.(4) | 923 | 2,388 | 3,311 | 1,249 | 404 | 1,653 | |||||||||||||
Total | $ | 1,082 | $ | 3,630 | $ | 4,712 | $ | 1,399 | $ | 590 | $ | 1,989 | |||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | |||||||||||||||||||
In U.S. offices | $ | 693 | $ | 3,704 | $ | 4,397 | $ | 449 | $ | 388 | $ | 837 | |||||||
In offices outside the U.S.(4) | 230 | 1,067 | 1,297 | 472 | (290 | ) | 182 | ||||||||||||
Total | $ | 923 | $ | 4,771 | $ | 5,694 | $ | 921 | $ | 98 | $ | 1,019 | |||||||
Brokerage payables | |||||||||||||||||||
In U.S. offices | $ | 32 | $ | 418 | $ | 450 | $ | 12 | $ | 34 | $ | 46 | |||||||
In offices outside the U.S.(4) | 3 | 5 | 8 | 9 | 2 | 11 | |||||||||||||
Total | $ | 35 | $ | 423 | $ | 458 | $ | 21 | $ | 36 | $ | 57 | |||||||
Trading account liabilities(5) | |||||||||||||||||||
In U.S. offices | $ | (5 | ) | $ | 21 | $ | 16 | $ | 24 | $ | (2 | ) | $ | 22 | |||||
In offices outside the U.S.(4) | (1 | ) | 12 | 11 | — | 14 | 14 | ||||||||||||
Total | $ | (6 | ) | $ | 33 | $ | 27 | $ | 24 | $ | 12 | $ | 36 | ||||||
Short-term borrowings | |||||||||||||||||||
In U.S. offices | $ | (59 | ) | $ | 1,062 | $ | 1,003 | $ | 52 | $ | 475 | $ | 527 | ||||||
In offices outside the U.S.(4) | (36 | ) | 263 | 227 | 234 | (119 | ) | 115 | |||||||||||
Total | $ | (95 | ) | $ | 1,325 | $ | 1,230 | $ | 286 | $ | 356 | $ | 642 | ||||||
Long-term debt | |||||||||||||||||||
In U.S. offices | $ | 550 | $ | 1,777 | $ | 2,327 | $ | (12 | ) | $ | 916 | $ | 904 | ||||||
In offices outside the U.S.(4) | 187 | 37 | 224 | 409 | 198 | 607 | |||||||||||||
Total | $ | 737 | $ | 1,814 | $ | 2,551 | $ | 397 | $ | 1,114 | $ | 1,511 | |||||||
Mandatorily redeemable securities of subsidiary trusts(6) | $ | — | $ | — | $ | — | $ | (217 | ) | $ | (217 | ) | $ | (434 | ) | ||||
Total interest expense | $ | 2,676 | $ | 11,996 | $ | 14,672 | $ | 2,831 | $ | 1,989 | $ | 4,820 | |||||||
Net interest revenue | $ | 4,176 | $ | (6,502 | ) | $ | (2,326 | ) | $ | 6,846 | $ | (2,496 | ) | $ | 4,350 | ||||
82
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
Overview
Citigroup's capital management framework is designed to ensure the capital position and ratios ofthat Citigroup and its subsidiaries aremaintain sufficient capital consistent with the Company's risk profile, all applicable regulatory standards orand guidelines, and external ratingsrating agency considerations. The capital management process embodies centralizedis centrally overseen by senior management oversight and ongoing reviewis continuously reviewed at the entity and country levellevel. Capital is generated principally via earnings, issuance of common and preferred stock and subordinated debt, and equity issued as applicable.a result of employee benefit plans. It is used primarily to support growth in the Company's businesses. Excess capital is used to pay dividends to shareholders, repurchase stock, and fund acquisition activity.
TheSenior management oversees the capital plans, forecasts, and positionsmanagement process of Citigroup and its principal subsidiaries are reviewed by, and subject to oversight of,mainly through Citigroup's Finance and Capital Committee. Current members of this committee includeThis Committee includes Citigroup's Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Corporate Treasurer, Senior Risk Officer, and several senior business managers.
The Finance and Capital Committee's capital management responsibilities include: determination ofDetermining the overall financial structure of Citigroup and its principal subsidiaries, including debt/equity ratios and asset growth guidelines;subsidiaries; ensuring appropriate actions are taken to maintain capital adequacy forthat Citigroup and its regulated entities; determinationentities are adequately capitalized; reviewing the funding and capital markets plan for Citigroup; monitoring interest rate risk, corporate and bank liquidity, the impact of hedging of capitalcurrency translation on non-U.S. earnings and foreign exchange translation risk associated with non-dollar earnings;capital; and reviewreviewing and recommendation ofrecommending share repurchase levels and dividends on common and preferred stock. The Finance and Capital Committee establishes applicablehas established capital targets for Citigroup on a consolidated basis and for significant subsidiaries. These targets exceed applicablethe regulatory standards.
Citigroup and Citicorp areis subject to risk-based capital ratio guidelines issued by the BoardFRB. Capital adequacy is measured via two risk-based ratios, Tier 1 and Total Capital (Tier 1 + Tier 2 Capital). Tier 1 Capital is considered core capital while Total Capital includes other items such as subordinated debt and loan loss reserves. Both measures of Governorscapital are stated as a percent of the Federal Reserve System (FRB). These guidelinesrisk-adjusted assets. Risk-adjusted assets are used to evaluate capital adequacy basedmeasured primarily on thetheir perceived credit risk associated with balance sheet assets, as well asand include certain off-balance sheet exposures, such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. The risk-based capital guidelines are supplemented by
Citigroup is also subject to the Leverage Ratio requirement, a leveragenon-risk-based asset ratio, requirement.which is defined as Tier 1 Capital as a percentage of adjusted average assets. To be "well capitalized" under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 Capital Ratio of at least 6%, a combined Tier 1 and Tier 2Total Capital Ratio of at least 10%, and a leverage ratioLeverage Ratio of at least 3%, and not be subject to aan FRB directive order, or written agreement to meet and maintain specifichigher capital levels.
As noted in the following table, below, Citigroup maintained a "well capitalized" position during both 20042005 and 2003.2004. See also Note 1917 to the Consolidated Financial Statements.Statements on page 140.
Citigroup Regulatory Capital Ratios
At year end | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||||
| At year end | |||||||||
Tier 1 Capital | 8.74 | % | 8.91 | % | 8.79 | % | 8.74 | % | ||
Total Capital (Tier 1 and Tier 2) | 11.85 | % | 12.04 | % | 12.02 | 11.85 | ||||
Leverage(1) | 5.20 | % | 5.56 | % | 5.35 | 5.20 | ||||
Common stockholders' equity | 7.29 | % | 7.67 | % | 7.46 | 7.29 | ||||
Components of Capital Under Regulatory Guidelines
| | 2004 | 2003 | | 2005 | 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars at year end | | In millions of dollars at year end | ||||||||||||
Tier 1 Capital | Tier 1 Capital | Tier 1 Capital | ||||||||||||||
Common stockholders' equity | Common stockholders' equity | $ | 108,166 | $ | 96,889 | Common stockholders' equity | $ | 111,412 | $ | 108,166 | ||||||
Qualifying perpetual preferred stock | Qualifying perpetual preferred stock | 1,125 | 1,125 | Qualifying perpetual preferred stock | 1,125 | 1,125 | ||||||||||
Qualifying mandatorily redeemable securities of subsidiary trusts | Qualifying mandatorily redeemable securities of subsidiary trusts | 6,209 | 6,257 | Qualifying mandatorily redeemable securities of subsidiary trusts | 6,264 | 6,209 | ||||||||||
Minority interest | Minority interest | 937 | 1,158 | Minority interest | 512 | 937 | ||||||||||
Less: Net unrealized gains on securities available-for-sale(1) | Less: Net unrealized gains on securities available-for-sale(1) | (2,633 | ) | (2,908 | ) | Less: Net unrealized gains on securities available-for-sale(1) | (1,084 | ) | (2,633 | ) | ||||||
Accumulated net gains on cash flow hedges, net of tax | (173 | ) | (751 | ) | ||||||||||||
Intangible assets:(2) | ||||||||||||||||
Less: Accumulated net gains on cash flow hedges, net of tax | Less: Accumulated net gains on cash flow hedges, net of tax | (612 | ) | (173 | ) | |||||||||||
Less: Intangible assets: | Less: Intangible assets: | |||||||||||||||
Goodwill | (31,992 | ) | (27,581 | ) | Goodwill | (33,130 | ) | (31,992 | ) | |||||||
Other disallowed intangible assets | (6,794 | ) | (6,725 | ) | Other disallowed intangible assets | (6,163 | ) | (6,794 | ) | |||||||
50% investment in certain subsidiaries(3) | (68 | ) | (45 | ) | ||||||||||||
Less: 50% investment in certain subsidiaries(2) | Less: 50% investment in certain subsidiaries(2) | — | (68 | ) | ||||||||||||
Other | Other | (362 | ) | (548 | ) | Other | (500 | ) | (362 | ) | ||||||
Total Tier 1 Capital | Total Tier 1 Capital | 74,415 | 66,871 | Total Tier 1 Capital | $ | 77,824 | $ | 74,415 | ||||||||
Tier 2 Capital | Tier 2 Capital | Tier 2 Capital | ||||||||||||||
Allowance for credit losses(4) | 10,785 | 9,545 | ||||||||||||||
Qualifying debt(5) | 15,383 | 13,573 | ||||||||||||||
Allowance for credit losses(3) | Allowance for credit losses(3) | 10,602 | 10,785 | |||||||||||||
Qualifying debt(4) | Qualifying debt(4) | 17,368 | 15,383 | |||||||||||||
Unrealized marketable equity securities gains(1) | Unrealized marketable equity securities gains(1) | 384 | 399 | Unrealized marketable equity securities gains(1) | 608 | 384 | ||||||||||
Less: 50% investment in certain subsidiaries(3) | (68 | ) | (45 | ) | ||||||||||||
Less: 50% investment in certain subsidiaries(2) | Less: 50% investment in certain subsidiaries(2) | — | (68 | ) | ||||||||||||
Total Tier 2 Capital | Total Tier 2 Capital | 26,484 | 23,472 | Total Tier 2 Capital | $ | 28,578 | $ | 26,484 | ||||||||
Total Capital (Tier 1 and Tier 2) | Total Capital (Tier 1 and Tier 2) | $ | 100,899 | $ | 90,343 | Total Capital (Tier 1 and Tier 2) | $ | 106,402 | $ | 100,899 | ||||||
Risk-adjusted assets(6) | $ | 851,563 | $ | 750,293 | ||||||||||||
Risk-Adjusted Assets(5) | Risk-Adjusted Assets(5) | $ | 885,472 | $ | 851,563 | |||||||||||
83
Common stockholders' equity increased approximately $11.3$3.2 billion during the year to $108.2$111.4 billion at December 31, 2004,2005, representing 7.3%7.5% of assets, comparedassets. This compares to $96.9$108.2 billion and 7.7%7.3% at year-end 2003.2004. The increase in common stockholders' equity during the year principally reflected net income of $17.0$24.6 billion $2.7and $3.5 billion related to the issuance of shares pursuant to employee benefit plans and other activity and $0.5activity. These increases were offset by a $12.8 billion stock buyback, dividends of $9.2 billion, $2.2 billion related to the after-tax net change in equity from nonowner sources. These increases were offset by dividends declared on commonsources, and preferred stock$0.7 billion related to the net issuance of $8.4 billion,restricted and treasury stock acquired of $0.5 billion, including shares repurchased from the Citigroup Employee Pension Fund.deferred stock. The decreaseincrease in the common stockholders' equity ratio during the year reflected the above items and the 17%0.7% increase in total assets.
On April 14, 2005, the Board of Directors authorized a $15 billion share buyback program. As of December 31, 2005, $4.4 billion remained under authorized repurchase programs after the repurchase of $12.8 billion in shares during the year. For further details see "Unregistered Sales of Equity Securities and Use of Proceeds," on page 180.
On February 15, 2006, Citigroup redeemed for cash all outstanding shares of its Fixed/Adjustable Rate Cumulative Preferred Stock, Series V. The redemption price was $50.00 per depositary share, plus accrued dividends to the date of redemption. At December 31, 2005, $125 million of Series V Preferred Stock was outstanding.
The table below summarizes the Company's repurchase activity during 2005:
| Total Common Shares Repurchased | Dollar Value of Shares Repurchased | Average Price Paid per Share | Dollar Value of Remaining Authorized Repurchase Program | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| In millions, except per share amounts | ||||||||||
First quarter 2005 | 19.0 | $ | 906 | $ | 47.65 | $ | 1,300 | ||||
Second quarter 2005 | 41.8 | 1,965 | 47.06 | 14,335 | |||||||
Third quarter 2005 | 124.2 | 5,500 | 44.27 | 8,835 | |||||||
Fourth quarter 2005 | 92.9 | 4,423 | 47.60 | 4,412 | |||||||
Total year-to-date | 277.9 | $ | 12,794 | $ | 46.03 | $ | 4,412 | ||||
Total mandatorily redeemable securities of subsidiary trusts (trust preferred securities), which qualify as Tier 1 Capital, were $6.264 billion at December 31, 2004 and December 31, 2003 were2005, as compared to $6.209 billion and $6.257 billion, respectively. The amount outstanding at December 31, 2003 included $5.217 billion of parent-obligated securities and $840 million of subsidiary-obligated securities. During the 2004 first quarter, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46-R.2004. On September 27, 2004, Citigroup issued $600 million in Trust Preferred Securities (Citigroup XI). On October 14, 2004, Citigroup redeemed for cash all of the $600 million Trust Preferred Securities of Citigroup Capital VI, at the redemption price of $25 per preferred security plus any accrued distribution up to but excluding the date of redemption. The FRB has issued interim guidance that continues to recognize trust preferred securities as a component of TierMarch 1, Capital. On May 6, 2004,2005, the FRB issued a proposedthe final rule that would retainallows for the continued limited inclusion of trust preferred securities in the Tier 1 Capital of Bank Holding Companies (BHCs), subject to conditions. while placing them and other restricted core capital elements under stricter quantitative limits. The final rule provides a transition period, ending March 31, 2009, for application of the quantitative limits. See "Regulatory Capital and Accounting Standards Developments" on page 65. If Tier 2 Capital treatment of trust preferred securities had been required at December 31, 2004, Citigroup would have continued to be "well capitalized."below.
On July 20, 2004, the federal banking and thrift regulatory agencies issued the final rule on capital requirements for asset-backed commercial paper (ABCP) programs. The final rule, which generally became effective September 30, 2004, increased the capital requirement on most short-term liquidity facilities that provide support to ABCP programs by imposing a 10% credit conversion factor on such facilities. Additionally, the final rule permanently excludes ABCP program assets consolidated under FIN 46-R and any minority interests from the calculation of risk-weighted assets and Tier 1 Capital, respectively. The denominator of the leverage ratio calculation remains unaffected by the final rule, as the risk-based capital treatment does not alter the reporting of the on-balance sheet assets under GAAP guidelines. The impact of adopting the final rule on Citigroup's Tier 1 Capital ratio was approximately 4 basis points.
Citicorp's subsidiary depository institutions in the United States are subject to risk-based capital guidelines issued by their respective primary federal bank regulatory agencies, which are similar to the FRB's guidelines. To be "well capitalized" under federal bank regulatory agency definitions, Citicorp'sCitigroup's depository institutions must have a Tier 1 Capital Ratio of at least 6%, a combined Tier 1 and Tier 2 Capital Ratio (Total Capital) of at least 10%, and a leverage ratioLeverage Ratio of at least 5%, and not be subject to aan FRB directive order, or written agreement to meet and maintain specifichigher capital levels. At December 31, 2004,2005, all of Citicorp'sCitigroup's subsidiary depository institutions were "well capitalized" under the federal regulatory agencies' definitions.
Similar to Citigroup, Citicorp's capital ratios includedefinitions, including Citibank, N.A. as noted in the benefit of the inclusion of trust preferred securities. See Note 13 to Consolidated Financial Statements.table below.
CiticorpCitibank, N.A. Ratios
At year end | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||||
| At year end | |||||||||
Tier 1 Capital | 8.69 | % | 8.44 | % | 8.41 | % | 8.42 | % | ||
Total Capital (Tier 1 and Tier 2) | 12.59 | % | 12.68 | % | 12.55 | 12.51 | ||||
Leverage(1) | 6.74 | % | 6.70 | % | 6.45 | 6.28 | ||||
Common stockholder's equity | 9.93 | % | 9.97 | % | ||||||
Common stockholders' equity | 7.96 | 7.51 | ||||||||
CiticorpCitibank, N.A. Components of Capital Under Regulatory Guidelines
| 2004 | 2003 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars at year end | In billions of dollars at year end | ||||||||||
Tier 1 Capital | $ | 60.1 | $ | 50.7 | $ | 44.7 | $ | 41.7 | ||||
Total Capital (Tier 1 and Tier 2) | $ | 87.1 | $ | 76.2 | 66.8 | 62.0 | ||||||
Citibank had net income for 2005 amounting to $8.8 billion. During 2005, Citibank paid dividends of $4.1 billion.
During 2005, Citibank issued an additional $1.4 billion of subordinated notes to Citigroup that qualify for inclusion in Citibank's Tier 2 capital. Total subordinated notes issued to Citigroup that were outstanding at December 31, 2005 and December 31, 2004 and included in Citibank's Tier 2 capital amounted to $15.3 billion and $13.9 billion, respectively. Following the merger of Citicorp into Citigroup on August 1, 2005, all of Citibank's subordinated debt was assigned to Citigroup. See "Funding" on page 87 for further details of the merger.
84
Other Subsidiary Capital Considerations
Certain of the Company's U.S. and non-U.S. broker/dealer subsidiaries, subsidiaries—including Citigroup Global Markets Inc., an indirect wholly owned subsidiary of Citigroup Global Markets Holdings Inc. (CGMHI), —are subject to various securities and commodities regulations and capital adequacy requirements promulgated byof the regulatory and exchange authorities of the countries in which they operate. The Company's U.S. registered broker/dealer subsidiaries are subject to the Securities and Exchange Commission's Net Capital Rule, Rule 15c3-1 (the Net Capital Rule), promulgated under the Exchange Act. The Net Capital Rule requires the maintenance of a defined amount of minimum net capital, as defined.capital. The Net Capital Rule also limits the ability of broker/dealers to transfer large amounts of capital to parent companies and other affiliates. Compliance with the Net Capital Rule could limit those operations of the Company that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, andbalances. It could also could restrict CGMHI's ability to withdraw capital from its broker/dealer subsidiaries, which in turn could limit CGMHI's ability to pay dividends and make payments on its debt. See Notes 13 and 19 to the Consolidated Financial Statements. CGMHI monitors its leverage and capital ratios on a daily basis. CertainSee Notes 15 and 17 to the Consolidated Financial Statements on pages 136 and 140, respectively.
In addition, certain of the Company's broker/dealer subsidiaries are also subject to regulation in the other countries outside of the U.S. in which they do business. Such regulations may includebusiness, including requirements to maintain specified levels of net capital or its equivalent. The Company's U.S. and non-U.S. broker/dealer subsidiaries were in compliance with their respective capital requirements at December 31, 2004.2005.
Certain of the Company's Insurance Subsidiaries are subject to regulatory capital requirements. The National Association of Insurance Commissioners (NAIC) adopted risk-based capital (RBC) requirements for life 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, the Company believes it is not appropriate to use the formulas to rate or to rank such companies. At December 31, 2004 and 2003, all of the Company's life insurance companies had adjusted capital in excess of amounts requiring Company or any regulatory action.
Under its long-standing repurchase program, the Company buys back common shares in the market or otherwise from time to time, primarily to provide shares for use under its equity compensation plans.
The following table summarizes the Company's share repurchases during 2004:
| Total Shares Repurchased | Average Price Paid per Share | Dollar Value of Remaining Authorized Repurchase Program | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions, except per share amounts | ||||||||
First quarter 2004 | |||||||||
Open market repurchases(1) | 0.5 | $ | 48.89 | ||||||
Employee transactions(2) | 22.0 | $ | 48.02 | ||||||
Private equity transactions(3) | 10.0 | $ | 50.22 | ||||||
Total first quarter 2004 | 32.5 | $ | 48.71 | $ | 2,208 | ||||
Second quarter 2004 | |||||||||
Open market repurchases | — | — | |||||||
Employee transactions | 1.2 | $ | 50.57 | ||||||
Private equity transactions | — | — | |||||||
Total second quarter 2004 | 1.2 | $ | 50.57 | $ | 2,208 | ||||
Third quarter 2004 | |||||||||
Open market repurchases | 0.1 | $ | 44.19 | ||||||
Employee transactions | 2.5 | $ | 45.69 | ||||||
Private equity transactions | — | — | |||||||
Total third quarter 2004 | 2.6 | $ | 45.66 | $ | 2,206 | ||||
October 2004 | |||||||||
Employee transactions | 0.1 | $ | 44.72 | ||||||
November 2004 | |||||||||
Employee transactions | 0.2 | $ | 45.62 | ||||||
December 2004 | |||||||||
Employee transactions | 0.5 | $ | 46.56 | ||||||
Fourth quarter 2004 | |||||||||
Open market repurchases | — | — | |||||||
Employee transactions | 0.8 | $ | 46.10 | ||||||
Private equity transactions | — | — | |||||||
Total fourth quarter 2004 | 0.8 | $ | 46.10 | $ | 2,206 | ||||
Full year 2004 | |||||||||
Open market repurchases | 0.6 | $ | 48.39 | ||||||
Employee transactions | 26.5 | $ | 47.86 | ||||||
Private equity transactions | 10.0 | $ | 50.22 | ||||||
Total full year 2004 | 37.1 | $ | 48.50 | $ | 2,206 | ||||
Regulatory Capital and Accounting Standards Developments
TheCitigroup supports the move to a new set of risk-based regulatory capital standards, published on June 26, 2004 (and subsequently amended in November 2005) by the Basel Committee on Banking Supervision (the Basel Committee), consisting of central banks and bank supervisors from 13 countries, has developed a new setcountries. Basel II will allow Citigroup to leverage internal risk models used to measure credit, operational, and market risk exposures to drive regulatory capital calculations. On September 30, 2005, the U.S. banking regulators delayed the U.S. implementation of risk-basedBasel II by one year. The current U.S. implementation timetable consists of parallel calculations under the current regulatory capital standards (the New Accord)regime (Basel I) and Basel II, starting January 1, 2008, and an implementation transition period, starting January 1, 2009 through year-end 2011 or possibly later. The U.S. regulators have also reserved the right to change how Basel II is applied in the U.S., on which it has received significant input from Citigroup and other majorretain the existing Prompt Corrective Action and leverage capital requirements applicable to U.S. banking organizations. The Basel Committee published the text of the New Accord on June 26, 2004, specified that parallel testingnew timetable, clarifications, and other proposals will be necessary, and designatedset forth in a new implementation date of year-end 2007. The U.S. banking regulators issued an advance notice of proposed rulemaking in August 2003, and subsequently issued additional guidance in October 2004, relating to(NPR), which the new Basel standards. Citigroup, along with other major banking organizations and associations, are continuing to provide significant input into these proposed rules. In addition, Citigroup is participating in certain quantitative studies of these proposed rules, discussing the proposed rules withU.S. banking regulators and developing overall implementation plans. The final version of these new capital rules will applyare expected to Citigroup, as well as to other large U.S. banks and BHCs.issue during 2006.
Citigroup continues to monitor and analyze the developing capital standards in the U.S. and in countries where Citigroup has significant presence, in order to assess thetheir collective impact and participate in efforts to refine these future capital standards.allocate project management and funding resources accordingly.
Capital Instruments
On May 6, 2004,March 1, 2005, the FRB issued a proposedthe final rule, that would retainwith an effective date of April 11, 2005, which retains trust preferred securities in the Tier 1 Capital of BHCs, but with stricter quantitative limits and clearer qualitative standards. Under the proposal,rule, after a three-yearfive-year transition period, the aggregate amount of trust preferred securities and certain other capital elements includableincluded in Tier 1 Capital would be limited to 25% of Tier 1 Capital elements, net of goodwill.goodwill less any associated deferred tax liability. Under these proposed rules,this rule, Citigroup currently would have less than 11%10% against thisthe limit. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 Capital, subject to restrictions. Internationally-active BHCs (such as Citigroup) would generally be expected to limit trust preferred securities and certain other capital elements to 15% of Tier 1 Capital elements, net of goodwill. Under this 15% limit, Citigroup would be able to retain the full amount of its trust preferred securities within Tier 1 Capital.
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 73.95.
85
LIQUIDITY
At the Holding Company level for Citigroup, for CGMHI and for the Combined Holding Company, Citigroup maintains sufficient liquidity to meet all maturing unsecured debt obligations due within a one-year time horizon without accessing the unsecured markets.
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 the Corporate Treasury.
A primary tenetThe basis 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 withAs discussed in the role"Capital Resources" on page 83, Citigroup's Finance and Capital Committee monitors the liquidity position of the Corporate Treasurer,Citigroup. In addition, the Global Asset and Liability Committee (ALCO) undertakes this oversight responsibility.responsibility, along with the Corporate Treasurer. The Global ALCO functions as an oversight forum composed of Citigroup's Chief Financial Officer, Senior Risk Officer, Corporate Treasurer, independent Senior Treasury Risk Officer, Head of Risk Architecture and the senior corporate and business treasurers and business chief financial officers. One of the objectives of the Global ALCO is to monitor and review the overall liquidity and balance sheet positions 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 principal 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 TreasuryIndependent Risk Officer.Management. The funding and liquidity 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, 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 beare self-funded or net providers of liquidity.
A series of standard corporate-wide liquidity ratios havehas been established to monitor the structural elements of Citigroup's liquidity. For bank entities, these include cash capital (defined as core deposits, long-term liabilities,debt, and capital compared with illiquid assets), liquid assets against liquidity gaps, core deposits to loans, long-term assets to long-term liabilities and deposits to loans. Several measures exist to review potential concentrations of funding by individual name, product, industry, or geography. ForAt the ParentHolding Company Insurance Entitieslevel for Citigroup and for CGMHI, thereratios are ratios established for liquid assets against short-term obligations. Triggers to elicitfor management discussion, which may result in other actions 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 TreasuryHead of Risk OfficerArchitecture and are discussed within 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.
Simulated liquidity stress testing is periodically 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 either 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 menuseries of alternatives that can be utilizedused by the Corporate Treasurer in a liquidity event.
Citigroup maintains sufficientCGMHI monitors liquidity at the Parent Companyby tracking asset levels, collateral and funding availability to maintain flexibility to meet all maturing unsecured debt obligations due withinits financial commitments. As a one-year time horizon without incrementalpolicy, CGMHI attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis in the event that its access to the unsecured markets.
On February 11, 2005 Citigroup announced plansuncollateralized financing is temporarily impaired. This is documented in CGMHI's contingency funding plan. This plan is reviewed periodically to merge its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. This transaction is subject to regulatory approval and is expected to take place by the end of the 2005 third quarter. Citigroup will assume all existing indebtedness and outstanding guarantees of Citicorp.
Citigroup also announced it would consolidate its capital markets funding activities in two legal entities: i) Citigroup Inc., which will continue to issue long-term debt, trust preferred securities, preferred and common stock, and ii) Citigroup Funding Inc. ("CFI") a newly formed, fully guaranteed, first-tier subsidiary of Citigroup, which will issue commercial paper and medium-term notes. It is anticipated that this funding consolidation will commence during the 2005 second quarter.
As part ofkeep the funding consolidation, it is expected that Citigroup will unconditionally guarantee Citigroup Global Markets Holdings Inc.'s outstanding public indebtedness. Upon issuanceoptions current and in line with market conditions. The management of the guarantee,this plan includes an analysis used to determine CGMHI's ability to withstand varying levels of stress, including rating downgrades, which could impact its liquidation horizons and required margins. CGMHI will no longer file periodic reports with the Securitiesmaintains liquidity reserves of cash and Exchange Commission and will continue to be rated on the basisloan value of a guaranteeunencumbered securities in excess of its financial obligations from Citigroup.outstanding short-term uncollateralized liabilities. This is monitored on a daily basis. CGMHI also ensures that long-term illiquid assets are funded with long-term liabilities.
Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.86
Funding
As a financial holding company, substantially all of Citigroup's net earnings are generated within its operating subsidiaries. These subsidiaries make funds available to Citigroup, primarily in the form of dividends. Certain subsidiaries' dividend paying abilities may be limited by covenant restrictions in credit agreements, regulatory requirements and/or rating agency requirements that also impact their capitalization levels.
CiticorpCitigroup 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'sCitigroup's banking subsidiaries may extend credit, pay dividends or otherwise supply funds to Citicorp.Citigroup and its nonbank subsidiaries. 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.
As of December 31, 2004, Citicorp's2005, Citigroup's national and state-chartered bank subsidiaries can declare dividends to their respective parent companies, without regulatory approval, of approximately $11.6$13.6 billion. In determining whether and to what extent to pay dividends, each bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements, as well as policy statements of the federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings. Consistent with these considerations, CiticorpCitigroup estimates that, as of December 31, 2004,2005, its bank subsidiaries can directly or through their parent holding company distribute dividends to CiticorpCitigroup of approximately $10.6$12.2 billion of the available $11.6$13.6 billion.
CiticorpCitigroup 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.
As discussed in the "Capital Resources" section beginning on page 62,83, the ability of CGMHI to declare dividends couldcan be restricted by capital considerations of its broker/dealer subsidiaries.
The Travelers Insurance Company (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 $908 million of statutory surplus is available by the end of the year 2005 for such dividends without the prior approval of the Connecticut Insurance Department.
During 2005,2006, 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. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.*
Primary sources of liquidity for Citigroup and its principal subsidiaries include deposits, collateralized financing transactions, senior and subordinated debt, issuance of commercial paper, proceeds from issuance of trust preferred securities, and purchased/wholesale funds. Citigroup and its principal subsidiaries also generate funds through securitizing financial assets, including credit card receivables and single-family or multi-family residences. See Note 13 to the Consolidated Financial Statements on page 128 for additional information about securitization activities. Finally, Citigroup's net earnings provide a significant source of funding to the corporation.
Citigroup's funding sources are well diversified across funding types and geography, a benefit of the strength of the global franchise. Funding for the Parentparent and its major operating subsidiaries includes a large geographically diverse retail and corporate deposit base of $562.1$592.6 billion. A significant portion of these deposits havehas been, and areis expected to be, long-term and stable and areis considered core.
Citigroup and its subsidiaries have a significant presence in the global capital markets. A substantial portion ofDuring the publicly underwritten debt issuance is originated in the name of Citigroup. Debt is also issued in the name of CGMHI,2005 second quarter, Citigroup consolidated its capital markets funding activities into two legal entities: (i) Citigroup Inc., which issues long-term debt, trust preferred securities, preferred and common stock, and (ii) Citigroup Funding Inc. (CFI), a newly formed first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes, and structured notes, primarily in response to specific investor inquiries.all of which is guaranteed by Citigroup. Publicly underwritten debt was also formerly issued by CGMHI, Citicorp, Associates First Capital Corporation (Associates) and CitiFinancial Credit Company, which includes the underwritten debt previously issued by WMF. As part of the funding consolidation during the 2005 second quarter, Citigroup unconditionally guaranteed CGMHI's outstanding SEC-registered indebtedness. CGMHI will no longer file reports with the SEC and will continue to be rated on the basis of a guarantee of its financial obligations from Citigroup. On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp. As a result, Citigroup has also guaranteed various debt obligations of Associates and of CitiFinancial Credit Company, each an indirect subsidiary of Citicorp.Citigroup. See Note 27 to the Consolidated Financial Statements on page 159 for further discussions. Other significant elements of long-term debt in the Consolidated Balance Sheet include advances from the Federal Home Loan Bank system, asset-backed outstandings related to the purchase of Sears, and debt of foreign subsidiaries.
Citigroup's borrowings are diversified by geography, investor, instrument and currency. Decisions regarding the ultimate currency and interest rate profile of liquidity generated through these borrowings can be separated from the actual issuance through the use of derivative financial products.
Citigroup, Citicorp, and CGMHI are the primary legal entities issuing commercial paper directly to investors. Citigroup and Citicorp, both of which are bank holding companies, maintain liquidity reserves of cash and securities to support their combined outstanding commercial paper. CGMHI maintains liquidity reserves of cash and liquid securities to support its outstanding commercial paper. See Note 13 of the Consolidated Financial Statements for additional detail on outstandings under the commercial paper program.
At December 31, 2004, long-term debt and commercial paper outstanding for Citigroup Parent Company, Citicorp, and CGMHI were as follows:
| Citigroup Parent Company | Citicorp and subsidiaries | CGMHI | ||||||
---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | ||||||||
Long-term debt | $ | 87.9 | $ | 73.8 | $ | 45.2 | |||
Commercial paper | $ | — | $ | 8.3 | $ | 17.4 | |||
Citigroup's ability to access the capital markets and other sources of wholesale funds, as well as the cost of these funds, is highly dependent on its credit ratings. The accompanying chart indicates the current ratings for Citigroup. As of December 31, 2004, the ratings outlook for these ratings is "stable."
Citigroup Debt Ratings as of December 31, 2004
The debt ratings of Citicorp and CGMHI at December 31, 2004 were identical to those shown above for Citigroup and the outlook for such debt ratings is "stable."
Some of Citigroup's affiliates have credit facilities outstanding. Details of these facilities can be found in Note 13 of the Consolidated Financial Statements.
Citicorp, CGMHI, 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. There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries. In general, these restrictions require that any such transactions must be on terms that would ordinarily be offered to unaffiliated entities and secured by designated amounts of specified collateral.
Citigroup uses its liquidity to service debt obligations, to pay dividends to its stockholders, to support organic growth, to fund acquisitions and to repurchase its shares in the market or otherwise, pursuant to Board-of-Directors approved plans.
Each of Citigroup's major operating subsidiaries finances its operations on a basis consistent with its capitalization, regulatory structure and the environment in which it operates. Additional liquidity considerations for Citigroup's principal subsidiaries follow.
Citicorp
Citicorp, a U.S. bank holding company with no significant operating activities of its own, is a wholly owned indirect subsidiary of Citigroup. While Citicorp is a separately rated entity, it did not access external markets for any long-term debt or equity issuance in 2004. Citicorp continues to issue commercial paper and other short-term debt instruments within board-established limits and certain management guidelines.
On a combined basis, at the Holding Company level, Citigroup and Citicorp maintain sufficient liquidity to meet all maturing unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets. In aggregate, bank subsidiaries maintain "cash capital," defined as core deposits, long-term liabilities, and capital, in excess of their illiquid assets.
Citicorp's assets and liabilities, which are principally held through its bank and nonbank subsidiaries, are diversified across many currencies, geographic areas, and businesses. Particular attention is paid to those businesses that for tax, sovereign risk, or regulatory reasons cannot be freely and readily funded in the international markets. Citicorp's assets consist primarily of consumer and corporate loans, available-for-sale and trading securities, and placements.
A diversity of funding sources, currencies, and maturities is used to gain a broad access to the investor base. Citicorp's deposits, which represent 59% of total funding at December 31, 2004 and December 31, 2003, are broadly diversified by both geography and customer segments.
Asset securitization programs remain an important source of liquidity. See Note 12 to the Consolidated Financial Statements for additional information about securitization activities.
Citigroup Finance Canada Inc., a wholly owned subsidiary of Associates, has an unutilized credit facility of Canadian $1.0 billion as of December 31, 2004 that matures in October 2005. The facility is guaranteed by Citicorp. In connection therewith, Citicorp is required to maintain a certain level of consolidated stockholder's equity (as defined in the credit facility's agreements). At December 31, 2004, this requirement was exceeded by approximately $76.5 billion.
CGMHI
CGMHI's total assets were $428 billion at December 31, 2004, an increase from $351 billion at year-end 2003. Due to the nature of CGMHI's trading activities, it is not uncommon for CGMHI's asset levels to fluctuate significantly from period to period.
CGMHI's consolidated statement of financial conditionbalance sheet is highly liquid, with the vast majority of its assets consisting of marketable securities and collateralized short-term financing agreements arising from securities transactions. The highly liquid nature of these assets provides CGMHI with flexibility in financing and managing its business. CGMHI 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.
CGMHI funds its operationsCitigroup's borrowings are diversified by geography, investor, instrument and currency. Decisions regarding the ultimate currency and interest rate profile of liquidity generated through these borrowings can be separated from the actual issuance through the use of collateralizedderivative financial products.
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At December 31, 2005, long-term debt and uncollateralized short-term borrowings, long-term borrowings,commercial paper outstanding for Citigroup Parent Company, CGMHI, Citigroup Funding Inc. and its equity. Collateralized short-term financing, including repurchase agreements and secured loans, is CGMHI's principal funding source. Such borrowings are reported net by counterparty, when applicable, pursuantCitigroup's Subsidiaries were as follows:
| Citigroup Parent Company | CGMHI | Citigroup Funding Inc. | Other Citigroup Subsidiaries | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | |||||||||||
Long-term debt | $ | 100.6 | $ | 39.2 | $ | 6.0 | $ | 71.7 | ||||
Commercial paper | — | — | 32.6 | 1.6 | ||||||||
See Note 15 to the provisionsConsolidated Financial Statements on page 136 for further detail on long-term debt and commercial paper outstanding.
Citigroup's ability to access the capital markets and other sources of Financial Accounting Standards Board Interpretation No. 41, "Offsettingwholesale funds, as well as the cost of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excludingthese funds, is highly dependent on its credit ratings. The accompanying chart indicates the impactcurrent ratings for Citigroup.
Citigroup's Debt Ratings as of FIN 41, short-term collateralized borrowings totaled $250.9 billion at December 31, 2004. Uncollateralized short-term borrowings provide CGMHI with2005
Citigroup Inc. | Citigroup Funding Inc. | Citibank, N.A. | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Debt | Subordinated Debt | Commercial Paper | Senior Debt | Subordinated Debt | Commercial Paper | Long-Term | Short- Term | |||||||||
Fitch Ratings | AA+ | AA | F1+ | AA+ | AA | F1+ | AA+ | F1+ | ||||||||
Moody's Investors Service | Aal | Aa2 | P-1 | Aa1 | Aa2 | P-1 | Aa1 | P-1 | ||||||||
Standard & Poor's | AA- | A+ | A-1+ | AA- | A+ | A-1+ | AA | A-1+ |
The outlook for all Citigroup Inc. and Citigroup Funding Inc. debt ratings is "stable." Moody's Investors Service assigned a source"positive" outlook to the long-term rating for Citibank, N.A. in December, 2005. The outlook for all other Citibank, N.A. ratings is "stable."
Some of short-term liquidity and are also utilized as an alternative to secured financing when they represent a less expensive source. Sources of short-term uncollateralized borrowings include commercial paper, unsecured bank borrowings, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $25.8 billion at December 31, 2004.
CGMHI hasCitigroup's affiliates have credit facilities outstanding. Details of these facilities can be found in Note 13 to15 of the Consolidated Financial Statements.Statements on page 136.
Unsecured term debt isSome of Citigroup's nonbank subsidiaries, including CGMHI, have credit facilities with Citigroup's subsidiary banks, including Citibank, N.A. Borrowings under these facilities must be secured in accordance with Section 23A of the Federal Reserve Act. There are various legal restrictions on the extent to which a significant component of CGMHI's long-term capital. Long-term debt totaled $45.2 billion at December 31, 2004bank holding company and $35.6 billion at December 31, 2003. CGMHI utilizes interest rate swaps to convert the majoritycertain of its fixed-rate long-termnonbank subsidiaries can borrow or obtain credit from banking subsidiaries or engage in certain other transactions with them. In general, these restrictions require that transactions be on arms-length terms and be secured by designated amounts of specified collateral.
Citigroup uses its liquidity to service debt usedobligations, to pay dividends to its stockholders, to support organic growth, to fund inventory-related working capital requirements into variable rate obligations. Long-term debt issuances denominatedacquisitions and to repurchase its shares, pursuant to Board of Directors approved plans.
Each of Citigroup's major operating subsidiaries finances its operations on a basis consistent with its capitalization, regulatory structure and the environment in
currencies other than the U.S. dollar which it operates. Particular attention is paid to those businesses that are not used to finance assetsfor tax, sovereign risk, or regulatory reasons cannot be freely and readily funded in the same currency are effectively converted to U.S. dollar obligations through the use of cross-currency swaps and forward currency contracts.international markets.
CGMHI's borrowing relationships are with a broad range of banks, financial institutions and other firms, including affiliates, from which it draws funds. The volume of CGMHI's borrowings generally fluctuates in response to changes in the level of CGMHI's financial instruments, commodities and contractual commitments, customer balances, the amount of securities purchased under agreements to resell, and securities borrowed transactions. As CGMHI's activities increase, borrowings generally increase to fund the additional activities. Availability of financing to CGMHI can vary depending upon market conditions, credit ratings and the overall availability of credit to the securities industry. CGMHI 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.
CGMHI monitors liquidity by tracking asset levels, collateral and funding availability to maintain flexibility to meet its financial commitments. As a policy, CGMHI 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 CGMHI's access to uncollateralized financing is temporarily impaired. This is documented in CGMHI's contingency funding plan. 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 used to determine CGMHI's ability to withstand varying levels of stress, including ratings downgrades, which could impact its liquidation horizons and required margins. CGMHI maintains a loan value of unencumbered securities in excess of its outstanding short-term unsecured liabilities. This is monitored on a daily basis. CGMHI also ensures that long-term illiquid assets are funded with long-term liabilities.
The Travelers Insurance Company (TIC)
At December 31, 2004, TIC had $48.2 billion of life and annuity product deposit funds and reserves. Of that total, $27.7 billion is not subject to discretionary withdrawal based on contract terms. The remaining $20.5 billion is for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount that is subject to discretionary withdrawal is $7.5 billion of liabilities that are surrenderable with market value adjustments. Also included is an additional $4.9 billion of the life insurance and individual annuity liabilities which are subject to discretionary withdrawals at an average surrender charge of 6.5%. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $8.1 billion of liabilities is surrenderable without charge. Approximately 6% 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 2005, 2006, 2007, 2008, 2009 and thereafter are $5.243 billion, $1.862 billion, $1.561 billion, $1.343 billion, $1.393 billion and $2.835 billion, respectively. At December 31, 2004, the interest rates credited on GICs had a weighted average rate of 4.23%.
TIC's primary tool for liquidity management is a cash reporting tool and forecast performed on a daily basis. In addition, TIC monitors its ability to cover contractual obligations under extreme stress conditions through the use of liquid securities in its investment portfolio.
Contractual Obligations
The following table includes aggregated information about Citigroup's contractual obligations. These contractual obligations that impact the Company'sits short- and long-term liquidity and capital resource needs. The table includes information about payments due under specified contractual obligations, aggregated by type of contractual obligation, includingobligation; it includes the maturity profile of the Company's consolidated long-term debt, operating leases and other long-term liabilities reported on the Company's Consolidated Balance Sheet at December 31, 2004.liabilities. The Company's capital lease obligations are not material and are included within purchase obligations in the table.
Citigroup's contractual obligations include purchase obligations that are enforceable and legally binding onfor the Company. For the purposes of the table below, purchase obligations are included through the termination date specified inof the respective agreements, even if the contract is renewable. Many of the purchase agreements for goods or services include clauses that would allow the Company to cancel the agreement prior to the expiration of the contract within awith specified notice period;notice; however, that impact is not included in the table includes(unless Citigroup has already notified the Company's obligations without regard to such termination clauses (unless actual noticecounterparty of the Company'sits intention to terminate the agreement has been communicated to the counterparty)agreement).
In the table following, otherOther liabilities reflected on the Company's Consolidated Balance Sheet include obligations for goods and services whichthat have already been received, and litigation settlements, as well as other long-term liabilities that have already been incurred and will ultimately be paid in cash. TheExcluded from the following table excludesare obligations that are generally short-term in nature, including deposit liabilities as a majority of the deposits are payable on demand or within one year.and securities sold under agreements to repurchase. The table also excludes certain insurance and investment contracts that are subject to mortality and morbidity risks or do not havewithout defined maturities, such that the timing of payments and withdrawals is uncertain. The liabilities related to these insurance and investment contracts
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are included on the Consolidated Balance Sheet as Insurance Policy and Claims Reserves and Contractholder Funds and Separate and Variable Accounts.
Citigroup's funding policy for U.S. and non-U.S. pension plans is generally to fund to the amounts of accumulated benefit obligations. At December 31, 2004,2005, there were no minimum required contributions, and no discretionary or non-cash contributions are currently planned for U.S. pension plans. Accordingly, no amounts have been included in the table below for future contributions to the U.S. pension plan. For the non-U.S. plans, discretionary contributions in 20052006 are anticipated to be approximately $173$116 million and this amount has been included within purchase obligations in the table below. The estimated pension plan contributions are subject to change since contribution decisions are affected by various factors such as market performance, regulatory and legal requirements, and management's ability to change funding policy. For additional information regarding the Company's retirement benefit obligations, see Note 2321 to the Consolidated Financial Statements.Statements on page 147.
| | Contractual Obligations by Year | Contractual Obligations by Year | | |||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||||
| | In millions of dollars | In millions of dollars at year end | | |||||||||||||||||||||||||||||||||
Long-term debt obligations(1) | Long-term debt obligations(1) | $ | 36,632 | $ | 38,253 | $ | 28,774 | $ | 20,250 | $ | 21,477 | $ | 62,524 | $ | 39,175 | $ | 34,901 | $ | 35,981 | $ | 21,561 | $ | 20,509 | $ | 65,372 | ||||||||||||
Operating lease obligations | Operating lease obligations | 1,297 | 988 | 861 | 743 | 626 | 2,967 | 2,301 | 1,664 | 987 | 872 | 750 | 4,074 | ||||||||||||||||||||||||
Purchase obligations | Purchase obligations | 3,826 | 1,031 | 508 | 367 | 305 | 676 | 4,393 | 832 | 551 | 359 | 260 | 825 | ||||||||||||||||||||||||
Other liabilities reflected on the Company's Consolidated Balance Sheet: | |||||||||||||||||||||||||||||||||||||
Securities sold with agreements to repurchase | 191,340 | 907 | 1,708 | 484 | 1,409 | 2,000 | |||||||||||||||||||||||||||||||
Guaranteed investment contracts(2) | 5,243 | 1,862 | 1,561 | 1,343 | 1,393 | 2,835 | |||||||||||||||||||||||||||||||
Other(3) | 35,901 | 1,172 | 1,309 | 1,106 | 113 | 608 | |||||||||||||||||||||||||||||||
Business acquisitions(2) | 3,790 | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other liabilities reflected on the Company's Consolidated Balance Sheet(3) | 35,859 | 175 | 135 | 112 | 95 | 1,541 | |||||||||||||||||||||||||||||||
Total | Total | $ | 274,239 | $ | 44,213 | $ | 34,721 | $ | 24,293 | $ | 25,323 | $ | 71,610 | $ | 85,518 | $ | 37,572 | $ | 37,654 | $ | 22,904 | $ | 21,614 | $ | 71,812 | ||||||||||||
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.
An SPE is an entity in the form of a trust or other legal vehicle, designed to fulfill a specific limited need of the company that organized it (such as a transfer of risk or desired tax treatment).
The principal uses of SPEs are to obtain sources of liquidity and favorable capital treatment by securitizing certain of Citigroup's financial assets, to assist our clients in securitizing their financial assets, and to create other investment products for ourthe Company's clients.
SPEs may be organized as trusts, partnerships, or corporations. In a securitization, the Companycompany transferring assets to an SPE converts those assets into cash before they would have been realized in the normal course of business. The SPE obtainsbusiness, through the cash needed to pay the transferor for the assets received bySPE's 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 SPESPEs can typically obtain a more favorable credit rating from rating agencies such as Standard & Poor's, Moody's Investors Service, or Fitch Ratings, 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 derivative contracts in order to convert the yield or currency of the underlying assets to match the needs of the SPE'sSPE investors or to limit or change the credit risk of the SPE. The CompanyCitigroup may be the counterparty to any such derivative.these derivatives.
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 liquidityraising money by selling the clients'their 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 the institutional and private bank clients as well as retail customers.individual investor. In connection with such arrangements, Citigroup may purchase and temporarily hold assets designated for subsequent securitization.
OurSPEs may be Qualifying SPEs (QSPEs) or VIEs or neither. The Company's credit card receivablereceivables and mortgage loan securitizations are organized as Qualifying SPEs (QSPEs)QSPEs and are, therefore, not VIEs subject to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)," (FIN 46-R). SPEs may be QSPEs or VIEs or neither. When an entity is deemed a variable interest entity (VIE) under FIN 46-R, the entity in question must be consolidated by the primary beneficiary; however, we arethe Company is not the primary beneficiary of most of these entities and as such dodoes not consolidate most of them.
Securitization of Citigroup's Assets
In certainsome of these off-balance sheet arrangements, including credit card receivable and mortgage loan securitizations, Citigroup is securitizing assets that were previously recorded inon its Consolidated Balance Sheet. A summary of certain cash flows received from and paid to securitization trusts is included in Note 1213 to the Consolidated Financial Statements.Statements on page 128.
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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 seller's interest, retained securities, 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. CGMHI is one of several underwriters that distribute securities issued by the truststrust to investors. The Company relies on securitizations to fund approximately 60%65% of its CitiU.S. Cards business.
At December 31, 2004 and 2003, total assets inThe following table reflects amounts related to the Company's securitized credit card trusts were $101 billion and $89 billion, respectively. Of those amountsreceivables at December 31, 2004 and 2003, $82 billion and $76 billion, respectively, has been sold to investors via trust-issued securities, and of the remaining seller's interest, $15.8 billion and $11.9 billion, respectively, is recorded in Citigroup's Consolidated Balance Sheet as Consumer Loans. Additional retained securities issued by the trusts totaling $2.9 billion and $1.1 billion at December 31, 2004 and 2003, respectively, are included in Citigroup's Consolidated Balance Sheet as Available-for-Sale securities. Citigroup retains credit risk on its seller's interest, retained securities, and reserves for expected credit losses. Amounts receivable from the trusts were $1.4 billion and $1.4 billion, respectively, and amounts due to the trusts were $1.3 billion and $1.1 billion, respectively, at December 31, 2004 and 2003. The Company also recognized an interest-only strip of $1.1 billion and $836 million at December 31, 2004 and 2003, respectively, that arose from the calculation of gain or loss at the time assets were sold to the QSPE.31:
| 2005 | 2004 | |||||
---|---|---|---|---|---|---|---|
| In billions of dollars | ||||||
Total assets in trusts | $ | 107.7 | $ | 100.8 | |||
Amounts sold to investors via trust-issued securities | 92.1 | 82.1 | |||||
Remaining seller's interest: | |||||||
Recorded as consumer loans | 11.6 | 15.8 | |||||
Recorded as available-for-sale securities (AFS) | 4.0 | 2.9 | |||||
Amounts receivable from trusts | 1.0 | 1.4 | |||||
Amounts payable to trusts | 1.6 | 1.3 | |||||
Interest-only strip in AFS | 2.1 | 1.1 | |||||
Net gains on securitizations | 1.0 | 0.2 | |||||
In 2004,2005, the Company recorded net gains of $234 million and, in 2003, recorded net gains of $342 million, primarily related to thefrom securitization of credit card receivables as a result of changes$1.0 billion. Net gains reflect the following:
The net gain recorded in estimates in2004 of $234 million does not reflect $420 million of reversals of loan loss reserves associated with the timingsecuritizations. Prior to 2005, the amount of revenue recognitionthe gain related to reserve releases was allocated to the Provision for loan losses rather than to Other revenue.
See Note 13 to the Consolidated Financial Statements on securitizations.page 128 for additional information regarding the Company's securitization activities.
Mortgages and Other Assets
The Company provides a wide range of mortgage and other loan products to a diverse customer base.its customers. 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 that 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. In addition to servicing rights, the Company also retains a residual interest in its auto loan, student loan and other asset securitizations, consisting of securities 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 $323 million, $435 million and $588 million in 2005, 2004 and $331 million in 2004, 2003, and 2002, respectively.
SecuritizationsSecuritization 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'their trade receivables or other financial assets to an SPE.
The CompanyIn addition, Citigroup administers several third-party owned,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.its clients. As administrator, the Company provides accounting, funding, and operations services to these conduits. The Companyconduits but has no ownership interest in the conduits.interest. Generally, 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 conduits by providing collateral in the form of excess assets or holding a residual interest. 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 loss enhancement in the form of letters of credit and other guarantees. All fees are charged on a market basis. During 2003 to comply with FIN 46, all but twomany of the conduits issued "first loss" subordinated notes to third-party investors so that such that one third-party investorinvestors in each conduit would be deemed the primary beneficiary under FIN 46-R, and would consolidate that conduit.
At December 31, 20042005 and 2003,2004, total assets and liabilities in the unconsolidated conduits were $54$55 billion and $44$54 billion, respectively. One conduit with assets of $656 million iswas consolidated at December 31, 2004, compared with $823 million consolidated at December 31, 2003.2004. For 20042005 and 2003,2004, the Company's revenues for these activities amounted to $193 million and $197 million, and $217 million,respectively, and estimated expenses before taxes were $36 million and $34 million, and $37 million.respectively. Expenses have been estimated based upon a percentage of product revenues to business revenues.
Creation of Other Investment and Financing Products
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. In 2005 and 2004, respectively, the Company had organized 36 and 29 mortgage securitizations with assets of $25 billion and $24 billion. For 2005 and 2004, the Company's revenues for these activities were $483 million and $464 million, and estimated expenses before taxes were $116 million and $78 million. Expenses have been estimated based upon a percentage of product revenues to total business revenues.
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.
The Company packages and securitizes assets purchased in the financial markets in order to create new security offerings, including arbitrage collateralized debt obligations (CDOs) and synthetic CDOs for institutional clients and retail customers, thatwhich match the clients' investment needs and preferences. Typically these instruments diversify investors' risk to a pool of assets as compared with investments in an individual asset. The VIEs, which are issuers of CDO securities, are generally organized as limited liability corporations. The Company typically receives fees for structuring and/or distributing the securities sold to investors. In some cases, the Company may repackage the investment with higher-rated debt CDO securities or U.S. Treasury securities to provide a greater or a very high degree of certainty of the return of invested principal. A third-party manager is typically retained by the VIE to select collateral for inclusion in the pool and then actively manage it or, in other cases, only to manage work-out credits. The Company may also provide other financial services and/or products to the VIEs for market-rate fees. These may include: the provision of liquidity or contingent liquidity facilities, interest rate or foreign exchange hedges and credit derivative instruments, as well as the purchasing and warehousing of securities until they are sold to the SPE. The Company is not the primary beneficiary of these VIEs under FIN 46-R due to its limited continuing involvement and, as a result, we do not consolidate their assets and liabilities in our financial statements.
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See Note 1213 to the Consolidated Financial Statements on page 128 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.
| 2004 | 2003 | 2005 | 2004(1) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||
Financial standby letters of credit and foreign office guarantees | $ | 45,796 | $ | 36,402 | $ | 52,384 | $ | 45,796 | ||||
Performance standby letters of credit and foreign office guarantees | 9,145 | 8,101 | 13,946 | 9,145 | ||||||||
Commercial and similar letters of credit | 5,811 | 4,411 | 5,790 | 5,811 | ||||||||
One- to four-family residential mortgages | 4,559 | 3,599 | 3,343 | 4,559 | ||||||||
Revolving open-end loans secured by one- to four-family residential properties | 15,705 | 14,007 | 25,089 | 15,705 | ||||||||
Commercial real estate, construction and land development | 2,084 | 1,382 | 2,283 | 2,084 | ||||||||
Credit card lines | 776,281 | 739,162 | 859,504 | 776,281 | ||||||||
Commercial and other consumer loan commitments(2) | 256,670 | 210,751 | ||||||||||
Commercial and other consumer loan commitments(1) (3) | 346,444 | 274,237 | ||||||||||
Total | $ | 1,116,051 | $ | 1,017,815 | $ | 1,308,783 | $ | 1,133,618 | ||||
See Note 2725 to the Consolidated Financial Statements on page 154 for additional information on credit commitments and lines of credit.
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INTEREST RATE RISK ASSOCIATED WITH CONSUMER MORTGAGE LENDING ACTIVITY
Citigroup originates and funds mortgage loans. As with all other lending activity, this exposes Citigroup to several risks, including credit, liquidity and interest rate risks. To manage credit and liquidity risk, Citigroup sells most of the mortgage loans it originates, but retains the servicing. These sale transactions create an intangible asset referred to as mortgage servicing rights (MSRs). The fair value of this asset is primarily affected by changes in prepayments that result from shifts in mortgage interest rates. Thus, by retaining the servicing rights of sold mortgage loans, Citigroup is still exposed to interest rate risk.
In managing this risk, Citigroup hedges a significant portion of the value of its MSRs through the use of interest rate derivative contracts, forward purchase commitments of mortgage-backed securities, and purchased securities classified as available-for-sale or trading (primarily fixed income debt, such as U.S. government and agencies obligations, and mortgage-backed securities including principal-only strips).
Since the change in the value of these hedging instruments does not perfectly match the change in the value of the MSRs, Citigroup is still exposed to what is commonly referred to as "basis risk." Citigroup manages this risk by reviewing the mix of the various hedging instruments referred to above on a daily basis.
For the portion of the MSRs that are hedged with instruments that qualify for hedge accounting under SFAS 133, MSRs are recorded at fair value. For the remaining portion of the MSRs, which are hedged with instruments that do not qualify for hedge accounting under SFAS 133 or are unhedged, the MSRs are accounted for at the lower-of-cost-or-market.
Citigroup's MSRs totaled $3.318 billion, net of a valuation allowance of $1.021 billion at December 31, 2005, and $2.869 billion, net of a valuation allowance of $1.280 billion at December 31, 2004.
As part of the mortgage lending activity, Citigroup commonly enters into purchase commitments to fund residential mortgage loans at specific interest rates within a given period of time, generally up to 60 days after the rate has been set. If the resulting loans from these commitments will be classified as loans-held-for-sale, Citigroup accounts for the commitments as derivatives under SFAS 133. Accordingly, changes in the fair value of these commitments, which are driven by changes in mortgage interest rates, are recognized in current earnings after taking into consideration the likelihood that the commitment will be funded. However, a value is not assigned to the MSRs until after the loans have been funded and sold.
Citigroup hedges its exposure to the change in the value of these commitments by utilizing hedging instruments similar to those referred to above.
As of December 31, 2005 and 2004, Citigroup's total commitment to make or purchase loans was $5.493 billion and $7.533 billion, respectively. Of these total commitments $3.835 billion and $4.228 billion at December 31, 2005 and 2004, respectively, are considered derivative financial instruments in accordance with SFAS 133.
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PENSION AND POSTRETIREMENT PLANS
The Company has several non-contributory defined benefit pension plans covering substantially all U.S. employees and has various defined benefit pension and termination indemnity plans covering employees outside the United States. The U.S. defined benefit plan provides benefits under a cash balance formula. Employees satisfying certain age and service requirements remain covered by a prior final pay formula. The Company also offers postretirement health care and life insurance benefits to certain eligible U.S. retired employees, as well as to certain eligible employees outside the United States.
The following table shows the pension expense and contributions for Citigroup's plans:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||
| (In millions of dollars) | |||||||||||||||||
Pension expense | $ | 237 | $ | 196 | $ | 101 | $ | 182 | $ | 185 | $ | 158 | ||||||
Company contributions(1) | 160 | 400 | 500 | 379 | 524 | 279 | ||||||||||||
The following table shows the combined postretirement expense and contributions for Citigroup's U.S. and foreign plans:
| U.S. and Non-U.S. Plans | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | ||||||
| (In millions of dollars) | ||||||||
Postretirement expense | $ | 73 | $ | 75 | $ | 97 | |||
Company contributions | 226 | 216 | 166 | ||||||
Expected Rate of Return
Citigroup determines its assumptions for the expected rate of return on plan assets for its U.S. pension and postretirement 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 long-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, 2005, 2004 and 2003, reflecting the performance of the global capital markets. Actual returns in 2005, 2004 and 2003 were more than the expected returns. The expected returns impacted pretax earnings by 2.7%, 3.3% and 2.8%, respectively. This expected amount reflects the expected annual appreciation of the plan assets and reduces the obligation of the Company. It is deducted from the service cost, interest and other components of pension expense to arrive at the net pension expense. Net pension expense for 2005, 2004 and 2003 reflects deductions of $806 million, $750 million and $700 million of expected returns, respectively.
The following table shows the expected versus actual rate of return on plan assets for the U.S. pension and postretirement plans:
| 2005 | 2004 | 2003 | ||||
---|---|---|---|---|---|---|---|
Expected rate of return | 8.0 | % | 8.0 | % | 8.0 | % | |
Actual rate of return | 9.7 | % | 11.5 | % | 24.2 | % | |
For the foreign plans, pension expense for 2005 was reduced by the expected return of $315 million, which impacted pretax earnings by 1.1%. Pension expense for 2004 and 2003 was reduced by expected returns of $251 million and $209 million, respectively. Actual returns were higher in 2005, 2004 and 2003 than the expected returns in those years.
For additional information on the pension and postretirement plans, as well as the effects of a one percentage-point change in the expected rates of return, see Note 21 to the Company's Consolidated Financial Statements on page 147.
Discount Rate
The 2005 discount rates for the U.S. pension and postretirement plans were selected by reference to a Citigroup-specific analysis using each plan's specific cash flows and compared with the Moody's Aa Long-Term Corporate Bond Yield for reasonableness. Under the analysis, the resulting plan-specific discount rates for the pension and postretirement plans were 5.63% and 5.49%, respectively. Citigroup's policy is to round to the nearest tenth of a percent. Accordingly, at December 31, 2005, the discount rate was set at 5.6% for the pension plan and 5.5% for the postretirement plans.
At December 31, 2004, the Moody's Aa Long-Term Corporate Bond Yield was 5.66% and the discount rate was set at 5.75% for the pension plans and 5.50% for the postretirement plans, rounding up to the nearest quarter percent, after giving consideration to a Citigroup-specific cash flow analysis.
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. For additional information on discount rates used in determining pension and postretirement benefit obligations and net benefit expense for the Company's plans, as well as the effects of a one percentage-point change in the discount rates, see Note 21 to the Company's Consolidated Financial Statements on page 147.
FASB Pension Project
The FASB is currently working on a project that will change the way pension and postretirement plan obligations are displayed on the Consolidated Balance Sheet.
Citigroup expects the standard to require companies to record an asset or liability on the Consolidated Balance Sheet equal to the funded status of the plans. Any other plan assets or liabilities would be reflected net as an adjustment to stockholders' equity.
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CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES
Citigroup has had a long-standing process whereby business and financial officers throughout the Company attest to the accuracy of financial information reported in corporate systems as well as the effectiveness of internal controls over financial reporting and disclosure processes. The Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to make certain certifications with respect to this report and to the Company's disclosure control and procedures and internal control over financial reporting.Corporate governance
The Company has a Disclosure Committee, which has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures for the Company in connection with its external disclosures. Citigroup has a Code of Conduct that expresses the values that drive employee behavior and maintains the Company's commitment to the highest standards of conduct. The Company has established an ethics hotline for employees. In addition, the Company adoptedThe Code of Conduct is supplemented by a Code of Ethics for Financial Professionals that applies to all(including finance, accounting, treasury, tax and investor relations professionals worldwide andprofessionals) that supplements the Company-wide Code of Conduct.applies worldwide.
Both the Code of Conduct and the Code of Ethics for Financial Professionals can be found on the Citigroup Web site, at www.citigroup.com, by clicking on the "Corporate Governance" page. The Company's Corporate Governance Guidelines and the charters for the Audit and Risk Management Committee, the Nomination and Governance Committee, the Personnel and Compensation Committee, and the Public Affairs Committee of the Board are also available free of charge on our Web site under the "Corporate Governance" page, or by writing to Citigroup Inc., Corporate Governance, 425 Park Avenue, 2nd floor, New York, New York 10043.
Disclosure Controls and Proceduresprocedures
Disclosure
The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed under the Exchange Act Securities Laws is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and appropriate SEC filings.
The Company's Disclosure Committee is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Company's external disclosures.
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)Act) as of the end of the period covered by this report. BasedDecember 31, 2005 and, based on suchthat evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as of the end of such period,at that date the Company's disclosure controls and procedures were effective.
Financial reporting
The Company'sinternal control over financial reporting is a process under the supervision of the Chief Executive Officer and Chief Financial Officer, and effected by Citigroup's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. These controls include policies and procedures that
Citigroup has had a longstanding process whereby business and financial officers throughout the Company attest to the accuracy of financial information reported in corporate systems as well as the effectiveness of internal controls over financial reporting and disclosure processes.
Company management is responsible for establishing and maintaining adequate internal control over financial reporting. 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 in recording, processing, summarizing, and reporting, on a timely basis, information requiredto monitor performance, including performance of internal control procedures.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be disclosedeffective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Citigroup management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. This evaluation was based on the criteria in Internal Control-Integrated Framework issued by the Company inCommittee of Sponsoring Organizations of the reportsTreadway Commission (COSO). Based on this evaluation, management believes that it files or submits underat that date the Exchange Act.Company's internal control over financial reporting was effective.
Internal Control Over Financial Reporting Management's assessment of effectiveness has been audited by KPMG LLP, the Company's independent registered public accounting firm. Their report, on page 101, expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2005.
There have not been anywere no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 20042005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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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: changing economic conditions—U.S., global, regional, or related to specific issuers or industries; movements in interest rates and foreign exchange rates; the credit environment, inflation, and geopolitical risks;risks, including the continued threat of terrorism; 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 regulatory developments in the countries in which the Company's businesses operate; the level of bankruptcy filings and unemployment rates; the continued threat of terrorism; changes in assumptions underlying the fair value of investments and trading account assets and liabilities; changes in management's estimates ofability to accurately estimate probable losses inherent in the lending portfolio; the performance of pension plans' assets; costs associated with the implementation of the Japan Private Bank Exit Plan; the ability ofU.S. Cards to continue brand development, private-label expansion and new product launches, and organic growth;launches; the effect of CitiU.S. Cards raising conforming to industry and regulatory guidance regarding minimum required payments;payment calculations; the ability ofRetail Banking to continue to expand into select markets; the ability of Prime HomeInternational Consumer Finance to continue leveraging Citigroup distribution channels; Primerica's ability to benefit from cross-selling relationships; possible legislative and regulatory reforms in the mutual fund industry; the ability ofSmith Barney to grow its franchise;organically in existing branches and to open new branches; the abilityimpact of theAsset Management business to leverage its global investment capabilities; the credit performancea variety of unresolved matters involving some of the portfolios, portfolio growth and seasonal factors;companies in CVC/Brazil; the Company's subsidiaries' dividending capabilities; the effect of FASB's amendments to the accounting standards governing asset transfers, securitization accounting and fair value of financial instruments; 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 and regulatory proceedings and related matters.
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Accumulated Benefit Obligation (ABO) | The actuarial present value of benefits (vested and | |
Additional Minimum Liability (AML) | Recognition of an additional minimum liability is required when the ABO exceeds pension plan assets and | |
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 Formula | A formula, within a defined benefit plan, that defines the ultimate benefit as a hypothetical account balance based on annual benefit credits and interest earnings. | |
Cash-Basis Loans | Loans in which the borrower has fallen behind in interest payments | |
Claim | Request by an insured for a benefit from an insurance company for an insurable event. | |
Collateralized Debt Obligations (CDOs) | An investment-grade security backed by a pool of bonds, loans, or other assets. | |
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 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 tax law. | |
A retirement plan under which the benefits paid are based on a specific formula. The formula is usually a function of age, service and compensation. A non-contributory plan does not require employee contributions. | ||
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. | |
Interest-only (or IO) strip | A residual interest in securitization trusts representing the remaining value of expected net cash flows to the Company after payments to third party investors and net credit losses. |
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Leverage Ratio | The leverage ratio is calculated by dividing Tier 1 Capital by leverage assets. Leverage assets are defined as quarterly average total assets, net of goodwill, intangibles and certain other items as required by the Federal Reserve. | |
Managed Average Yield | Gross managed interest revenue earned divided by average managed loans. | |
Managed Basis | Managed basis presentation includes results from both on-balance sheet loans and off-balance sheet loans, and exclude the impact of card securitization activity. Managed basis disclosures assume that securitized loans have not been sold and present the result of the securitized loans in the same manner as the Company's owned loans. | |
Managed Loans | Includes loans classified as Loans on the balance sheet plus loans held-for-sale that are included in other assets | |
Managed Net Credit Losses | Net credit losses adjusted for the effect of credit card securitizations. See Managed Loans. | |
Market-Related Value of Plan Assets | A balance used to calculate the expected return on | |
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 Consolidated Statement of Income is equal to the minority's proportionate share of the subsidiary's net income and, as included within other liabilities on the Consolidated Balance Sheet, is equal to the minority's proportionate share of the subsidiary's net assets. | |
Mortgage Servicing Rights (MSRs) | An intangible asset representing servicing rights retained in the securitization of mortgage loans, which are measured by allocating the carrying value of the loans between the assets sold and the interests retained. | |
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 Credit Margin |
Revenues less net credit losses. | ||
Net | ||
Non-Qualified Plan | A retirement plan that is not subject to certain Internal Revenue Code requirements and subsequent regulations. Contributions to non-qualified plans do not receive tax-favored treatment; the employer's tax deduction is taken when the benefits are paid to participants. | |
Notional Amount | The principal balance of a derivative contract used as a reference to calculate the amount of interest or other payments. | |
On-Balance Sheet Loans | Loans originated or purchased by the Company that reside on the balance sheet at the date of the balance sheet. | |
Projected Benefit Obligation (PBO) | The actuarial present value of all pension benefits accrued |
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Qualifying SPE (QSPE) | A Special Purpose Entity that is very limited in its activities and in the types of assets it can hold. It is a passive entity and may not engage in active decision making. QSPE status allows the seller to remove assets transferred to the QSPE from its books, achieving sale accounting. QSPEs are not consolidated by the seller or the investors in the QSPE. | |
Return on Assets | Annualized income divided by average assets. | |
Return on Common Equity | Annualized income less preferred stock dividends, divided by average common equity. | |
Return on Invested Capital | Annualized net income, adjusted to exclude the effects of capital charges on goodwill and intangibles, divided by average invested capital, which consists of risk capital plus goodwill and intangibles. | |
Return on Risk Capital | Annualized net income, divided by average risk capital. | |
Risk Capital | Risk capital is a management metric defined as the amount of capital required to absorb potential unexpected economic volatility. | |
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, | |
Securities Purchased Under Agreements to Resell | An agreement between a seller and a buyer, generally of government or agency 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 securities, whereby the seller agrees to repurchase the securities at an agreed-upon price at a future date. | |
Shared Responsibilities | Citigroup's concept to become the most respected global financial services company. This entails a commitment by every employee to be responsible on behalf of our clients, each other, and the franchise. | |
Special Purpose Entity (SPE) | An entity in the form of a trust or other legal vehicle, designed to fulfill a specific limited need of the company that organized it (such as a transfer of risk or desired tax treatment). | |
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 it obligates the bank to guarantee or stand as a surety for the benefit of the third party to the extent permitted by law or regulation. | |
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Termination Indemnity Plan | A lump sum benefit payable to an employee when they leave the Company for any reason, whether voluntarily or involuntarily (including retirement, disability, death and dismissal). This benefit is | |
Tier 1 and Tier 2 Capital | Tier 1 Capital includes common stockholders' equity (excluding certain components of other comprehensive income), qualifying perpetual preferred stock, qualifying mandatorily redeemable securities of subsidiary trusts, and minority | |
Unearned Compensation | The unamortized portion of a grant to employees of restricted or deferred stock measured at the market value on the date of grant. Unearned compensation is displayed as a reduction of stockholders' equity | |
Unfunded Commitments | Legally binding agreements to provide financing at a future date. | |
Variable Interest Entity (VIE) | An entity that does not have enough equity to finance its activities without additional subordinated financial support from third parties. VIEs may include entities with equity investors that cannot make significant decisions about the entity's operations. A VIE must be consolidated by its primary beneficiary, if any, which is the party that has the majority of the expected losses or residual returns of the VIE or both. |
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Citigroup is responsible for establishing and maintaining adequate internal control over financial reporting. Citigroup's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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 seeensure that information and communication flows are effective and to monitor performance, including performance of internal control procedures.
Citigroup management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 20042005 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2004,2005, the Company's internal control over financial reporting is effective.
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 20042005 has been audited by KPMG LLP, the Company's independent registered public accounting firm, as stated in their report appearing on page 77,101, which expressesexpressed unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004.2005.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Citigroup Inc.:
We have audited management's assessment, included in the Management's Report on Internal Control over Financial Reporting appearing on page 76,100, that Citigroup Inc. and subsidiaries (the "Company" or "Citigroup") maintained effective internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Citigroup maintained effective internal control over financial reporting as of December 31, 2004,2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. Also, in our opinion, Citigroup maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Citigroup as of December 31, 20042005 and 2003,2004, 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, 2004,2005, and our report dated February 25, 200523, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/S/ KPMG LLP
New York, New York
February 25, 200523, 2006
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM—
CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Citigroup Inc.:
We have audited the accompanying consolidated balance sheets of Citigroup Inc. and subsidiaries (the "Company" or "Citigroup") as of December 31, 20042005 and 2003, and2004, 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, 2005, and the related consolidated balance sheets of Citibank, N.A. and subsidiaries as of December 31, 2005 and 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 as of December 31, 20042005 and 2003, and2004, the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, and the financial position of Citibank, N.A. and subsidiaries as of December 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,Consolidated Financial Statements, in 2005 the Company changed its method of accounting for conditional asset retirement obligations associated with operating leases, and in 2003 the Company changed its methods of accounting for variable interest entities and stock-based compensation and 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.compensation.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Citigroup's internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 200523, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New York
February 25, 200523, 2006
102
CONSOLIDATED FINANCIAL STATEMENTSCitigroup Inc. and SubsidiariesCITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
| Year Ended December 31 | Year Ended December 31 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2005 | 2004(1) | 2003(1) | |||||||||||||
| In millions of dollars, except per share amounts | (In millions of dollars, except per share amounts) | |||||||||||||||||
Revenues | |||||||||||||||||||
Loan interest, including fees | $ | 43,981 | $ | 38,110 | $ | 37,903 | $ | 47,188 | $ | 43,796 | $ | 37,952 | |||||||
Other interest and dividends | 22,728 | 18,937 | 21,036 | 28,833 | 19,887 | 16,562 | |||||||||||||
Insurance premiums | 3,993 | 3,749 | 3,410 | 3,132 | 2,726 | 2,455 | |||||||||||||
Commissions and fees | 16,772 | 16,314 | 15,258 | 17,143 | 15,981 | 15,657 | |||||||||||||
Principal transactions | 3,756 | 5,120 | 4,513 | 6,443 | 3,716 | 4,885 | |||||||||||||
Asset management and administration fees | 6,845 | 5,665 | 5,146 | 6,119 | 5,524 | 4,576 | |||||||||||||
Realized gains (losses) from sales of investments | 831 | 510 | (485 | ) | 1,962 | 833 | 529 | ||||||||||||
Other revenue | 9,370 | 6,308 | 5,775 | 9,498 | 9,176 | 6,162 | |||||||||||||
Total revenues | 108,276 | 94,713 | 92,556 | $ | 120,318 | $ | 101,639 | $ | 88,778 | ||||||||||
Interest expense | 22,086 | 17,271 | 21,248 | 36,676 | 22,004 | 17,184 | |||||||||||||
Total revenues, net of interest expense | 86,190 | 77,442 | 71,308 | $ | 83,642 | $ | 79,635 | $ | 71,594 | ||||||||||
Benefits, claims, and credit losses | |||||||||||||||||||
Provision for credit losses and for benefits and claims | |||||||||||||||||||
Provision for loan losses | $ | 7,929 | $ | 6,233 | $ | 8,046 | |||||||||||||
Policyholder benefits and claims | 3,801 | 3,895 | 3,478 | 867 | 884 | 878 | |||||||||||||
Provision for credit losses | 6,233 | 8,046 | 9,995 | ||||||||||||||||
Provision for unfunded lending commitments | 250 | — | — | ||||||||||||||||
Total benefits, claims, and credit losses | 10,034 | 11,941 | 13,473 | ||||||||||||||||
Total provision for credit losses and for benefits and claims | $ | 9,046 | $ | 7,117 | $ | 8,924 | |||||||||||||
Operating expenses | |||||||||||||||||||
Non-insurance compensation and benefits | 23,707 | 21,288 | 18,650 | ||||||||||||||||
Compensation and benefits | $ | 25,772 | $ | 22,934 | $ | 20,719 | |||||||||||||
Net occupancy expense | 4,847 | 4,280 | 4,005 | 5,141 | 4,791 | 4,227 | |||||||||||||
Technology/communications expense | 3,586 | 3,414 | 3,139 | ||||||||||||||||
Insurance underwriting, acquisition, and operating | 1,234 | 1,063 | 992 | ||||||||||||||||
Restructuring-related items | (5 | ) | (46 | ) | (15 | ) | |||||||||||||
Technology/communication expense | 3,524 | 3,518 | 3,353 | ||||||||||||||||
Advertising and marketing expense | 2,533 | 2,653 | 1,938 | ||||||||||||||||
Other operating expenses | 18,605 | 9,169 | 10,527 | 8,193 | 15,886 | 7,263 | |||||||||||||
Total operating expenses | 51,974 | 39,168 | 37,298 | $ | 45,163 | $ | 49,782 | $ | 37,500 | ||||||||||
Income from continuing operations before income taxes, minority interest, and cumulative effect of accounting change | 24,182 | 26,333 | 20,537 | $ | 29,433 | $ | 22,736 | $ | 25,170 | ||||||||||
Provision for income taxes | 6,909 | 8,195 | 6,998 | 9,078 | 6,464 | 7,838 | |||||||||||||
Minority interest, net of income taxes | 227 | 285 | 91 | ||||||||||||||||
Minority interest, net of taxes | 549 | 218 | 274 | ||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | 17,046 | 17,853 | 13,448 | $ | 19,806 | $ | 16,054 | $ | 17,058 | ||||||||||
Discontinued operations | |||||||||||||||||||
Income from discontinued operations | — | — | 965 | $ | 908 | $ | 1,446 | $ | 1,163 | ||||||||||
Gain on sale of stock by subsidiary | — | — | 1,270 | ||||||||||||||||
Provision for income taxes | — | — | 360 | ||||||||||||||||
Gain on sale | 6,790 | — | — | ||||||||||||||||
Provision for income taxes and minority interest, net of taxes | 2,866 | 454 | 368 | ||||||||||||||||
Income from discontinued operations, net | — | — | 1,875 | ||||||||||||||||
Cumulative effect of accounting change, net | — | — | (47 | ) | |||||||||||||||
Income from discontinued operations, net of taxes | $ | 4,832 | $ | 992 | $ | 795 | |||||||||||||
Cumulative effect of accounting change, net of taxes | (49 | ) | — | — | |||||||||||||||
Net income | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 24,589 | $ | 17,046 | $ | 17,853 | |||||||
Basic earnings per share | |||||||||||||||||||
Income from continuing operations | $ | 3.32 | $ | 3.49 | $ | 2.63 | $ | 3.90 | $ | 3.13 | $ | 3.34 | |||||||
Income from discontinued operations, net | — | — | 0.37 | ||||||||||||||||
Cumulative effect of accounting change, net | — | — | (0.01 | ) | |||||||||||||||
Income from discontinued operations, net of taxes | 0.95 | 0.19 | 0.15 | ||||||||||||||||
Cumulative effect of accounting change, net of taxes | (0.01 | ) | — | — | |||||||||||||||
Net income | $ | 3.32 | $ | 3.49 | $ | 2.99 | |||||||||||||
Net Income | $ | 4.84 | $ | 3.32 | $ | 3.49 | |||||||||||||
Weighted average common shares outstanding | 5,107.2 | 5,093.3 | 5,078.0 | 5,067.6 | 5,107.2 | 5,093.3 | |||||||||||||
Diluted earnings per share | |||||||||||||||||||
Income from continuing operations | $ | 3.26 | $ | 3.42 | $ | 2.59 | $ | 3.82 | $ | 3.07 | $ | 3.27 | |||||||
Income from discontinued operations, net | — | — | 0.36 | ||||||||||||||||
Cumulative effect of accounting change, net | — | — | (0.01 | ) | |||||||||||||||
Income from discontinued operations, net of taxes | 0.94 | 0.19 | 0.15 | ||||||||||||||||
Cumulative effect of accounting change, net of taxes | (0.01 | ) | — | — | |||||||||||||||
Net income | $ | 3.26 | $ | 3.42 | $ | 2.94 | $ | 4.75 | $ | 3.26 | $ | 3.42 | |||||||
Adjusted weighted average common shares outstanding | 5,207.4 | 5,193.6 | 5,166.2 | 5,160.4 | 5,207.4 | 5,193.6 | |||||||||||||
See Notes to the Consolidated Financial Statements.
103
Citigroup Inc. and Subsidiaries
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| | December 31 | | December 31 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | | 2005 | 2004(1) | ||||||||||
| | In millions of dollars | | (In millions of dollars) | ||||||||||||
Assets | Assets | Assets | ||||||||||||||
Cash and due from banks (including segregated cash and other deposits) | Cash and due from banks (including segregated cash and other deposits) | $ | 23,556 | $ | 21,149 | Cash and due from banks (including segregated cash and other deposits) | $ | 28,373 | $ | 23,556 | ||||||
Deposits at interest with banks | Deposits at interest with banks | 23,889 | 19,777 | Deposits at interest with banks | 26,904 | 23,889 | ||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | Federal funds sold and securities borrowed or purchased under agreements to resell | 200,739 | 172,174 | Federal funds sold and securities borrowed or purchased under agreements to resell | 217,464 | 200,739 | ||||||||||
Brokerage receivables | Brokerage receivables | 39,273 | 26,476 | Brokerage receivables | 42,823 | 39,273 | ||||||||||
Trading account assets (including $102,573 and $65,352 pledged to creditors at December 31, 2004 and December 31, 2003, respectively) | 280,167 | 235,319 | ||||||||||||||
Investments (including $15,587 and $12,066 pledged to creditors at December 31, 2004 and December 31, 2003, respectively) | 213,243 | 182,892 | ||||||||||||||
Trading account assets (including $92,495 and $102,573 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | Trading account assets (including $92,495 and $102,573 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | 295,820 | 280,167 | |||||||||||||
Investments (including $15,819 and $15,587 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | Investments (including $15,819 and $15,587 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | 180,597 | 213,243 | |||||||||||||
Loans, net of unearned income | Loans, net of unearned income | Loans, net of unearned income | ||||||||||||||
Consumer | 435,226 | 379,932 | Consumer | 454,620 | 435,226 | |||||||||||
Corporate | 113,603 | 98,074 | Corporate | 128,883 | 113,603 | |||||||||||
Loans, net of unearned income | Loans, net of unearned income | 548,829 | 478,006 | Loans, net of unearned income | $ | 583,503 | $ | 548,829 | ||||||||
Allowance for credit losses | (11,269 | ) | (12,643 | ) | Allowance for loan losses | (9,782 | ) | (11,269 | ) | |||||||
Total loans, net | Total loans, net | 537,560 | 465,363 | Total loans, net | $ | 573,721 | $ | 537,560 | ||||||||
Goodwill | Goodwill | 31,992 | 27,581 | Goodwill | 33,130 | 31,992 | ||||||||||
Intangible assets | Intangible assets | 15,271 | 13,881 | Intangible assets | 14,749 | 15,271 | ||||||||||
Reinsurance recoverables | 4,783 | 4,577 | ||||||||||||||
Separate and variable accounts | 32,264 | 27,473 | ||||||||||||||
Other assets | Other assets | 81,364 | 67,370 | Other assets | 80,456 | 118,411 | ||||||||||
Total assets | Total assets | $ | 1,484,101 | $ | 1,264,032 | Total assets | $ | 1,494,037 | $ | 1,484,101 | ||||||
Liabilities | Liabilities | Liabilities | ||||||||||||||
Non-interest-bearing deposits in U.S. offices | $ | 31,533 | $ | 30,074 | Non-interest-bearing deposits in U.S. offices | $ | 32,869 | $ | 31,533 | |||||||
Interest-bearing deposits in U.S. offices | 161,113 | 146,675 | Interest-bearing deposits in U.S. offices | 173,813 | 161,113 | |||||||||||
Non-interest-bearing deposits in offices outside the U.S. | 28,379 | 22,940 | Non-interest-bearing deposits in offices outside the U.S. | 32,614 | 28,379 | |||||||||||
Interest-bearing deposits in offices outside the U.S. | 341,056 | 274,326 | Interest-bearing deposits in offices outside the U.S. | 353,299 | 341,056 | |||||||||||
Total deposits | Total deposits | 562,081 | 474,015 | Total deposits | $ | 592,595 | $ | 562,081 | ||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | Federal funds purchased and securities loaned or sold under agreements to repurchase | 209,555 | 181,156 | Federal funds purchased and securities loaned or sold under agreements to repurchase | 242,392 | 209,555 | ||||||||||
Brokerage payables | Brokerage payables | 50,208 | 37,330 | Brokerage payables | 70,994 | 50,208 | ||||||||||
Trading account liabilities | Trading account liabilities | 135,487 | 121,869 | Trading account liabilities | 121,108 | 135,487 | ||||||||||
Contractholder funds and separate and variable accounts | 68,801 | 58,402 | ||||||||||||||
Insurance policy and claims reserves | 19,177 | 17,478 | ||||||||||||||
Investment banking and brokerage borrowings | 25,799 | 22,442 | ||||||||||||||
Short-term borrowings | Short-term borrowings | 30,968 | 36,187 | Short-term borrowings | 66,930 | 56,767 | ||||||||||
Long-term debt | Long-term debt | 207,910 | 162,702 | Long-term debt | 217,499 | 207,910 | ||||||||||
Other liabilities | Other liabilities | 64,824 | 48,380 | Other liabilities | 69,982 | 152,802 | ||||||||||
Citigroup or subsidiary-obligated mandatorily redeemable securities of subsidiary trusts holding solely junior subordinated debt securities of | ||||||||||||||||
—Parent | — | 5,217 | ||||||||||||||
—Subsidiary | — | 840 | ||||||||||||||
Total liabilities | Total liabilities | 1,374,810 | 1,166,018 | Total liabilities | $ | 1,381,500 | $ | 1,374,810 | ||||||||
Stockholders' equity | Stockholders' equity | Stockholders' equity | ||||||||||||||
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value | Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value | 1,125 | 1,125 | Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value | $ | 1,125 | $ | 1,125 | ||||||||
Common stock ($.01 par value; authorized shares: 15 billion), issued shares: 2004—5,477,416,086 shares and 2003—5,477,416,254 shares | 55 | 55 | ||||||||||||||
Common stock ($.01 par value; authorized shares: 15 billion), issued shares:2005 and 2004—5,477,416,086 shares | Common stock ($.01 par value; authorized shares: 15 billion), issued shares:2005 and 2004—5,477,416,086 shares | 55 | 55 | |||||||||||||
Additional paid-in capital | Additional paid-in capital | 18,851 | 17,531 | Additional paid-in capital | 20,119 | 18,851 | ||||||||||
Retained earnings | Retained earnings | 102,154 | 93,483 | Retained earnings | 117,555 | 102,154 | ||||||||||
Treasury stock, at cost: 2004—282,773,501 shares and 2003—320,466,849 shares | (10,644 | ) | (11,524 | ) | ||||||||||||
Treasury stock, at cost:2005—497,192,288 and 2004—282,773,501 shares | Treasury stock, at cost:2005—497,192,288 and 2004—282,773,501 shares | (21,149 | ) | (10,644 | ) | |||||||||||
Accumulated other changes in equity from nonowner sources | Accumulated other changes in equity from nonowner sources | (304 | ) | (806 | ) | Accumulated other changes in equity from nonowner sources | (2,532 | ) | (304 | ) | ||||||
Unearned compensation | Unearned compensation | (1,946 | ) | (1,850 | ) | Unearned compensation | (2,636 | ) | (1,946 | ) | ||||||
Total stockholders' equity | Total stockholders' equity | 109,291 | 98,014 | Total stockholders' equity | $ | 112,537 | $ | 109,291 | ||||||||
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 1,484,101 | $ | 1,264,032 | Total liabilities and stockholders' equity | $ | 1,494,037 | $ | 1,484,101 | ||||||
See Notes to the Consolidated Financial Statements.
104
Citigroup Inc. and Subsidiaries
CITIGROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
| Year Ended December 31 | Year Ended December 31 | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amounts | Shares | Amounts | Shares | ||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||
| In millions of dollars, except shares in thousands | In millions of dollars, except shares in thousands | ||||||||||||||||||||||||||||||
Preferred stock at aggregate liquidation value | ||||||||||||||||||||||||||||||||
Balance, beginning of year | $ | 1,125 | $ | 1,400 | $ | 1,525 | 4,250 | 5,350 | 5,850 | $ | 1,125 | $ | 1,125 | $ | 1,400 | 4,250 | 4,250 | 5,350 | ||||||||||||||
Redemption or retirement of preferred stock | — | (275 | ) | (125 | ) | — | (1,100 | ) | (500 | ) | — | — | (275 | ) | — | — | (1,100 | ) | ||||||||||||||
Balance, end of year | 1,125 | 1,125 | 1,400 | 4,250 | 4,250 | 5,350 | $ | 1,125 | $ | 1,125 | $ | 1,125 | 4,250 | 4,250 | 4,250 | |||||||||||||||||
Common stock and additional paid-in capital | ||||||||||||||||||||||||||||||||
Balance, beginning of year | 17,586 | 17,436 | 23,251 | 5,477,416 | 5,477,416 | 5,477,416 | $ | 18,906 | $ | 17,586 | $ | 17,436 | 5,477,416 | 5,477,416 | 5,477,416 | |||||||||||||||||
Employee benefit plans | 1,212 | 133 | 664 | — | — | — | ||||||||||||||||||||||||||
Contribution to Citigroup Pension Fund | — | — | (83 | ) | — | — | — | |||||||||||||||||||||||||
Other(1) | 108 | 17 | (6,396 | ) | — | — | — | |||||||||||||||||||||||||
Employee benefits plans | 1,214 | 1,212 | 133 | — | — | — | ||||||||||||||||||||||||||
Other | 54 | 108 | 17 | — | — | — | ||||||||||||||||||||||||||
Balance, end of year | 18,906 | 17,586 | 17,436 | 5,477,416 | 5,477,416 | 5,477,416 | $ | 20,174 | $ | 18,906 | $ | 17,586 | 5,477,416 | 5,477,416 | 5,477,416 | |||||||||||||||||
Retained earnings | ||||||||||||||||||||||||||||||||
Balance, beginning of year | 93,483 | 81,403 | 69,803 | $ | 102,154 | $ | 93,483 | $ | 81,403 | |||||||||||||||||||||||
Net income | 17,046 | 17,853 | 15,276 | 24,589 | 17,046 | 17,853 | ||||||||||||||||||||||||||
Common dividends | (8,307 | ) | (5,702 | ) | (3,593 | ) | ||||||||||||||||||||||||||
Common dividends(1) | (9,120 | ) | (8,307 | ) | (5,702 | ) | ||||||||||||||||||||||||||
Preferred dividends | (68 | ) | (71 | ) | (83 | ) | (68 | ) | (68 | ) | (71 | ) | ||||||||||||||||||||
Balance, end of year | 102,154 | 93,483 | 81,403 | $ | 117,555 | $ | 102,154 | $ | 93,483 | |||||||||||||||||||||||
Treasury stock, at cost | ||||||||||||||||||||||||||||||||
Balance, beginning of year | (11,524 | ) | (11,637 | ) | (11,099 | ) | (320,467 | ) | (336,735 | ) | (328,728 | ) | $ | (10,644 | ) | $ | (11,524 | ) | $ | (11,637 | ) | (282,774 | ) | (320,467 | ) | (336,735 | ) | |||||
Issuance of shares pursuant to employee benefit plans | 1,659 | 2,437 | 1,495 | 54,121 | 75,586 | 43,242 | 2,203 | 1,659 | 2,437 | 61,278 | 54,121 | 75,586 | ||||||||||||||||||||
Contribution to Citigroup Pension Fund | — | — | 583 | — | — | 16,767 | ||||||||||||||||||||||||||
Treasury stock acquired(2) | (25 | ) | (1,967 | ) | (5,483 | ) | (516 | ) | (52,464 | ) | (151,102 | ) | (12,794 | ) | (25 | ) | (1,967 | ) | (277,918 | ) | (516 | ) | (52,464 | ) | ||||||||
Shares purchased from Employee Pension Fund | (502 | ) | (449 | ) | — | (10,001 | ) | (9,556 | ) | — | — | (502 | ) | (449 | ) | — | (10,001 | ) | (9,556 | ) | ||||||||||||
Other(3) | (252 | ) | 92 | 2,867 | (5,911 | ) | 2,702 | 83,086 | 86 | (252 | ) | 92 | 2,222 | (5,911 | ) | 2,702 | ||||||||||||||||
Balance, end of year | (10,644 | ) | (11,524 | ) | (11,637 | ) | (282,774 | ) | (320,467 | ) | (336,735 | ) | $ | (21,149 | ) | $ | (10,644 | ) | $ | (11,524 | ) | (497,192 | ) | (282,774 | ) | (320,467 | ) | |||||
Accumulated other changes in equity from nonowner sources | ||||||||||||||||||||||||||||||||
Balance, beginning of year | (806 | ) | (193 | ) | (844 | ) | $ | (304 | ) | $ | (806 | ) | $ | (193 | ) | |||||||||||||||||
Net change in unrealized gains and losses on investment securities, net of tax | (275 | ) | 951 | 1,105 | (1,549 | ) | (275 | ) | 951 | |||||||||||||||||||||||
Net change for cash flow hedges, net of tax | (578 | ) | (491 | ) | 1,074 | |||||||||||||||||||||||||||
Net change in cash flow hedges, net of tax | 439 | (578 | ) | (491 | ) | |||||||||||||||||||||||||||
Net change in foreign currency translation adjustment, net of tax | 1,355 | (1,073 | ) | (1,528 | ) | (980 | ) | 1,355 | (1,073 | ) | ||||||||||||||||||||||
Minimum pension liability adjustment, net of tax | (138 | ) | — | — | ||||||||||||||||||||||||||||
Balance, end of year | (304 | ) | (806 | ) | (193 | ) | $ | (2,532 | ) | $ | (304 | ) | $ | (806 | ) | |||||||||||||||||
Unearned compensation | ||||||||||||||||||||||||||||||||
Balance, beginning of year | (1,850 | ) | (1,691 | ) | (1,389 | ) | $ | (1,946 | ) | $ | (1,850 | ) | $ | (1,691 | ) | |||||||||||||||||
Net issuance of restricted and deferred stock | (96 | ) | (159 | ) | (302 | ) | (690 | ) | (96 | ) | (159 | ) | ||||||||||||||||||||
Balance, end of year | (1,946 | ) | (1,850 | ) | (1,691 | ) | $ | (2,636 | ) | $ | (1,946 | ) | $ | (1,850 | ) | |||||||||||||||||
�� | ||||||||||||||||||||||||||||||||
Total common stockholders' equity and common shares outstanding | 108,166 | 96,889 | 85,318 | 5,194,642 | 5,156,949 | 5,140,681 | $ | 111,412 | $ | 108,166 | $ | 96,889 | 4,980,224 | 5,194,642 | 5,156,949 | |||||||||||||||||
Total stockholders' equity | $ | 109,291 | $ | 98,014 | $ | 86,718 | $ | 112,537 | $ | 109,291 | $ | 98,014 | ||||||||||||||||||||
Summary of changes in equity from nonowner sources | ||||||||||||||||||||||||||||||||
Net income | $ | 17,046 | $ | 17,853 | $ | 15,276 | $ | 24,589 | $ | 17,046 | $ | 17,853 | ||||||||||||||||||||
Other changes in equity from nonowner sources, net of tax | 502 | (613 | ) | 651 | (2,228 | ) | 502 | (613 | ) | |||||||||||||||||||||||
Total changes in equity from nonowner sources | $ | 17,548 | $ | 17,240 | $ | 15,927 | $ | 22,361 | $ | 17,548 | $ | 17,240 | ||||||||||||||||||||
See Notes to the Consolidated Financial Statements.
105
Citigroup Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Citigroup Inc. and Subsidiaries
| | Year Ended December 31, | | Year Ended December 31 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2004 | 2003 | 2002 | | 2005 | 2004(1) | 2003(1) | ||||||||||||||
| | In millions of dollars | | In millions of dollars | ||||||||||||||||||
Cash flows from operating activities of continuing operations | Cash flows from operating activities of continuing operations | Cash flows from operating activities of continuing operations | ||||||||||||||||||||
Net income | Net income | $ | 17,046 | $ | 17,853 | $ | 15,276 | Net income | $ | 24,589 | $ | 17,046 | $ | 17,853 | ||||||||
Income from discontinued operations, net of tax | — | — | 717 | Income from discontinued operations, net of taxes | 630 | 992 | 795 | |||||||||||||||
Gain on sale of stock by subsidiary, net of tax | — | — | 1,158 | Gain on sale, net of taxes | 4,202 | — | — | |||||||||||||||
Cumulative effect of accounting change | — | — | (47 | ) | Cumulative effect of accounting changes, net of taxes | (49 | ) | — | — | |||||||||||||
Income from continuing operations | Income from continuing operations | 17,046 | 17,853 | 13,448 | Income from continuing operations | $ | 19,806 | $ | 16,054 | $ | 17,058 | |||||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities of continuing operations | ||||||||||||||||||||||
Amortization of deferred policy acquisition costs and present value of future profits | 687 | 547 | 405 | |||||||||||||||||||
Additions to deferred policy acquisition costs | (1,303 | ) | (976 | ) | (865 | ) | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities of continuing operations | Adjustments to reconcile net income to net cash provided by (used in) operating activities of continuing operations | |||||||||||||||||||||
Depreciation and amortization | 2,060 | 1,574 | 1,521 | Amortization of deferred policy acquisition costs and present value of future profits | $ | 274 | $ | 277 | $ | 268 | ||||||||||||
Deferred tax (benefit) provision | (983 | ) | 861 | (204 | ) | Additions to deferred policy acquisition costs | (382 | ) | (493 | ) | (392 | ) | ||||||||||
Provision for credit losses | 6,233 | 8,046 | 9,995 | Depreciation and amortization | 2,318 | 2,056 | 1,570 | |||||||||||||||
Change in trading account assets | (43,071 | ) | (80,111 | ) | (10,625 | ) | Deferred tax (benefit) provision | (181 | ) | (1,209 | ) | 808 | ||||||||||
Change in trading account liabilities | 13,110 | 30,443 | 10,883 | Provision for credit losses | 7,929 | 6,233 | 8,046 | |||||||||||||||
Change in federal funds sold and securities borrowed or purchased under agreements to resell | (28,131 | ) | (32,228 | ) | (2,127 | ) | Change in trading account assets | (16,399 | ) | (43,071 | ) | (80,111 | ) | |||||||||
Change in federal funds purchased and securities loaned or sold under agreements to repurchase | 22,966 | 19,468 | 7,176 | Change in trading account liabilities | (13,986 | ) | 13,110 | 30,443 | ||||||||||||||
Change in brokerage receivables net of brokerage payables | 81 | 14,188 | (1,070 | ) | Change in federal funds sold and securities borrowed or purchased under agreements to resell | (16,725 | ) | (28,131 | ) | (32,228 | ) | |||||||||||
Change in insurance policy and claims reserves | 1,699 | 1,128 | 3,272 | Change in federal funds purchased and securities loaned or sold under agreements to repurchase | 33,808 | 22,966 | 19,468 | |||||||||||||||
Net (gains)/losses from sales of investments | (831 | ) | (510 | ) | 485 | Change in brokerage receivables net of brokerage payables | 17,236 | 81 | 14,188 | |||||||||||||
Venture capital activity | (201 | ) | 134 | 577 | Net gains from sales of investments | (1,962 | ) | (833 | ) | (529 | ) | |||||||||||
Restructuring-related items | (5 | ) | (46 | ) | (15 | ) | Venture capital activity | 962 | (201 | ) | 134 | |||||||||||
Other, net | 8,239 | 4,775 | (6,827 | ) | Other, net | (853 | ) | 10,885 | 6,415 | |||||||||||||
Total adjustments | Total adjustments | (19,450 | ) | (32,707 | ) | 12,581 | Total adjustments | $ | 12,039 | $ | (18,330 | ) | $ | (31,920 | ) | |||||||
Net cash (used in) provided by operating activities of continuing operations | (2,404 | ) | (14,854 | ) | 26,029 | |||||||||||||||||
Net cash provided by (used in) operating activities of continuing operations | Net cash provided by (used in) operating activities of continuing operations | $ | 31,845 | $ | (2,276 | ) | $ | (14,862 | ) | |||||||||||||
Cash flows from investing activities of continuing operations | Cash flows from investing activities of continuing operations | Cash flows from investing activities of continuing operations | ||||||||||||||||||||
Change in deposits at interest with banks | Change in deposits at interest with banks | (2,175 | ) | (3,395 | ) | 2,935 | Change in deposits at interest with banks | $ | (3,286 | ) | $ | (2,175 | ) | $ | (3,395 | ) | ||||||
Change in loans | Change in loans | (68,451 | ) | (30,012 | ) | (40,780 | ) | Change in loans | (68,100 | ) | (68,451 | ) | (30,012 | ) | ||||||||
Proceeds from sales of loans | Proceeds from sales of loans | 15,121 | 18,553 | 17,005 | Proceeds from sales of loans | 22,435 | 15,121 | 18,553 | ||||||||||||||
Purchases of investments | Purchases of investments | (195,903 | ) | (208,040 | ) | (393,344 | ) | Purchases of investments | (203,023 | ) | (195,903 | ) | (208,040 | ) | ||||||||
Proceeds from sales of investments | Proceeds from sales of investments | 112,470 | 127,277 | 280,234 | Proceeds from sales of investments | 82,603 | 112,470 | 127,277 | ||||||||||||||
Proceeds from maturities of investments | Proceeds from maturities of investments | 63,318 | 71,730 | 78,505 | Proceeds from maturities of investments | 97,513 | 63,318 | 71,730 | ||||||||||||||
Other investments, primarily short-term, net | Other investments, primarily short-term, net | (29 | ) | 130 | (531 | ) | Other investments, primarily short-term, net | 148 | (29 | ) | 130 | |||||||||||
Capital expenditures on premises and equipment | Capital expenditures on premises and equipment | (3,011 | ) | (2,354 | ) | (1,377 | ) | Capital expenditures on premises and equipment | (3,724 | ) | (3,011 | ) | (2,354 | ) | ||||||||
Proceeds from sales of premises and equipment, subsidiaries and affiliates, and repossessed assets | Proceeds from sales of premises and equipment, subsidiaries and affiliates, and repossessed assets | 3,106 | 1,260 | 2,184 | Proceeds from sales of premises and equipment, subsidiaries and affiliates, and repossessed assets | 17,611 | 3,106 | 1,260 | ||||||||||||||
Business acquisitions | Business acquisitions | (3,677 | ) | (21,456 | ) | (3,953 | ) | Business acquisitions | (602 | ) | (3,677 | ) | (21,456 | ) | ||||||||
Net cash used in investing activities of continuing operations | Net cash used in investing activities of continuing operations | (79,231 | ) | (46,307 | ) | (59,122 | ) | Net cash used in investing activities of continuing operations | $ | (58,425 | ) | $ | (79,231 | ) | $ | (46,307 | ) | |||||
Cash flows from financing activities of continuing operations | Cash flows from financing activities of continuing operations | Cash flows from financing activities of continuing operations | ||||||||||||||||||||
Dividends paid | Dividends paid | (8,375 | ) | (5,773 | ) | (3,676 | ) | Dividends paid | $ | (9,188 | ) | $ | (8,375 | ) | $ | (5,773 | ) | |||||
Issuance of common stock | Issuance of common stock | 912 | 686 | 483 | Issuance of common stock | 1,400 | 912 | 686 | ||||||||||||||
Issuance of mandatorily redeemable securities of parent trusts | Issuance of mandatorily redeemable securities of parent trusts | — | 1,600 | — | Issuance of mandatorily redeemable securities of parent trusts | — | — | 1,600 | ||||||||||||||
Redemption of mandatorily redeemable securities of parent trusts | Redemption of mandatorily redeemable securities of parent trusts | — | (700 | ) | — | Redemption of mandatorily redeemable securities of parent trusts | — | — | (700 | ) | ||||||||||||
Redemption of mandatorily redeemable securities of subsidiary trusts | Redemption of mandatorily redeemable securities of subsidiary trusts | — | (625 | ) | (400 | ) | Redemption of mandatorily redeemable securities of subsidiary trusts | — | — | (625 | ) | |||||||||||
Redemption of preferred stock, net | Redemption of preferred stock, net | — | (275 | ) | (125 | ) | Redemption of preferred stock, net | — | — | (275 | ) | |||||||||||
Treasury stock acquired | Treasury stock acquired | (779 | ) | (2,416 | ) | (5,483 | ) | Treasury stock acquired | (12,794 | ) | (779 | ) | (2,416 | ) | ||||||||
Stock tendered for payment of withholding taxes | Stock tendered for payment of withholding taxes | (511 | ) | (499 | ) | (475 | ) | Stock tendered for payment of withholding taxes | (696 | ) | (511 | ) | (499 | ) | ||||||||
Issuance of long-term debt | Issuance of long-term debt | 75,764 | 67,054 | 39,520 | Issuance of long-term debt | 68,852 | 75,764 | 67,054 | ||||||||||||||
Payments and redemptions of long-term debt | Payments and redemptions of long-term debt | (49,686 | ) | (45,800 | ) | (47,169 | ) | Payments and redemptions of long-term debt | (52,364 | ) | (49,686 | ) | (45,800 | ) | ||||||||
Change in deposits | Change in deposits | 65,818 | 42,136 | 30,554 | Change in deposits | 27,912 | 65,818 | 42,136 | ||||||||||||||
Change in short-term borrowings and investment banking and brokerage borrowings | (4,363 | ) | 6,647 | 11,988 | ||||||||||||||||||
Change in short-term borrowings | Change in short-term borrowings | 10,163 | (4,363 | ) | 6,647 | |||||||||||||||||
Contractholder fund deposits | Contractholder fund deposits | 11,797 | 8,346 | 8,548 | Contractholder fund deposits | 349 | 11,797 | 8,346 | ||||||||||||||
Contractholder fund withdrawals | Contractholder fund withdrawals | (7,266 | ) | (5,976 | ) | (5,815 | ) | Contractholder fund withdrawals | (351 | ) | (7,266 | ) | (5,976 | ) | ||||||||
Net cash provided by financing activities of continuing operations | Net cash provided by financing activities of continuing operations | 83,311 | 64,405 | 27,950 | Net cash provided by financing activities of continuing operations | $ | 33,283 | $ | 83,311 | $ | 64,405 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | 731 | 579 | 98 | Effect of exchange rate changes on cash and cash equivalents | $ | (1,840 | ) | $ | 731 | $ | 579 | ||||||||||
Discontinued operations | ||||||||||||||||||||||
Net cash used in discontinued operations | — | — | (237 | ) | ||||||||||||||||||
Proceeds from sale of stock by subsidiary | — | — | 4,093 | |||||||||||||||||||
Discontinued Operations | Discontinued Operations | |||||||||||||||||||||
Net cash (used in) provided by discontinued operations | Net cash (used in) provided by discontinued operations | $ | (46 | ) | $ | (128 | ) | $ | 8 | |||||||||||||
Change in cash and due from banks | Change in cash and due from banks | 2,407 | 3,823 | (1,189 | ) | Change in cash and due from banks | $ | 4,817 | $ | 2,407 | $ | 3,823 | ||||||||||
Cash and due from banks at beginning of period | Cash and due from banks at beginning of period | 21,149 | 17,326 | 18,515 | Cash and due from banks at beginning of period | $ | 23,556 | $ | 21,149 | $ | 17,326 | |||||||||||
Cash and due from banks at end of period | Cash and due from banks at end of period | $ | 23,556 | $ | 21,149 | $ | 17,326 | Cash and due from banks at end of period | $ | 28,373 | $ | 23,556 | $ | 21,149 | ||||||||
Supplemental disclosure of cash flow information for continuing operations | Supplemental disclosure of cash flow information for continuing operations | Supplemental disclosure of cash flow information for continuing operations | ||||||||||||||||||||
Cash paid during the period for income taxes | Cash paid during the period for income taxes | $ | 6,808 | $ | 6,113 | $ | 6,834 | Cash paid during the period for income taxes | $ | 8,621 | $ | 6,808 | $ | 6,113 | ||||||||
Cash paid during the period for interest | Cash paid during the period for interest | $ | 18,544 | $ | 15,732 | $ | 20,226 | Cash paid during the period for interest | 32,081 | $ | 18,544 | $ | 15,732 | |||||||||
Non-cash investing activities | Non-cash investing activities | Non-cash investing activities | ||||||||||||||||||||
Transfers to repossessed assets | Transfers to repossessed assets | $ | 1,046 | $ | 1,077 | $ | 1,180 | Transfers to repossessed assets | $ | 1,268 | $ | 1,046 | $ | 1,077 | ||||||||
See Notes to the Consolidated Financial Statements.
106
Citigroup Inc.CITIBANK, N.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2005 | 2004(1) | ||||||
| (In millions of dollars) | |||||||
Assets | ||||||||
Cash and due from banks | $ | 15,706 | $ | 13,354 | ||||
Deposits at interest with banks | 22,704 | 21,756 | ||||||
Federal funds sold and securities purchased under agreements to resell | 15,187 | 15,637 | ||||||
Trading account assets (including $600 and $389 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | 86,966 | 97,697 | ||||||
Investments (including $2,122 and $2,484 pledged to creditors at December 31, 2005 and December 31, 2004, respectively) | 124,147 | 108,780 | ||||||
Loans, net of unearned income | 386,565 | 378,100 | ||||||
Allowance for loan losses | (6,307 | ) | (7,897 | ) | ||||
Total loans, net | $ | 380,258 | $ | 370,203 | ||||
Goodwill | 9,093 | 9,593 | ||||||
Intangible assets | 10,644 | 10,557 | ||||||
Premises and equipment, net | 5,873 | 6,288 | ||||||
Interest and fees receivable | 5,722 | 5,250 | ||||||
Other assets | 30,197 | 35,414 | ||||||
Total assets | $ | 706,497 | $ | 694,529 | ||||
Liabilities | ||||||||
Non-interest-bearing deposits in U.S. offices | $ | 23,464 | $ | 22,399 | ||||
Interest-bearing deposits in U.S. offices | 112,264 | 102,376 | ||||||
Non-interest-bearing deposits in offices outside the U.S. | 28,738 | 24,443 | ||||||
Interest-bearing deposits in offices outside the U.S. | 321,524 | 309,784 | ||||||
Total deposits | $ | 485,990 | $ | 459,002 | ||||
Trading account liabilities | 46,812 | 56,630 | ||||||
Purchased funds and other borrowings | 48,653 | 47,160 | ||||||
Accrued taxes and other expense | 9,047 | 10,970 | ||||||
Long-term debt and subordinated notes | 34,404 | 41,038 | ||||||
Other liabilities | 25,327 | 25,588 | ||||||
Total liabilities | $ | 650,233 | $ | 640,388 | ||||
Stockholder's equity | ||||||||
Preferred stock ($100 par value) | $ | — | $ | 1,950 | ||||
Capital stock ($20 par value) standing shares: 37,534,553 in each period | 751 | 751 | ||||||
Surplus | 27,244 | 25,972 | ||||||
Retained earnings | 30,651 | 25,935 | ||||||
Accumulated other changes in equity from nonowner sources(2) | (2,382 | ) | (467 | ) | ||||
Total stockholder's equity | $ | 56,264 | $ | 54,141 | ||||
Total liabilities and stockholder's equity | $ | 706,497 | $ | 694,529 | ||||
See Notes to the Consolidated Financial Statements.
107
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). The Company consolidates subsidiaries in which it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control. Entities where the Company holds 20% to 50% of the voting rights and/or has the ability to exercise significant influence, 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.revenue. Income from investments in less than 20%-owned companies is recognized when dividends are received. As discussed below, Citigroup consolidates entities deemed to be variable interest entities (VIEs) when Citigroup is determined to be the primary beneficiary under FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" (FIN 46-R).beneficiary. Gains and losses on the 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.revenue.
Citibank, N.A.
The Company recognizesCitibank, N.A. is 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 indirectcommercial bank and wholly owned subsidiary of Citigroup on December 31, 2001). Following the distribution, Citigroup began reporting TPC separately as discontinued operations. SeeInc. Citibank's principal offerings include credit cards, consumer finance and retail banking products and services; investment banking, commercial banking, cash management, trade finance and e-commerce products and services; and private banking products and services.
�� The Company includes a balance sheet and statement of changes in stockholder's equity (see Note 328 to the Consolidated Financial Statements on page 169) for additional discussion of discontinued operations.Citibank, N.A. to provide information about this entity to shareholders and international regulatory agencies.
Certain amounts in prior years have been reclassified to conform to the current year's presentation.
Variable Interest Entities
An entity is referred to as a variable interest entity (VIE) if it meets the criteria outlined in FASB Interpretation No. 46-R, "Consolidation of Variable Interest Entities (revised December 2003)" (FIN 46-R), which are: (1) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has 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.
In addition, as specified in FIN 46-R, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE, 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.
Along with the VIEs that are consolidated in accordance with these guidelines, the Company has significant variable interests in other VIEs that are not consolidated because the Company is not the primary beneficiary. These include multi-seller finance companies, collateralized debt obligations (CDOs), many structured finance transactions, and various investment funds. All other entities not deemed to be VIEs, with which the Company has involvement, are evaluated for consolidation under ARB No. 51, "Consolidated Financial Statements," and SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries" (SFAS 94).
Foreign Currency Translation
Assets and liabilities denominated in non-U.S. dollarforeign currencies are translated into U.S. dollar equivalentsdollars 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 operationsincome 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 incomerevenue along with the 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.
InvestmentsInvestment Securities
Investments include fixed maturityincome and equity securities. Fixed maturitiesincome instruments 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-redeemablenonredeemable preferred stocks. Fixed maturitiesincome investments 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 maturityincome securities and marketable equity securities classified as "available-for-sale" are carried at fair value, which is determined based onupon quoted market prices when available, or ifavailable. If quoted market prices are not available, on discounted expected cash flows using market rates commensurate with the credit quality and maturitycharacteristics of the investment are used 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 maturitiesincome that areis in default or on which it is likely that future interest payments will not be made as scheduled. Fixed maturitiesincome subject to prepayment risk areis 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
108
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.revenue. 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 isprices are 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 a 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
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
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
Trading Account Assetsaccount assets and Liabilities,liabilities, including securities, commodities and derivatives, are carried at fair value. Fair value which is determined based upon quoted prices when available, or under an alternative approach such as matrix or model pricing when market prices are not readily available. If quoted market prices are not available for fixed maturityincome 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, 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.revenue.
Commodities are accounted for on a lower of cost or market (LOCOM) basis and include physical quantities of commodities involving future settlement or delivery, and relateddelivery. 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 of derivative contracts reflect cash the Company has paid or received (for example, option premiums and cash margin in connection with credit support agreements). 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 prohibitednot recognized 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. The Company defers trade date gains orand losses on derivative transactions where the fair value is not determined based upon observable market transactions and market data. The deferral is recognized in income when the market data becomes observable or over the life of the transaction.
Commissions, Underwriting, and Principal Transactions
Commissions, Underwriting, and Principal Transactions revenues and related expenses are recognized in income on a trade-date basis.
Consumer Loans
Consumer Loans include loans and leases managed by the Global Consumer business and thePrivate Bank. As a general rule, interest accrual ceases for open-end revolving and closed-end installment and real estate loans interest accrual ceases when payments are no later than 90 days contractually past due, except for certain open-end revolving products (e.g.,due. For credit cards), wherecards, however, the Company accrues interest until payments are 180 days contractually past due and reversereverses the interest and fees earned, but not collected.
As a general rule, unsecured closed-end installment loans that becomeare charged off at 120 days contractually past due and unsecured open-end (revolving) loans that becomeare charged off at 180 contractually days contractually past due are charged-off.due. Loans secured with non-real-estate collateral are written down to the estimated value of the collateral, less costs to sell, at 120 days past due. Real-estate secured loans (both open- and closed-end) are written down to the estimated value of the property, less costs to sell, no later thanat 180 days past due.
In certainConsumer Finance consumer businesses in North America,the U.S., secured real estate loans are written down to the estimated value of the property, less costs to sell, at the earlier of the receipt of title or 12 months in foreclosure (which(a process that must commence when payments are no later than 120 days contractually past due). Closed-end loans secured by non-real-estate collateral are written
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down to the estimated value of the collateral, less costs to sell, when payments are no later thanat 180 days contractually past due. Unsecured loans (both open- and closed-end) are charged-off when the loan becomescharged off at 180 days contractually past due and 180 days from the last payment, but in no event can these loans exceed 360 days contractually past due.
Certain Western European businesses have exceptions to these charge-off policies due to the local environment in which these businesses operate.
Unsecured loans in bankruptcy are charged-off within 30 days of notification of filing by the bankruptcy court or within the contractual write-off periods, whichever occurs earlier. In the North AmericanU.S.Consumer Finance business, unsecured loans in bankruptcy are charged-offcharged off when they are 30 days contractually past due.
Commercial Business which is included withinRetail Banking, includes loans and leases made principally to small- and middle-market businesses.Commercial Business loans are placed on a non-accrual basis when it is determined that the payment of interest or principal is doubtful of collection or when interest or principal ispayments are past due for 90 days or more, except when the loan is well-securedwell secured and in the process of collection.
Corporate Loans
Corporate Loans represent loans and leases managed by Global Corporate and Investment Bank (GCIB).the CIB. Corporate loans are identified as impaired and placed on a cash (non-accrual) 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,past due, except when the loan is well-securedwell secured and in the process of collection. Any interest accrued on impaired corporate loans and leases 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 represent direct financing leases and also include leveraged leases. Unearned income is amortized under a method that 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.revenue.
Loans Held-for-Sale
Credit cardCorporate and other receivables and mortgageconsumer loans originatedthat have been identified for sale are classified as loans held-for-sale whichwithin other assets and are accounted for at the lower of cost or market value, and reported in other assets with net credit lossesany write-downs or subsequent recoveries charged to other income.revenue.
Allowance for CreditLoan Losses
Allowance for Credit Lossesloan 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 overall portfolio. Additions to the allowance are made by means ofthrough 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 and Commercial Business portfolios, larger-balance, non-homogeneousnon-homogenous exposures representing significant individual credit exposures are evaluated based upon the borrower's overall financial condition, resources, and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. Reserves are established for these loans based upon an estimate of probable losses for the individual larger-balance, non-homogeneous loans deemed to be impaired. This estimate considers all available evidence including, as appropriate, the present value of the expected future cash flows discounted at the loan's contractual effective rate, the secondary market value of the loan and the fair value of collateral less disposal costs. 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 analyses. These analyses consider historical and projectedproject 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.
A similar approach is also used for calculating a reserve for the expected losses related to unfunded loan commitments and standby letters of credit. This reserve is classified on the balance sheet with other liabilities.
For Consumer,consumer loans (excluding Commercial Business loans), each portfolio of smaller-balance, homogeneous loans, homogenous loans—including consumer mortgage, installment, revolving credit, and most other consumer loans, 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 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; trends in volumes and terms of loans; an evaluation of overall credit quality; 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 necessary110
Allowance for orderly debt servicing.
Transfers of Financial AssetsUnfunded Lending Commitments
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 Balance Sheet. If the conditions for sale are not met, the transfer is considered to be a secured borrowing, and the assets remain on the Company's Consolidated Balance Sheet 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.
See Note 12similar approach to the Consolidated Financial Statements.
Securitizations
Citigroupallowance for loan losses is used for calculating a reserve for the expected losses related to unfunded loan commitments and its subsidiaries securitize primarily credit card receivables and mortgages. Other types of assets securitized include corporate debt securities, auto loans, and student loans.
After securitizations of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the trusts. The Company also arranges for third parties to provide credit enhancement to the trusts, including cash collateral accounts, subordinated securities, andstandby letters of credit. As specified in certain of the sale agreements, the net revenue collected each monthThis reserve is accumulated up to a predetermined maximum amount, and is available over the remaining term of that transaction to make payments of yield, fees, and transaction costs in the event that net cash flows from the receivables are not sufficient. When the predetermined amount is reached, net revenue is passed directly to the Citigroup subsidiary that sold the receivables.
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 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 trading account assets. 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 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 inbalance sheet within 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 not available, the Company estimates the fair value of these retained interests by determining the present value of expected future cash flows using modeling techniques that incorporate management's best estimates of key assumptions, including prepayment 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. If the securitization entity is determined to be a VIE, the Company consolidates the VIE if it is the primary beneficiary.
For all other securitization entities determined not to be VIEs in which Citigroup participates, a consolidation decision is made by evaluating 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.
Variable Interest Entities
An entity is subject to FIN 46-R and is called a 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 under 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.
In addition to the VIEs that are consolidated in accordance with FIN 46-R, the Company has significant variable interests in certain other VIEs that are not consolidated because the Company is not the primary beneficiary. These include multi-seller finance companies, collateralized debt obligations (CDOs), many structured finance transactions, and various investment funds.liabilities.
Mortgage Servicing Rights (MSRs)
Mortgage Servicing Rights (MSRs), which are included within intangible assets onin the Consolidated Balance Sheet, 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 Company estimates the fair value of MSRs by discounting projected net servicing cash flows of the remaining servicing portfolio and considering market loan prepayment predictions and other economic factors. The Company uses fair values that 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 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 rateinterest-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.
Additional information on the Company's MSRs can be found in Note 13 to the Consolidated Financial Statements on page 128.
Goodwill
Goodwill represents an acquired company's acquisition cost lessover the fair value of net tangible and intangible assets. Effective January 1, 2002, the Company no longer amortizes goodwill.assets acquired. 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
Intangible Assets, Assets—including MSRs, core deposit intangibles, present value of future profits, purchased credit card relationships, other customer relationships, and other intangible assets, assets—are amortized over their estimated useful lives unless they are deemed to have indefinite useful lives. Upon 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. 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, whichrepossessed assets. This is reported in other assets, net of a valuation allowance for selling costs and net declines in value as appropriate.
Securitizations
The Company primarily securitizes credit card receivables and mortgages. Other types of securitized assets include corporate debt securities, auto loans, and student loans.
There are two key accounting determinations that must be made relating to securitizations. First, in the case where Citigroup originated or owned the financial assets transferred to the securitization entity, a decision must be made as to whether that transfer is considered a sale under Generally Accepted Accounting Principles. If it is a sale, the transferred assets are removed from the Company's Consolidated Balance Sheet with a gain or loss recognized. Alternatively, when the transfer would not be considered a sale but rather a financing, the assets will remain on the Company's Balance Sheet with an offsetting liability recognized in the amount of received proceeds.
Second, determination must be made as to whether the securitization entity is sufficiently independent. If so, the entity would not be included in the Company's Consolidated Financial Statements. For each securitization entity with which it is involved, the Company makes a determination of whether the entity should be considered a subsidiary of the Company and be included in its 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 accounting requirements to be a QSPE, the securitization entity is not consolidated by the seller of transferred assets. If the securitization entity is determined to be a VIE, the Company consolidates the VIE if it is the primary beneficiary.
For all other securitization entities determined not to be VIEs in which Citigroup participates, a consolidation decision is made by evaluating 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.
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 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 an historical cost basis and classified as consumer loans. Retained interests in securitized mortgage loans are classified as trading account assets. 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 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 revenue.
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The Company values its securitized retained interest at fair value using either financial models, quoted market prices, or sales of similar assets. Where quoted market prices are not available, the Company estimates the fair value of these retained interests by determining the present value of expected future cash flows using modeling techniques that incorporate management's best estimates of key assumptions, including prepayment speeds, credit losses, and discount rates.
Additional information on the Company's securitization activities can be found in "Off-Balance Sheet Arrangements" on page 89 and in Note 13 to the Consolidated Financial Statements on page 128.
Transfers of Financial Assets
For a transfer of financial assets to be considered a sale, the assets must have been isolated from the Company, even in bankruptcy or other receivership; the purchaser must have the right to sell the assets transferred, or the purchaser must be a QSPE. If these sale requirements are met, the assets are removed from the Company's Consolidated Balance Sheet. If the conditions for sale are not met, the transfer is considered to be a secured borrowing, and the assets remain on the Consolidated Balance Sheet. The sale proceeds are recognized as the Company's liability. A legal opinion on a sale is generally obtained for complex transactions or where the Company has continuing involvement with assets transferred or with the securitization entity. Those opinions must state that the asset transfer is considered a sale and that the assets transferred would not be consolidated with the other assets in the event of the Company's insolvency.
See Note 13 to the Consolidated Financial Statements on page 128.
Risk Management Activities—Derivatives Used forFor 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, a derivative must be highly effective in offsetting the risk designated as being hedged. The hedge relationship must also be 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 will be assessed and ineffectiveness measured. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis, typically using quantitative measures of correlation with hedge ineffectiveness measured and recorded in current earnings. 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.revenue.
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,revenue, together with changes in the fair value of the related hedged item. TheThese are expected to, and generally do, offset each other. Any 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.flows come into earnings. To the extent these derivatives are not effective, changes in their fair values are immediately included in other income.revenue. Citigroup's cash flow hedges primarily include hedges of loans, rollovers of short-term liabilities, and foreign currency denominated funding. Cash flow hedgesThey also include hedges of certain forecasted transactions up to a maximum term 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 for hedge accounting purposes are also carried at fair value, with changes in value included in trading account income or other income.revenue. Citigroup often utilizesuses economic hedges when qualifying for hedge accounting would be too complex or operationally burdensome, such asburdensome; examples are hedges of the credit risk component of commercial loans and loan commitments. Citigroup periodically evaluates its hedging strategies in other areas, such as mortgage servicing rights, and may designate either a qualifying hedge or an economic hedge, after considering the relative cost and benefits. Economic hedges are also utilizedemployed when the hedged item itself is marked to market through current earnings, such as hedges of one-to-four family mortgage loan commitments and non-U.S. dollar debt.
For those hedge relationships that are terminated or when hedge designations are removed, 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 in the fair value of the hedged item remain as part of the basis of the asset or liability and are ultimately reflected 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
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in earnings of future periods when earnings are also affected by the variability of the hedged cash flows.flows flow into earnings. However, 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.revenue.
Insurance PremiumsEmployee Benefits Expense
Insurance Premiums from long-duration contracts, principally life insurance,Employee Benefits Expense includes current service costs of pension and other postretirement benefit plans, which are earned when due as determined byaccrued on a current basis; contributions and unrestricted awards under other employee plans; the respective contract. Premiums from short-duration insurance contracts, principally credit lifeamortization of restricted stock awards; and accident and health policies, are earnedcosts of other employee benefits.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), allows companies to recognize compensation expense over the related contract period.service period based on the grant date fair value of the stock award.
Prior to January 1, 2003, the Company accounted for stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations (APB 25). Under APB 25, there is generally no charge to earnings for employee stock option awards because the options granted under these plans have an exercise price equal to the common stock on the grant date. Alternatively, on January 1, 2003, the Company adopted the fair value provisions of SFAS 123. See "Accounting Changes" on page 114.
Deferred Policy Acquisition Costs (DACs)Income Taxes
Deferred Policy Acquisition Costs (DACs),taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not.
Commissions, Underwriting, and Principal Transactions
Commissions, Underwriting, and Principal Transactions revenues and related expenses are recognized in income on a trade-date basis.
Earnings Per Share
Earnings per share is computed after recognition of preferred stock dividend requirements. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding restricted stock. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. It is computed after giving consideration to the weighted average dilutive effect of the Company's stock options and the shares issued under the Company's Capital Accumulation Program and other restricted stock plans.
Use of Estimates
Management must make estimates and assumptions that affect the Consolidated Financial Statements and the related footnote disclosures. While management makes its best judgment, actual results could differ from those estimates.
Cash Flows
Cash equivalents are defined as those amounts included in othercash and due from banks. Cash flows from risk management activities are classified in the same category as the related assets representand liabilities.
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Accounting for Conditional Asset Retirement Obligations
On December 31, 2005, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" (FIN 47). The Interpretation requires entities to estimate and recognize a liability for costs associated with the retirement or removal of acquiring new business, principally commissions,an asset from service, regardless of the uncertainty of timing or whether performance will be required. For Citigroup, this applies to certain underwritingreal estate restoration activities in the Company's branches and agency expenses, and the costoffice space, most of issuing policies.which are rented under operating lease agreements.
For traditional lifeThe impact of adopting this interpretation was a $49 million after-tax ($80 million pretax) charge to earnings, which was reported on the Consolidated Statement of Income as the cumulative effect of accounting change (net of taxes). Had Citigroup adopted FIN 47 at the inception of leases requiring restoration, pro forma net income and health business, including term insurance, DAC is amortizedEPS would have been the amounts shown below.
2005 | 2004 | 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions of dollars, except per share amounts | |||||||||||
Cumulative effect of accounting change related to adoption of FIN 47, net of taxes | As reported Pro forma | $ | 49 2 | $ | — 4 | $ | — 7 | ||||
Net income | As reported Pro forma | $ | 24,589 24,636 | $ | 17,046 17,042 | $ | 17,853 17,846 | ||||
Basic earnings per share | As reported Pro forma | $ | 4.84 4.85 | $ | 3.32 3.32 | $ | 3.49 3.49 | ||||
Diluted earnings per share | As reported Pro forma | $ | 4.75 4.76 | $ | 3.26 3.26 | $ | 3.42 3.42 |
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
On January 1, 2005, Statement of Position (SOP) No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" (SOP 03-3), was adopted for loan acquisitions. SOP 03-3 requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3.
SOP 03-3 limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the premium-paying periodsinvestor's initial investment in the loan. The excess of the related policies,contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in proportioncash flows expected to the ratiobe collected are recognized prospectively through an adjustment of the annual premium revenueloan's yield over its remaining life. Decreases in expected cash flows are recognized as impairments.
Consolidation of Variable Interest Entities
On January 1, 2004, the Company adopted FIN 46-R, which includes substantial changes from the original FIN 46. Included in these changes, the calculation of expected losses and expected residual returns has been altered to reduce the total anticipated premium revenueimpact of decision maker and guarantor fees in the calculation of expected residual returns and expected losses. In addition, the definition of a variable interest has been changed in the revised guidance. FIN 46 and FIN 46-R change the method of determining whether certain entities, including securitization entities, should be included in the Company's Consolidated Financial Statements. The Company has determined that in accordance with SFAS No. 60, "AccountingFIN 46-R, the multi-seller finance companies administered by the Company should continue not to be consolidated. However, the trust preferred security vehicles are now deconsolidated. The cumulative effect of adopting FIN 46 was an increase to assets and Reporting by Insurance Enterprises" (SFAS 60), which is generally over 5-20 years. Assumptions asliabilities of approximately $1.6 billion, primarily due to certain structured finance transactions.
For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities, and noncontrolling interests of the VIE are initially measured at their carrying amounts with any difference between the net amount added to the anticipated
premiums are madebalance 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 interests of policythe VIE. In October 2003, the FASB announced that the effective date of FIN 46 was deferred from July 1, 2003 to periods ending after December 15, 2003 for VIEs created prior to February 1, 2003. With the exception of the deferral related to certain investment company subsidiaries, Citigroup elected to implement the remaining provisions of FIN 46-R in the 2003 third quarter, resulting in the consolidation of VIEs increasing both total assets and total liabilities by approximately $2.1 billion. The implementation of FIN 46-R encompassed a review of thousands of entities to determine the impact of adoption, and considerable judgment was used in evaluating whether or not a VIE should be consolidated.
The Company administers several third party owned, special purpose, multi-seller finance companies (the "conduits") that purchase pools of trade receivables, credit cards, and other financial assets from third party clients of the Company. The Company has no ownership interest in the conduits, but as administrator, provides them with accounting, funding, and operations services. Generally, 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 conduits by providing collateral in the form of excess assets or residual interest. 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 loss protection in the form of letters of credit and other guarantees. During 2003, to comply with FIN 46-R, many of the conduits issued "first loss" subordinated notes, such that one third party investor in each conduit would be deemed the primary beneficiary and would consolidate that conduit.
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Some of the Company's private equity subsidiaries may invest in venture capital entities that may also be subject to FIN 46-R. The Company accounts for its venture capital activities in accordance with the Investment Company Audit Guide (Audit Guide). The FASB has deferred adoption of FIN 46-R for non-registered investment companies that apply the Audit Guide. The FASB has also permitted registered investment companies to defer consolidation of VIEs with which they are involved until a Statement of Position on the scope of the Audit Guide is finalized, which will amend the definition of an investment company in the Audit Guide.
Following issuance of the Statement of Position, the FASB will consider further modification to FIN 46-R to provide an exception for companies that qualify to apply the revised Audit Guide. Following issuance of the revised Audit Guide, the Company will assess the effect of such guidance on its private equity business.
The Company may provide administrative, trustee and/or acquisitioninvestment management services to numerous personal estate trusts, which are considered VIEs under FIN 46-R, but are not consolidated. See Note 13 to the Consolidated Financial Statements on page 128.
Postretirement Benefits
In May 2004, the FASB issued FASB Staff Position FAS No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS 106-2), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act of 2003). The Act of 2003 established a prescription drug benefit for Medicare-eligible participants, as well as a federal subsidy of 28% of prescription drug claims for sponsors of retiree health care plans with drug benefits that are consistently appliedat least actuarially equivalent to those offered under Medicare Part D. If a plan qualifies, FSP FAS 106-2 requires plan sponsors to disclose the effect of the subsidy on the net periodic expense and the accumulated postretirement benefit obligation in their financial statements. Plan sponsors that initially elected to defer accounting for the effects of the subsidy are allowed the option of retroactive application to the date of enactment or prospective application from the date of adoption.
In the third quarter of 2004, Citigroup reflected the effects of the subsidy in its financial statements retroactive to January 1, 2004 in accordance with FSP FAS 106-2. The effect of adopting FSP FAS 106-2 is included in Note 21 to the Company's Consolidated Financial Statements on page 147.
Accounting for Loan Commitments Accounted for as Derivatives
On April 1, 2004, the Company adopted the SEC's Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" (SAB 105), which specifies that servicing assets embedded in commitments for loans to be held for sale should be recognized only when the servicing asset has been contractually separated from the associated loans by sale or securitization. The impact of implementing SAB 105 across all of the Company's business was a delay in recognition of $35 million pretax in the second quarter of 2004.
Profit Recognition on Bifurcated Hybrid Instruments
On January 1, 2004, Citigroup revised the application of Derivatives Implementation Group (DIG) Issue B6, "Embedded Derivatives: Allocating the Basis of a Hybrid Instrument to the Host Contract of the Embedded Derivative." In December 2003, the SEC staff gave a speech that clarified the accounting for derivatives embedded in financial instruments ("hybrid instruments") to preclude the recognition of any profit on the trade date for hybrid instruments that must be bifurcated for accounting purposes. The trade-date revenue must instead be amortized over the life of the policy.hybrid instrument. The impact of this change in application was an approximately $256 million pretax reduction in revenue, net of amortization, across all of the Company's businesses during 2004. This revenue is recognized over the life of the transactions, which on average is approximately four years.
Adoption of SFAS 132-R
For universal life and corporate-owned life insurance products, DAC is amortized at a constant rate based uponIn December 2003, the present value of estimated gross profits expected to be realized in accordance withFASB issued SFAS No. 97, "Accounting132 (Revised 2003), "Employers' Disclosures About Pensions and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from Sale of Investments"Other Postretirement Benefits" (SFAS 97)132-R), which is generally over 16-25 years. Actual profits can vary from management's estimates, resulting in increases or decreasesretains the disclosure requirements of SFAS 132 and requires additional disclosure in the ratefinancial statements about the assets, obligations, cash flows, and net periodic benefit cost of amortization. ChangesU.S. defined benefit pension and postretirement plans for periods ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. The new disclosure requirements for foreign retirement plans apply to fiscal years ending after June 15, 2004, although the Company elected to adopt it for these plans as of December 31, 2003. Certain disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. The annual disclosures are included in estimates of gross profits result in retrospective adjustmentsNote 21 to earnings by a cumulative charge or credit to income.the Consolidated Financial Statements on page 147.
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 OriginatingExit or Acquiring Loans and Initial DirectDisposal Activities
On January 1, 2003, Citigroup adopted SFAS No. 146, "Accounting for Costs of Leases"Associated with Exit or Disposal Activities" (SFAS 91), which is 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 using146). SFAS 146 requires that 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, resultingliability for costs associated with exit or disposal activities, other than in a new amortization pattern overbusiness combination, be recognized when the remaining estimated life ofliability is incurred. In the business.
Deferred policy acquisitionpast, the 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
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 forcewere recognized 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. The impact of adopting SFAS 146 was not material.
Derivative Instruments and Hedging Activities
On July 1, 2003, the Company adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). In particular, SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have a material impact on the Company's acquisitionConsolidated Financial Statements.
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Liabilities and Equity
On July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of insurance businessesBoth Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an issuer measures and classifies certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. It did not have a material impact on the Company's Consolidated Financial Statements.
Stock-Based Compensation
On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, prospectively for all awards granted, modified, or settled after December 31, 2002. The prospective method is one of the adoption methods provided for under SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" (SFAS 148) issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the employees' service period (which is 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 APB 25 (the alternative method of accounting), under SFAS 123, an offsetting increase to stockholders' equity is recorded equal to the amount of compensation expense. Earnings per share dilution is recognized as well.
Had the Company applied SFAS 123 prior to 2003 in accounting for all of the Company's stock option plans, including the Citigroup 2003 Stock Purchase Program, net income and net income per share would have been the pro forma amounts indicated below:
2005 | 2004 | 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions of dollars, except per share amounts | |||||||||||
Compensation expense related to stock option plans, net of tax | As reported Pro forma | $ | 84 163 | $ | 173 325 | $ | 110 365 | ||||
Net income | As reported Pro forma | $ | 24,589 24,510 | $ | 17,046 16,894 | $ | 17,853 17,598 | ||||
Basic earnings per share | As reported Pro forma | $ | 4.84 4.82 | $ | 3.32 3.29 | $ | 3.49 3.44 | ||||
Diluted earnings per share | As reported Pro forma | $ | 4.75 4.73 | $ | 3.26 3.23 | $ | 3.42 3.37 |
During the first quarter of 2004, the Company changed its option valuation method from the Black-Scholes model to the binomial method, which did not have a material impact on the Company's Consolidated Financial Statements.
The Company has made changes to various stock-based compensation plan provisions for future awards. For example, in January 2005, the Company largely moved from granting stock options to granting restricted and deferred stock awards, unless participants elect to receive all or a portion of their award in the form of stock options. Thus, the majority of management options granted in 2005 were due to stock option elections and carried the same assumptions thatvesting period as the restricted or deferred stock awards in lieu of which they were usedgranted. Stock options granted in 2003 and 2004 have three-year vesting periods and six-year terms. In addition, the sale of underlying shares acquired upon exercise is restricted for computing-related liabilities where appropriate. The present valuea two-year period and pursuant to a stock ownership commitment, senior executives must retain 75% of future profits is amortizedthe shares they own and acquire from the Company over the contract period using current interest crediting ratesterm of their employment. Options granted in 2003 and thereafter do not have a reload feature; however, some previously granted options retain that feature.
See Note 20 to accrete interestthe Company's Consolidated Financial Statements on page 144.
Future Application of Accounting Standards
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and using amortization methodssupersedes APB 25. SFAS 123-R requires companies to measure and record compensation expense for stock options and other share-based payments based on the instruments' fair value reduced by expected forfeitures.
Citigroup adopted SFAS 123-R as of January 1, 2006, by using the modified prospective approach, which requires recognizing expense for options granted prior to the adoption date equal to the grant date fair value of the unvested amounts over their remaining vesting period. For unvested stock-based awards granted before January 1, 2003 ("APB 25 awards"), the Company will expense the incremental grant date fair value of the awards at the grant date over the remaining vesting period. The portion of fair value attributable to vested APB 25 awards is not recognized. The estimated impact of this change to Citigroup will be to recognize approximately $46 million (pretax) and $12 million (pretax) compensation expense for the unvested APB 25 awards in 2006 and 2007, respectively.
Citigroup grants restricted or deferred shares to eligible employees under its Capital Accumulation Program (CAP). The program provides that employees who meet certain age plus years-of-service requirements (retirement-eligible employees) may terminate active employment and continue vesting in their awards provided they comply with specified non-compete provisions. Citigroup had been amortizing the compensation cost of those awards over the full vesting periods. The SEC recently indicated that in the case of retirement-eligible employees, non-compete agreements would be a sufficient basis for amortizing these compensation costs over the full vesting period only if there was evidence, on an individual basis, that the non-compete compelled the employee to continue to work.
The Company currently is in discussions with the SEC regarding a number of practical implications concerning this matter, including, among other things, the adequacy of non-compete agreements as a basis for amortization. The Company also believes there may be other factors, including plan design changes, which may preserve the current features of the plan, including amortization of these expenses. If it is concluded that the compensation expense for awards granted to retirement-eligible employees must be recognized on the date of grant rather than over an associated service period, Citigroup may record an incremental charge to pretax earnings in the 2006 first quarter of approximately $700 million.
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Other-Than-Temporary Impairments of Certain Investments
On September 30, 2004, the FASB voted unanimously to delay the effective date of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments." The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that were delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-temporary impairment charge through earnings. On November 3, 2005, the FASB issued FASB Staff Position FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments," revising the guidance in EITF 03-1, which did not have a material impact on the Company's Consolidated Financial Statements. The disclosures required by EITF 03-1 are included in Note 5 to the Consolidated Financial Statements on page 121.
Accounting for Certain Hybrid Financial Instruments
On February 16, 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" (SFAS 155), an amendment of SFAS 140 and SFAS 133. SFAS 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under SFAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the Company's fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company's 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. The Company has not yet decided whether it will early adopt SFAS 155 effective January 1, 2006, and is still assessing the impact of this change in accounting.
Potential Amendments to Various Current Accounting Standards
The FASB is currently working on a number of amendments to the existing accounting standards governing asset transfers, securitizations, leveraged lease transactions, and fair value of financial instruments. Upon completion of these standards, the Company will need to reevaluate its accounting and disclosures. Due to the ongoing deliberations by the Board, the Company is unable to accurately determine the effect of future amendments or proposals at this time.
In addition, the FASB is currently working on a project that will change the accounting and reporting for pension and postretirement plans. Citigroup expects the new standard to require companies to record an asset or liability on the Consolidated Balance Sheet equal to the funded status of the plans. Any other plan assets or liabilities would be reflected net as an adjustment to stockholders' equity.
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Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement, as previously announced, Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed the acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of the transaction's closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million ($157 million pretax).
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in the Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total Citigroup has acquired 99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition, KorAm was a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion at the time of the acquisition. During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Electronic Financial Services Inc. (EFS) for $390 million. EFS is a provider of government-issued benefits payments and prepaid stored value cards used by state and federal government agencies, as well as of stored value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired Sears' Credit Card and Financial Products business (Sears), the eighth largest portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of the Sears portfolio are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot's private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of this portfolio acquisition are included in the Consolidated Financial Statements from July 2003 forward.
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3. Discontinued Operations
Sale of the Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for its broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. The business consisted of areas in which Citigroup already had full capabilities, including investment banking, institutional equity sales and trading, taxable fixed income sales and trading, and research. No gain or loss was recognized from this transaction. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business.")
In connection with this sale, Citigroup and Legg Mason entered into a three-year agreement under which Citigroup will continue to offer its clients Asset Management's products, will become the primary retail distributor of the Legg Mason funds managed by Legg Mason Capital Management Inc., and may also distribute other Legg Mason products. TraditionalThese products will be offered primarily through Citigroup's Global Wealth Management businesses,Smith Barney andPrivate Bank, as well as through Primerica and Citibank. The distribution of these products will be subject to applicable requirements of law and Citigroup's suitability standards and product requirements. For the eleven months ended November 30, 2005 and the years ended December 31, 2004 and 2003, the intercompany fees paid by the Asset Management Business to various other Citigroup businesses totaled approximately $180 million, $206 million, and $208 million, respectively. For the month ended December 31, 2005, these fees, of approximately $31 million, which were received from Legg Mason, are included in the Consolidated Statement of Income.
Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management Business. Results for all of the businesses included in the Sale of the Asset Management Business, including the gain, are reported as Discontinued Operations for all periods presented. Changes in the market value of the Legg Mason common and preferred shares since the closing of the transaction are included in the Consolidated Statement of Change in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to these securities, such as dividend revenue, are included in the results of Alternative Investments.
The following is summarized financial information for discontinued operations related to the Sale of the Asset Management Business:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 4,599 | $ | 1,383 | $ | 1,251 | |||
Income from discontinued operations | $ | 168 | $ | 203 | $ | 363 | |||
Gain on sale | 3,404 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 1,382 | 112 | 147 | ||||||
Income from discontinued operations, net of taxes | $ | 2,190 | $ | 91 | $ | 216 | |||
The following is a summary of the assets and liabilities of discontinued operations related to the Sale of the Asset Management Business as of December 1, 2005:
| December 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 96 | |
Investments | 3 | ||
Intangible assets | 776 | ||
Other assets | 563 | ||
Total assets | $ | 1,438 | |
Liabilities | |||
Other liabilities | $ | 575 | |
Total liabilities | $ | 575 | |
Sale of the Life Insurance & Annuities Business
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life insurance business inMexico (which is amortized overnow included withinInternational Retail Banking). International operations included wholly owned insurance companies in the periodUnited Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of anticipated premiums, universal lifethe Life Insurance and Annuities Business.")
In connection with the Sale of the Life Insurance and Annuities Business, Citigroup and MetLife entered into ten-year agreements under which Travelers Life & Annuity and MetLife products will be made available through certain Citigroup distribution channels. For the six months ended
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June 30, 2005 and the years ended December 31, 2004 and 2003, the commission fees related to the distribution of these products totaled approximately $230 million, $426 million, and $351 million, respectively. For the six months ended December 31, 2005, these fees, of approximately $200 million, which were received from MetLife, are included in relationCitigroup's Consolidated Statement of Income.
Results for all of the businesses included in the Sale of the Life Insurance and Annuities Business are reported as Discontinued Operations for all periods presented. The unrealized gain on the MetLife securities after the closing of the transaction are included in the Consolidated Statement of Changes in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to estimated gross profits,these securities, such as dividend revenue and annuity contracts employinghedging costs, are included in the results of Alternative Investments.
Summarized financial information for discontinued operations related to the Sale of the Life Insurance and Annuities Business is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 6,128 | $ | 5,172 | $ | 4,597 | |||
Income from discontinued operations | $ | 740 | $ | 1,243 | $ | 800 | |||
Gain on sale | 3,386 | — | — | ||||||
Provision for income taxes | 1,484 | 342 | 221 | ||||||
Income from discontinued operations, net of taxes | $ | 2,642 | $ | 901 | $ | 579 | |||
The following is a level effective yield methodology. The valuesummary of present valuethe assets and liabilities of future profitsdiscontinued operations related to the Sale of the Life Insurance and Annuities Business as of July 1, 2005, the date of the distribution:
| July 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 158 | |
Investments | 48,860 | ||
Intangible assets | 86 | ||
Other assets(1) | 44,123 | ||
Total assets | $ | 93,227 | |
Liabilities | |||
Federal funds purchased and securities loaned or sold under agreements to repurchase | $ | 971 | |
Other liabilities(2) | 82,842 | ||
Total liabilities | $ | 83,813 | |
Summarized financial information for all of the Company's discontinued operations is reviewed periodically for recoverabilityas follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 10,727 | $ | 6,555 | $ | 5,848 | |||
Income from discontinued operations | $ | 908 | $ | 1,446 | $ | 1,163 | |||
Gain on sale | 6,790 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 2,866 | 454 | 368 | ||||||
Income from discontinued operations, net of taxes | $ | 4,832 | $ | 992 | $ | 795 | |||
Cash flows from discontinued operations
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Cash flows from operating activities | $ | (3,313 | ) | $ | 1,284 | $ | (97 | ) | ||
Cash flows from investing activities | 2,504 | (4,704 | ) | (429 | ) | |||||
Cash flows from financing activities | 763 | 3,292 | 534 | |||||||
Net cash (used in) provided by discontinued operations | $ | (46 | ) | $ | (128 | ) | $ | 8 | ||
In addition to determine if any adjustment is required.the accounting policies outlined in Note 1 to the Consolidated Financial Statements on page 108, the following represents the policies specifically related to the Life Insurance and Annuities Business that was sold:
Separate and Variable AccountsProfit Recognition on Bifurcated Hybrid Instruments
Separate and Variable Accounts primarily represent fundsOn January 1, 2004, Citigroup revised the application of Derivatives Implementation Group (DIG) Issue B6, "Embedded Derivatives: Allocating the Basis of a Hybrid Instrument to the Host Contract of the Embedded Derivative." In December 2003, the SEC staff gave a speech that clarified the accounting for which investment income and investment gains and losses accrue directlyderivatives embedded in financial instruments ("hybrid instruments") to and investment risk is borne by,preclude the contractholders. Each account has specific investment objectives. The assets of each account are legally segregated and are not subject to claims that arise outrecognition of any other businessprofit on the trade date for hybrid instruments that must be bifurcated for accounting purposes. The trade-date revenue must instead be amortized over the life of the Company.hybrid instrument. The impact of this change in application was an approximately $256 million pretax reduction in revenue, net of amortization, across all of the Company's businesses during 2004. This revenue is recognized over the life of the transactions, which on average is approximately four years.
Adoption of SFAS 132-R
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers' Disclosures About Pensions and Other Postretirement Benefits" (SFAS 132-R), which retains the disclosure requirements of SFAS 132 and requires additional disclosure in the financial statements about the assets, obligations, cash flows, and net periodic benefit cost of U.S. defined benefit pension and postretirement plans for periods ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. The new disclosure requirements for foreign retirement plans apply to fiscal years ending after June 15, 2004, although the Company elected to adopt it for these accountsplans as of December 31, 2003. Certain disclosures required by this Statement are generally carried at market value. Amounts assessed to the contractholderseffective for management servicesinterim periods beginning after December 15, 2003. The annual disclosures are included in revenues. Deposits,Note 21 to the Consolidated Financial Statements on page 147.
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. In the past, the costs were recognized 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. The impact of adopting SFAS 146 was not material.
Derivative Instruments and Hedging Activities
On July 1, 2003, the Company adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). In particular, SFAS 149 clarifies under what circumstances a contract with an initial net investment incomemeets the characteristic of a derivative and realized investment gainswhen a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and losses for these accounts are excluded from revenues,did not have a material impact on the Company's Consolidated Financial Statements.
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Liabilities and related liability increases are excluded from benefits and expenses.
Insurance Policy and Claims ReservesEquity
Insurance PolicyOn July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Claims Reserves representEquity" (SFAS 150). SFAS 150 establishes standards for how an issuer measures and classifies certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for future insurance policy benefits. Insurance reserves for traditional life insurance, annuities,financial instruments entered into or modified after May 31, 2003, 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 7.03%, for annuity products and 2.5% to 7.0%, with a weighted average interest rate of 3.51%, for life products) applicable to these coverages, including adverse deviation. These assumptions consider Company experience and industry standards and may be revised if itotherwise is determined that future experience will differ substantially from that previously assumed.
Contractholder Funds
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 doeffective July 1, 2003. It did 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 1.0% to 8.05%, with a weighted average rate of 4.34%, for annuity products and 3.5% to 5.95%, with a weighted average interest rate of 4.34%, for life products), basedmaterial impact 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
Employee Benefits Expense includes prior and current service costs of pension and other postretirement benefit plans, which are accrued on a current basis, contributions and unrestricted awards under other employee plans, the amortization of restricted stock awards, and costs of other employee benefits.Consolidated Financial Statements.
Stock-Based Compensation
Prior to January 1, 2003, Citigroup accounted for stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations. Under APB 25, there is generally no charge to earnings for employee stock option awards because the options granted under these plans have an exercise price equal to the market value of the underlying common stock on the grant date. Alternatively, SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), allows companies to recognize compensation expense over the related service period based on the grant-date fair value of the stock award. Under both methods, upon issuance of previously unissued shares under employee plans, proceeds received in excess of par value are credited to additional paid-in capital. Upon issuance of treasury shares, the difference between the proceeds received and the average cost of treasury shares is recorded in additional paid-in capital. Under both methods, the dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. On January 1, 2003, the Company adopted the fair value provisionrecognition provisions of SFAS 123. See123, prospectively for all awards granted, modified, or settled after December 31, 2002. The prospective method is one of the adoption methods provided for under SFAS No. 148, "Accounting Changes" on page 89.for Stock-Based Compensation—Transition and Disclosure" (SFAS 148) issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the employees' service period (which is 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 APB 25 (the alternative method of accounting), under SFAS 123, an offsetting increase to stockholders' equity is recorded equal to the amount of compensation expense. Earnings per share dilution is recognized as well.
Had the Company applied SFAS 123 prior to 2003 in accounting for all of the Company's stock option plans, including the Citigroup 2003 Stock Purchase Program, net income and net income per share would have been the pro forma amounts indicated below:
| | 2005 | 2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars, except per share amounts | |||||||||||||
Compensation expense related to stock option plans, net of tax | As reported Pro forma | $ | 84 163 | $ | 173 325 | $ | 110 365 | |||||||
Net income | As reported Pro forma | $ | 24,589 | $ | 17,046 16,894 | $ | 17,853 17,598 | |||||||
Basic earnings per share | As reported Pro forma | $ | 4.84 | $ | 3.32 3.29 | $ | 3.49 3.44 | |||||||
Diluted earnings per share | As reported Pro forma | $ | 4.75 | $ | 3.26 3.23 | $ | 3.42 3.37 |
Income Taxes
Deferred taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. The Company and its wholly owned domestic subsidiaries file a consolidated federal income tax return.
Earnings Per Share
Earnings per share is computed after recognition of preferred stock dividend requirements. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding restricted stock. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and has been computed after giving consideration to the weighted average dilutive effect of the Company's convertible securities, common stock warrants, stock options, and the shares issued under the Company's Capital Accumulation Program and other restricted stock plans.
Accounting Changes
Consolidation of Variable Interest Entities
On January 1, 2004, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)," (FIN 46-R), which includes substantial changes from the original FIN 46. Included in these changes, the calculation of expected losses and expected residual returns has been altered to reduce the impact of decision maker and guarantor fees in the calculation of expected residual returns and expected losses. In addition, the definition of a variable interest has been changed in the revised guidance. FIN 46 and FIN 46-R change the method of determining whether certain entities, including securitization entities, should be included in the Company's Consolidated Financial Statements. The Company has determined that in accordance with FIN 46-R, the multi-seller finance companies administered by the Company should continue not to be consolidated. However, the trust preferred security vehicles are now deconsolidated. The cumulative effect of adopting FIN 46-R was an increase to assets and liabilities of approximately $1.6 billion, primarily due to certain structured finance transactions.
For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities, and noncontrolling interests of the VIE are 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 interests of the VIE. In October 2003, the FASB announced that the effective date of FIN 46 was deferred from July 1, 2003 to periods ending after December 15, 2003 for VIEs created prior to February 1, 2003. With the exception of the deferral related to certain investment company subsidiaries, Citigroup elected to implement the remaining provisions of FIN 46 in the 2003 third quarter, resulting in the consolidation of VIEs increasing both total assets and total liabilities by approximately $2.1 billion. The implementation of FIN 46 encompassed a review of thousands of entities to determine the impact of adoption, and considerable judgment was used in evaluating whether or not a VIE should be consolidated.
The Company administers several third-party owned, special purpose, multi-seller finance companies (the "conduits") that purchase pools of trade receivables, credit cards, and other financial assets from third-party clients of the Company. The Company has no ownership interest in the conduits, but as administrator provides them with accounting, funding, and operations services. Generally, 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 conduits by providing collateral in the form of excess assets or residual interest. 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 loss protection in the form of letters of credit and other guarantees. During 2003, to comply with FIN 46-R, all but two of the conduits issued "first loss" subordinated notes, such that one third-party investor in each conduit would be deemed the primary beneficiary and would consolidate that conduit.
Some of the Company's private equity subsidiaries may invest in venture capital entities that may also be subject to FIN 46-R. The Company accounts for its venture capital activities in accordance with the Investment Company Audit Guide (Audit Guide). The FASB deferred adoption of FIN 46-R for non-registered investment companies that apply the Audit Guide. The FASB permitted nonregistered investment companies to defer consolidation of VIEs with which they are involved until a Statement of Position on the scope of the Audit Guide is finalized, which is expected before the end of the first quarter of 2005. Following issuance of the Statement of Position, the FASB will consider further modification to FIN 46-R to provide an exception for companies that qualify to apply the revised Audit Guide. Following issuance of the revised Audit Guide, the Company will assess the effect of such guidance on its private equity business.
The Company may provide administrative, trustee and/or investment management services to numerous personal estate trusts, which are considered VIEs under FIN 46-R, but are not consolidated.
See Note 12 to the Consolidated Financial Statements.
In May 2004, the FASB issued FASB Staff Position FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS 106-2), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit for individuals under Medicare (Medicare Part D), as well as a federal subsidy equal to 28% of prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D. If a plan is determined to be actuarially equivalent to Medicare Part D, FSP FAS 106-2 requires plan sponsors to disclose the effect of the subsidy on the net periodic expense and the accumulated postretirement benefit obligation in their interim and annual financial statements for periods beginning after June 15, 2004. Plan sponsors who initially elected to defer accounting for the effects of the subsidy are allowed the option of retroactive application to the date of enactment or prospective application from the date of adoption.
Under FSP FAS 106-1, the Company elected to defer the accounting for the effects of the Act. However, Citigroup believes that our plans are eligible for the subsidy and decided to adopt FSP FAS 106-2 in the third quarter of 2004 retroactive to January 1, 2004. The effect of adopting FAS 106-2 is included in Note 23 to the Company's Consolidated Financial Statements.
Accounting for Loan Commitments Accounted For As Derivatives
On April 1, 2004, the Company adopted the SEC's Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" (SAB 105), which specifies that servicing assets embedded in commitments for loans to be held for sale should be recognized only when the servicing asset has been contractually separatedchanged its option valuation method from the associated loans by sale or securitization. The impact of implementing SAB 105 across all ofBlack-Scholes model to the Company's businesses was a delay in recognition of $35 million pretax in the second quarter 2004.
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
On January 1, 2004, the Company adopted Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1). SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for separate account presentation, accounting for an insurer's interest in a separate account, transfers to a separate account, valuation of certain liabilities, contracts with death or other benefit features, contracts that provide annuitization benefits, and sales inducements to contract holders. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003. The adoption of SOP 03-1binomial method, which did not have a material impact on the Company's Consolidated Financial Statements.
The Company has made changes to various stock-based compensation plan provisions for future awards. For example, in January 2005, the Company largely moved from granting stock options to granting restricted and deferred stock awards, unless participants elect to receive all or a portion of their award in the form of stock options. Thus, the majority of management options granted in 2005 were due to stock option elections and carried the same vesting period as the restricted or deferred stock awards in lieu of which they were granted. Stock options granted in 2003 and 2004 have three-year vesting periods and six-year terms. In addition, the sale of underlying shares acquired upon exercise is restricted for a two-year period and pursuant to a stock ownership commitment, senior executives must retain 75% of the shares they own and acquire from the Company over the term of their employment. Options granted in 2003 and thereafter do not have a reload feature; however, some previously granted options retain that feature.
See Note 20 to the Company's Consolidated Financial Statements on page 144.
Future Application of Accounting Standards
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB 25. SFAS 123-R requires companies to measure and record compensation expense for stock options and other share-based payments based on the instruments' fair value reduced by expected forfeitures.
Citigroup adopted SFAS 123-R as of January 1, 2006, by using the modified prospective approach, which requires recognizing expense for options granted prior to the adoption date equal to the grant date fair value of the unvested amounts over their remaining vesting period. For unvested stock-based awards granted before January 1, 2003 ("APB 25 awards"), the Company will expense the incremental grant date fair value of the awards at the grant date over the remaining vesting period. The portion of fair value attributable to vested APB 25 awards is not recognized. The estimated impact of this change to Citigroup will be to recognize approximately $46 million (pretax) and $12 million (pretax) compensation expense for the unvested APB 25 awards in 2006 and 2007, respectively.
Citigroup grants restricted or deferred shares to eligible employees under its Capital Accumulation Program (CAP). The program provides that employees who meet certain age plus years-of-service requirements (retirement-eligible employees) may terminate active employment and continue vesting in their awards provided they comply with specified non-compete provisions. Citigroup had been amortizing the compensation cost of those awards over the full vesting periods. The SEC recently indicated that in the case of retirement-eligible employees, non-compete agreements would be a sufficient basis for amortizing these compensation costs over the full vesting period only if there was evidence, on an individual basis, that the non-compete compelled the employee to continue to work.
The Company currently is in discussions with the SEC regarding a number of practical implications concerning this matter, including, among other things, the adequacy of non-compete agreements as a basis for amortization. The Company also believes there may be other factors, including plan design changes, which may preserve the current features of the plan, including amortization of these expenses. If it is concluded that the compensation expense for awards granted to retirement-eligible employees must be recognized on the date of grant rather than over an associated service period, Citigroup may record an incremental charge to pretax earnings in the 2006 first quarter of approximately $700 million.
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Other-Than-Temporary Impairments of Certain Investments
On September 30, 2004, the FASB voted unanimously to delay the effective date of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments." The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that were delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-temporary impairment charge through earnings. On November 3, 2005, the FASB issued FASB Staff Position FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments," revising the guidance in EITF 03-1, which did not have a material impact on the Company's Consolidated Financial Statements. The disclosures required by EITF 03-1 are included in Note 5 to the Consolidated Financial Statements on page 121.
Accounting for Certain Hybrid Financial Instruments
On February 16, 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments" (SFAS 155), an amendment of SFAS 140 and SFAS 133. SFAS 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under SFAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the Company's fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company's 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. The Company has not yet decided whether it will early adopt SFAS 155 effective January 1, 2006, and is still assessing the impact of this change in accounting.
Potential Amendments to Various Current Accounting Standards
The FASB is currently working on a number of amendments to the existing accounting standards governing asset transfers, securitizations, leveraged lease transactions, and fair value of financial instruments. Upon completion of these standards, the Company will need to reevaluate its accounting and disclosures. Due to the ongoing deliberations by the Board, the Company is unable to accurately determine the effect of future amendments or proposals at this time.
In addition, the FASB is currently working on a project that will change the accounting and reporting for pension and postretirement plans. Citigroup expects the new standard to require companies to record an asset or liability on the Consolidated Balance Sheet equal to the funded status of the plans. Any other plan assets or liabilities would be reflected net as an adjustment to stockholders' equity.
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Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement, as previously announced, Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed the acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of the transaction's closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of $111 million ($157 million pretax).
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in the Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total Citigroup has acquired 99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition, KorAm was a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion at the time of the acquisition. During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Electronic Financial Services Inc. (EFS) for $390 million. EFS is a provider of government-issued benefits payments and prepaid stored value cards used by state and federal government agencies, as well as of stored value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired Sears' Credit Card and Financial Products business (Sears), the eighth largest portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of the Sears portfolio are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot's private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of this portfolio acquisition are included in the Consolidated Financial Statements from July 2003 forward.
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3. Discontinued Operations
Sale of the Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for its broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
Concurrently, Citigroup sold Legg Mason's Capital Markets business to Stifel Financial Corp. The business consisted of areas in which Citigroup already had full capabilities, including investment banking, institutional equity sales and trading, taxable fixed income sales and trading, and research. No gain or loss was recognized from this transaction. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business.")
In connection with this sale, Citigroup and Legg Mason entered into a three-year agreement under which Citigroup will continue to offer its clients Asset Management's products, will become the primary retail distributor of the Legg Mason funds managed by Legg Mason Capital Management Inc., and may also distribute other Legg Mason products. These products will be offered primarily through Citigroup's Global Wealth Management businesses,Smith Barney andPrivate Bank, as well as through Primerica and Citibank. The distribution of these products will be subject to applicable requirements of law and Citigroup's suitability standards and product requirements. For the eleven months ended November 30, 2005 and the years ended December 31, 2004 and 2003, the intercompany fees paid by the Asset Management Business to various other Citigroup businesses totaled approximately $180 million, $206 million, and $208 million, respectively. For the month ended December 31, 2005, these fees, of approximately $31 million, which were received from Legg Mason, are included in the Consolidated Statement of Income.
Upon completion of the Sale of the Asset Management Business, Citigroup added 1,226 financial advisors in 124 branch offices from Legg Mason to its Global Wealth Management Business. Results for all of the businesses included in the Sale of the Asset Management Business, including the gain, are reported as Discontinued Operations for all periods presented. Changes in the market value of the Legg Mason common and preferred shares since the closing of the transaction are included in the Consolidated Statement of Change in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to these securities, such as dividend revenue, are included in the results of Alternative Investments.
The following is summarized financial information for discontinued operations related to the Sale of the Asset Management Business:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 4,599 | $ | 1,383 | $ | 1,251 | |||
Income from discontinued operations | $ | 168 | $ | 203 | $ | 363 | |||
Gain on sale | 3,404 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 1,382 | 112 | 147 | ||||||
Income from discontinued operations, net of taxes | $ | 2,190 | $ | 91 | $ | 216 | |||
The following is a summary of the assets and liabilities of discontinued operations related to the Sale of the Asset Management Business as of December 1, 2005:
| December 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 96 | |
Investments | 3 | ||
Intangible assets | 776 | ||
Other assets | 563 | ||
Total assets | $ | 1,438 | |
Liabilities | |||
Other liabilities | $ | 575 | |
Total liabilities | $ | 575 | |
Sale of the Life Insurance & Annuities Business
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life insurance business inMexico (which is now included withinInternational Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business.")
In connection with the Sale of the Life Insurance and Annuities Business, Citigroup and MetLife entered into ten-year agreements under which Travelers Life & Annuity and MetLife products will be made available through certain Citigroup distribution channels. For the six months ended
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June 30, 2005 and the years ended December 31, 2004 and 2003, the commission fees related to the distribution of these products totaled approximately $230 million, $426 million, and $351 million, respectively. For the six months ended December 31, 2005, these fees, of approximately $200 million, which were received from MetLife, are included in Citigroup's Consolidated Statement of Income.
Results for all of the businesses included in the Sale of the Life Insurance and Annuities Business are reported as Discontinued Operations for all periods presented. The unrealized gain on the MetLife securities after the closing of the transaction are included in the Consolidated Statement of Changes in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to these securities, such as dividend revenue and hedging costs, are included in the results of Alternative Investments.
Summarized financial information for discontinued operations related to the Sale of the Life Insurance and Annuities Business is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 6,128 | $ | 5,172 | $ | 4,597 | |||
Income from discontinued operations | $ | 740 | $ | 1,243 | $ | 800 | |||
Gain on sale | 3,386 | — | — | ||||||
Provision for income taxes | 1,484 | 342 | 221 | ||||||
Income from discontinued operations, net of taxes | $ | 2,642 | $ | 901 | $ | 579 | |||
The following is a summary of the assets and liabilities of discontinued operations related to the Sale of the Life Insurance and Annuities Business as of July 1, 2005, the date of the distribution:
| July 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 158 | |
Investments | 48,860 | ||
Intangible assets | 86 | ||
Other assets(1) | 44,123 | ||
Total assets | $ | 93,227 | |
Liabilities | |||
Federal funds purchased and securities loaned or sold under agreements to repurchase | $ | 971 | |
Other liabilities(2) | 82,842 | ||
Total liabilities | $ | 83,813 | |
Summarized financial information for all of the Company's discontinued operations is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 10,727 | $ | 6,555 | $ | 5,848 | |||
Income from discontinued operations | $ | 908 | $ | 1,446 | $ | 1,163 | |||
Gain on sale | 6,790 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 2,866 | 454 | 368 | ||||||
Income from discontinued operations, net of taxes | $ | 4,832 | $ | 992 | $ | 795 | |||
Cash flows from discontinued operations
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Cash flows from operating activities | $ | (3,313 | ) | $ | 1,284 | $ | (97 | ) | ||
Cash flows from investing activities | 2,504 | (4,704 | ) | (429 | ) | |||||
Cash flows from financing activities | 763 | 3,292 | 534 | |||||||
Net cash (used in) provided by discontinued operations | $ | (46 | ) | $ | (128 | ) | $ | 8 | ||
In addition to the accounting policies outlined in Note 1 to the Consolidated Financial Statements on page 108, the following represents the policies specifically related to the Life Insurance and Annuities Business that was sold:
Profit Recognition on Bifurcated Hybrid Instruments
On January 1, 2004, Citigroup revised the application of Derivatives Implementation Group (DIG) Issue B6, "Embedded Derivatives: Allocating the Basis of a Hybrid Instrument to the Host Contract andof the Embedded Derivative." In December 2003, the SEC staff gave a speech that clarified the accounting for derivatives embedded in financial instruments ("hybrid instruments") to preclude the recognition of any profit on the trade date for hybrid instruments that must be bifurcated for accounting purposes. The trade-date revenue must instead be amortized over the life of the hybrid instrument. The impact of this change in application was an approximately $256 million pretax reduction in revenue, net of amortization, across all of the Company's businesses during 2004. This revenue will beis recognized over the life of the transactions, which on average is approximately four years.
Adoption of SFAS 132-R
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers' Disclosures aboutAbout Pensions and Other Postretirement Benefits" (SFAS 132-R), which retains the disclosure requirements contained inof SFAS 132 and requires additional disclosure in the financial statements about the assets, obligations, cash flows, and net periodic benefit cost of domesticU.S. defined benefit pension plans and other domestic defined benefit postretirement plans for periods ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. The new disclosure requirements for foreign retirement plans apply to fiscal years ending after June 15, 2004. However,2004, although the Company elected to adopt SFAS 132-Rit for its foreignthese plans as of December 31, 2003. Certain disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. The new annual disclosures are included in Note 2321 to the Consolidated Financial Statements.Statements on page 147.
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 forIn the recognition of suchpast, the costs were recognized 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. The impact of adopting of SFAS 146 was not material.
Derivative Instruments and Hedging Activities
On July 1, 2003, the Company adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). In particular, SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have a material impact on the Company's Consolidated Financial Statements.
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Liabilities and Equity
On July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of bothBoth Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an issuer measures and classifies certain financial instruments with characteristics of both liabilities and equity and classifies them in its
statement of financial position.equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) when that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003, and2003. It did not have a material impact on the Company's Consolidated Financial Statements.
Stock-Based Compensation
On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, prospectively for all awards granted, modified, or settled after December 31, 2002. The prospective method is one of the adoption methods provided for under SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" (SFAS 148) issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the employees' service period (generally(which is 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 APB 25 the(the alternative method of accounting,accounting), under SFAS 123, an offsetting increase to stockholders' equity is recorded equal to the amount of compensation expense charged.expense. Earnings per share dilution is recognized as well.
The impactHad the Company applied SFAS 123 prior to 2003 in accounting for all of this change inthe Company's stock option plans, including the Citigroup 2003 Stock Purchase Program, net income and 2004 is disclosed on page 88.net income per share would have been the pro forma amounts indicated below:
2005 | 2004 | 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions of dollars, except per share amounts | |||||||||||
Compensation expense related to stock option plans, net of tax | As reported Pro forma | $ | 84 163 | $ | 173 325 | $ | 110 365 | ||||
Net income | As reported Pro forma | $ | 24,589 24,510 | $ | 17,046 16,894 | $ | 17,853 17,598 | ||||
Basic earnings per share | As reported Pro forma | $ | 4.84 4.82 | $ | 3.32 3.29 | $ | 3.49 3.44 | ||||
Diluted earnings per share | As reported Pro forma | $ | 4.75 4.73 | $ | 3.26 3.23 | $ | 3.42 3.37 |
During the first quarter of 2004, the Company changed its option valuation method from the Black-Scholes model to the binomial method, which did not have a material impact on the Company's Consolidated Financial Statements.
The Company has made changes to various stock-based compensation plan provisions for future awards. For example, in January 2005, the Company largely moved from granting stock options to granting restricted and deferred stock awards, unless participants elect to receive all or a portion of their award in the form of stock options. Thus, the majority of management options granted in 2005 were due to stock option elections and carried the same vesting period andas the termrestricted or deferred stock awards in lieu of stockwhich they were granted. Stock options granted in 2003 and 2004 are threehave three-year vesting periods and six years, respectively.six-year terms. In addition, the sale of underlying shares acquired through theupon exercise of options granted after December 31, 2002 is restricted for a two-year period. The existingperiod and pursuant to a 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 grantsOptions granted in 2003 and thereafter do not have a reload feature; however, some previously granted options retain that feature.
In January 2005, the Company largely moved from granting stock options as incentive compensation to granting restricted and deferred stock awards. See Note 22 to Notes to Consolidated Financial Statements.
Guarantees and Indemnifications
In November 2002, the 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. On January 1, 2003, the Company adopted the recognition and measurement provisions of FIN 45. The impact of adopting FIN 45 was not material. FIN 45 also requires additional disclosures in financial statements for periods ending after December 15, 2002. Accordingly, these disclosures are included in Note 27 to the Consolidated Financial Statements.
Acquisitions of Certain Financial Institutions
In the fourth quarter of 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147). SFAS 147 requires that business combinations involving depository financial institutions within its scope, except for combinations between mutual institutions, be accounted for under SFAS 141. Previously, generally accepted accounting principles for acquisitions of financial institutions provided for recognition of the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. Under SFAS 147, such excess is accounted for as goodwill. The impact of adopting SFAS 147 did not materially affect the Consolidated Financial Statements.
Adoption of EITF 02-3
During the fourth quarter of 2002, the Company adopted 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. The initial adoption and ongoing effects of EITF 02-3 are not material20 to the Company's Consolidated Financial Statements.Statements on page 144.
Impairment or Disposal of Long-Lived Assets
On January 1, 2002, Citigroup adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), when the rule became effective for calendar year companies. SFAS 144 establishes additional criteria as compared to existing generally accepted accounting principles to determine when a long-lived asset is held-for-sale. It also broadens the definition of "discontinued operations," but does not allow for the accrual of future operating losses, as was previously permitted. The impact of adopting SFAS 144 was not material.
Business Combinations, Goodwill and Other Intangible Assets
Effective July 1, 2001, the Company adopted the provisions of 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. The new rules require that all business combinations consummated after June 30, 2001 be accounted for under the purchase method. The nonamortization provisions of the new rules affecting goodwill and intangible assets deemed to have indefinite lives are effective for all purchase business combinations completed after June 30, 2001.
On January 1, 2002, Citigroup adopted the remaining provisions of SFAS 142, when the rules became effective for calendar year companies. 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 continue to be amortized over their useful lives. The adoption resulted in a cumulative adjustment of $47 million (after-tax) reported as a charge to earnings related to the impairment of certain intangible assets.
Future Application of Accounting Standards
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (Revised(revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB 25. SFAS 123-R requires
companies to measure and record compensation expense for stock options and other share-based paymentpayments based on the instruments' fair value.value reduced by expected forfeitures.
Citigroup adopted SFAS 123-R is effective for interim and annual reporting periods beginning after June 15, 2005. The Company will adopt SFAS 123-R on Julyas of January 1, 20052006, by using the modified prospective approach, which requires recognizing expense for options granted prior to the adoption date equal to the grant date fair value of the unvested amounts over their remaining vesting period. The portion of these options' fair value attributable to vested awards prior to the adoption of SFAS 123-R is never recognized. For unvested stock-based awards granted before January 1, 2003 ("APB 25 awards"), the Company will expense the incremental grant date fair value of the awards as at the grant date over the remaining vesting period. The portion of fair value attributable to vested APB 25 awards is not recognized. The estimated impact of recognizingthis change to Citigroup will be to recognize approximately $46 million (pretax) and $12 million (pretax) compensation expense for the unvested APB 25 awards will be approximately $24 millionin 2006 and $20 million additional expense2007, respectively.
Citigroup grants restricted or deferred shares to eligible employees under its Capital Accumulation Program (CAP). The program provides that employees who meet certain age plus years-of-service requirements (retirement-eligible employees) may terminate active employment and continue vesting in their awards provided they comply with specified non-compete provisions. Citigroup had been amortizing the compensation cost of those awards over the full vesting periods. The SEC recently indicated that in the third and fourth quarterscase of 2005, respectively. In addition, approximately $43 million and $42 million additionalretirement-eligible employees, non-compete agreements would be a sufficient basis for amortizing these compensation costs over the full vesting period only if there was evidence, on an individual basis, that the non-compete compelled the employee to continue to work.
The Company currently is in discussions with the SEC regarding a number of practical implications concerning this matter, including, among other things, the adequacy of non-compete agreements as a basis for amortization. The Company also believes there may be other factors, including plan design changes, which may preserve the current features of the plan, including amortization of these expenses. If it is concluded that the compensation expense willfor awards granted to retirement-eligible employees must be disclosed asrecognized on the impactdate of grant rather than over an associated service period, Citigroup may record an incremental charge to pretax earnings in the 2006 first and second quartersquarter of 2005, respectively, as if the standard had been adopted as of January 1, 2005, but will not be recognized in earnings. The Company continues to evaluate other aspects of adopting SFAS 123-R.approximately $700 million.
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Other-Than-Temporary Impairments of Certain Investments
On September 30, 2004, the FASB voted unanimously to delay the effective date of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and its ApplicationApplications to Certain Investments." The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that have beenwere delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-temporary impairment charge through earnings.
The On November 3, 2005, the FASB will be issuing implementationissued FASB Staff Position FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and its Applications to Certain Investments," revising the guidance related to this topic. Once issued, Citigroup will evaluatein EITF 03-1, which did not have a material impact on the impact of adopting EITF 03-1.Company's Consolidated Financial Statements. The disclosures required by EITF 03-1 are included in Note 5 to the Consolidated Financial Statements.Statements on page 121.
Accounting for Certain Loans or Debt Securities Acquired in a TransferHybrid Financial Instruments
On December 12, 2003,February 16, 2006, the American Institute of Certified Public Accountants (AICPA)FASB issued Statement of Position (SOP)SFAS No. 03-3,155, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. SOP 03-3 requires acquired loansHybrid Financial Instruments" (SFAS 155), an amendment of SFAS 140 and SFAS 133. SFAS 155 permits the Company to be recordedelect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and prohibits carrying over valuation allowances inaccounted for separately under SFAS 133. The election to measure the initial accounting for all loans acquired in a transfer that have evidence of deterioration in credit quality since origination, when it is probable that the investor will be unable to collect all contractual cash flows. Loans carriedhybrid instrument at fair value mortgage loans held-for-sale,is made on an instrument-by-instrument basis and loansis irreversible. The Statement will be effective for all instruments acquired, issued, or subject to borrowersa remeasurement event occurring after the beginning of the Company's fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company's 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. The Company has not yet decided whether it will early adopt SFAS 155 effective January 1, 2006, and is still assessing the impact of this change in good standing under revolving credit agreements are excluded from the scopeaccounting.
Potential Amendments to Various Current Accounting Standards
The FASB is currently working on a number of SOP 03-3.
SOP 03-3 limits the yield that may be accretedamendments to the excessexisting accounting standards governing asset transfers, securitizations, leveraged lease transactions, and fair value of financial instruments. Upon completion of these standards, the Company will need to reevaluate its accounting and disclosures. Due to the ongoing deliberations by the Board, the Company is unable to accurately determine the effect of future amendments or proposals at this time.
In addition, the FASB is currently working on a project that will change the accounting and reporting for pension and postretirement plans. Citigroup expects the new standard to require companies to record an asset or liability on the Consolidated Balance Sheet equal to the funded status of the undiscounted expected cash flows over the investor's initial investment in the loan. The excess of the contractual cash flows over expected cash flows may notplans. Any other plan assets or liabilities would be recognizedreflected net as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan's yield over its remaining life. Decreases in expected cash flows are recognized as an impairment.stockholders' equity.
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Acquisition of Federated Credit Card Portfolio and Credit Card Agreement With Federated Department Stores
On June 2, 2005, Citigroup announced that it had agreed to enter into a long-term agreement with Federated Department Stores, Inc. (Federated) under which the companies will partner to manage Federated's credit card business, including existing and new accounts.
Under the agreement, as previously announced, Citigroup will acquire Federated's approximately $6.3 billion credit card receivables portfolio in three phases. For the first phase, which closed on October 24, 2005, Citigroup acquired Federated's receivables under management, totaling approximately $3.3 billion. For the second phase, additional Federated receivables, which total approximately $1.2 billion, are expected to be transferred to Citigroup in the 2006 second quarter from the current provider. For the final phase, Citigroup expects to acquire, in the 2006 third quarter, the approximately $1.8 billion credit card receivable portfolio of The May Department Stores Company (May), which recently merged with Federated.
Citigroup is paying a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
Acquisition of First American Bank
On March 31, 2005, Citigroup completed the acquisition of First American Bank in Texas (FAB). The transaction established Citigroup's retail branch presence in Texas, giving Citigroup 106 branches, $4.2 billion in assets and approximately 120,000 new customers in the state at the time of the transaction's closing. The results of FAB are included in the Consolidated Financial Statements from March 2005 forward.
Divestiture of CitiCapital's Transportation Finance Business
On November 22, 2004, the Company reached an agreement to sell CitiCapital's Transportation Finance Business based in Dallas and Toronto to GE Commercial Finance for total cash consideration of approximately $4.4$4.6 billion. The sale, which was completed on January 31, 2005, resulted in an after-tax gain of approximately $100 million. The Transportation Finance business is part of the Company's Global Consumer Retail Banking, which provides financing, leasing, and asset-based lending to the commercial trucking industry.
Acquisition of First American Bank
On August 24, 2004, Citigroup announced it will acquire First American Bank in Texas (FAB)$111 million ($157 million pretax). The transaction is expected to close in the first quarter of 2005, subject to and pending applicable regulatory approvals. The transaction will establish Citigroup's retail banking presence in Texas, giving Citigroup more than 100 branches, $3.5 billion in assets and approximately 120,000 new customers in the state.
Sale of Samba Financial Group
On June 15, 2004, the Company sold, for cash, its 20% equity investment in Thethe Samba Financial Group (Samba), formerly known as the Saudi American Bank, to the Public Investment Fund, a Saudi public sector entity. Citigroup recognized an after-tax gain of $756 million ($1.168 billion pretax) on the sale during the 2004 second quarter. The gain was recognized equally between Global Consumer and GCIB.CIB.
Acquisition of KorAm Bank
On April 30, 2004, Citigroup completed its tender offer to purchase all the outstanding shares of KorAm Bank (KorAm) at a price of KRW 15,500 per share in cash. In total Citigroup has acquired 99.8%99.9% of KorAm's outstanding shares for a total of KRW 3.14 trillion ($2.7 billion). The results of KorAm are included in the Consolidated Financial Statements from May 2004 forward.
At the time of the acquisition, KorAm iswas a leading commercial bank in Korea, with 223 domestic branches and total assets at June 30, 2004 of $37 billion.
billion at the time of the acquisition. During the 2004 fourth quarter, KorAm was merged with the Citibank Korea branch to form Citibank Korea Inc.
Divestiture of Citicorp Electronic Financial Services Inc.
During January 2004, the Company completed the sale for cash of Citicorp's Electronic Financial Services Inc. (EFS), a subsidiary of Citigroup, for $390 million (pretax).million. EFS is a provider of government-issued benefits payments and prepaid stored value cards used by state and federal government agencies, as well as of stored value services for private institutions. The sale of EFS resulted in an after-tax gain of $180 million ($255 million pretax) in the 2004 first quarter.
Acquisition of Washington Mutual Finance Corporation
On January 9, 2004, Citigroup completed the acquisition of Washington Mutual Finance Corporation (WMF) for $1.25 billion in cash. WMF was the consumer finance subsidiary of Washington Mutual, Inc. WMF provides direct consumer installment loans and real-estate-secured loans, as well as sales finance and the sale of insurance. The acquisition included 427 WMF offices located in 26 states, primarily in the Southeastern and Southwestern United States, and total assets of $3.8 billion. Citigroup has guaranteed all outstanding unsecured indebtedness of WMF in connection with this acquisition. The results of WMF are included in the Consolidated Financial Statements from January 2004 forward.
Acquisition of Sears' Credit Card and Financial Products Business
On November 3, 2003, Citigroup acquired the Sears' Credit Card and Financial Products business (Sears)., the eighth largest portfolio in the U.S. $28.6 billion of gross receivables were acquired for a 10% premium of $2.9 billion and annual performance payments over the next 10ten years based on new accounts, retail sales volume and financial product sales. The Company recorded $5.8 billion of intangible assets and goodwill as a result of this transaction. In addition, the companies signed a multi-year marketing and servicing agreement across a range of each company's businesses, products and services. The results of the Sears portfolio are included in the Consolidated Financial Statements from November 2003 forward.
Acquisition of The Home Depot's Private-Label Portfolio
In July 2003, Citigroup completed the acquisition of The Home Depot's private-label portfolio (Home Depot), which added $6 billion in receivables and 12 million accounts. The results of Home Depotthis portfolio acquisition are included in the Consolidated Financial Statements from July 2003 forward.
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Acquisition3. Discontinued Operations
Sale of Golden State Bancorpthe Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its Asset Management Business to Legg Mason, Inc. (Legg Mason) in exchange for its broker-dealer business, $2.298 billion of Legg Mason's common and preferred shares (valued as of the closing date), and $500 million in cash. This cash was obtained via a lending facility provided by Citigroup Corporate and Investment Banking. The transaction did not include Citigroup's asset management business in Mexico, its retirement services business in Latin America (both of which are now included inInternational Retail Banking) or its interest in the CitiStreet joint venture (which is now included inSmith Barney). The total value of the transaction at the time of closing was approximately $4.369 billion, resulting in an after-tax gain to Citigroup of approximately $2.082 billion ($3.404 billion pretax). This gain remains subject to final closing adjustments.
On November 6, 2002,Concurrently, Citigroup completed its acquisitionsold Legg Mason's Capital Markets business to Stifel Financial Corp. The business consisted of 100% of Golden State Bancorp (GSB) in a transactionareas in which Citigroup already had full capabilities, including investment banking, institutional equity sales and trading, taxable fixed income sales and trading, and research. No gain or loss was recognized from this transaction. (The transactions described in these two paragraphs are referred to as the "Sale of the Asset Management Business.")
In connection with this sale, Citigroup and Legg Mason entered into a three-year agreement under which Citigroup will continue to offer its clients Asset Management's products, will become the primary retail distributor of the Legg Mason funds managed by Legg Mason Capital Management Inc., and may also distribute other Legg Mason products. These products will be offered primarily through Citigroup's Global Wealth Management businesses,Smith Barney andPrivate Bank, as well as through Primerica and Citibank. The distribution of these products will be subject to applicable requirements of law and Citigroup's suitability standards and product requirements. For the eleven months ended November 30, 2005 and the years ended December 31, 2004 and 2003, the intercompany fees paid by the Asset Management Business to various other Citigroup businesses totaled approximately $2.3 billion in cash$180 million, $206 million, and issued 79.5$208 million, Citigroup common shares. The total transaction valuerespectively. For the month ended December 31, 2005, these fees, of approximately $5.8 billion was based on the average prices of Citigroup shares, as adjusted for the effect of the TPC distribution. GSB was the parent company of California Federal Bank, the second-largest thrift in the U.S. and, through its First Nationwide Mortgage business, the eighth-largest mortgage servicer. The results of GSB$31 million, which were received from Legg Mason, are included in the Consolidated Financial Statements from November 2002 forward.
3. Discontinued OperationsStatement of Income.
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 (IPO) on March 27, 2002. In 2002, Citigroup recognized an after-tax gain of $1.158 billion as a resultUpon completion of the IPO. In connection with the IPO, Citigroup entered into an agreement with TPC that provided that, in any fiscal year in which TPC recorded asbestos-related income statement charges in excess of $150 million, net of any reinsurance, Citigroup would pay to TPC the amount of any such excess up to a cumulative aggregate of $520 million after-tax. A portionSale of the gross IPO gain was deferred to offset any payments arisingAsset Management Business, Citigroup added 1,226 financial advisors in connection with this agreement. During 2002 and 2003, $159 million and $361 million, respectively, was paid under this agreement.
On August 20, 2002, Citigroup completed the distribution124 branch offices from Legg Mason to its stockholdersGlobal Wealth Management Business. Results for all 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 and subsequent merger of TPC and the St. Paul Companies (St. Paul Travelers) on April 1, 2004, Citigroup remains a holder of approximately 6.0% of St. Paul Travelers' outstanding equity securities, which are carried at fair valuebusinesses included in the Proprietary Investment Activities segment and classified as available-for-sale within Investments on the Consolidated Balance Sheet. The Company is required to sell these securities within five yearsSale of the distribution in order to maintainAsset Management Business, including the tax-free status.
Following the August 20, 2002 distribution, the results of TPC weregain, are reported by the Company separately as discontinued operationsDiscontinued Operations for all periods presented. TPC represented the primary vehicle by which Citigroup engagedChanges in the propertymarket value of the Legg Mason common and casualty insurance business.preferred shares since the closing of the transaction are included in the Consolidated Statement of Change in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to these securities, such as dividend revenue, are included in the results of Alternative Investments.
SummarizedThe following is summarized financial information for discontinued operations is as follows:related to the Sale of the Asset Management Business:
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | — | $ | — | $ | 8,233 | |||
Income from discontinued operations | — | — | 965 | ||||||
Gain on sale of stock by subsidiary | — | — | 1,270 | ||||||
Provision for income taxes | — | — | 360 | ||||||
Income from discontinued operations, net | $ | — | $ | — | $ | 1,875 | |||
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 4,599 | $ | 1,383 | $ | 1,251 | |||
Income from discontinued operations | $ | 168 | $ | 203 | $ | 363 | |||
Gain on sale | 3,404 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 1,382 | 112 | 147 | ||||||
Income from discontinued operations, net of taxes | $ | 2,190 | $ | 91 | $ | 216 | |||
The following is a summary of the assets and liabilities of discontinued operations related to the Sale of the Asset Management Business as of August 20, 2002,December 1, 2005:
| December 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 96 | |
Investments | 3 | ||
Intangible assets | 776 | ||
Other assets | 563 | ||
Total assets | $ | 1,438 | |
Liabilities | |||
Other liabilities | $ | 575 | |
Total liabilities | $ | 575 | |
Sale of the Life Insurance & Annuities Business
On July 1, 2005, the Company completed the sale of Citigroup's Travelers Life & Annuity and substantially all of Citigroup's international insurance businesses to MetLife, Inc. (MetLife). The businesses sold were the primary vehicles through which Citigroup engaged in the Life Insurance and Annuities business.
Citigroup received $1.0 billion in MetLife equity securities and $10.830 billion in cash, which resulted in an after-tax gain of approximately $2.120 billion ($3.386 billion pretax). This gain remains subject to final closing adjustments.
The transaction encompassed Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life insurance business inMexico (which is now included withinInternational Retail Banking). International operations included wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China. The transaction also included Citigroup's Argentine pension business. (The transaction described in the preceding three paragraphs is referred to as the "Sale of the Life Insurance and Annuities Business.")
In connection with the Sale of the Life Insurance and Annuities Business, Citigroup and MetLife entered into ten-year agreements under which Travelers Life & Annuity and MetLife products will be made available through certain Citigroup distribution channels. For the six months ended
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June 30, 2005 and the years ended December 31, 2004 and 2003, the commission fees related to the distribution of these products totaled approximately $230 million, $426 million, and $351 million, respectively. For the six months ended December 31, 2005, these fees, of approximately $200 million, which were received from MetLife, are included in Citigroup's Consolidated Statement of Income.
Results for all of the businesses included in the Sale of the Life Insurance and Annuities Business are reported as Discontinued Operations for all periods presented. The unrealized gain on the MetLife securities after the closing of the transaction are included in the Consolidated Statement of Changes in Stockholders' Equity within "Accumulated Other Changes in Equity from Nonowner Sources" (net change in unrealized gains and losses on investment securities, net of tax). Any effects on the Company's current earnings related to these securities, such as dividend revenue and hedging costs, are included in the results of Alternative Investments.
Summarized financial information for discontinued operations related to the Sale of the Life Insurance and Annuities Business is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 6,128 | $ | 5,172 | $ | 4,597 | |||
Income from discontinued operations | $ | 740 | $ | 1,243 | $ | 800 | |||
Gain on sale | 3,386 | — | — | ||||||
Provision for income taxes | 1,484 | 342 | 221 | ||||||
Income from discontinued operations, net of taxes | $ | 2,642 | $ | 901 | $ | 579 | |||
The following is a summary of the assets and liabilities of discontinued operations related to the Sale of the Life Insurance and Annuities Business as of July 1, 2005, the date of the distribution:
| August 20, 2002 | ||
---|---|---|---|
| In millions of dollars | ||
Cash | $ | 252 | |
Investments | 33,984 | ||
Trading account assets | 321 | ||
Loans | 261 | ||
Reinsurance recoverables | 10,940 | ||
Other assets | 14,242 | ||
Total assets | $ | 60,000 | |
Long-term debt | $ | 2,797 | |
Insurance policy and claim reserves | 36,216 | ||
Other liabilities | 11,831 | ||
Mandatorily redeemable securities of subsidiary trusts | 900 | ||
Total liabilities | $ | 51,744 | |
| July 1, 2005 | ||
---|---|---|---|
| In millions of dollars | ||
Assets | |||
Cash and due from banks | $ | 158 | |
Investments | 48,860 | ||
Intangible assets | 86 | ||
Other assets(1) | 44,123 | ||
Total assets | $ | 93,227 | |
Liabilities | |||
Federal funds purchased and securities loaned or sold under agreements to repurchase | $ | 971 | |
Other liabilities(2) | 82,842 | ||
Total liabilities | $ | 83,813 | |
Summarized financial information for all of the Company's discontinued operations is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Total revenues, net of interest expense | $ | 10,727 | $ | 6,555 | $ | 5,848 | |||
Income from discontinued operations | $ | 908 | $ | 1,446 | $ | 1,163 | |||
Gain on sale | 6,790 | — | — | ||||||
Provision for income taxes and minority interest, net of taxes | 2,866 | 454 | 368 | ||||||
Income from discontinued operations, net of taxes | $ | 4,832 | $ | 992 | $ | 795 | |||
Cash flows from discontinued operations
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Cash flows from operating activities | $ | (3,313 | ) | $ | 1,284 | $ | (97 | ) | ||
Cash flows from investing activities | 2,504 | (4,704 | ) | (429 | ) | |||||
Cash flows from financing activities | 763 | 3,292 | 534 | |||||||
Net cash (used in) provided by discontinued operations | $ | (46 | ) | $ | (128 | ) | $ | 8 | ||
In addition to the accounting policies outlined in Note 1 to the Consolidated Financial Statements on page 108, the following represents the policies specifically related to the Life Insurance and Annuities Business that was sold:
Separate and Variable Accounts
Separate and variable accounts primarily represent funds for which investment income and investment gains/losses accrue directly to, and investment risk is borne by, the contractholders. 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.
Contractholder Funds
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.
120
4. Business Segment Information
Citigroup is a diversified bank holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. The Company's activities are conducted through the Global Consumer, Global Corporate and Investment Bank,Banking, Global Wealth Management, Global Investment Management, and Proprietary Investment ActivitiesAlternative Investments business segments. These segments reflect the characteristics of their products and services and the clients to which those products or services are delivered.
The Global Consumer segment includes a global, full-service consumer franchise delivering a wide array of banking, lending, insurance and investment services through a network of local branches, offices, and electronic delivery systems.
The businesses included in the Company's Global Corporate and Investment BankBanking segment provide corporations, governments, institutions, and investors in approximately 100 countries with a broad range of banking and financial products and services.
The Global Wealth Management segment provides investment advice, financial planning, brokerage services,is composed of theSmith Barney Private Client businesses, Citigroup Private Bank and personalized wealth
management to affluent individuals, small and mid-size companies, non-profits and large corporations. In addition,Citigroup Investment Research.Smith Barney provides independent client-focused researchinvestment advice, financial planning and brokerage services to affluent individuals, companies, and institutions around the world.non-profits.Private Bank provides personalized wealth management services for high net worth clients.
The Global Investment ManagementAlternative Investments segment offers a broad rangemanages capital on behalf of life insurance, annuity, and asset management products and services distributed to institutional and retail clients.
The Proprietary Investment Activities segment includesCitigroup (including the Company's venture capital activities, ownership of St. PaulPaul's Travelers, shares, the Alternative Investment business, results from certain proprietary investments,MetLife, and the results of certain investments in countries that refinanced debt under the 1989 Brady Plan or plans of a similar nature.Legg Mason shares) and third-party clients across five asset classes, including private equity, hedge funds, real estate, structured products and managed futures.
Corporate/Other includes net treasury results, corporate staff and otherunallocated corporate expenses, offsets to certain intersegment eliminations,line-item reclassifications (eliminations), the results of discontinued operations, the cumulative effect of accounting changes and taxes not allocated to the other business segments.unallocated taxes.
The accounting policies of these reportable segments are the same as those disclosed in Note 1 to the Consolidated Financial Statements.Statements on page 108.
The following table presents certain information regarding the Company's continuing operations by segment:
| Revenues, Net of Interest Expense(1)(2) | Provision (Benefit) for Income Taxes(1) | Income (Loss) from Continuing Operations Before Cumulative Effect of Accounting Change(1)(2)(3)(4) | Identifiable Assets at Year End(1) | Revenues, Net of Interest Expense(1)(2) | Provision (Benefit) for Income Taxes(1) | Income (Loss) from Continuing Operations Before Cumulative Effect of Accounting Change(1)(2)(3)(4) | Identifiable Assets at Year End(1)(5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||||||||||||
| In millions of dollars, except identifiable assets in billions | In millions of dollars, except identifiable assets in billions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Consumer | $ | 47,267 | $ | 40,970 | $ | 37,659 | $ | 5,547 | $ | 4,554 | $ | 4,373 | $ | 11,811 | $ | 9,491 | $ | 8,044 | $ | 527 | $ | 453 | $ | 48,245 | $ | 47,887 | $ | 41,501 | $ | 4,904 | $ | 5,592 | $ | 4,551 | $ | 10,897 | $ | 11,987 | $ | 9,665 | $ | 559 | $ | 532 | ||||||||||||||||||||||
Global Corporate and Investment Bank | 21,774 | 20,021 | 19,165 | 93 | 2,426 | 1,620 | 2,038 | 5,371 | 3,172 | 763 | 637 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Investment Banking | 23,863 | 21,786 | 20,032 | 2,818 | 96 | 2,429 | 6,895 | 2,042 | 5,374 | 839 | 763 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Wealth Management | 8,511 | 7,840 | 7,566 | 652 | 735 | 698 | 1,199 | 1,343 | 1,282 | 61 | 55 | 8,684 | 8,529 | 7,847 | 715 | 659 | 736 | 1,244 | 1,209 | 1,346 | 63 | 61 | ||||||||||||||||||||||||||||||||||||||||||||
Global Investment Management | 7,422 | 6,645 | 5,813 | 553 | 419 | 403 | 1,311 | 1,116 | 993 | 104 | 92 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proprietary Investment Activities | 1,663 | 1,222 | 247 | 383 | 288 | 5 | 743 | 366 | (50 | ) | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Alternative Investments | 3,430 | 1,703 | 1,279 | 950 | 398 | 309 | 1,437 | 768 | 402 | 13 | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate/Other | (447 | ) | 744 | 858 | (319 | ) | (227 | ) | (101 | ) | (56 | ) | 166 | 7 | 20 | 18 | (580 | ) | (270 | ) | 935 | (309 | ) | (281 | ) | (187 | ) | (667 | ) | 48 | 271 | 20 | 119 | |||||||||||||||||||||||||||||||||
Total | $ | 86,190 | $ | 77,442 | $ | 71,308 | $ | 6,909 | $ | 8,195 | $ | 6,998 | $ | 17,046 | $ | 17,853 | $ | 13,448 | $ | 1,484 | $ | 1,264 | $ | 83,642 | $ | 79,635 | $ | 71,594 | $ | 9,078 | $ | 6,464 | $ | 7,838 | $ | 19,806 | $ | 16,054 | $ | 17,058 | $ | 1,494 | $ | 1,484 | ||||||||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||
Fixed maturities, substantially all available-for-sale at fair value | $ | 194,088 | $ | 165,928 | ||||||||
Fixed income, substantially all available- for-sale at fair value | $ | 163,177 | $ | 194,088 | ||||||||
Equity securities | 10,114 | 7,687 | 14,368 | 10,114 | ||||||||
Venture capital, at fair value | 3,806 | 3,605 | 2,844 | 3,806 | ||||||||
Short-term and other | 5,235 | 5,672 | 208 | 5,235 | ||||||||
Total | $ | 213,243 | $ | 182,892 | $ | 180,597 | $ | 213,243 | ||||
121
The amortized cost and fair value of investments in fixed maturitiesincome and equity securities at December 31, were as follows:
| 2004 | 2003 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||||||
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities held to maturity(1) | $ | 94 | $ | — | $ | — | $ | 94 | $ | 62 | $ | — | $ | — | $ | 62 | ||||||||||||||||||||||||||||||||
Fixed income securities held to maturity(1) | $ | 2 | $ | — | $ | — | $ | 2 | $ | 94 | $ | — | $ | — | $ | 94 | ||||||||||||||||||||||||||||||||
Fixed maturity securities available-for-sale | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed income securities available-for-sale | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities, principally obligations of U.S. federal agencies | $ | 20,662 | $ | 412 | $ | 66 | $ | 21,008 | $ | 27,527 | $ | 479 | $ | 74 | $ | 27,932 | $ | 13,157 | $ | 42 | $ | 262 | $ | 12,937 | $ | 20,662 | $ | 412 | $ | 66 | $ | 21,008 | ||||||||||||||||
U.S. Treasury and federal agencies | 33,791 | 143 | 318 | 33,616 | 30,885 | 197 | 75 | 31,007 | 28,448 | 18 | 432 | 28,034 | 33,791 | 143 | 318 | 33,616 | ||||||||||||||||||||||||||||||||
State and municipal | 8,897 | 602 | 17 | 9,482 | 7,990 | 585 | 9 | 8,566 | 13,090 | 512 | 21 | 13,581 | 8,897 | 602 | 17 | 9,482 | ||||||||||||||||||||||||||||||||
Foreign government | 65,538 | 590 | 158 | 65,970 | 44,407 | 788 | 118 | 45,077 | 67,823 | 439 | 388 | 67,874 | 65,538 | 590 | 158 | 65,970 | ||||||||||||||||||||||||||||||||
U.S. corporate | 38,921 | 1,861 | 374 | 40,408 | 31,304 | 1,645 | 370 | 32,579 | 25,050 | 312 | 307 | 25,055 | 38,921 | 1,861 | 374 | 40,408 | ||||||||||||||||||||||||||||||||
Other debt securities | 23,010 | 536 | 36 | 23,510 | 20,202 | 551 | 48 | 20,705 | 15,665 | 74 | 45 | 15,694 | 23,010 | 536 | 36 | 23,510 | ||||||||||||||||||||||||||||||||
190,819 | 4,144 | 969 | 193,994 | 162,315 | 4,245 | 694 | 165,866 | $ | 163,233 | $ | 1,397 | $ | 1,455 | $ | 163,175 | $ | 190,819 | $ | 4,144 | $ | 969 | $ | 193,994 | |||||||||||||||||||||||||
Total fixed maturities | $ | 190,913 | $ | 4,144 | $ | 969 | $ | 194,088 | $ | 162,377 | $ | 4,245 | $ | 694 | $ | 165,928 | ||||||||||||||||||||||||||||||||
Total fixed income securities | $ | 163,235 | $ | 1,397 | $ | 1,455 | $ | 163,177 | $ | 190,913 | $ | 4,144 | $ | 969 | $ | 194,088 | ||||||||||||||||||||||||||||||||
Equity securities(2) | $ | 9,260 | $ | 859 | $ | 5 | $ | 10,114 | $ | 6,800 | $ | 901 | $ | 14 | $ | 7,687 | $ | 13,017 | $ | 1,372 | $ | 21 | $ | 14,368 | $ | 9,260 | $ | 859 | $ | 5 | $ | 10,114 | ||||||||||||||||
At December 31, 2004,2005, the cost of approximately 6,3004,000 investments in equity and fixed maturityincome securities exceeded their fair value by $974 million.$1.476 billion. Of the $974 million,$1.476 billion, the gross unrealized loss on equity securities was $5$21 million. Of the remainder, $487$674 million represents fixed maturityincome investments that have been in a gross unrealized loss position for less than a year, and of these 96%97% are rated investment grade; and $482$781 million represents fixed maturityincome investments that have been in a gross unrealized loss position for a year or more, and of these 88%98% are rated investment grade.
The fixed maturityincome investments that have been in a gross unrealized loss position for a year or more include 23 related investment grade asset-backed securities, withinclassified with U.S. Corporatecorporate in the following table above, with a gross unrealized loss of $256$269 million. These asset-backed securities were acquired between 1994 and 1999 and have remaining maturities ranging from 20052006 through 2021. The unrealized loss on these asset-backed securities is due solely to the current interest rate environment, i.e., the unrealized loss is unrelated to the credit of the securities. These 23 related asset-backed securities are accounted for similarly to debt securities and are classified as available-for-sale, under FASB Statement No. 115, pursuant to paragraph 14 of FASB Statement No. 140, and any other-than-temporary impairment of the securities is recognizedrecorded in current income in accordance with EITF Issue No. 96-12.income. The Company has entered into hedges of these investments that qualify for cash flow hedge accounting under SFAS 133. The changes in fair value of the asset-backed securities and the changes in fair value of the hedging instruments are reported in accumulated other comprehensive incomechanges in equity from nonowner sources (a component of equity). Any other-than-temporary impairment recognizedreported in current income on the asset-backed securities would be offset by the reclassification of an amount from accumulated other comprehensive incomecharges in equity from nonowner sources into current income related to the hedging instrument.
Management has determined that the unrealized losses on the Company's investments in equity and fixed maturityincome securities at December 31, 20042005 are temporary in nature. The Company conducts a periodic review to identify and evaluate
investments that have indications of possible impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Company's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The Company's review for impairment generally entails:
122
The table below shows the fair value of investments in fixed maturityincome and equity securities that are available-for-sale and that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of December 31, 20042005 and 2003:2004:
| Less Than 12 Months | 12 Months Or Longer | Total | Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
| In millions of dollars at year-end | In millions of dollars at year end | ||||||||||||||||||||||||||||||||||
2004: | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities available-for-sale | ||||||||||||||||||||||||||||||||||||
2005: | ||||||||||||||||||||||||||||||||||||
Fixed income securities available-for-sale | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities, principally obligations of U.S. federal agencies | $ | 6,514 | $ | 45 | $ | 1,300 | $ | 21 | $ | 7,814 | $ | 66 | $ | 7,242 | $ | 69 | $ | 1,437 | $ | 193 | $ | 8,679 | $ | 262 | ||||||||||||
U.S. Treasury and federal agencies | 18,510 | 313 | 76 | 5 | 18,586 | 318 | 20,697 | 71 | 4,356 | 361 | 25,053 | 432 | ||||||||||||||||||||||||
State and municipal | 690 | 8 | 336 | 9 | 1,026 | 17 | 2,205 | 21 | 12 | — | 2,217 | 21 | ||||||||||||||||||||||||
Foreign government | 8,395 | 49 | 6,872 | 109 | 15,267 | 158 | 20,124 | 186 | 12,074 | 202 | 32,198 | 388 | ||||||||||||||||||||||||
U.S. corporate | 3,895 | 52 | 1,574 | 322 | 5,469 | 374 | 1,542 | 301 | 903 | 6 | 2,445 | 307 | ||||||||||||||||||||||||
Other debt securities | 2,363 | 20 | 537 | 16 | 2,900 | 36 | 3,276 | 26 | 1,281 | 19 | 4,557 | 45 | ||||||||||||||||||||||||
Total fixed maturities available-for-sale | $ | 40,367 | $ | 487 | $ | 10,695 | $ | 482 | $ | 51,062 | $ | 969 | ||||||||||||||||||||||||
Total fixed income securities available-for-sale | $ | 55,086 | $ | 674 | $ | 20,063 | $ | 781 | $ | 75,149 | $ | 1,455 | ||||||||||||||||||||||||
Equity securities | $ | 49 | $ | 3 | $ | 32 | $ | 2 | 81 | $ | 5 | $ | 229 | $ | 16 | $ | 34 | $ | 5 | $ | 263 | $ | 21 | |||||||||||||
2003: | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities available-for-sale | ||||||||||||||||||||||||||||||||||||
2004: | ||||||||||||||||||||||||||||||||||||
Fixed income securities available-for-sale | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities, principally obligations of U.S. federal agencies | $ | 3,286 | $ | 69 | $ | 384 | $ | 5 | $ | 3,670 | $ | 74 | $ | 6,514 | $ | 45 | $ | 1,300 | $ | 21 | $ | 7,814 | $ | 66 | ||||||||||||
U.S. Treasury and federal agencies | 3,326 | 73 | 39 | 2 | 3,365 | 75 | 18,510 | 313 | 76 | 5 | 18,586 | 318 | ||||||||||||||||||||||||
State and municipal | 73 | 3 | 332 | 6 | 405 | 9 | 690 | 8 | 336 | 9 | 1,026 | 17 | ||||||||||||||||||||||||
Foreign government | 5,015 | 67 | 1,957 | 51 | 6,972 | 118 | 8,395 | 49 | 6,872 | 109 | 15,267 | 158 | ||||||||||||||||||||||||
U.S. corporate | 2,185 | 92 | 1,689 | 278 | 3,874 | 370 | 3,895 | 52 | 1,574 | 322 | 5,469 | 374 | ||||||||||||||||||||||||
Other debt securities | 1,954 | 36 | 291 | 12 | 2,245 | 48 | 2,363 | 20 | 537 | 16 | 2,900 | 36 | ||||||||||||||||||||||||
Total fixed maturities available-for-sale | $ | 15,839 | $ | 340 | $ | 4,692 | $ | 354 | $ | 20,531 | $ | 694 | ||||||||||||||||||||||||
Total fixed income securities available-for-sale | $ | 40,367 | $ | 487 | $ | 10,695 | $ | 482 | $ | 51,062 | $ | 969 | ||||||||||||||||||||||||
Equity securities | $ | 53 | $ | 4 | $ | 30 | $ | 10 | $ | 83 | $ | 14 | $ | 49 | $ | 3 | $ | 32 | $ | 2 | $ | 81 | $ | 5 | ||||||||||||
123
The following table presents the amortized cost, fair value, and average yield on amortized cost of fixed maturityincome securities by contractual maturity dates as of December 31, 2004:2005:
| Amortized Cost | Fair Value | Yield | Amortized Cost | Fair Value | Yield | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||||||
U.S. Treasury and federal agencies(1) | ||||||||||||||||||
Due within 1 year | $ | 5,415 | $ | 5,387 | 2.20 | % | $ | 9,738 | $ | 9,665 | 3.50 | % | ||||||
After 1 but within 5 years | 24,964 | 24,702 | 3.20 | % | 16,459 | 16,128 | 4.08 | |||||||||||
After 5 but within 10 years | 1,966 | 1,986 | 5.29 | % | 2,451 | 2,437 | 4.57 | |||||||||||
After 10 years(2) | 17,210 | 17,476 | 5.65 | % | 11,201 | 10,976 | 5.48 | |||||||||||
Total | $ | 49,555 | $ | 49,551 | 4.02 | % | $ | 39,849 | $ | 39,206 | 4.36 | % | ||||||
State and municipal | ||||||||||||||||||
Due within 1 year | $ | 118 | $ | 119 | 5.93 | % | $ | 116 | $ | 114 | 5.17 | % | ||||||
After 1 but within 5 years | 449 | 459 | 5.35 | % | 408 | 401 | 5.88 | |||||||||||
After 5 but within 10 years | 1,165 | 1,232 | 5.67 | % | 1,656 | 1,692 | 5.37 | |||||||||||
After 10 years(2) | 7,165 | 7,672 | 5.42 | % | 10,910 | 11,374 | 5.24 | |||||||||||
Total | $ | 8,897 | $ | 9,482 | 5.45 | % | $ | 13,090 | $ | 13,581 | 5.28 | % | ||||||
All other(3) | ||||||||||||||||||
All other(3) | ||||||||||||||||||
Due within 1 year | $ | 30,135 | $ | 30,419 | 4.47 | % | $ | 32,639 | $ | 32,852 | 4.02 | % | ||||||
After 1 but within 5 years | 57,687 | 58,463 | 5.12 | % | 44,134 | 44,045 | 4.70 | |||||||||||
After 5 but within 10 years | 25,266 | 26,158 | 6.32 | % | 12,796 | 12,715 | 5.70 | |||||||||||
After 10 years(2) | 19,373 | 20,015 | 4.95 | % | 20,727 | 20,778 | 4.63 | |||||||||||
Total | $ | 132,461 | $ | 135,055 | 5.18 | % | $ | 110,296 | $ | 110,390 | 4.60 | % | ||||||
Total fixed maturities | $ | 190,913 | $ | 194,088 | 4.89 | % | ||||||||||||
Total fixed income securities | $ | 163,235 | $ | 163,177 | 4.60 | % | ||||||||||||
The following table presents interest and dividends on investments:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||||||
Taxable interest | $ | 8,256 | $ | 6,758 | $ | 6,959 | $ | 6,453 | $ | 5,507 | $ | 4,450 | ||||||
Interest exempt from U.S. federal income tax | 434 | 384 | 337 | 500 | 412 | 365 | ||||||||||||
Dividends | 279 | 408 | 208 | 292 | 81 | 224 | ||||||||||||
Total interest and dividends | $ | 8,969 | $ | 7,550 | $ | 7,504 | $ | 7,245 | $ | 6,000 | $ | 5,039 | ||||||
The following table presentsrepresents realized gains and losses onfrom sales of investments:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Gross realized investment gains | $ | 1,454 | $ | 1,610 | $ | 1,532 | ||||
Gross realized investment (losses) | (623 | ) | (1,100 | ) | (2,017 | ) | ||||
Net realized gains/(losses)(1) | $ | 831 | $ | 510 | $ | (485 | ) | |||
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Gross realized investment gains | $ | 2,275 | $ | 1,456 | $ | 1,629 | ||||
Gross realized investment losses | (313 | ) | (623 | ) | (1,100 | ) | ||||
Net realized gains (losses) | $ | 1,962 | $ | 833 | $ | 529 | ||||
This table excludes the realized gains/(losses)and unrealized gains and losses related to insurance subsidiaries, salethe venture capital investments, which were classified in other revenue because the mark-to-market of OREO and mortgage loans of ($2) million, ($13)these investments is recognized in earnings. The net gain reflected in earnings from these venture capital investments were $1.055 billion, $554 million, and $8$703 million infor the years ended December 31, 2005, 2004, and 2003, and 2002, respectively.
The following table presentstotal carrying value and cost for the venture capital investment gainsinvestments at December 31, were as follows:
| 2005 | 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars | |||||
Carrying value | $ | 2,844 | $ | 3,806 | ||
Cost | 2,499 | 2,806 | ||||
Among these investments, which were held by Citigroup's private equity subsidiaries including those subsidiaries registered as Small Business Investment Companies and losses:other subsidiaries that engage exclusively in venture capital activities, were positions in publicly traded securities that amounted to $83 million and $380 million carrying value at December 31, 2005 and 2004, respectively. These publicly traded positions include thinly traded securities, large block holdings, restricted shares or other special situations. The quoted market prices used in determining their carrying value were discounted to produce an estimate of the attainable fair value for these securities. The remaining venture capital positions consist of investments in privately held companies, with a total carrying value of $2.7 billion and $3.4 billion as of December 31, 2005 and 2004, respectively. Their carrying value was determined based upon the investments' financial performance, relevant third-party arm's length transactions, current and subsequent financings, and comparisons to similar companies for which quoted market prices were available.
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Net realized investment gains (losses) | $ | (14 | ) | $ | 406 | $ | 214 | |||
Gross unrealized gains | 945 | 737 | 563 | |||||||
Gross unrealized (losses) | (377 | ) | (440 | ) | (863 | ) | ||||
Net realized and unrealized gains/(losses) | $ | 554 | $ | 703 | ($ | 86 | ) | |||
6. Federal Funds, Securities Borrowed, Loaned, and Subject to Repurchase Agreements
Federal funds sold and securities borrowed or purchased under agreements to resell, at their respective carrying values, consisted of the following at December 31:
| 2004 | 2003(1) | ||||
---|---|---|---|---|---|---|
| In millions of dollars | |||||
Federal funds sold | $ | 172 | $ | 302 | ||
Securities purchased under agreement to resell | 129,648 | 121,929 | ||||
Deposits paid for securities borrowed | 70,919 | 49,943 | ||||
Total | $ | 200,739 | $ | 172,174 | ||
| 2005 | 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars at year end | |||||
Federal funds sold | $ | 30 | $ | 172 | ||
Securities purchased under agreements to resell | 119,377 | 129,648 | ||||
Deposits paid for securities borrowed | 98,057 | 70,919 | ||||
Total | $ | 217,464 | $ | 200,739 | ||
Federal funds purchased and securities loaned or sold under agreements to repurchase, at their respective carrying values, consisted of the following at December 31:
| 2004 | 2003(1) | ||||
---|---|---|---|---|---|---|
| In millions of dollars | |||||
Federal funds purchased | $ | 11,707 | $ | 5,608 | ||
Securities sold under agreement to repurchase | 172,216 | 156,045 | ||||
Deposits received for securities loaned | 25,632 | 19,503 | ||||
Total | $ | 209,555 | $ | 181,156 | ||
| 2005 | 2004 | ||||
---|---|---|---|---|---|---|
| In millions of dollars at year end | |||||
Federal funds purchased | $ | 9,821 | $ | 11,707 | ||
Securities sold under agreements to repurchase | 198,730 | 172,216 | ||||
Deposits received for securities loaned | 33,841 | 25,632 | ||||
Total | $ | 242,392 | $ | 209,555 | ||
The resale and repurchase agreements represent collateralized financing transactions used to generate net interest income and facilitate trading activity. These instruments are collateralized principally by government and government agency securities and generally have terms ranging from overnight to up to a year. It is the Company's policy to take possession of the underlying collateral, monitor its market value relative to the amounts due under the agreements, and, when necessary, require prompt transfer of additional collateral or reduction in the balance in order to maintain contractual margin protection. In the event of counterparty default, the financing agreement provides the Company with the right to liquidate the collateral held. Resale agreements and repurchase agreements are reported net by counterparty, when applicable, pursuant to FASB Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the impact of FIN 41, resale agreements totaled $206.6$230.8 billion and $195.6$206.6 billion at December 31, 2005 and 2004, and 2003, respectively.
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Deposits paid for securities borrowed (securities borrowed) and deposits received for securities loaned (securities loaned) are recorded at the amount of cash advanced or received and are collateralized principally by government and government agency securities, corporate debt and equity securities. Securities borrowed transactions require the Company to deposit cash with the lender. With respect to securities loaned, the Company receives cash collateral in an amount generally in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and securities loaned daily, and additional collateral is obtained as necessary. Securities borrowed and securities loaned are reported net by counterparty, when applicable, pursuant to FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" (FIN 39).
7. Brokerage Receivables and Brokerage Payables
The Company has receivables and payables for financial instruments purchased from and sold to brokers and dealers and customers. The Company is exposed to risk of loss from the inability of brokers and dealers or customers to pay for purchases or to deliver the financial instrumentinstruments sold, in which case the Company would have to sell or purchase the financial instruments at prevailing market prices. Credit risk is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transaction.
The Company seeks to protect itself from the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with regulatory and internal guidelines. Margin levels are monitored daily, and customers deposit additional collateral as required. Where customers cannot meet collateral requirements, the Company will liquidate sufficient underlying financial instruments to bring the customer into compliance with the required margin level.
Exposure to credit risk is impacted by market volatility, which may impair the ability of clients to satisfy their obligations to the Company. Credit limits are established and closely monitored for customers and brokers and dealers engaged in forwardforwards and futures and other transactions deemed to be credit sensitive.
Brokerage receivables and brokerage payables, which arise in the normal course of business, consisted of the following at December 31:
| 2004 | 2003 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||
Receivables from customers | $ | 24,626 | $ | 18,817 | $ | 29,394 | $ | 24,626 | ||||
Receivables from brokers, dealers, and clearing organizations | 14,647 | 7,659 | 13,429 | 14,647 | ||||||||
Total brokerage receivables | $ | 39,273 | $ | 26,476 | $ | 42,823 | $ | 39,273 | ||||
Payables to customers | $ | 29,742 | $ | 21,317 | $ | 46,184 | $ | 29,742 | ||||
Payables to brokers, dealers, and clearing organizations | 20,466 | 16,013 | 24,810 | 20,466 | ||||||||
Total brokerage payables | $ | 50,208 | $ | 37,330 | $ | 70,994 | $ | 50,208 | ||||
8. Trading Account Assets and Liabilities
Trading account assets and liabilities, at market value, consisted of the following at December 31:
| 2004 | 2003 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||
Trading account assets | ||||||||||||
U.S. Treasury and federal agency securities | $ | 38,506 | $ | 58,788 | $ | 38,771 | $ | 38,506 | ||||
State and municipal securities | 12,430 | 7,736 | 17,856 | 12,430 | ||||||||
Foreign government securities | 27,556 | 22,267 | 21,266 | 27,556 | ||||||||
Corporate and other debt securities | 56,924 | 49,529 | 60,137 | 56,924 | ||||||||
Derivatives(1) | 57,484 | 55,255 | 47,414 | 57,484 | ||||||||
Equity securities | 58,260 | 25,419 | 64,553 | 58,260 | ||||||||
Mortgage loans and collateralized mortgage securities | 15,678 | 8,780 | 27,852 | 15,678 | ||||||||
Other | 13,329 | 7,545 | 17,971 | 13,329 | ||||||||
Total trading account assets | $ | 280,167 | $ | 235,319 | $ | 295,820 | $ | 280,167 | ||||
Trading account liabilities | ||||||||||||
Securities sold, not yet purchased | $ | 71,001 | $ | 63,245 | $ | 59,780 | $ | 71,001 | ||||
Derivatives(1) | 64,486 | 58,624 | 61,328 | 64,486 | ||||||||
Total trading account liabilities | $ | 135,487 | $ | 121,869 | $ | 121,108 | $ | 135,487 | ||||
In determining the fair value of our trading portfolio, management also reviews the length of time trading positions have been held to identify aged inventory. During 2005, the monthly average aged trading inventory designated as available-for-immediate-sale was approximately $8.8 billion compared with $7.6 billion in 2004. Inventory positions that are both aged and whose values are unverified amounted to $1.0 billion compared to $2.9 billion at December 31, 2005 and 2004, respectively. The fair value of aged-inventory is actively monitored and, when 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, 2005 and 2004, such valuation adjustments amounted to $96 million and $83 million, respectively.
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9. Principal Transactions Revenue
Principal transactions revenues consistrevenue consists of realized and unrealized gains and losses from trading activities. Not included in the table below is the impact of net interest revenue related to trading activities. The impactactivities, which is an integral part of these items is included in the Trading Account Assets and Trading Account Liabilities caption on the Average Balance and Interest Rates schedule on pages 133 and 134.trading activities' profitability. The following table presents principal transactions revenue for the years ended December 31:
| 2004 | 2003(1) | 2002(1) | 2005 | 2004(1) | 2003(1) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | |||||||||||||||||
Fixed income(2) | $ | 1,832 | $ | 2,641 | $ | 2,269 | $ | 2,094 | $ | 1,789 | $ | 2,448 | |||||||
Equities(3) | (338 | ) | 225 | 207 | 585 | (335 | ) | 182 | |||||||||||
Foreign exchange(4) | 1,839 | 2,175 | 1,872 | 2,870 | 1,839 | 2,176 | |||||||||||||
Commodities(5) | 371 | 136 | 125 | 910 | 371 | 136 | |||||||||||||
All other | 52 | (57 | ) | 40 | (16 | ) | 52 | (57 | ) | ||||||||||
Total principal transactions revenue | $ | 3,756 | $ | 5,120 | $ | 4,513 | $ | 6,443 | $ | 3,716 | $ | 4,885 | |||||||
10. Commissions and Fees
Commissions and fees revenue represents charges to our customers for credit and bank cards, including transaction-processing fees and annual fees; advisory, and equity and debt underwriting services; lending and deposit-related transactions, such as loan commitments, standby letters of credit, and other deposit and loan servicing activities; investment management-related fees including brokerage services, and custody and trust services; insurance fees and commissions.
The following table presents commissions and fees revenue for the years ended December 31:
| 2005 | 2004 | 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Credit cards and bank cards | 4,498 | 4,501 | 4,151 | |||||||
Investment banking | 3,669 | 3,482 | 3,471 | |||||||
Smith Barney | 2,326 | 2,228 | 2,106 | |||||||
CIB trading-related | 2,295 | 1,998 | 1,647 | |||||||
Checking-related | 997 | 1,026 | 1,033 | |||||||
Transaction services | 739 | 729 | 747 | |||||||
Corporate finance | 483 | 456 | 493 | |||||||
Mortgage servicing | 540 | (188 | ) | (74 | ) | |||||
Primerica insurance | 374 | 351 | 301 | |||||||
Other Consumer | 754 | 924 | 981 | |||||||
Other Corporate and Investment Banking CIB | 346 | 374 | 293 | |||||||
Other | 122 | 100 | 360 | |||||||
Total commissions and fees | $ | 17,143 | $ | 15,981 | $ | 15,657 | ||||
11. Loans
| | 2004 | 2003 | | 2005 | 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars at year end | | In millions of dollars at year end | ||||||||||||
Consumer | Consumer | Consumer | ||||||||||||||
In U.S. offices | In U.S. offices | In U.S. offices | ||||||||||||||
Mortgage and real estate(1) | $ | 161,832 | $ | 129,507 | ||||||||||||
Mortgage and real estate(1) | $ | 192,108 | $ | 161,832 | ||||||||||||
Installment, revolving credit, and other | 134,784 | 136,725 | Installment, revolving credit, and other | 127,789 | 134,784 | |||||||||||
Lease financing | 6,030 | 8,523 | Lease financing | 5,095 | 6,030 | |||||||||||
302,646 | 274,755 | $ | 324,992 | $ | 302,646 | |||||||||||
In offices outside the U.S. | In offices outside the U.S. | In offices outside the U.S. | ||||||||||||||
Mortgage and real estate(1) | 39,601 | 28,743 | Mortgage and real estate(1) | $ | 39,619 | $ | 39,601 | |||||||||
Installment, revolving credit, and other | 93,523 | 76,718 | Installment, revolving credit, and other | 90,466 | 93,523 | |||||||||||
Lease financing | 1,619 | 2,216 | Lease financing | 866 | 1,619 | |||||||||||
134,743 | 107,677 | $ | 130,951 | $ | 134,743 | |||||||||||
437,389 | 382,432 | $ | 455,943 | $ | 437,389 | |||||||||||
Net unearned income | Net unearned income | (2,163 | ) | (2,500 | ) | Net unearned income | (1,323 | ) | (2,163 | ) | ||||||
Consumer loans, net of unearned income | Consumer loans, net of unearned income | $ | 435,226 | $ | 379,932 | Consumer loans, net of unearned income | $ | 454,620 | $ | 435,226 | ||||||
Corporate | Corporate | Corporate | ||||||||||||||
In U.S. offices | In U.S. offices | In U.S. offices | ||||||||||||||
Commercial and industrial(2) | $ | 14,437 | $ | 15,207 | Commercial and industrial(2) | $ | 22,366 | $ | 14,437 | |||||||
Lease financing | 1,879 | 2,010 | Lease financing | 1,952 | 1,879 | |||||||||||
Mortgage and real estate (1)(3) | 100 | 95 | Mortgage and real estate(1) | 29 | 100 | |||||||||||
16,416 | 17,312 | $ | 24,347 | $ | 16,416 | |||||||||||
In offices outside the U.S. | In offices outside the U.S. | In offices outside the U.S. | ||||||||||||||
Commercial and industrial(2) | 77,052 | 62,884 | Commercial and industrial(2) | $ | 80,116 | $ | 77,052 | |||||||||
Mortgage and real estate(1) | 3,928 | 1,751 | Mortgage and real estate(1) | 5,206 | 3,928 | |||||||||||
Loans to financial institutions | 12,921 | 12,063 | Loans to financial institutions | 16,889 | 12,921 | |||||||||||
Lease financing | 2,485 | 2,859 | Lease financing | 1,797 | 2,485 | |||||||||||
Governments and official institutions | 1,100 | 1,496 | Governments and official institutions | 882 | 1,100 | |||||||||||
97,486 | 81,053 | $ | 104,890 | $ | 97,486 | |||||||||||
113,902 | 98,365 | $ | 129,237 | $ | 113,902 | |||||||||||
Net unearned income | Net unearned income | (299 | ) | (291 | ) | Net unearned income | (354 | ) | (299 | ) | ||||||
Corporate loans, net of unearned income | Corporate loans, net of unearned income | $ | 113,603 | $ | 98,074 | Corporate loans, net of unearned income | $ | 128,883 | $ | 113,603 | ||||||
Included in the loan table above are lending products whose terms may give rise to additional credit issues. Credit cards with below-market introductory interest rates, multiple loans heldsupported by the insurance subsidiaries whichsame collateral (e.g., home equity loans), or interest-only loans are included within Other Assets on the Consolidated Balance Sheet in 2004examples of such products. However, these products are not material to Citigroup's financial position and 2003.are closely managed via credit controls that mitigate their additional inherent risk.
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Impaired loans are those on which Citigroup believes it is not probable that it will be able tonot collect all amounts due according to the contractual terms of the loan, excludingloan. This excludes smaller-balance homogeneoushomogenous loans that are evaluated collectively for impairment, and are carried on a cash basis. Valuation allowances for these loans are estimated considering all available evidence including, as appropriate, the present value of the expected future cash flows discounted at the loan's contractual effective rate, the secondary market value of the loan and the fair value of collateral less disposal costs.
The following table presents information about impaired loans:
| 2004 | 2003 | 2002 | | 2005 | 2004 | 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | | In millions of dollars at year end | ||||||||||||||||
Impaired corporate loans | $ | 1,854 | $ | 3,301 | $ | 3,844 | Impaired corporate loans | $ | 925 | $ | 1,854 | $ | 3,301 | ||||||
Other impaired loans(1) | 934 | 986 | 1,154 | Other impaired loans(1) | 327 | 934 | 986 | ||||||||||||
Total impaired loans(2) | 2,788 | $ | 4,287 | $ | 4,998 | Total impaired loans(2) | $ | 1,252 | $ | 2,788 | $ | 4,287 | |||||||
Impaired loans with valuation allowances | $ | 1,847 | $ | 3,277 | $ | 3,905 | Impaired loans with valuation allowances | $ | 919 | $ | 1,847 | $ | 3,277 | ||||||
Total valuation allowances(3) | 431 | 561 | 1,069 | Total valuation allowances(3) | 238 | 431 | 561 | ||||||||||||
During the year | During the year | ||||||||||||||||||
Average balance of impaired loans | $ | 2,215 | $ | 3,452 | $ | 3,993 | |||||||||||||
Interest income recognized on impaired loans | 175 | 100 | 119 | ||||||||||||||||
Average balance of impaired loans | $ | 1,432 | $ | 2,215 | $ | 3,452 | |||||||||||||
Interest income recognized on impaired loans | $ | 99 | $ | 175 | $ | 100 | |||||||||||||
In addition, included in the loan table above are purchased distressed loans, which are loans that have evidenced credit deterioration subsequent to origination but prior to acquisition by Citigroup. In conforming to the new accounting requirements of Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" (SOP 03-3), which became effective in 2005, these purchased loans were reclassified from other assets to loans.
In accordance with SOP 03-3, the difference between the total expected cash flows for these loans and the initial recorded investments must be recognized in income over the life of the loans using a level yield. Accordingly, these loans have been excluded from the impaired loan information presented above. In addition, per the Statement of Position, subsequent decreases to the expected cash flows for a purchased distressed loan require a build of an allowance so the loan retains its level yield. However, increases in the expected cash flows are first recognized as a reduction of any previously established allowance and then recognized as income prospectively over the remaining life of the loan by increasing the loan's level yield. Where the expected cash flow cannot be estimated, the purchased distressed loan is accounted for under the cost recovery method.
The carrying amount of the purchased distressed loan portfolio at December 31, 2005 was $1.152 million net of an allowance of $63 million.
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11. The changes in the accretable yield, related allowance and carrying amount net of accretable yield for 2005 are as follows:
| Accretable Yield | Carrying amount net of accretable yield | Allowance | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||
Balance reclassified from other assets | $ | 243 | $ | 1,117 | $ | 39 | |||
Additions(1) | 96 | 274 | |||||||
Disposals/payments received | (12 | ) | (327 | ) | |||||
Accretion | (88 | ) | 88 | ||||||
Builds/(reductions) to the allowance | (2 | ) | — | 24 | |||||
Balance, December 31, 2005(2) | $ | 237 | $ | 1,152 | $ | 63 | |||
12. Allowance for Credit Losses
| 2004 | 2003 | 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||
Allowance for credit losses at beginning of year | $ | 12,643 | $ | 11,101 | $ | 9,688 | |||||
Additions | |||||||||||
Consumer provision for credit losses | 7,205 | 7,316 | 7,714 | ||||||||
Corporate provision for credit losses | (972 | ) | 730 | 2,281 | |||||||
Total provision for credit losses | 6,233 | 8,046 | 9,995 | ||||||||
Deductions | |||||||||||
Consumer credit losses | 10,241 | 9,053 | 8,691 | ||||||||
Consumer credit recoveries | (1,770 | ) | (1,498 | ) | (1,239 | ) | |||||
Net consumer credit losses | 8,471 | 7,555 | 7,452 | ||||||||
Corporate credit losses | 632 | 1,473 | 1,875 | ||||||||
Corporate credit recoveries(1) | (502 | ) | (262 | ) | (324 | ) | |||||
Net corporate credit losses | 130 | 1,211 | 1,551 | ||||||||
Other, net(2) | 994 | 2,262 | 421 | ||||||||
Allowance for credit losses at end of year | 11,269 | 12,643 | 11,101 | ||||||||
Allowance for credit losses on unfunded lending commitments(3) | 600 | 600 | 567 | ||||||||
Total allowance for loans, leases, and unfunded lending commitments | $ | 11,869 | $ | 13,243 | $ | 11,668 | |||||
| 2005 | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||||||
Allowance for loan losses at beginning of year | $ | 11,269 | $ | 12,643 | $ | 11,101 | |||||
Additions | |||||||||||
Consumer provision for credit losses | 8,224 | 7,205 | 7,316 | ||||||||
Corporate provision for credit losses | (295 | ) | (972 | ) | 730 | ||||||
Total provision for credit losses | $ | 7,929 | $ | 6,233 | $ | 8,046 | |||||
Deductions | |||||||||||
Consumer credit losses | $ | 10,586 | $ | 10,241 | $ | 9,053 | |||||
Consumer credit recoveries | (1,903 | ) | (1,770 | ) | (1,498 | ) | |||||
Net consumer loan losses | $ | 8,683 | $ | 8,471 | $ | 7,555 | |||||
Corporate credit losses | $ | 375 | $ | 632 | $ | 1,473 | |||||
Corporate credit recoveries(1) | (652 | ) | (502 | ) | (262 | ) | |||||
Net corporate credit losses (recoveries) | $ | (277 | ) | $ | 130 | $ | 1,211 | ||||
Other, net(2) | $ | (1,010 | ) | $ | 994 | $ | 2,262 | ||||
Allowance for loan losses at end of year | $ | 9,782 | $ | 11,269 | $ | 12,643 | |||||
Allowance for credit losses on unfunded lending commitments at beginning of year(3) | $ | 600 | $ | 600 | $ | 567 | |||||
Provision for unfunded lending commitments | $ | 250 | $ | — | $ | 33 | |||||
Allowance for credit losses on unfunded lending commitments at end of year | $ | 850 | $ | 600 | $ | 600 | |||||
Total allowance for credit losses | $ | 10,632 | $ | 11,869 | $ | 13,243 | |||||
12.13. Securitizations and Variable Interest Entities
Citigroup and its subsidiaries securitizeThe Company primarily securitizes credit card receivables and mortgages. Other types of assets securitized include corporate debt securities, auto loans, and student loans.
After securitizationssecuritization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to 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 certainsome of the sale agreements, the net revenue collected each month is accumulated up to a predetermined maximum amount, and is available over the remaining term of that transaction to make payments of yield, fees, and transaction costs in the event that net cash flows from the receivables are not sufficient. WhenOnce the predetermined amount is reached, net revenue is passed directly torecognized by the Citigroup subsidiary that sold the receivables.
The Company provides a wide range of mortgage and other loan products to a diverse customer base. 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 requirements may lead to a termination of the servicing rights and the loss of future servicing fees. In non-recourse servicing, the principal credit risk to the servicerCompany is the cost of temporary advances of funds. In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans such as FNMA or FHLMC or with a private investor, insurer, or guarantor. Losses on recourse servicing occur primarily when foreclosure sale proceeds of the property underlying a defaulted mortgage are less than the outstanding principal balance and accrued interest of the loan and the cost of holding and disposing of the underlying property. The Company's mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchase of the securities issued by the trust.
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The Company also originates and sells first mortgage loans in the ordinary course of its mortgage banking activities. The Company sells certainsome of these loans to the Government National Mortgage Association (GNMA) with the servicing rights retained. GNMA has the primary recourse obligation on the individual loans; however, GNMA's recourse obligation is capped at a fixed amount per loan. Any losses above that fixed amount are borne by Citigroup as the seller/servicer.
The following table summarizes certain cash flows received from and paid to securitization trusts during 2005, 2004, 2003, and 2002:2003:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Credit Cards | Mortgages | Other(1) | Credit Cards | Mortgages | Other(1) | Credit Cards | Mortgages | Other(1) | Credit Cards | Mortgages | Other(1) | Credit Cards | Mortgages | Other(1) | Credit Cards | Mortgages | Other(1) | ||||||||||||||||||||||||||||||||||||
| In billions of dollars | In billions of dollars | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from new securitizations | $ | 20.2 | $ | 66.4 | $ | 22.7 | $ | 19.1 | $ | 70.9 | $ | 12.2 | $ | 15.3 | $ | 40.1 | $ | 10.0 | $ | 21.6 | $ | 85.2 | $ | 33.1 | $ | 20.2 | $ | 66.4 | $ | 22.7 | $ | 19.1 | $ | 70.9 | $ | 12.2 | ||||||||||||||||||
Proceeds from collections reinvested in new receivables | 171.1 | 0.8 | 0.1 | 143.4 | — | — | 130.9 | — | — | 201.3 | 1.4 | — | 171.1 | 0.8 | 0.1 | 143.4 | — | — | ||||||||||||||||||||||||||||||||||||
Servicing fees received | 1.5 | 0.7 | — | 1.4 | 0.3 | — | 1.2 | 0.3 | — | 1.9 | 0.9 | — | 1.5 | 0.7 | — | 1.4 | 0.3 | — | ||||||||||||||||||||||||||||||||||||
Cash flows received on Retained interests and other net cash flows | 5.3 | — | 0.1 | 4.4 | — | 0.1 | 3.9 | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||
Cash flows received on retained interests and other net cash flows | 6.4 | 0.1 | 0.1 | 5.3 | — | 0.1 | 4.4 | — | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||
The Company recognized gains on securitizations of mortgages of $197 million, $342 million, and $536 million for 2005, 2004, and $296 million for 2004, 2003, and 2002, respectively. In 2004,2005, the Company recorded net gains of $1.0 billion and, in 2004 and 2003, recorded net gains of $234 million and in 2003 and 2002, recorded net gains of $342 million and $425 million, respectively, related to the securitization of credit card receivables including the impact of changes in estimates in the timing of revenue recognition on securitizations.receivables. Gains recognized on the securitization of other assets during 2005, 2004 and 2003 and 2002 were $126 million, $93 million $52 million and $35$52 million, respectively.
Key assumptions used for credit cards, mortgages, and other assets during 20042005 and 20032004 in measuring the fair value of retained interests at the date of sale or securitization follow:
| ||||||||
---|---|---|---|---|---|---|---|---|
| Credit Cards | Mortgages and Other(1) | Credit Cards | Mortgages and Other(1) | ||||
Discount rate | 0.4% to 98.6% | 10.0% to 15.6% | 0.4% to | |||||
Constant prepayment rate | ||||||||
Anticipated net credit losses | 0.0% to 80.0% | |||||||
The 2003 to 2004 increase in the credit card discount rate and anticipated net credit loss assumptions, as well as the decline in the prepayment assumptions, are primarily driven by the increased securitization of cards and private label credit card receivables, including the Home Depot and Sears receivables, during 2004.
As required by SFAS 140, the effect of two negative changes in each of the key assumptions used to determine the fair value of retained interests must be disclosed. The negative effect of each change in each assumption must be calculated independently, holding all other assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse changes in the key assumptions may be less than the sum of the individual effects shown below.
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At December 31, 2004,2005, the key assumptions used to value retained interests and the sensitivity of the fair value to adverse changes of 10% and 20% in each of the key assumptions were as follows:
Key assumptions at December 31, 2005
Discount Rate | Constant Prepayment Rate | Anticipated Net Credit Losses | ||||
---|---|---|---|---|---|---|
Mortgages and other(1) | 0.0% to | |||||
Credit cards | ||||||
| | December 31, 2005 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2004 | | Credit Cards | Mortgages and Other | ||||||||
| | In millions of dollars | | In millions of dollars | |||||||||
Carrying value of retained interests | Carrying value of retained interests | $ | 8,953 | Carrying value of retained interests | $ | 7,275 | $ | 8,501 | |||||
Discount rate | Discount rate | Discount rate | |||||||||||
10% | $ | (111 | ) | $ | (124 | ) | |||||||
10% | $ | (162 | ) | 20% | (179 | ) | (243 | ) | |||||
20% | $ | (313 | ) | ||||||||||
Constant prepayment rate | Constant prepayment rate | Constant prepayment rate | |||||||||||
10% | $ | (345 | ) | 10% | $ | (160 | ) | $ | (281 | ) | |||
20% | $ | (661 | ) | 20% | (301 | ) | (531 | ) | |||||
Anticipated net credit losses | Anticipated net credit losses | Anticipated net credit losses | |||||||||||
10% | $ | (244 | ) | 10% | $ | (422 | ) | $ | (7 | ) | |||
20% | $ | (482 | ) | 20% | (841 | ) | (14 | ) | |||||
Managed Loans
After securitization of credit card receivables, the Company continues to maintain credit card customer account relationships and provides servicing for receivables transferred to the trusts. As a result, the Company considers both the securitized and unsecuritized credit card receivables to be part of the business it manages.
The following tables present a reconciliation between the managed basis and on-balance sheet credit card portfolios and the related delinquencies (loans which are 90 days or more past due) and credit losses, net of recoveries.
| 2005 | 2004 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars, except loans in billions | ||||||
Principal amounts, at year end | |||||||
On-balance sheet | $ | 69.5 | $ | 77.9 | |||
Securitized amounts | 96.2 | 85.3 | |||||
Loans held-for-sale | — | 2.5 | |||||
Total managed | $ | 165.7 | $ | 165.7 | |||
Delinquencies, at year end | |||||||
On balance sheet | $ | 1,630 | $ | 1,616 | |||
Securitized amounts | 1,314 | 1,296 | |||||
Loans held-for-sale | — | 32 | |||||
Total managed | $ | 2,944 | $ | 2,944 | |||
Credit losses, net of recoveries, for the year ended December 31, | 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
On-balance sheet | $ | 3,404 | $ | 4,140 | $ | 2,944 | |||
Securitized amounts | 5,326 | 4,865 | 4,529 | ||||||
Loans held-for-sale | 28 | 214 | 221 | ||||||
Total managed | $ | 8,758 | $ | 9,219 | $ | 7,694 | |||
Managed Credit Card Receivables
| 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|
| In millions of dollars, except loans in billions | |||||||
Principal amounts, at period end | ||||||||
Total managed | $ | 165.7 | $ | 158.4 | ||||
Securitized amounts | (85.3 | ) | (76.1 | ) | ||||
Loans held-for-sale | (2.5 | ) | — | |||||
On-balance sheet | $ | 77.9 | $ | 82.3 | ||||
Delinquencies, at period end | ||||||||
Total managed | $ | 2,944 | $ | 3,392 | ||||
Securitized amounts | (1,296 | ) | (1,421 | ) | ||||
Loans held-for-sale | (32 | ) | — | |||||
On-balance sheet | $ | 1,616 | $ | 1,971 | ||||
Credit losses, net of recoveries, for the year ended December 31 | 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Total managed | $ | 9,219 | $ | 7,694 | $ | 7,169 | ||||
Securitized amounts | (4,865 | ) | (4,529 | ) | (3,760 | ) | ||||
Loans held-for-sale | (214 | ) | (221 | ) | (355 | ) | ||||
On-balance sheet | $ | 4,140 | $ | 2,944 | $ | 3,054 | ||||
Mortgage Servicing Rights
The fair value of capitalized mortgage loan servicing rights (MSRs) was $4.1$4.3 billion and $2.0$4.1 billion at December 31, 20042005 and 2003,2004, respectively. The following table summarizes the changes in capitalized mortgage servicing rights (MSR):MSRs:
| 2004 | 2003 | 2005 | 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||
Balance, beginning of period | $ | 1,980 | $ | 1,632 | ||||||||||
Balance, beginning of year | $ | 4,149 | $ | 1,980 | ||||||||||
Originations | 769 | 839 | 842 | 769 | ||||||||||
Purchases | 2,559 | 301 | 107 | 2,559 | ||||||||||
Amortization | (628 | ) | (471 | ) | (859 | ) | (628 | ) | ||||||
Gain (loss) on change in value of MSRs(1) | (16 | ) | (39 | ) | (158 | ) | (16 | ) | ||||||
Provision for impairment(2)(3) | (515 | ) | (282 | ) | ||||||||||
Provision for impairments(2)(3) | 258 | (515 | ) | |||||||||||
Balance, end of period | $ | 4,149 | $ | 1,980 | ||||||||||
Balance, end of year | $ | 4,339 | $ | 4,149 | ||||||||||
130
The following table summarizes all the Company's involvement in VIEsSPEs by business segment at December 31, 20042005 and 20032004, both as direct participant or structurer:
Business Segments
| | 2005 | 2004(1) | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2004 Assets | 2003(1) Assets | | VIEs | QSPEs | Total Involvement with SPEs | VIEs | QSPEs | Total Involvement with SPEs | ||||||||||||||||
| | In millions of dollars | | In millions of dollars of SPE assets | ||||||||||||||||||||||
Global Consumer | Global Consumer | Global Consumer | ||||||||||||||||||||||||
Credit cards | $ | 11,564 | $ | 17,554 | Credit Cards | $ | 791 | $ | 107,925 | $ | 108,716 | $ | 11,564 | $ | 103,070 | $ | 114,634 | |||||||||
Leasing | 504 | 2,429 | Investment funds | 10,920 | — | 10,920 | 15,640 | — | 15,640 | |||||||||||||||||
Mortgages | 1,847 | 2,830 | Leasing | 2,437 | — | 2,437 | 504 | — | 504 | |||||||||||||||||
Other | 7,418 | 2,091 | Mortgages | 1,833 | 283,245 | 285,078 | 1,847 | 272,694 | 274,541 | |||||||||||||||||
Other | 1,733 | 5,716 | 7,449 | 7,418 | 1,902 | 9,320 | ||||||||||||||||||||
Total | $ | 21,333 | $ | 24,904 | ||||||||||||||||||||||
Total | Total | $ | 17,714 | $ | 396,886 | $ | 414,600 | $ | 36,973 | $ | 377,666 | $ | 414,639 | |||||||||||||
Global Corporate and Investment Bank | ||||||||||||||||||||||||||
Corporate and Investment Banking | Corporate and Investment Banking | |||||||||||||||||||||||||
Commercial paper conduits | $ | 49,114 | $ | 45,134 | Commercial paper conduits | $ | 59,662 | $ | — | $ | 59,662 | $ | 49,114 | $ | — | $ | 49,114 | |||||||||
Mortgage-backed securities | 70,809 | 34,885 | Mortgage-backed securities | 95,149 | 798,220 | 893,369 | 70,809 | 588,000 | 658,809 | |||||||||||||||||
CDOs | 45,516 | 24,050 | CDOs | 74,290 | — | 74,290 | 45,516 | — | 45,516 | |||||||||||||||||
Structured finance | 186,309 | 134,802 | Structured finance | 141,398 | 6,117 | 147,515 | 186,309 | 3,517 | 189,826 | |||||||||||||||||
Other | 42,915 | 56,514 | Other | 54,853 | 2,289 | 57,142 | 42,915 | 2,742 | 45,657 | |||||||||||||||||
Total | $ | 394,663 | $ | 295,385 | ||||||||||||||||||||||
Global Investment Management | ||||||||||||||||||||||||||
Investment funds | $ | 25,358 | $ | 25,655 | ||||||||||||||||||||||
Other | 375 | 420 | ||||||||||||||||||||||||
Total | $ | 25,733 | $ | 26,075 | ||||||||||||||||||||||
Total | Total | $ | 425,352 | $ | 806,626 | $ | 1,231,978 | $ | 394,663 | $ | 594,259 | $ | 988,922 | |||||||||||||
Global Wealth Management | Global Wealth Management | Global Wealth Management | ||||||||||||||||||||||||
Structured Investment Vehicles | $ | 3,546 | $ | 4,511 | Investment funds | $ | 4,820 | $ | — | $ | 4,820 | $ | 5,349 | $ | — | $ | 5,349 | |||||||||
Structured investment vehicles | 620 | — | 620 | 3,546 | — | 3,546 | ||||||||||||||||||||
Total | $ | 3,546 | $ | 4,511 | ||||||||||||||||||||||
Total | Total | $ | 5,440 | $ | — | $ | 5,440 | $ | 8,895 | $ | — | $ | 8,895 | |||||||||||||
Proprietary Investment Activities | ||||||||||||||||||||||||||
Alternative Investments | Alternative Investments | |||||||||||||||||||||||||
Structured investment vehicles | $ | 50,968 | $ | 53,978 | Structured investment vehicles | $ | 55,692 | $ | — | $ | 55,692 | $ | 50,968 | $ | — | $ | 50,968 | |||||||||
Investment funds | 3,443 | 2,446 | Investment funds | 4,249 | — | 4,249 | 3,443 | — | 3,443 | |||||||||||||||||
Total | Total | $ | 59,941 | $ | — | $ | 59,941 | $ | 54,411 | $ | — | $ | 54,411 | |||||||||||||
Total | $ | 54,411 | $ | 56,424 | ||||||||||||||||||||||
Discontinued Operations(2) | Discontinued Operations(2) | |||||||||||||||||||||||||
Investment Funds | $ | — | $ | — | $ | — | $ | 4,369 | $ | — | $ | 4,369 | ||||||||||||||
Other | — | — | — | 375 | — | 375 | ||||||||||||||||||||
Total | Total | $ | — | $ | — | $ | — | $ | 4,744 | $ | — | $ | 4,744 | |||||||||||||
Total Citigroup | Total Citigroup | $ | 499,686 | $ | 407,299 | Total Citigroup | $ | 508,447 | $ | 1,203,512 | $ | 1,711,959 | $ | 499,686 | $ | 971,925 | $ | 1,471,611 | ||||||||
131
Some of the Company's private equity subsidiaries may invest in venture capital entities that may also be subject to FIN 46-R and are not included in the previous table above showing our VIE involvement. The Company accounts for its venture capital activities in accordance with the Investment Company Audit Guide (Audit Guide). Also excluded from the above table are certain funds for which the Company provides investment management services. The FASB deferred adoption ofCompany's involvement in these funds is not considered significant, and in accordance with FIN 46-R, for nonregistered investment companies that apply the Audit Guide. The FASB permitted nonregistered investment companies to defer consolidationthese funds do not qualify as VIEs.
Following issuance of VIEs with which they are involved until a proposed Statement of Position, onamending the scope of the Audit Guide is finalized, which is expected in the first quarter of 2005. Following issuance of the Statement of Position,guide to redefine an investment company, the FASB will consider further modification to FIN 46-R to provide an exception for companies that qualify to apply the revised Audit Guide. Following issuance of the revised Audit Guide, which is expected in 2006, and further modification, if any, to FIN 46-R, the Company will assess the effect of such guidance on its private equity business.
The Company may provide administrative, trustee and/or investment management services to numerous personal estate trusts, which are considered VIEs under FIN 46-R, but not consolidated. These trusts are excluded from the table summarizing the Company's involvement in VIEs.
The following table represents the carrying amounts and classification of consolidated assets that are collateral for VIE obligations, including VIEs that were consolidated prior to the implementation of FIN 4646-R under existing guidance and VIEs that the Company became involved with after July 1, 2003:
| December 31, 2004 | December 31, 2003 | December 31, 2005 | December 31, 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars | In billions of dollars | ||||||||||
Cash | $ | 0.4 | $ | 0.2 | $ | 0.4 | $ | 0.4 | ||||
Trading account assets | 16.8 | 13.9 | 29.7 | 16.8 | ||||||||
Investments | 6.6 | 8.4 | 3.2 | 6.6 | ||||||||
Loans | 10.7 | 12.2 | 9.5 | 10.7 | ||||||||
Other assets | 1.1 | 2.2 | 4.7 | 1.1 | ||||||||
Total assets of consolidated VIEs | $ | 35.6 | $ | 36.9 | $ | 47.5 | $ | 35.6 | ||||
The consolidated VIEs included in the table above represent hundreds of separate entities with which the Company is involved and includes approximately $1.6 billion related to VIEs newly consolidated as a result of adopting FIN 46-R as of January 1, 2004 and $2.1 billion related to VIEs newly consolidated as a result of adopting FIN 46 at July 1, 2003. Of the $35.6$47.5 billion and $36.9$35.6 billion of total assets of VIEs consolidated by the Company at December 31, 2005 and 2004, and 2003, respectively, $28.1$37.2 billion and $24.0$28.1 billion represent structured transactions where the Company packages and securitizes assets purchased in the financial markets or from clients in order to create new security offerings and financing opportunities for clients, $4.8clients; $7.6 billion and $5.6$4.8 billion represent investment vehicles that were established to provide a return to the investors in the vehicles,vehicles; and $2.7 billion and $1.2 billion represent vehicles that hold lease receivables and equipment as collateral to issue debt securities, thus obtaining secured financing at favorable interest rates. The December 31, 2003 consolidated VIE balance includes $6.1 billion of trust preferred securities, which are a source of funding and regulatory capital for the Company. As a result of adopting FIN 46-R as of March 31, 2004, the trust preferred securities were deconsolidated, and the December 31, 2004 total asset balance of consolidated VIEs therefore excludes trust preferred securities.
The Company may along with other financial institutions,provide various products and services to the VIEs. It may provide liquidity facilities, to the VIEs. Furthermore, the Company may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of letters of credit and other guarantees to the VIEs, may be the investment manager, and may also have an ownership interest or other investment in certain VIEs. In general, the investors in the obligations of consolidated VIEs have recourse only to the assets of thosethe VIEs and do not have recourse to the Company, except where the Company has provided a guarantee to the investors or is the counterparty to a derivative transaction involving the VIE.
In addition to the VIEs that are consolidated in accordance with FIN 46-R, the Company has significant variable interests in certain other VIEs that are not consolidated because the Company is not the primary beneficiary. These include multi-seller finance companies, collateralized debt obligations (CDOs), structured finance transactions,
and numerous investment funds. In addition to these VIEs, the Company issues preferred securities to third-partythird- party investors through trust vehicles as a source of funding and regulatory capital, which were deconsolidated during the first quarter of 2004. One trust with assets of $206 million was deconsolidated at December 31, 2003. The Company's liabilities to the deconsolidated truststrust are included in long-term debt at December 31, 2004 and 2003.debt.
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. Generally, the Company has no ownership interest in the conduits. The sellers continue to service the transferred assets. The conduits' asset purchases are funded by issuing commercial paper and medium-term notes. The sellers absorb the first losses of the conduits 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 loss enhancement in the form of letters of credit and other guarantees. All fees are charged on a market basis.
During 2003, to comply with FIN 46, all but two46-R, many of the conduits issued "first loss" subordinated notes such that one third-party investor in each conduit would be deemed the primary beneficiary and would consolidate the conduit. At December 31, 20042005 and 2003,2004, total assets in unconsolidated conduits were $54.2$55.3 billion and $44.3$54.2 billion, respectively. One conduit with assets of $656 million and $823 million iswas consolidated at December 31, 2004 and 2003, respectively.
The Company packages and securitizes assets purchased in the financial markets or from clients in order to create new security offerings and financing opportunities for institutional and private bank clients as well as retail customers, including hedge funds, mutual funds, unit investment trusts, and other investment funds that match the clients' investment needs and preferences. The funds 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. In a limited number of cases, the Company may guarantee the return of principal to investors. The Company typically manages the funds for market-rate fees. In addition, the Company may be one of several liquidity providers to the funds and may place the securities with investors. Many investment funds are organized as registered investment companies (RICs), corporations or partnerships with sufficient capital to fund their operations without additional credit support.2004.
The Company also packages and securitizes assets purchased in the financial markets in order to create new security offerings, including arbitrage collateralized debt obligations (CDOs)CDOs and synthetic CDOs for institutional clients and retail customers, that match the clients' investment needs and preferences. Typically, these instruments diversify investors' risk to a pool of assets as compared with investments in an individual asset. The VIEs, which are issuers of CDO securities, are generally organized as limited liability corporations. The Company typically receives fees for structuring and/or distributing the securities sold to investors. In some cases, the Company may repackage the investment with higher rated debt CDO securities or U.S. Treasury securities to provide a greater or a very high degree of certainty of the return of invested principal. A third-party manager is typically retained by the VIE to select collateral for inclusion in the pool and then actively manage it, or, in other cases, only to manage work-out credits. The Company may also provide other financial services and/or products to the VIEs for market-rate fees. These may include: the provision of liquidity or contingent liquidity facilities,facilities; interest rate or foreign exchange hedges and credit derivative instruments, as well asinstruments; and the purchasing and warehousing of securities until they are sold to the SPE. The Company is not the primary beneficiary of these VIEs under FIN 46-R due to ourits limited continuing involvement and, as a result, we dodoes not consolidate their assets and liabilities in ourits financial statements.
132
In addition to the conduits discussed above, the totalfollowing table represents the assets of unconsolidated VIEs where the Company has significant involvement is $145.9 billion and $116.6 billioninvolvement:
| December 31, 2005 | December 31, 2004(1) | ||||
---|---|---|---|---|---|---|
| In billions of dollars | |||||
CDO-type transactions | $ | 40.7 | $ | 17.6 | ||
Investment-related transactions | 6.9 | 7.6 | ||||
Trust preferred securities | 6.5 | 6.4 | ||||
Mortgage-related transactions | 3.1 | 2.2 | ||||
Structured finance and other | 60.5 | 102.0 | ||||
Total assets of significant unconsolidated VIEs | $ | 117.7 | $ | 135.8 | ||
The Company has also established a number of investment funds as opportunities for qualified employees to invest in venture capital investments. The Company acts as investment manager to these funds and may provide employees with financing on both a recourse and non-recourse basis for a portion of the employees' investment commitments.
In addition, the Company administers numerous personal estate trusts. The Company may act as trustee and may also be the investment manager for the trust assets.
As mentioned above, the Company may, along with other financial institutions, provide liquidity facilities, such as commercial paper backstop lines of credit to the VIEs. The Company may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of letters of credit and other guarantees to the VIEs, may be the investment manager, and may also have an ownership interest in certain VIEs. Although actual losses are not expected to be material, the Company's maximum exposure to loss as a result of its involvement with VIEs that are not consolidated was $78$91 billion and $50$78 billion at December 31, 20042005 and 2003,2004 respectively. For this purpose, maximum exposure is considered to be the notional amounts of credit lines, guarantees, other credit support, and liquidity facilities, the notional amounts of credit default swaps and certain total return swaps, and the amount invested where Citigroup has an ownership interest in the VIEs. In addition, the Company may be party to other derivative contracts with VIEs. Exposures that are considered to be guarantees are also included in Note 2725 to the Consolidated Financial Statements.Statements on page 154.
133
14. Goodwill and Intangible Assets
The changes in goodwill during 2004 and 2005 were as follows:
| Goodwill | |||
---|---|---|---|---|
| In millions of dollars | |||
Balance at December 31, 2003 | $ | 27,581 | ||
WMF acquisition | 760 | |||
KorAm acquisition | 2,200 | |||
Principal Residential Mortgage, Inc. acquisition | 102 | |||
Knight Trading acquisition | 118 | |||
Purchase accounting adjustments—Sears credit card portfolio acquisition | 582 | |||
Foreign exchange translation and other | 649 | |||
Balance at December 31, 2004 | $ | 31,992 | ||
Legg Mason acquisition | $ | 716 | ||
FAB acquisition | 612 | |||
ABN Amro Custody acquisition | 62 | |||
Unisen acquisition | 57 | |||
Purchase accounting adjustments — KorAm acquisition | (110 | ) | ||
Disposition of Life Insurance and Annuities | (291 | ) | ||
Disposition of CitiCapital Transportation Finance | (119 | ) | ||
Foreign exchange translation and other | 211 | |||
Balance at December 31, 2005 | $ | 33,130 | ||
During 2005 and 2004 no goodwill was written off due to impairment.
The changes in intangible assets during 2004 and 2005 were as follows:
| Intangible Assets (Net Carrying Amount) | |||
---|---|---|---|---|
| In millions of dollars | |||
Balance at December 31, 2003 | $ | 13,881 | ||
WMF acquisition—customer relationship intangibles | 140 | |||
Alliance acquisition—present value of future profits | 143 | |||
KorAm acquisition—customer relationship intangibles | 170 | |||
KorAm acquisition—core deposit intangibles | 81 | |||
KorAm acquisition—other intangibles | 41 | |||
Changes in gross capitalized MSRs(1)(2)(3) | 2,797 | |||
Purchase accounting adjustments—Sears credit card portfolio acquisition | (582 | ) | ||
Foreign exchange translation and other | 92 | |||
Amortization expense | (1,492 | ) | ||
Balance at December 31, 2004 | $ | 15,271 | ||
Federated receivables acquisition—purchased credit card relationships | $ | 535 | ||
Legg Mason acquisition—customer relationship intangibles | 380 | |||
FAB acquisition—core deposit intangibles | 56 | |||
Servicing rights on Student Loan securitizations | 78 | |||
Unisen acquisition—customer relationship intangibles | 38 | |||
Changes in gross capitalized MSRs(1)(2) | 1,049 | |||
Disposition of Life Insurance and Annuities | (86 | ) | ||
Disposition of Asset Management | (778 | ) | ||
Foreign exchange translation and other | 48 | |||
Amortization expense | (1,842 | ) | ||
Balance at December 31, 2005 | $ | 14,749 | ||
134
The changes in goodwill by segment during 2005 and 2004 were as follows:
| Global Consumer | Corporate and Investment Banking | Global Wealth Management | Corporate/ Other | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
Balance at January 1, 2004(1) | $ | 22,507 | $ | 4,275 | $ | 376 | $ | 423 | $ | 27,581 | ||||||
Goodwill acquired during 2004 | 2,072 | 990 | 118 | — | 3,180 | |||||||||||
Other(1)(2) | 720 | 552 | 1 | (42 | ) | 1,231 | ||||||||||
Balance at December 31, 2004(1) | $ | 25,299 | $ | 5,817 | $ | 495 | $ | 381 | $ | 31,992 | ||||||
Goodwill acquired during 2005 | $ | 612 | $ | 119 | $ | 716 | $ | — | $ | 1,447 | ||||||
Goodwill disposed during 2005 | (119 | ) | — | — | (291 | ) | (410 | ) | ||||||||
Other(2) | 272 | 1 | (82 | ) | (90 | ) | 101 | |||||||||
Balance at December 31, 2005 | $ | 26,064 | $ | 5,937 | $ | 1,129 | $ | — | $ | 33,130 | ||||||
The components of intangible assets were as follows:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization(1) | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization(1) | Net Carrying Amount | ||||||||||||
| In millions of dollars | |||||||||||||||||
Purchased credit card relationships | $ | 7,541 | $ | 2,929 | $ | 4,612 | $ | 7,040 | $ | 2,366 | $ | 4,674 | ||||||
Mortgage servicing rights(1) | 8,808 | 4,469 | 4,339 | 8,099 | 3,950 | 4,149 | ||||||||||||
Core deposit intangibles | 1,248 | 424 | 824 | 1,158 | 318 | 840 | ||||||||||||
Other customer relationships | 1,065 | 596 | 469 | 1,089 | 497 | 592 | ||||||||||||
Present value of future profits | 429 | 229 | 200 | 781 | 474 | 307 | ||||||||||||
Other(2) | 4,455 | 647 | 3,808 | 4,129 | 692 | 3,437 | ||||||||||||
Total amortizing intangible assets | $ | 23,546 | $ | 9,294 | $ | 14,252 | $ | 22,296 | $ | 8,297 | $ | 13,999 | ||||||
Indefinite-lived intangible assets | 497 | 1,272 | ||||||||||||||||
Total intangible assets | $ | 14,749 | $ | 15,271 | ||||||||||||||
The intangible assets recorded during 2005 and their respective amortization periods are as follows:
| 2005 | Weighted-Average Amortization Period in Years | |||
---|---|---|---|---|---|
| In millions of dollars | ||||
Mortgage servicing rights | $ | 950 | 6 | ||
Purchased credit card relationships | 535 | 11 | |||
Other customer relationships | 418 | 14 | |||
Core deposit intangibles | 56 | 15 | |||
Other intangibles | 91 | 5 | |||
Total intangible assets recorded during the period(1) | $ | 2,050 | |||
Intangible assets amortization expense was $1,842 million, $1,482 million and $1,178 million for 2005, 2004 and 2003, respectively. Intangible assets amortization expense is estimated to be $2,013 million in 2006, $1,806 million in 2007, $1,630 million in 2008, $1,474 million in 2009, and $1,271 million in 2010.
135
Investment Banking and Brokerage Borrowings
Investment banking and brokerage borrowings and the corresponding weighted average interest rates at December 31 are as follows:
| 2004 | 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | Weighted Average Interest Rate | Balance | Weighted Average Interest Rate | |||||||
| In millions of dollars | ||||||||||
Commercial paper | $ | 17,368 | 2.25 | % | $ | 17,626 | 1.07 | % | |||
Bank borrowings | 1,427 | 3.33 | % | 918 | 1.23 | % | |||||
Other | 7,004 | 2.32 | % | 3,898 | 3.23 | % | |||||
Total | $ | 25,799 | $ | 22,442 | |||||||
Investment banking and brokerage borrowings are short-term in nature and include commercial paper, bank borrowings and other borrowings used to finance the operations of CGMHI, including the securities settlement process. Outstanding bank borrowings include both U.S. dollar- and non-U.S. dollar-denominated loans. The non-U.S. dollar loans are denominated in various currencies including the Japanese yen, the euro, and U.K. sterling. All of the commercial paper outstanding at December 31, 2004 and 2003 was U.S. dollar- denominated.
CGMHI has 364-day committed uncollateralized revolving line of credit facilities with unaffiliated banks totaling $3.3 billion. These facilities have a two-year term-out provision with any borrowings maturing on various dates through 2007. CGMHI also has three-year facilities totaling $1.4 billion with unaffiliated banks with any borrowings maturing on various dates in 2007. CGMHI may borrow under these revolving credit facilities at various interest rate options (LIBOR, Fed Funds or base rate) and compensates the banks for these facilities through facility fees. At December 31, 2004, there were no outstanding borrowings under these facilities. CGMHI also has committed long-term financing facilities with unaffiliated banks. At December 31, 2004, CGMHI had drawn down the full $1.5 billion then available under these facilities. A bank can terminate these facilities by giving CGMHI prior notice (generally one year). CGMHI compensates the banks for these facilities through facility fees. Under all of these facilities, CGMHI is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreements). At December 31, 2004, this requirement was exceeded by approximately $6.8 billion. CGMHI also has substantial borrowing arrangements consisting of facilities that CGMHI has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an ongoing basis to ensure flexibility in meeting CGMHI's short-term requirements.
Short-Term Borrowings
Short-term borrowings consist of commercial paper and other borrowings with weighted average interest rates as follows:
| 2004 | 2003 | 2005 | 2004 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | Weighted Average | Balance | Weighted Average | Balance | Weighted Average | Balance | Weighted Average | ||||||||||||||
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||
Citigroup Parent Company | $ | — | — | $ | 381 | 0.84 | % | |||||||||||||||
Citicorp and Subsidiaries | 8,270 | 2.28 | % | 14,712 | 1.25 | % | ||||||||||||||||
Citigroup Funding Inc. | $ | 32,581 | 4.34 | % | $ | — | — | % | ||||||||||||||
Citigroup Global Markets Holdings Inc. | — | — | 17,368 | 2.25 | ||||||||||||||||||
Other Citigroup Subsidiaries | 1,578 | 3.50 | 8,270 | 2.28 | ||||||||||||||||||
8,270 | 15,093 | $ | 34,159 | $ | 25,638 | |||||||||||||||||
Other borrowings | 22,698 | 2.56 | % | 21,094 | 1.81 | % | 32,771 | 3.85 | % | 31,129 | 2.54 | % | ||||||||||
Total | $ | 30,968 | $ | 36,187 | $ | 66,930 | $ | 56,767 | ||||||||||||||
Citigroup and Citicorp issueissues commercial paper directly to investors. Citigroup and Citicorp, both of which are bank holding companies, maintain combinedinvestors, maintaining liquidity reserves of cash and securities to support their combinedits outstanding commercial paper.
Borrowings under bank lines of credit may be at interest rates based on LIBOR, CD rates, the prime rate, or bids submitted by the banks. Each companyCitigroup pays its banks commitment fees for its lines of credit.
Citicorp,Citigroup, CGMHI, and some of their nonbank subsidiaries have credit facilities with Citicorp'sCitigroup's subsidiary banks, including Citibank, N.A. Borrowings under these facilities must be secured in accordance with Section 23A of the Federal Reserve Act.
Citigroup Finance Canada Inc.,CGMHI has a wholly owned subsidiarysyndicated five-year committed uncollateralized revolving line of Associates, has an unutilized credit facility of Canadian $1.0 billion as ofwith unaffiliated banks totaling $2.5 billion. CGMHI also has three-and five-year bilateral facilities totaling $575 million with unaffiliated banks with borrowings maturing on various dates in 2007, 2008 and 2010. At December 31, 2004 that matures in October 2005. The facility2005, there were no outstanding borrowings under these facilities.
CGMHI also has committed long-term financing facilities with unaffiliated banks. At December 31, 2005, CGMHI had drawn down the full $1.65 billion available under these facilities, of which $375 million is guaranteed by Citicorp. In connection therewith, CiticorpCitigroup. A bank can terminate these facilities by giving CGMHI prior notice (generally one year). Under all of these facilities, CGMHI is required to maintain a certain level of consolidated stockholder's equityadjusted net worth (as defined in the agreements). At December 31, 2004,2005, this requirement was exceeded by approximately $76.5$8.9 billion. CiticorpCGMHI also has also guaranteed various other debt obligationssubstantial borrowing arrangements consisting of Associates and CitiFinancial Credit Company, eachfacilities that CGMHI has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an indirect subsidiary of Citicorp.ongoing basis to ensure flexibility in meeting CGMHI's short-term requirements.
136
Long-Term Debt
| | | Balances | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Coupon | | ||||||||||||||||||
| Weighted Average Coupon | Maturities | 2004 | 2003 | Maturities | 2005 | 2004 | |||||||||||||
| In millions of dollars at year end | In millions of dollars at year end | ||||||||||||||||||
Citigroup Parent Company | ||||||||||||||||||||
Senior notes(1) | 4.17 | % | 2005-2034 | $ | 68,119 | $ | 53,452 | 4.42 | % | 2006-2035 | $ | 74,429 | $ | 68,119 | ||||||
Subordinated notes | 5.46 | % | 2015-2033 | 14,243 | 10,734 | 5.45 | 2006-2033 | 19,712 | 14,243 | |||||||||||
Junior subordinated notes relating to trust preferred securities(2) | 6.69 | % | 2031-2036 | 5,551 | 200 | |||||||||||||||
Citicorp and Subsidiaries | ||||||||||||||||||||
Junior subordinated notes relating to trust preferred securities | 6.68 | 2027-2036 | 6,459 | 6,397 | ||||||||||||||||
Citigroup Subsidiaries | ||||||||||||||||||||
Senior notes | 4.41 | % | 2005-2037 | 68,173 | 56,880 | 4.75 | 2006-2037 | 68,563 | 68,173 | |||||||||||
Subordinated notes | 6.67 | % | 2005-2033 | 4,808 | 5,071 | 5.71 | 2006-2016 | 2,576 | 4,808 | |||||||||||
Junior subordinated notes relating to trust preferred securities(2) | 7.98 | % | 2027 | 846 | — | |||||||||||||||
Citigroup Global Markets Holdings Inc. | ||||||||||||||||||||
Citigroup Global Markets Holdings Inc.(2) | ||||||||||||||||||||
Senior notes | 3.60 | % | 2005-2097 | 45,139 | 35,490 | 2.61 | 2006-2097 | 38,884 | 45,139 | |||||||||||
Subordinated notes | 3.04 | % | 2005-2006 | 98 | 130 | 4.77 | 2006-2011 | 330 | 98 | |||||||||||
Travelers Insurance Company | 12.00 | % | 2014 | 5 | 8 | |||||||||||||||
Citigroup Funding Inc.(3) | ||||||||||||||||||||
Senior notes | 4.24 | 2006-2035 | 5,963 | — | ||||||||||||||||
Other | ||||||||||||||||||||
Secured debt | 2.42 | % | 2005-2044 | 928 | 737 | 1.83 | 2006-2044 | 583 | 933 | |||||||||||
Total | $ | 207,910 | $ | 162,702 | $ | 217,499 | $ | 207,910 | ||||||||||||
Senior notes | $ | 181,431 | $ | 145,822 | $ | 187,839 | $ | 181,431 | ||||||||||||
Subordinated notes | 19,149 | 15,935 | 22,618 | 19,149 | ||||||||||||||||
Junior subordinated notes relating to trust preferred securities(2) | 6,397 | 200 | ||||||||||||||||||
Junior subordinated notes relating to trust preferred securities | 6,459 | 6,397 | ||||||||||||||||||
Other | 933 | 745 | 583 | 933 | ||||||||||||||||
Total | $ | 207,910 | $ | 162,702 | $ | 217,499 | $ | 207,910 | ||||||||||||
The Company issues both U.S. dollar- and non-U.S. dollar- denominated fixed and variable rate debt. The Company utilizesdebt in a range of currencies. It uses derivative contracts, primarily interest rate swaps, to effectively convert a portion of its fixed rate debt to variable rate debt and variable rate debt to fixed rate debt. The maturity structure of the derivatives generally corresponds withto the maturity structure of the debt being hedged. In addition, the Company utilizesuses other derivative contracts to manage the foreign exchange impact of certain debt issuances. At December 31, 2004,2005, the Company's overall weighted average interest rate for long-term debt was 4.35%4.36% on a contractual basis and 3.50%4.08% including the effects of derivative contracts.
Aggregate annual maturities onof long-term debt obligations (based on final maturity dates) including trust preferred securities are as follows:
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||||||||||||||||||||||||
Citigroup Parent Company | $ | 11,478 | $ | 10,186 | $ | 8,877 | $ | 6,692 | $ | 7,570 | $ | 43,110 | $ | 10,957 | $ | 9,610 | $ | 12,240 | $ | 7,721 | $ | 11,792 | $ | 48,280 | ||||||||||||
Citicorp and Subsidiaries | 18,170 | 18,031 | 13,722 | 8,222 | 6,022 | 9,660 | ||||||||||||||||||||||||||||||
Other Citigroup Subsidiaries | 19,109 | 19,165 | 15,809 | 7,568 | 2,280 | 7,208 | ||||||||||||||||||||||||||||||
Citigroup Global Markets Holdings Inc. | 6,789 | 9,786 | 6,010 | 5,109 | 7,874 | 9,669 | 8,273 | 5,359 | 5,767 | 6,032 | 5,446 | 8,337 | ||||||||||||||||||||||||
Travelers Insurance Company | — | — | — | — | — | 5 | ||||||||||||||||||||||||||||||
Citigroup Funding Inc. | 586 | 602 | 2,088 | 229 | 991 | 1,467 | ||||||||||||||||||||||||||||||
Other | $ | 195 | $ | 250 | $ | 165 | $ | 227 | $ | 11 | $ | 80 | 250 | 165 | 77 | 11 | — | 80 | ||||||||||||||||||
Total | $ | 36,632 | $ | 38,253 | $ | 28,774 | $ | 20,250 | $ | 21,477 | $ | 62,524 | $ | 39,175 | $ | 34,901 | $ | 35,981 | $ | 20,561 | $ | 20,509 | $ | 65,372 | ||||||||||||
137
Long-term debt at December 31, 2005 and December 31, 2004 includes $6,459 million and $6,397 million, respectively, of junior subordinated debt. The Company formed statutory business trusts under the laws of the state of Delaware, which exist for the exclusive purposes of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of its parent; and (iii) engaging in only those activities necessary or incidental thereto. Upon approval from the Federal Reserve, Citigroup has the right to redeem these securities.
As of December 31, 2003 and prior, these Trusts were consolidated subsidiaries of Citigroup. As a result, the related Trust Securities were classified as "Citigroup or subsidiary-obligated mandatorily redeemable securities of subsidiary trusts holding solely junior subordinated debt securities of—Parent or Subsidiary" on Citigroup's Consolidated Balance Sheet. In addition, the related interest expense was included in the Consolidated Statement of Income.
In 2004, Citigroup adopted FIN 46-R, which resulted in the assets and liabilities, as well as the related income and expenses of the Trusts, being excluded from Citigroup's Consolidated Financial Statements. However, the subordinated debentures issued by the Citigroup subsidiaries and purchased by the Trusts remain on Citigroup's Consolidated Balance Sheet. In addition, the related interest expense continues to be included withinin the Consolidated Income Statement.
For Regulatory Capital purposes, these Trust Securities remain a component of Tier 1 Capital. See "Capital Resources and Liquidity" section on page 62.83.
Citigroup owns all of the voting securities of the subsidiary trusts. The subsidiary trusts have no assets, operations, revenues or cash flows other than those related to the issuance, administration, and repayment of the subsidiary trusts and the subsidiary trusts' common securities. The subsidiary trusts' obligations are fully and unconditionally guaranteed by Citigroup.
The following table summarizes the financial structure of each of the Company's subsidiary trusts at December 31, 2004:2005:
| | | | | | Junior Subordinated Debentures Owned by Trust | | | | | | Junior Subordinated Debentures Owned by Trust | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | Common Shares Issued to Parent | | | | | Common Shares Issued to Parent | ||||||||||||||||||||||||||
Trust Securities with Distributions Guaranteed by: | Issuance Date | Securities Issued | Liquidation Value(1) | Coupon Rate | Amount | Maturity | Redeemable by Issuer Beginning | Issuance Date | Securities Issued | Liquidation Value | Coupon Rate | Amount | Maturity | Redeemable by Issuer Beginning | ||||||||||||||||||||||
| In millions of dollars, except share amounts | In million of dollars except share amounts | ||||||||||||||||||||||||||||||||||
Citigroup: | ||||||||||||||||||||||||||||||||||||
Citicorp Capital I(1) | Dec. 1996 | 300,000 | $ | 300 | 7.933 | % | 9,000 | $ | 309 | Feb. 15, 2027 | Feb. 15, 2007 | |||||||||||||||||||||||||
Citicorp Capital II(1) | Jan. 1997 | 450,000 | 450 | 8.015 | % | 13,500 | 464 | Feb. 15, 2027 | Feb. 15, 2007 | |||||||||||||||||||||||||||
Citigroup Capital II | Dec. 1996 | 400,000 | $ | 400 | 7.750 | % | 12,372 | $ | 412 | Dec. 1, 2036 | Dec. 1, 2006 | Dec. 1996 | 400,000 | 400 | 7.750 | % | 12,372 | 412 | Dec. 1, 2036 | Dec. 1, 2006 | ||||||||||||||||
Citigroup Capital III | Dec. 1996 | 200,000 | 200 | 7.625 | % | 6,186 | 206 | Dec. 1, 2036 | Not redeemable | Dec. 1996 | 200,000 | 200 | 7.625 | % | 6,186 | 206 | Dec. 1, 2036 | Not redeemable | ||||||||||||||||||
Citigroup Capital VII | July 2001 | 46,000,000 | 1,150 | 7.125 | % | 1,422,681 | 1,186 | July 31, 2031 | July 31, 2006 | July 2001 | 46,000,000 | 1,150 | 7.125 | % | 1,422,681 | 1,186 | July 31, 2031 | July 31, 2006 | ||||||||||||||||||
Citigroup Capital VIII | Sept. 2001 | 56,000,000 | 1,400 | 6.950 | % | 1,731,959 | 1,443 | Sept. 15, 2031 | Sept. 17, 2006 | Sept. 2001 | 56,000,000 | 1,400 | 6.950 | % | 1,731,959 | 1,443 | Sept. 15, 2031 | Sept. 17, 2006 | ||||||||||||||||||
Citigroup Capital IX | Feb. 2003 | 44,000,000 | 1,100 | 6.000 | % | 1,360,825 | 1,134 | Feb. 14, 2033 | Feb. 13, 2008 | Feb. 2003 | 44,000,000 | 1,100 | 6.000 | % | 1,360,825 | 1,134 | Feb. 14, 2033 | Feb. 13, 2008 | ||||||||||||||||||
Citigroup Capital X | Sept. 2003 | 20,000,000 | 500 | 6.100 | % | 618,557 | 515 | Sept. 30, 2033 | Sept. 30, 2008 | Sept. 2003 | 20,000,000 | 500 | 6.100 | % | 618,557 | 515 | Sept. 30, 2033 | Sept. 30, 2008 | ||||||||||||||||||
Citigroup Capital XI | Sept. 2004 | 24,000,000 | 600 | 6.000 | % | 742,269 | 619 | Sept. 27, 2034 | Sept. 27, 2009 | Sept. 2004 | 24,000,000 | 600 | 6.000 | % | 742,269 | 619 | Sept. 27, 2034 | Sept. 27, 2009 | ||||||||||||||||||
Adam Capital Trust I(2) | Nov. 2001 | 25,000 | 25 | 6 mo. LIB +375 bp. | 774 | 26 | Dec. 08, 2031 | Dec. 08, 2006 | ||||||||||||||||||||||||||||
Adam Statutory Trust I(2) | Dec. 2001 | 23,000 | 23 | 3 mo. LIB +360 bp. | 712 | 24 | Dec. 18, 2031 | Dec. 18, 2006 | ||||||||||||||||||||||||||||
Adam Capital Trust II(2) | Apr. 2002 | 22,000 | 22 | 6 mo. LIB +370 bp. | 681 | 23 | Apr. 22, 2032 | Apr. 22, 2007 | ||||||||||||||||||||||||||||
Adam Statutory Trust II(2) | Mar. 2002 | 25,000 | 25 | 3 mo. LIB +360 bp. | 774 | 26 | Mar. 26, 2032 | Mar. 26, 2007 | ||||||||||||||||||||||||||||
Adam Capital Trust III(2) | Dec. 2002 | 17,500 | 18 | 3 mo. LIB +335 bp. | 542 | 18 | Jan. 07, 2033 | Jan. 07, 2008 | ||||||||||||||||||||||||||||
Adam Statutory Trust III(2) | Dec. 2002 | 25,000 | 25 | 3 mo. LIB +325 bp. | 774 | 26 | Dec. 26, 2032 | Dec. 26, 2007 | ||||||||||||||||||||||||||||
Adam Statutory Trust IV(2) | Sept. 2003 | 40,000 | 40 | 3 mo. LIB +295 bp. | 1,238 | 41 | Sept. 17, 2033 | Sept. 17, 2008 | ||||||||||||||||||||||||||||
Adam Statutory Trust V(2) | Mar. 2004 | 35,000 | 35 | 3 mo. LIB +279 bp. | 1,083 | 36 | Mar. 17, 2034 | Mar. 17, 2009 | ||||||||||||||||||||||||||||
Total parent-obligated | $ | 5,350 | $ | 5,515 | ||||||||||||||||||||||||||||||||
Total obligated | $ | 6,313 | $ | 6,508 | ||||||||||||||||||||||||||||||||
Subsidiaries: | ||||||||||||||||||||||||||||||||||||
Citicorp Capital I | Dec. 1996 | 300,000 | $ | 300 | 7.933 | % | 9,000 | $ | 309 | Feb. 15, 2027 | Feb. 15, 2007 | |||||||||||||||||||||||||
Citicorp Capital II | Jan. 1997 | 450,000 | 450 | 8.015 | % | 13,500 | 464 | Feb. 15, 2027 | Feb. 15, 2007 | |||||||||||||||||||||||||||
Total subsidiary-obligated | $ | 750 | $ | 773 | ||||||||||||||||||||||||||||||||
In each case, the coupon rate on the debentures is the same as that on the trust securities. Distributions on the trust securities and interest on the debentures are payable quarterly, except for Citigroup Capital II and III and Citicorp Capital I and II, on which distributions are payable semiannually.
On September 27, 2004, Citigroup issued $600 million in Trust Preferred Securities (Citigroup XI). On October 14, 2004, Citigroup redeemed for cash all of the $600 million Trust Preferred Securities of Citigroup Capital VI, at the redemption price of $25 per preferred security plus any accrued distribution to but excluding the date of redemption.138
During 2003, the Company redeemed Citigroup Capital IV, Citigroup Capital V, SSBH Capital I, and Citicorp Capital III.
14. Goodwill and Intangible Assets
During 2004 and 2003, no goodwill was impaired or written off. During the fourth quarter of 2004, the Company recorded approximately $118 million of goodwill in connection with the acquisition of Knight Trading. During the third quarter of 2004, the Company recorded approximately $102 million of goodwill in connection with the acquisition of Principal Residential Mortgage, Inc. During the second quarter of 2004, the Company recorded approximately $2.2 billion of goodwill in connection with the acquisition of KorAm. During the first quarter of 2004, the Company recorded approximately $890 million of goodwill in connection with the acquisition of WMF. Subsequently, $130 million of the WMF goodwill was reclassified during the 2004 second quarter to establish a deferred tax asset. The Company recorded goodwill of approximately $780 million during the fourth quarter of 2003, primarily related to the acquisition of Sears. During the 2003 third quarter, the Company recorded goodwill of approximately $170 million in connection with the acquisition of the remaining ownership interest in Diners Club Europe and reduced goodwill by $25 million in connection with the sale of a business in the Consumer segment.
The changes in goodwill during 2004 and 2003 were as follows:
| Global Consumer | Global Corporate and Investment Bank | Global Wealth Management | Global Investment Management | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||||||||
Balance at January 1, 2003(1) | $ | 19,073 | $ | 4,372 | $ | 377 | $ | 3,139 | $ | 26,961 | ||||||
Goodwill acquired during 2003 | 890 | 60 | — | — | 950 | |||||||||||
Other(2) | 42 | (157 | ) | (1 | ) | (214 | ) | (330 | ) | |||||||
Balance at December 31, 2003(1) | $ | 20,005 | $ | 4,275 | $ | 376 | $ | 2,925 | $ | 27,581 | ||||||
Goodwill acquired during 2004 | 2,072 | 990 | 118 | — | 3,180 | |||||||||||
Other(2) | 702 | 552 | 1 | (24 | ) | 1,231 | ||||||||||
Balance at December 31, 2004 | $ | 22,779 | $ | 5,817 | $ | 495 | $ | 2,901 | $ | 31,992 | ||||||
The components of intangible assets were as follows:
| December 31, 2004 | December 31, 2003 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization(1) | Net Carrying Amount | ||||||||||||
| In millions of dollars | |||||||||||||||||
Purchased credit card relationships | $ | 7,040 | $ | 2,366 | $ | 4,674 | $ | 7,132 | $ | 1,841 | $ | 5,291 | ||||||
Mortgage servicing rights(1) | 8,099 | 3,950 | 4,149 | 5,160 | 3,180 | 1,980 | ||||||||||||
Core deposit intangibles | 1,158 | 318 | 840 | 1,084 | 216 | 868 | ||||||||||||
Other customer relationships | 1,089 | 497 | 592 | 921 | 412 | 509 | ||||||||||||
Present value of future profits | 781 | 474 | 307 | 608 | 450 | 158 | ||||||||||||
Other(2) | 4,129 | 692 | 3,437 | 4,334 | 485 | 3,849 | ||||||||||||
Total amortizing intangible assets | $ | 22,296 | $ | 8,297 | $ | 13,999 | $ | 19,239 | $ | 6,584 | $ | 12,655 | ||||||
Indefinite-lived intangible assets | 1,272 | 1,226 | ||||||||||||||||
Total intangible assets | $ | 15,271 | $ | 13,881 | ||||||||||||||
At December 31, 2004 and 2003, $1.272 billion and $1.226 billion of the Company's acquired intangible assets, including $817 million and $776 million of asset management and administration contracts, $410 million and $405 million of trade names and $45 million and $45 million of other intangible assets were considered to be indefinite-lived and not subject to amortization. All other acquired intangible assets are subject to amortization.
The intangible assets recorded during 2004 and their respective amortization periods were as follows:
| 2004 | Weighted-Average Amortization Period in Years | |||
---|---|---|---|---|---|
| In millions of dollars | ||||
Mortgage servicing rights | $ | 3,328 | 6 | ||
Purchased credit card relationships and other customer relationships | 310 | 8 | |||
Other intangibles | 272 | 15 | |||
Total intangible assets recorded during the period(1) | $ | 3,910 | |||
During the third quarter of 2004, the Company recorded approximately $2.2 billion in mortgage servicing right intangibles in connection with the acquisition of Principal Residential Mortgage, Inc. During the second quarter of 2004, the Company recorded approximately $170 million of customer relationship intangibles, $81 million of core deposit intangibles and $41 million of other intangibles in connection with the KorAm acquisition. During the first quarter of 2004, the Company recorded approximately $140 million of customer relationship intangibles for the WMF acquisition. The Company also recorded in the first quarter of 2004 approximately $150 million of intangibles representing the present value of future profits associated with an acquired insurance portfolio.
Intangible assets amortization expense was $1,492 million, $1,192 million and $858 million for 2004, 2003 and 2002, respectively. Intangible assets amortization expense is estimated to be $1,804 million in 2005, $1,763 million in 2006, $1,631 million in 2007, $1,502 million in 2008, and $1,347 million in 2009.
15. Insurance Policy and Claims Reserves
At December 31, insurance policy and claims reserves consisted of the following:
| 2004 | 2003 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||
Benefits and loss reserves | |||||||
Property-casualty(1) | $ | 1,517 | $ | 1,620 | |||
Life and annuity | 13,508 | 12,417 | |||||
Accident and health | 1,927 | 1,722 | |||||
Unearned premiums | 1,168 | 917 | |||||
Policy and contract claims | 1,057 | 802 | |||||
$ | 19,177 | $ | 17,478 | ||||
16. Reinsurance
The Company's insurance operations participate in reinsurance in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. Life reinsurance is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. Reinsurance ceded arrangements do not discharge the insurance subsidiaries as the primary insurer, except for cases involving a novation.
Reinsurance amounts included in the Consolidated Statement of Income for the years ended December 31 were as follows:
| Gross Amount | Ceded | Net Amount | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
2004 | ||||||||||
Premiums | ||||||||||
Property-casualty insurance | $ | 118 | $ | (19 | ) | $ | 99 | |||
Life insurance | 3,892 | (423 | ) | 3,469 | ||||||
Accident and health insurance | 639 | (214 | ) | 425 | ||||||
$ | 4,649 | $ | (656 | ) | $ | 3,993 | ||||
Claims incurred | $ | 3,286 | $ | (885 | ) | $ | 2,401 | |||
2003 | ||||||||||
Premiums | ||||||||||
Property-casualty insurance | $ | 142 | $ | (1 | ) | $ | 141 | |||
Life insurance | 3,746 | (384 | ) | 3,362 | ||||||
Accident and health insurance | 479 | (233 | ) | 246 | ||||||
$ | 4,367 | $ | (618 | ) | $ | 3,749 | ||||
Claims incurred | $ | 3,367 | $ | (797 | ) | $ | 2,570 | |||
2002 | ||||||||||
Premiums | ||||||||||
Property-casualty insurance | $ | 368 | $ | (88 | ) | $ | 280 | |||
Life insurance | 3,212 | (330 | ) | 2,882 | ||||||
Accident and health insurance | 490 | (242 | ) | 248 | ||||||
$ | 4,070 | $ | (660 | ) | $ | 3,410 | ||||
Claims incurred | $ | 3,005 | $ | (790 | ) | $ | 2,215 | |||
Reinsurance recoverables, net of valuation allowance, at December 31, 2004 and 2003 include amounts recoverable on unpaid and paid losses and were as follows:
| 2004 | 2003 | |||||
---|---|---|---|---|---|---|---|
| In millions of dollars | ||||||
Life business | $ | 1,178 | $ | 1,092 | |||
Property-casualty business | |||||||
Pools and associations | 1,517 | 1,627 | |||||
Other reinsurance | 2,088 | 1,858 | |||||
Total | $ | 4,783 | $ | 4,577 | |||
17. Restructuring-Related Items
The status of the 2004, 2003, and 2002 restructuring initiatives are summarized in the following table:
Restructuring Reserve Activity
| Restructuring Initiatives | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| In millions of dollars | ||||||||||
Restructuring-related charges | $ | 1 | $ | — | $ | 65 | |||||
Purchase price allocations related to acquisitions(1) | 71 | 82 | 186 | ||||||||
Utilization during:(2) | |||||||||||
2004 | (25 | ) | (55 | ) | — | ||||||
2003 | — | — | (173 | ) | |||||||
2002 | — | — | (68 | ) | |||||||
(25 | ) | (55 | ) | (241 | ) | ||||||
Other(3) | (28 | ) | (6 | ) | (10 | ) | |||||
Balance at December 31, 2004 | $ | 19 | $ | 21 | $ | — | |||||
During 2004, Citigroup recognized $1 million of restructuring charges for the WMF acquisition and $71 million in the purchase price allocation for integration of operations relating to the acquisitions of WMF, KorAm, and PRMI.
Of the $71 million, $21 million was recognized as a liability in the purchase price allocation related to WMF ($4 million for employee severance and $17 million for existing leasehold and other contractual obligations), $33 million related to KorAm ($26 million for employee severance and $7 million for leasehold and other contractual obligations), and $17 million related to PRMI ($9 million for employee severance and $8 million for leasehold and other contractual obligations).
Through December 31, 2004, $25 million of the 2004 restructuring reserve has been utilized, of which $7 million for severance and $5 million for leasehold and other exit costs have been paid in cash, while $13 million is for other specifically identified contractual obligations. Approximately 125 and 250 staff positions have been eliminated in connection with the WMF and PRMI acquisitions, respectively.
During 2003, Citigroup recorded a restructuring reserve of $82 million in the purchase price allocation of Sears for the integration of its operations and operating platforms within the Global Consumer business. Of the $82 million, $47 million related to employee severance and $35 million related to exiting leasehold and other contractual obligations.
Through December 31, 2004, $55 million of the 2003 restructuring reserve has been utilized, of which $31 million for severance and $3 million for leasehold and other exit costs have been paid in cash, while $21 million is for other specifically identified contractual obligations. Approximately 2,600 staff positions have been eliminated under this program.
During 2002, Citigroup recorded restructuring charges of $65 million, of which $42 million related to the downsizing of Global Consumer and GCIB operations in Argentina, and $23 million related to the acquisition of GSB and the integration of its operations within the Global Consumer business. These restructuring charges were expensed and are included in "Restructuring-related items" in the Consolidated Statement of Income. In addition, a restructuring reserve of $186 million was also recognized as a liability in the purchase price allocation of GSB for the integration of operations and operating platforms. The 2002 reserves included $150 million related to employee severance and $101 million related to exiting leasehold and other contractual obligations.
Through December 31, 2004, $241 million of the 2002 restructuring reserve has been utilized, of which $128 million for employee severance and $77 million for leasehold and other exit costs have been paid in cash, while $36 million is for other specifically identified contractual obligations. Approximately 4,650 staff positions have been eliminated under these programs, including approximately 2,600 staff positions in connection with the GSB acquisition.
Restructuring-related items included in the Consolidated Statement of Income for the years ended December 31, 2004, 2003 and 2002 were as follows:
| 2004 | 2003 | 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | |||||||||
Restructuring charges | $ | 1 | $ | — | $ | 65 | ||||
Changes in estimates | (6 | ) | (46 | ) | (88 | ) | ||||
Accelerated depreciation | — | — | 8 | |||||||
Total restructuring-related items | $ | (5 | ) | $ | (46 | ) | $ | (15 | ) | |
Changes in estimates are attributable to facts and circumstances arising subsequent to an original restructuring charge. Changes in estimates attributable to lower than anticipated costs of implementing certain projects and a reduction in the scope of certain initiatives during 2004 resulted in reducing the reserve for 2004 and 2003 restructuring initiatives by $28 million and $6 million, respectively, both of which were recorded as adjustments to the liability in the purchase price allocations. In addition, a $5 million reduction for 2002 restructuring initiatives and a $1 million reduction in the reserve for prior years' restructuring initiatives were recorded in the line "Restructuring-related items" in the Consolidated Statement of Income.
During 2003, changes in estimates resulted in reducing the reserve for 2002 restructuring initiatives by $13 million and the reserve for prior years' restructuring initiatives by $33 million. During 2002, changes in estimates resulted in the reduction of the reserve for 2002 restructuring initiatives by $2 million and the reserve for prior years' restructuring initiatives by $86 million.
The implementation of these restructuring initiatives also caused certain related premises and equipment assets to become redundant. The remaining depreciable lives of these assets were shortened, and accelerated depreciation charges (in addition to normal scheduled depreciation on those assets) were recognized. There were no accelerated depreciation charges recognized in both 2004 and 2003, while an $8 million charge was recognized in 2002.
18. Income Taxes
| | 2004 | 2003 | 2002 | | 2005 | 2004 | 2003 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars | ||||||||||||||||||
Current | Current | Current | ||||||||||||||||||||
Federal | Federal | $ | 4,064 | $ | 4,030 | $ | 4,158 | Federal | $ | 3,908 | $ | 3,879 | $ | 3,757 | ||||||||
Foreign | Foreign | 3,076 | 2,809 | 2,454 | Foreign | 4,507 | 3,005 | 2,792 | ||||||||||||||
State | State | 752 | 495 | 590 | State | 844 | 739 | 481 | ||||||||||||||
Total current income taxes | Total current income taxes | 7,892 | 7,334 | 7,202 | Total current income taxes | 9,259 | $ | 7,673 | $ | 7,030 | ||||||||||||
Deferred | Deferred | Deferred | ||||||||||||||||||||
Federal | Federal | (1,080 | ) | 553 | (326 | ) | Federal | 40 | $ | (1,307 | ) | $ | 501 | |||||||||
Foreign | Foreign | 396 | 233 | 159 | Foreign | (104 | ) | 397 | 232 | |||||||||||||
State | State | (299 | ) | 75 | (37 | ) | State | (117 | ) | (299 | ) | 75 | ||||||||||
Total deferred income taxes | Total deferred income taxes | (983 | ) | 861 | (204 | ) | Total deferred income taxes | $ | (181 | ) | $ | (1,209 | ) | $ | 808 | |||||||
Provision for income tax on continuing operations before minority interest(1) | Provision for income tax on continuing operations before minority interest(1) | 6,909 | 8,195 | 6,998 | Provision for income tax on continuing operations before minority interest(1) | $ | 9,078 | $ | 6,464 | $ | 7,838 | |||||||||||
Provision for income tax on discontinued operations | Provision for income tax on discontinued operations | — | — | 360 | Provision for income tax on discontinued operations | 2,866 | 445 | 357 | ||||||||||||||
Provision (benefit) for income taxes on cumulative effect of accounting change | Provision (benefit) for income taxes on cumulative effect of accounting change | — | — | (14 | ) | Provision (benefit) for income taxes on cumulative effect of accounting change | (31 | ) | — | — | ||||||||||||
Income tax expense (benefit) reported in stockholders' equity related to: | Income tax expense (benefit) reported in stockholders' equity related to: | Income tax expense (benefit) reported in stockholders' equity related to: | ||||||||||||||||||||
Foreign currency translation | 146 | (327 | ) | (1,071 | ) | Foreign currency translation | 119 | 146 | (327 | ) | ||||||||||||
Securities available-for-sale | 48 | 456 | 548 | Securities available-for-sale | (1,234 | ) | 48 | 456 | ||||||||||||||
Employee stock plans | (474 | ) | (363 | ) | (381 | ) | Employee stock plans | (463 | ) | (474 | ) | (363 | ) | |||||||||
Cash flow hedges | (270 | ) | (154 | ) | 575 | Cash flow hedges | 194 | (270 | ) | (154 | ) | |||||||||||
Other | — | — | (26 | ) | Minimum Pension Liability | (69 | ) | — | — | |||||||||||||
Income taxes before minority interest | Income taxes before minority interest | $ | 6,359 | $ | 7,807 | $ | 6,989 | Income taxes before minority interest | $ | 10,460 | $ | 6,359 | $ | 7,807 | ||||||||
The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate applicable to income from continuing operations (before minority interest and the cumulative effect of accounting changes)change) for the years endedending December 31 was as follows:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||
State income taxes, net of federal benefit | 1.4 | % | 1.4 | % | 1.8 | % | ||||||||
State income taxes, net of federal benefits | 1.6 | 1.4 | 1.4 | |||||||||||
Foreign income tax rate differential | (4.2 | )% | (3.1 | )% | (2.1 | )% | (3.3 | ) | (4.5 | ) | (3.1 | ) | ||
Other, net | (3.6 | )% | (2.2 | )% | (0.6 | )% | (2.5 | ) | (3.5 | ) | (2.2 | ) | ||
Effective income tax rate | 28.6 | % | 31.1 | % | 34.1 | % | 30.8 | % | 28.4 | % | 31.1 | % | ||
Deferred income taxes at December 31 related to the following:
| 2004 | 2003 | 2005 | 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||
Deferred tax assets | ||||||||||||||
Credit loss deduction | $ | 2,893 | $ | 3,351 | $ | 2,597 | $ | 2,893 | ||||||
Differences in computing policy reserves | 365 | 538 | ||||||||||||
Deferred compensation | 1,277 | 1,256 | ||||||||||||
Employee benefits | 464 | 416 | ||||||||||||
Deferred compensation and employee benefits | 1,163 | 942 | ||||||||||||
Restructuring and settlement reserves | 3,682 | 673 | 3,194 | 3,682 | ||||||||||
Unremitted foreign earnings | 2,635 | 1,618 | ||||||||||||
Interest-related items | 571 | 494 | 839 | 188 | ||||||||||
Foreign and state loss carryforwards | 16 | 289 | 16 | 16 | ||||||||||
Other deferred tax assets | 1,986 | 2,383 | 1,912 | 2,311 | ||||||||||
Gross deferred tax assets | 11,254 | 9,400 | $ | 12,356 | $ | 11,650 | ||||||||
Valuation allowance | 16 | 320 | 16 | 16 | ||||||||||
Deferred tax assets after valuation allowance | 11,238 | 9,080 | $ | 12,340 | $ | 11,634 | ||||||||
Deferred tax liabilities | ||||||||||||||
Investments | (2,494 | ) | (2,604 | ) | $ | (1,294 | ) | $ | (2,494 | ) | ||||
Unremitted foreign earnings | (806 | ) | (343 | ) | ||||||||||
Deferred policy acquisition costs and value of insurance in force | (1,486 | ) | (1,272 | ) | (700 | ) | (1,486 | ) | ||||||
Leases | (2,705 | ) | (2,220 | ) | (2,308 | ) | (2,705 | ) | ||||||
Fixed assets | (1,001 | ) | (794 | ) | (1,319 | ) | (1,001 | ) | ||||||
Intangibles | (842 | ) | (600 | ) | (808 | ) | (908 | ) | ||||||
Other deferred tax liabilities | (554 | ) | (618 | ) | (2,349 | ) | (1,690 | ) | ||||||
Gross deferred tax liabilities | (9,888 | ) | (8,451 | ) | $ | (8,778 | ) | $ | (10,284 | ) | ||||
Net deferred tax asset | $ | 1,350 | $ | 629 | $ | 3,562 | $ | 1,350 | ||||||
Foreign pretax earnings approximated $10.6 billion in 2005, $10.5 billion in 2004, and $8.6 billion in 2003, and $8.7 billion in 2002.2003. As a U.S. corporation, Citigroup and its U.S. subsidiaries are subject to U.S. taxation, currently, on all foreign pretax earnings earned by a foreign branch. Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At December 31, 2004, $10.02005, $10.6 billion of accumulated undistributed earnings of non-U.S. subsidiaries were indefinitely invested. At the existing U.S. federal income tax rate, additional taxes (net of $2.7U.S. foreign tax credits) of $2.9 billion would have to be provided if suchthose earnings were remitted currently. The current year's effect on the income tax expense from continuing operations is included in the reconciliation of the federal statutory rate to the Company's effective income tax rate.
The Homeland Investment Act provision of the American Jobs Creation Act of 2004 ("2004 Tax Act") is intended to provideprovided companies with a one time 85% reduction in the U.S. net tax liability on cash dividends paid by foreign subsidiaries in 2005 to the extent that they exceedexceeded a baseline level of dividends paid in prior years. The provisions of the Act are complicated and companies, including Citigroup, are awaiting clarification of several provisions from the Treasury Department. The Company is still evaluating the provision and the effects it would have on the financing of the Company's foreign operations. In accordance with FASB Staff Position FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," the Company hasdid not recognizedrecognize any income tax effects of the repatriation provisions of the Act in its 2004 financial statements and will not do so untilstatements. In 2005, the above issues are resolved, sometime in 2005. The reasonably possible amounts that may be repatriated in 2005 that would be subject to the provision of the Act range from $0 to $3.2 billion. The related potential income tax effects
range fromCompany recognized a tax benefit of $0 to a tax benefit$198 million in continuing operations, net of $50 million, under current law.the impact of remitting income earned in 2005 and prior years that would have been indefinitely invested overseas.
Income taxes are not provided for on the Company's life insurance subsidiaries' "policyholders' surplus account"account," because under current U.S. tax rules such taxes will become payable only to the extent such amounts are distributed as a dividend
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or exceed limits prescribed by federal law. This "account" aggregated $982 million (subject to a tax of $344 million) at December 31, 2004. The 2004 Tax Act provides that this "account" cancould be reduced directly by distributions made by the life insurance subsidiaries in 2005 and 2006. The Company intends to makemade sufficient distributions in 2005 to eliminate this "account" within the timeframe permitted under the Act.and thus does not have a balance at December 31, 2005.
Income taxes are not provided for on the Company's "savings bank base year bad debt reserves" that arose before 1988, because under current U.S. tax rules such taxes will become payable only to the extent such amounts are distributed in excess of limits prescribed by federal law. At December 31, 2004,2005, the amount of the base year reserves totaled approximately $358 million (subject to a tax of $125 million).
The 2004There was no net change for 2005 in the valuation allowance related to deferred tax assets was a decrease of $304 million, primarily relating to a release of $234 million as a result of changes to the foreign tax credit rules contained in the 2004 Tax Act.assets. The valuation allowance of $16 million at December 31, 20042005 relates to state tax loss carryforwards. Management believes that the realization of the recognized net deferred tax asset (after valuation allowance) of $1,350$3,562 million is more likely than not based on existing carryback ability and expectations as to future taxable income in the jurisdictions in which it operates. The Company, which has a strong history of strong earnings, has reported pretax financial statement income from continuing operations in the Consolidated Income Statement of approximately $24$26 billion, on average, over the last three years.
19.17. Preferred Stock and Stockholders' Equity
Perpetual Preferred Stock
The following table sets forth the Company's perpetual preferred stock outstanding at December 31:
| | | | | Carrying Value | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Redeemable in Whole or in Part on or After(1) | Redemption Price Per Share(2) | Number of Shares | | | | | Carrying Value (in millions of dollars) | |||||||||||||||||||||
| Rate | 2004 | 2003 | | Redeemable in Whole or in Part on or After(1) | Redemption Price Per Share(2) | Number of Shares | |||||||||||||||||||||||
| | | | | (in millions of dollars) | Rate | 2005 | 2004 | ||||||||||||||||||||||
Series F(3) | 6.365% | June 16, 2007 | $ | 250 | 1,600,000 | $ | 400 | $ | 400 | 6.365% | June 16, 2007 | $ | 250 | 1,600,000 | $ | 400 | $ | 400 | ||||||||||||
Series G(3) | 6.213% | July 11, 2007 | $ | 250 | 800,000 | 200 | 200 | 6.213% | July 11, 2007 | $ | 250 | 800,000 | 200 | 200 | ||||||||||||||||
Series H(3) | 6.231% | September 8, 2007 | $ | 250 | 800,000 | 200 | 200 | 6.231% | September 8, 2007 | $ | 250 | 800,000 | 200 | 200 | ||||||||||||||||
Series M(3) | 5.864% | October 8, 2007 | $ | 250 | 800,000 | 200 | 200 | |||||||||||||||||||||||
Series M(3 | 5.864% | October 8, 2007 | $ | 250 | 800,000 | 200 | 200 | |||||||||||||||||||||||
Series V(4) | Fixed/Adjustable | February 15, 2006 | $ | 500 | 250,000 | 125 | 125 | Fixed/Adjustable | February 15, 2006 | $ | 500 | 250,000 | 125 | 125 | ||||||||||||||||
$ | 1,125 | $ | 1,125 | $ | 1,125 | $ | 1,125 | |||||||||||||||||||||||
All dividends on the Company's perpetual preferred stock are payable quarterly and are cumulative.
Dividends on the Series V preferred stock are payable at 5.86% throughOn February 15, 2006, and thereafter at rates determined quarterly by a formula based on certain interest rate indices, subjectCitigroup redeemed for cash all outstanding shares of its Fixed/Adjustable Rate Cumulative Preferred Stock, Series V. The redemption price was $50.00 per depositary share, plus accrued dividends to a minimum ratethe date of 6% and a maximum rate of 12%. The rate of dividends on the Series V preferred stock is subject to adjustment based upon the applicable percentage of the dividends received deduction.redemption.
Regulatory Capital
Citigroup and Citicorp areis subject to risk-based capital and leverage guidelines issued by the Board of Governors of the Federal Reserve System (FRB), and their. Its U.S. insured depository institution subsidiaries, including Citibank, N.A., are subject to similar guidelines issued by their respective primary federal bank regulatory agencies. These guidelines are used to evaluate capital adequacy and include the required minimums shown in the following table.
The regulatory agencies are required by law to take specific prompt actions with respect to institutions that do not meet minimum capital standards. As of December 31, 20042005 and 2003,2004, all of Citicorp'sCitigroup's U.S. insured subsidiary depository institutions were "well capitalized."
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At December 31, 2004,2005, regulatory capital as set forth in guidelines issued by the U.S. federal bank regulators is as follows:
| Required Minimum | Well Capitalized Minimum | Citigroup | Citicorp | Citibank, N.A. | Required Minimum | Well Capitalized Minimum | Citigroup | Citibank, N.A. | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | |||||||||||||||||||||||
Tier 1 Capital | $ | 74,415 | $ | 60,113 | $ | 41,702 | $ | 77,824 | $ | 44,733 | |||||||||||||||
Total Capital(1) | 100,899 | 87,118 | 61,965 | 106,402 | 66,777 | ||||||||||||||||||||
Tier 1 Capital Ratio | 4.0 | % | 6.0 | % | 8.74 | % | 8.69 | % | 8.42 | % | 4.0 | % | 6.0 | % | 8.79 | % | 8.41 | % | |||||||
Total Capital Ratio(1) | 8.0 | % | 10.0 | % | 11.85 | % | 12.59 | % | 12.51 | % | 8.0 | 10.0 | 12.02 | 12.55 | |||||||||||
Leverage Ratio(2) | 3.0 | % | 5.0 | %(3) | 5.20 | % | 6.74 | % | 6.28 | % | 3.0 | 5.0(3 | ) | 5.35 | 6.45 | ||||||||||
Citigroup 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'sCitigroup's banking subsidiaries may extend credit, pay dividends or otherwise supply funds to their parents. Citicorp'sCitigroup and its nonbank subsidiaries. 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.
As of December 31, 2005, Citigroup's national and state-chartered bank subsidiaries can declare dividends to their respective parent companies in 2005, without regulatory approval of approximately $11.6 billion adjusted by the effect of their net income (loss) for 2005 up to the date of any such dividend declaration.$13.6 billion. In determining whether and to what extentextend to pay dividends, each bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements, as well as policy statements of the federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings. Consistent with these considerations, CiticorpCitigroup estimates that, as of December 31, 2005, its bank subsidiaries can directly or through their parent holding company distribute dividends to CiticorpCitigroup of approximately $10.6$12.2 billion of the available $11.6 billion, adjusted by the effect of their net income (loss) up to the date of any such dividend declaration.$13.6 billion.
Travelers Insurance Company (TIC) isCitigroup also receives dividends from its nonbank subsidiaries. These nonbank subsidiaries are generally not subject to various regulatory restrictions that limit the maximum amounton their payment of dividends, available to its parent without priorexcept that the approval of the Connecticut Insurance Department. A maximumOffice of $908 millionThrift 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.
As discussed in "Capital Resources" on page 83, the ability of statutory surplus is availableCGMHI to declare dividends can be restricted by the endcapital considerations of the year 2005 for such dividends without the prior approval of the Connecticut Insurance Department. Certain of the Company's U.S. and non-U.S.its broker/dealer subsidiaries are subject to various securities and commodities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. The principal regulated subsidiaries, their net capital requirements or equivalent and excess over the minimum requirement as of December 31, 2004 are as follows:subsidiaries.
Subsidiary | Jurisdiction | Net Capital or Equivalent | Excess Over Minimum Requirement | Jurisdiction | Net Capital or Equivalent | Excess Over Minimum Requirement | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars | ||||||||||||
Citigroup Global Markets Inc. | U.S. Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) | $ | 4,488 | $ | 3,879 | U.S. Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) | $ | 3,548 | $ | 2,857 | ||||||
Citigroup Global Markets Limited | United Kingdom's Financial Services Authority | $ | 7,356 | $ | 1,904 | United Kingdom's Financial Services Authority | 8,337 | 2,517 | ||||||||
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20.18. Changes in Equity from Nonowner Sources
Changes in each component of "Accumulated Other Changes in Equity from Nonowner Sources" for the three-year period ended December 31, 20042005 are as follows:
| Net Unrealized Gains on Investment Securities | Foreign Currency Translation Adjustment | Cash Flow Hedges | Accumulated Other Changes in Equity from Nonowner Sources | Net Unrealized Gains on Investment Securities | Foreign Currency Translation Adjustment | Cash Flow Hedges | Minimum Pension Liability Adjustment | Accumulated Other Changes in Equity from Nonowner Sources | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | |||||||||||||||||||||||||||
Balance, January 1, 2002 | $ | 852 | $ | (1,864 | ) | $ | 168 | $ | (844 | ) | |||||||||||||||||||
Balance, January 1, 2003 | $ | 1,957 | $ | (3,392 | ) | $ | 1,242 | $ | — | $ | (193 | ) | |||||||||||||||||
Increase in net unrealized gains on investment securities, net of tax(1) | 792 | — | — | 792 | 1,283 | — | — | — | 1,283 | ||||||||||||||||||||
Add: Reclassification adjustment for losses included in net income, net of tax(1) | 313 | — | — | 313 | |||||||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax(1) | (332 | ) | — | — | — | (332 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net of tax(2) | — | (1,528 | ) | — | (1,528 | ) | — | (1,073 | ) | — | — | (1,073 | ) | ||||||||||||||||
Cash flow hedges, net of tax | — | — | 1,074 | 1,074 | — | — | (491 | ) | — | (491 | ) | ||||||||||||||||||
Change | 1,105 | (1,528 | ) | 1,074 | 651 | $ | 951 | $ | (1,073 | ) | $ | (491 | ) | $ | — | $ | (613 | ) | |||||||||||
Balance, December 31, 2002 | 1,957 | (3,392 | ) | 1,242 | (193 | ) | |||||||||||||||||||||||
Balance, December 31, 2003 | $ | 2,908 | $ | (4,465 | ) | $ | 751 | $ | — | $ | (806 | ) | |||||||||||||||||
Increase in net unrealized gains on investment securities, net of tax | 1,283 | — | — | 1,283 | 265 | — | — | — | 265 | ||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax(3) | (332 | ) | — | — | (332 | ) | |||||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax | (540 | ) | — | — | — | (540 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net of tax | — | (1,073 | ) | — | (1,073 | ) | — | 1,355 | — | — | 1,355 | ||||||||||||||||||
Cash flow hedges, net of tax | — | — | (491 | ) | (491 | ) | — | — | (578 | ) | — | (578 | ) | ||||||||||||||||
Change | 951 | (1,073 | ) | (491 | ) | (613 | ) | $ | (275 | ) | $ | 1,355 | $ | (578 | ) | $ | — | $ | 502 | ||||||||||
Balance, December 31, 2003 | 2,908 | (4,465 | ) | 751 | (806 | ) | |||||||||||||||||||||||
Increase in net unrealized gains on investment securities, net of tax | 265 | — | — | 265 | |||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 2,633 | $ | (3,110 | ) | $ | 173 | $ | — | $ | (304 | ) | |||||||||||||||||
Decrease in net unrealized gains on investment securities, net of tax(4) | (274 | ) | — | — | — | (274 | ) | ||||||||||||||||||||||
Less: Reclassification adjustment for gains included in net income, net of tax | (540 | ) | — | — | (540 | ) | (1,275 | ) | — | — | — | (1,275 | ) | ||||||||||||||||
Foreign currency translation adjustment, net of tax(5) | — | 1,355 | — | 1,355 | — | (980 | ) | — | — | (980 | ) | ||||||||||||||||||
Cash flow hedges, net of tax | — | — | (578 | ) | (578 | ) | — | — | 439 | — | 439 | ||||||||||||||||||
Minimum pension liability adjustment, net of tax(6) | — | — | — | (138 | ) | (138 | ) | ||||||||||||||||||||||
Current period change | (275 | ) | 1,355 | (578 | ) | 502 | $ | (1,549 | ) | $ | (980 | ) | $ | 439 | $ | (138 | ) | $ | (2,228 | ) | |||||||||
Balance, December 31, 2004 | $ | 2,633 | $ | (3,110 | ) | $ | 173 | $ | (304 | ) | |||||||||||||||||||
Balance, December 31, 2005 | $ | 1,084 | $ | (4,090 | ) | $ | 612 | $ | (138 | ) | $ | (2,532 | ) | ||||||||||||||||
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21.19. Earnings Per Share
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the years ended December 31:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions, except per share amounts | In millions, except per share amounts | ||||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | $ | 17,046 | $ | 17,853 | $ | 13,448 | $ | 19,806 | $ | 16,054 | $ | 17,058 | ||||||||
Discontinued operations | — | — | 1,875 | 4,832 | 992 | 795 | ||||||||||||||
Cumulative effect of accounting change | — | — | (47 | ) | (49 | ) | — | — | ||||||||||||
Preferred dividends | (68 | ) | (71 | ) | (83 | ) | (68 | ) | (68 | ) | (71 | ) | ||||||||
Income available to common stockholders for basic EPS | 16,978 | 17,782 | 15,193 | 24,521 | 16,978 | 17,782 | ||||||||||||||
Effect of dilutive securities | — | — | — | — | — | — | ||||||||||||||
Income available to common stockholders for diluted EPS | $ | 16,978 | $ | 17,782 | $ | 15,193 | $ | 24,521 | $ | 16,978 | $ | 17,782 | ||||||||
Weighted average common shares outstanding applicable to basic EPS | 5,107.2 | 5,093.3 | 5,078.0 | 5,067.6 | 5,107.2 | 5,093.3 | ||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||
Options | 44.3 | 47.1 | 47.4 | 33.6 | 44.3 | 47.1 | ||||||||||||||
Restricted and deferred stock | 55.9 | 52.3 | 39.7 | 59.2 | 55.9 | 52.3 | ||||||||||||||
Convertible securities | — | 0.9 | 1.1 | — | — | 0.9 | ||||||||||||||
Adjusted weighted average common shares outstanding applicable to diluted EPS | 5,207.4 | 5,193.6 | 5,166.2 | 5,160.4 | 5,207.4 | 5,193.6 | ||||||||||||||
Basic earnings per share | ||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | $ | 3.32 | $ | 3.49 | $ | 2.63 | $ | 3.90 | $ | 3.13 | $ | 3.34 | ||||||||
Discontinued operations | — | — | 0.37 | 0.95 | 0.19 | 0.15 | ||||||||||||||
Cumulative effect of accounting change | — | — | (0.01 | ) | (0.01 | ) | — | — | ||||||||||||
Net income | $ | 3.32 | $ | 3.49 | $ | 2.99 | $ | 4.84 | $ | 3.32 | $ | 3.49 | ||||||||
Diluted earnings per share | ||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | $ | 3.26 | $ | 3.42 | $ | 2.59 | $ | 3.82 | $ | 3.07 | $ | 3.27 | ||||||||
Discontinued operations | — | — | 0.36 | 0.94 | 0.19 | 0.15 | ||||||||||||||
Cumulative effect of accounting change | — | — | (0.01 | ) | (0.01 | ) | — | — | ||||||||||||
Net income | $ | 3.26 | $ | 3.42 | $ | 2.94 | $ | 4.75 | $ | 3.26 | $ | 3.42 | ||||||||
During 2005, 2004 2003 and 2002,2003, weighted average options of 99.2 million shares, 98.4 million shares 149.8 million shares and 223.6149.8 million shares with weighted average exercise prices of $49.44 per share, $49.60 per share, $46.08 per share, and $44.79$46.08 per share, respectively, were excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock.
143
22.20. Incentive Plans
The Company has adopted a number of equity compensation plans under which it administers stock options, restricted/restricted or deferred stock and stock purchase programsprograms. These plans are used to attract, retain and motivate officers and employees, to compensate them for their contributions to the growth and profits of the Company, and to encourage employee stock ownership. All of the plans are administered by the Personnel and Compensation Committee of the Citigroup Board of Directors, which is composed entirely of independent non-employee directors. At December 31, 2004,2005, approximately 438370 million shares were authorized for grant under Citigroup's stock incentive plans.
Stock Award Programs
The Company, primarily through its Capital Accumulation Program (CAP), issues shares of Citigroup common stock in the form of restricted or deferred stock to participating officers and employees. For all stock award programs, during the applicable vesting period, the shares awarded cannot be sold or transferred by the participant, and the award is subject to cancellation if the participant's employment is terminated. After the award vests, the shares become freely transferable (subject to the stock ownership commitment of senior executives). From the date of award, the recipient of a restricted stock award can direct the vote of the shares and receive regular dividends. Recipients of deferred stock awards receive dividend equivalents and cannot vote.
Stock awards granted in January 2005 generally vest 25% per year over four years, except for certain employees atSmith Barney whose awards vest after two years. Stock awards granted in 2003 and 2004 generally vest after a two- or three-year vesting period. CAP participants may elect to receive all or part of their award in stock options. The figures presented in the stock option program tables include options granted under CAP. Unearned compensation expense associated with the stock awards represents the market value of Citigroup common stock at the date of grant and is recognized as a charge to income ratably over the vesting period.
In 2003, special equity awards were issued to certain employees in the Corporate and Investment Banking, Global Wealth Management and Citigroup International businesses. The awards vest over a three-year term beginning on July 12, 2003, with one-sixth of the award vesting every six months. During the vesting period, the stock cannot be sold or transferred by the participant, and is subject to total or partial cancellation if the participant's employment is terminated.
During 2005, 2004 and 2003, Citigroup granted restricted or deferred shares under the Citigroup Ownership Program (COP) to eligible employees. This program replaces the WealthBuilder, CitiBuilder, and Citigroup Ownership stock option programs. Employees are issued either restricted or deferred shares of Citigroup common stock that vest after three years. Unearned compensation expense associated with the stock grants represents the market value of Citigroup common stock at the date of grant and is recognized as a charge to income ratably over the vesting period.
Information with respect to stock awards is as follows:
| 2005 | 2004 | 2003 | ||||||
---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars) | ||||||||
Shares awarded | 57,902,680 | 38,662,598 | 57,559,301 | ||||||
Weighted average fair market value per share | $ | 47.71 | $ | 38.65 | $ | 34.07 | |||
After-tax compensation cost charged to earnings | $ | 1,074 | $ | 922 | $ | 903 | |||
Stock Option Programs
The Company has a number of stock option programs for its directors, officers and employees. OptionsGenerally, since January 2005, stock options have been granted only to CAP participants who elect to receive stock options in lieu of restricted or deferred stock awards, and to non-employee directors who elect to receive their compensation in the form of a stock option grant. All stock options are granted on Citigroup common stock atwith exercise prices equal to the fair market value at the time of grant. Options granted in 2005 have six-year terms; directors' options vest after two years and all other options granted since January 2005 typically vest 25% each year over four years. Options granted in 2004 and 2003 typically vest 33%in thirds each year forover three years, with the first vesting date occurring 17 months after the grant date. The options granted in 2004 and 2003 have a termterms of six years. Also, theThe sale of underlying shares acquired through the exercise of employee stock options granted in 2004 andsince 2003 is restricted for a two-year period.period (and the shares are subject to the stock ownership commitment of senior executives thereafter). Prior to 2003, options were granted for a period of ten years. Generally, prior to 2003, Citigroup options, including options granted under Travelers' predecessor plans and options granted since the date of the merger of Citicorp and Travelers Group, Inc., vestgenerally vested at a rate of 20% per year over five years, with the first vesting date generally occurring 12 to 18 months following the grant date. Generally, 50% of the options granted under Citicorp predecessor plans prior to the merger were exercisable beginning on the third anniversary and 50% beginning on the fourth anniversary of the date of grant. Options granted under Associates' predecessor plans vested in 2001 at the time of the merger with Citigroup. Certain options, mostly granted prior to January 1, 2003, permit an employee exercising an option under certain conditions to be granted new options (reload options) in an amount equal to the number of common shares used to satisfy the exercise price and the withholding taxes due upon exercise. The reload options are granted for the remaining term of the related original option and vest after six months. An option may not be exercised using the reload method unless the market price on the date of exercise is at least 20% greater than the option exercise price.
To further encourage employee stock ownership, the Company's eligible employees participate in WealthBuilder, CitiBuilder, or the Citigroup Ownership Program. Options granted under the WealthBuilder and the Citigroup Ownership programprograms vest over a five-year period, whereas options granted under the CitiBuilder program vest after five years. These options do not have a reload feature. Beginning in 2003, new options are no longer beingOptions have not been granted under these programs.programs since 2002.
The Company redesigned its equity incentive programs for the 2004 compensation year. In January 2005, equity incentive awards were granted to eligible employees in the form of restricted or deferred stock under the Capital Accumulation Program (CAP), and stock options are only granted to CAP participants who elect to receive them. The stock options carry the same vesting period as the restricted or deferred stock awards, have a six-year term and an exercise price equal to 100% of fair market value on the grant date.144
Information with respect to stock option activity under Citigroup stock option plans for the years ended December 31, 2005, 2004 2003 and 20022003 is as follows:
| 2004 | 2003 | 2002 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||
Outstanding, beginning of year | 359,376,198 | $ | 37.07 | 380,274,611 | $ | 36.09 | 390,732,697 | $ | 33.74 | ||||||
Granted-original | 27,520,987 | 49.05 | 43,649,005 | 32.35 | 79,876,755 | 40.35 | |||||||||
Granted-reload | 12,725,607 | 49.99 | 13,956,702 | 44.21 | 10,248,798 | 40.94 | |||||||||
Forfeited or exchanged(1) | (16,606,946 | ) | 43.27 | (22,454,416 | ) | 40.27 | (49,735,340 | ) | 35.70 | ||||||
Expired | (1,635,927 | ) | 48.12 | (5,545,698 | ) | 48.66 | (10,021,156 | ) | 48.51 | ||||||
Exercised | (50,469,140 | ) | 29.89 | (50,504,006 | ) | 24.39 | (40,827,143 | ) | 20.99 | ||||||
Outstanding, end of year | 330,910,779 | $ | 39.28 | 359,376,198 | $ | 37.07 | 380,274,611 | $ | 36.09 | ||||||
Exercisable at year end | 214,952,186 | 199,263,927 | 192,109,773 | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||
Outstanding, beginning of year | 330,910,779 | $ | 39.28 | 359,376,198 | $ | 37.07 | 380,274,611 | $ | 36.09 | ||||||
Granted-original | 5,279,863 | 47.45 | 27,520,987 | 49.05 | 43,649,005 | 32.35 | |||||||||
Granted-reload | 3,013,384 | 48.85 | 12,725,607 | 49.99 | 13,956,702 | 44.21 | |||||||||
Forfeited or exchanged | (17,726,910 | ) | 44.29 | (16,606,946 | ) | 43.27 | (22,454,416 | ) | 40.27 | ||||||
Expired | (2,572,189 | ) | 47.70 | (1,635,927 | ) | 48.12 | (5,545,698 | ) | 48.66 | ||||||
Exercised | (41,648,992 | ) | 31.72 | (50,469,140 | ) | 29.89 | (50,504,006 | ) | 24.39 | ||||||
Outstanding, end of year | 277,255,935 | $ | 40.27 | 330,910,779 | $ | 39.28 | 359,376,198 | $ | 37.07 | ||||||
Exercisable at year end | 221,497,294 | 214,952,186 | 199,263,927 | ||||||||||||
The following table summarizes the information about stock options outstanding under Citigroup stock optionoptions plans at December 31, 2004:2005:
| Options Outstanding | | | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Options Exercisable | ||||||||||
| | Weighted Average Contractual Life Remaining | | |||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | ||||||||
$ 5.12 - $ 9.99 | 1,045,039 | 1.1 years | $ | 8.23 | 1,045,039 | $ | 8.23 | |||||
$10.00 - $19.99 | 8,663,464 | 1.9 years | 15.77 | 8,410,855 | 15.68 | |||||||
$20.00 - $29.99 | 51,141,089 | 3.3 years | 22.87 | 50,856,774 | 22.86 | |||||||
$30.00 - $39.99 | 57,353,781 | 4.8 years | 33.08 | 27,208,275 | 33.26 | |||||||
$40.00 - $49.99 | 198,224,144 | 5.6 years | 45.57 | 113,078,836 | 45.44 | |||||||
$50.00 - $56.83 | 14,483,262 | 4.0 years | 51.87 | 14,352,407 | 51.87 | |||||||
330,910,779 | 4.9 years | $ | 39.28 | 214,952,186 | $ | 37.64 | ||||||
Stock Award Programs
The Company, primarily through its Capital Accumulation Program (CAP), issues shares of Citigroup common stock in the form of restricted or deferred stock to participating officers and employees. Restricted or deferred stock awards granted in 2003 and 2004 generally vest after a two- or three-year vesting period, during which time the stock cannot be sold or transferred by the participant, and is subject to total or partial cancellation if the participant's employment is terminated. CAP awards granted in January 2005 generally vest 25% per year over four years, except for certain employees atSmith Barney whose awards vest after two years. CAP participants may elect to receive part of their award in stock options. The figures in the two previous tables include options granted under CAP. Unearned compensation expense associated with the stock grants represents the market value of Citigroup common stock at the date of grant and is recognized as a charge to income ratably over the vesting period.
In 2003, special equity awards were issued to certain employees in the Global Corporate and Investment Bank and Citigroup International businesses. The awards are not discounted and vest over a three-year term beginning on July 12, 2003, with one-sixth of the award vesting every six months. Until the shares vest, a recipient may not transfer the shares. After they vest, the shares become freely transferable (subject to the stock ownership commitment).
From the date of award, the recipient of a restricted stock award can direct the vote on the shares and receive regular dividends. Recipients of deferred stock awards receive dividend equivalents and cannot vote.
During 2004 and 2003, Citigroup granted restricted or deferred shares under the Citigroup Ownership Program (COP) to eligible employees. This program replaces the WealthBuilder, CitiBuilder, and Citigroup Ownership stock option programs. Employees are issued either restricted or deferred shares of Citigroup common stock that vest after three years, during which time the stock cannot be sold or transferred by the participant. Unearned compensation expense associated with the stock grants represents the market value of Citigroup common stock at the date of grant and is recognized as a charge to income ratably over the vesting period.
Information with respect to stock awards is as follows:
| 2004 | 2003 | 2002 | ||||||
---|---|---|---|---|---|---|---|---|---|
Shares awarded | 38,662,598 | 57,559,301 | 37,730,860 | ||||||
Weighted average fair market value per share | $ | 38.65 | $ | 34.07 | $ | 41.82 | |||
After-tax compensation cost charged to earnings(in millions of dollars) | $ | 922 | $ | 903 | $ | 766 |
| Options Outstanding | Options Exercisable | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number Outstanding | Weighted Average Contractual Life Remaining | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
Range of Exercise Prices | ||||||||||||
$7.77—$9.99 | 270,358 | .6 years | $ | 9.57 | 270,358 | $ | 9.57 | |||||
$10.00—$19.99 | 5,258,344 | 1.1 years | 16.55 | 5,251,765 | 16.55 | |||||||
$20.00—$29.99 | 37,348,315 | 2.4 years | 22.75 | 37,178,661 | 22.74 | |||||||
$30.00—$39.99 | 46,054,011 | 3.9 years | 33.02 | 34,277,389 | 33.22 | |||||||
$40.00—$49.99 | 175,936,477 | 4.6 years | 45.82 | 132,174,760 | 45.70 | |||||||
$50.00—$56.83 | 12,388,430 | 3.2 years | 51.87 | 12,344,361 | 51.87 | |||||||
277,255,935 | 4.1 years | $ | 40.27 | 221,497,294 | $ | 39.52 | ||||||
Stock Purchase Program
The Citigroup 2003 Stock Purchase Program, which iswas administered under the Citigroup 2000 Stock Purchase Plan, as amended, allowsallowed eligible employees of Citigroup to enter into fixed subscription agreements to purchase shares in the future at the lesser of the offeringmarket price on the first day of the offering period or at the closingmarket price at the end of the offering period. For the June 15, 2003 offering only, subject to certain limits, enrolled employees arewere permitted to make one purchase prior to end of the expiration date.offering period. The purchase price of the shares iswas paid with accumulated payroll deductions plus interest. Shares of Citigroup's common stock delivered under the Citigroup 2003 Stock Purchase Program may bewas sourced from authorized and unissued or treasury shares. The offering under the Citigroup 2003 Stock Purchase Program waswere made on June 15, 2003. In2003 and to new employees in June 2004, an additional offering was made to new employees. The program endsended in July 2005.
The original offeringfollowing are the share prices under the Citigroup Stock Purchase Program was in August 2000. Under this offering, eligible employees of Citigroup were able to enter into fixed subscription agreements to purchase shares in the future at the market value on the date of the agreements. In 2001, three additional offerings were made to new employees in April, August, and November 2001. In March 2002, an additional offering was made to new employees.
Following is the share price under both Stock Purchase Programs.Program. The fixed price for the June 2003 offering was $44.10. The$44.10 and the fixed price for the June 2004 offering was $46.74. The fixedmarket price forat the 2000end of the program in August 2000 was $49.36 per share.$46.50. The fixed prices forshares under the offerings made in April, August, and November 2001June 2003 offering were $41.95, $46.83 and $42.45, respectively. The fixed price forpurchased at the offering made in March 2002price $(44.10), which was $42.20.
| 2004 | 2003 | 2002 | ||||
---|---|---|---|---|---|---|---|
Outstanding subscribed shares at beginning of year | 8,336,245 | — | 22,796,355 | ||||
Subscriptions entered into | 495,144 | 8,784,380 | 363,970 | ||||
Shares purchased | (365,591 | ) | (65 | ) | (19,794 | ) | |
Canceled or terminated(1) | (1,353,120 | ) | (448,070 | ) | (23,140,531 | ) | |
Outstanding subscribed shares at end of year | 7,112,678 | 8,336,245 | — | ||||
| 2005 | 2004 | 2003 | ||||
---|---|---|---|---|---|---|---|
Outstanding subscribed shares at beginning of year | 7,112,678 | 8,336,245 | — | ||||
Subscriptions entered into | — | 495,144 | 8,784,380 | ||||
Shares purchased | (4,498,358 | ) | (365,591 | ) | (65 | ) | |
Canceled or terminated | (2,614,320 | ) | (1,353,120 | ) | (448,070 | ) | |
Outstanding subscribed shares at end of year | — | 7,112,678 | 8,336,245 | ||||
Pro Forma Impact of SFAS 123
Prior to January 1, 2003, Citigroup applied APB 25 in accounting for its stock-based compensation plans. Under APB 25, there is generally no charge to earnings for employee stock option awards because the options granted under these plans have an exercise price equal to the market value of the underlying common stock on the grant date. Alternatively, SFAS 123 allows companies to recognize compensation expense over the related service period based on the grant-dategrant date fair value of the stock award. Refer to Note 1 on page 108 for a further description of these accounting standards and a presentation of the effect on net income and earnings per share had the Company applied SFAS 123 in accounting for all of the Company'scompany's stock option plans. The pro forma adjustments in that table relaterelated to stock options granted from 1995 through 2002, for which a fair value on the date of grant was determined using a Black-Scholes option pricing model. In accordance with SFAS 123, no effect has been given to options granted prior to 1995. The fair values of stock-based
145
awards are based on assumptions that were determined at the grant date.
Fair Value Assumptions
SFAS 123 requires that reload options be treated as separate grants from the related original grants. Pursuant to the terms of currently outstanding reloadable options, upon exercise of an option, if employees use previously owned shares to pay the exercise price and surrender shares otherwise to be received for related tax withholding, andthey will receive a reload option covering the same number of shares used for such purposes.purposes, but only if the market price on the date of exercise is at least 20% greater than the option exercise price. Reload options vest at the end of a six-month period and carry the same expiration date onas the option that gave rise to the reload grant. The exercise price of a reload grant is the market price on the date the underlying option was exercised. Reload options are intended to encourage employees to exercise options at an earlier date and to retain the shares so acquired, in furtherance of the Company's long-standing policy of encouraging increased employee stock ownership.acquired. The result of this program is that employees generally will exercise options as soon as they are able and, therefore, these options have shorter expected lives. Shorter option lives result in lower valuations. However, such values are expensed more quickly due to the shorter vesting period of reload options. In addition, since reload options are treated as separate grants, the existence of the reload feature results in a greater number of options being valued.
Shares received through option exercises under the reload program, as well as certain other options granted, are subject to restrictions on sale. Discounts have been applied to the fair value of options granted to reflect these sale restrictions.
Additional valuation and related assumption information for Citigroup option plans, including the Citigroup 2003 Stock Purchase Program, is presented below. For 2005 and 2004, Citigroup utilized a binomial model to value stock options. For 2003 and prior grants, the Black-Scholes valuation model was utilized.used.
For Options Granted During | For Options Granted During | 2004 | 2003 | 2002 | For Options Granted During | 2005 | 2004 | 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Weighted average fair value | Weighted average fair value | Weighted average fair value | $7.23 | $6.82 | $6.92 | ||||||||||||||
Option | $ | 6.82 | $ | 6.92 | $ | 9.47 | |||||||||||||
Weighted average expected life | |||||||||||||||||||
Weighted averaged expected life | Weighted averaged expected life | ||||||||||||||||||
Original grants | 4.54 years | 3.45 years | 3.5 years | Original grants | 5.26 yrs. | 4.54 yrs. | 3.45 yrs. | ||||||||||||
Reload grants | 3.28 years | 2 years | 2 years | Reload grants | 3.29 yrs. | 3.28 yrs. | 2 yrs. | ||||||||||||
Stock Purchase Program grants | 1.07 years | 2.1 years | — | Stock Purchase Program grants | N/A | 1.07 yrs. | 2.1 yrs. | ||||||||||||
Valuation assumptions | Valuation assumptions | Valuation assumptions | |||||||||||||||||
Expected volatility | 25.98 | % | 37.74 | % | 37.19 | % | Expected volatility | 25.06% | 25.98% | 37.74% | |||||||||
Risk-free interest rate | 2.84 | % | 2.00 | % | 3.86 | % | Risk-free interest rate | 3.66% | 2.84% | 2.00% | |||||||||
Expected annual dividends per share | $ | 0.92 | Expected annual dividends per share | ||||||||||||||||
For grants before July 14, 2003 | $ | 0.92 | For grants before July 14, 2003 | $0.92 | |||||||||||||||
For grants on or after July 14, 2003 | $ | 1.54 | For grants on or after July 14, 2003 | $1.54 | |||||||||||||||
Expected dividend yield | 2.96 | % | Expected dividend yield | 3.35% | 2.96% | ||||||||||||||
Expected annual forfeitures | Expected annual forfeitures | ||||||||||||||||||
Original and reload grants | 7 | % | 7 | % | 7 | % | Original and reload grants | 7% | 7% | 7% | |||||||||
Stock Purchase Program grants | 10 | % | 10 | % | — | Stock Purchase Program grants | N/A | 10% | 10% | ||||||||||
146
The Company has several non-contributory defined benefit pension plans covering substantially all U.S. employees and has various defined benefit pension and termination indemnity plans covering employees outside the United States. The U.S. qualified defined benefit plan provides benefits under a cash balance formula. Employees satisfying certain age and service requirements remain covered by a prior final pay formula.formula under that plan. The Company also offers postretirement health care and life insurance benefits to certain eligible U.S. retired employees, as well as to certain eligible employees outside the United States.
The following tables summarize the components of net benefit expense recognized in the Consolidated Statement of Income and the funded status and amounts recognized in the Consolidated Balance Sheet for the Company's U.S. qualified plansplan and significant plans outside the United States. The Company uses a December 31 measurement date for the U.S. plans as well as the plans outside the United States.
Net (Benefit) Expense
| | Pension Plans | Postretirement Benefit Plans(2) | Pension Plans | Postretirement Benefit Plans(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. Plans(1) | Plans Outside U.S. | U.S. Plans | U.S. Plans(1) | Plans Outside U.S. | U.S. Plans | ||||||||||||||||||||||||||||||||||||||||||||||||||
| | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||||
| | In millions of dollars | In millions of dollars | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefits earned during the year | Benefits earned during the year | $ | 241 | $ | 208 | $ | 261 | $ | 147 | $ | 118 | $ | 116 | $ | 2 | $ | 3 | $ | 5 | $ | 257 | $ | 241 | $ | 208 | $ | 163 | $ | 147 | $ | 118 | $ | 2 | $ | 2 | $ | 3 | ||||||||||||||||||||
Interest cost on benefit obligation | Interest cost on benefit obligation | 581 | 548 | 528 | 222 | 190 | 185 | 66 | 72 | 73 | 599 | 581 | 548 | 261 | 222 | 190 | 63 | 66 | 72 | ||||||||||||||||||||||||||||||||||||||
Expected return on plan assets | Expected return on plan assets | (750 | ) | (700 | ) | (783 | ) | (251 | ) | (209 | ) | (188 | ) | (16 | ) | (18 | ) | (21 | ) | (806 | ) | (750 | ) | (700 | ) | (315 | ) | (251 | ) | (209 | ) | (14 | ) | (16 | ) | (18 | ) | ||||||||||||||||||||
Amortization of unrecognized: | Amortization of unrecognized: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net transition obligation | — | — | — | 2 | 3 | 5 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Prior service cost (benefit) | (24 | ) | (25 | ) | (25 | ) | 1 | — | — | (4 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net actuarial loss | 161 | 105 | 24 | 69 | 60 | 48 | 13 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Curtailment loss | — | — | — | 1 | 4 | 6 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Net transition obligation | — | — | — | 3 | 5 | 5 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Net expense | $ | 187 | $ | 152 | $ | 55 | $ | 182 | $ | 185 | $ | 158 | $ | 60 | $ | 56 | $ | 61 | |||||||||||||||||||||||||||||||||||||||
Prior service cost | (25 | ) | (25 | ) | (29 | ) | — | — | — | (4 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net actuarial loss (gain) | 105 | 24 | — | 60 | 48 | 15 | 8 | 8 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Curtailment (gain) loss | — | — | — | 4 | 6 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Net (benefit) expense | $ | 152 | $ | 55 | $ | (23 | ) | $ | 185 | $ | 158 | $ | 133 | $ | 56 | $ | 61 | $ | 52 | ||||||||||||||||||||||||||||||||||||||
147
Prepaid Benefit Cost (Benefit Liability)
| | Pension Plans | Postretirement Benefit Plans(2) | | Pension Plans | Postretirement Benefit Plans(2) | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. Plans(1) | Plans Outside U.S. | U.S. Plans | | U.S. Plans(1) | Plans Outside U.S. | U.S. Plans | ||||||||||||||||||||||||||||||||
| | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||||
| | In millions of dollars at year end | | In millions of dollars at year end | ||||||||||||||||||||||||||||||||||||
Change in projected benefit obligation | Change in projected benefit obligation | Change in projected benefit obligation | ||||||||||||||||||||||||||||||||||||||
Projected benefit obligation at beginning of year | Projected benefit obligation at beginning of year | $ | 9,032 | $ | 7,742 | $ | 3,513 | $ | 2,772 | $ | 1,184 | $ | 1,108 | Projected benefit obligation at beginning of year | $ | 10,249 | $ | 9,032 | $ | 4,381 | $ | 3,513 | $ | 1,172 | $ | 1,184 | ||||||||||||||
Benefits earned during the year | Benefits earned during the year | 241 | 208 | 147 | 118 | 2 | 3 | Benefits earned during the year | 257 | 241 | 163 | 147 | 2 | 2 | ||||||||||||||||||||||||||
Interest cost on benefit obligation | Interest cost on benefit obligation | 581 | 548 | 222 | 190 | 66 | 72 | Interest cost on benefit obligation | 599 | 581 | 261 | 222 | 63 | 66 | ||||||||||||||||||||||||||
Plan amendments | Plan amendments | — | — | 12 | 1 | — | (1 | ) | Plan amendments | — | — | (2 | ) | 12 | — | — | ||||||||||||||||||||||||
Actuarial (gain) loss | 845 | 936 | 381 | 382 | 16 | 93 | ||||||||||||||||||||||||||||||||||
Actuarial loss | Actuarial loss | 372 | 845 | 229 | 381 | 14 | 16 | |||||||||||||||||||||||||||||||||
Benefits paid | Benefits paid | (455 | ) | (412 | ) | (200 | ) | (191 | ) | (96 | ) | (85 | ) | Benefits paid | (493 | ) | (455 | ) | (211 | ) | (200 | ) | (90 | ) | (96 | ) | ||||||||||||||
Acquisitions | Acquisitions | 5 | 10 | 90 | 39 | — | (6 | ) | Acquisitions | — | 5 | 76 | 90 | — | — | |||||||||||||||||||||||||
Divestitures | Divestitures | — | — | (1 | ) | (5 | ) | — | — | Divestitures | — | — | — | (1 | ) | — | — | |||||||||||||||||||||||
Settlements | Settlements | — | — | (14 | ) | (37 | ) | — | — | Settlements | — | — | (45 | ) | (14 | ) | — | — | ||||||||||||||||||||||
Curtailment | — | — | (4 | ) | (6 | ) | — | — | ||||||||||||||||||||||||||||||||
Curtailments | Curtailments | — | — | 8 | (4 | ) | — | — | ||||||||||||||||||||||||||||||||
Foreign exchange impact | Foreign exchange impact | — | — | 235 | 250 | — | — | Foreign exchange impact | — | — | (308 | ) | 235 | — | — | |||||||||||||||||||||||||
Projected benefit obligation at year end | Projected benefit obligation at year end | $ | 10,249 | $ | 9,032 | $ | 4,381 | $ | 3,513 | $ | 1,172 | $ | 1,184 | Projected benefit obligation at year end | $ | 10,984 | $ | 10,249 | $ | 4,552 | $ | 4,381 | $ | 1,161 | $ | 1,172 | ||||||||||||||
Change in plan assets | Change in plan assets | Change in plan assets | ||||||||||||||||||||||||||||||||||||||
Plan assets at fair value at beginning of year | Plan assets at fair value at beginning of year | $ | 9,427 | $ | 7,551 | $ | 3,237 | $ | 2,543 | $ | 210 | $ | 192 | Plan assets at fair value at beginning of year | $ | 10,379 | $ | 9,427 | $ | 4,190 | $ | 3,237 | $ | 193 | $ | 210 | ||||||||||||||
Actual return on plan assets | Actual return on plan assets | 986 | 1,776 | 357 | 390 | 22 | 48 | Actual return on plan assets | 916 | 986 | 678 | 357 | 18 | 22 | ||||||||||||||||||||||||||
Company contributions | Company contributions | 418 | 512 | 524 | 279 | 57 | 55 | Company contributions | 179 | 418 | 379 | 524 | 58 | 57 | ||||||||||||||||||||||||||
Employee contributions | Employee contributions | — | — | 8 | 5 | — | — | Employee contributions | — | — | 5 | 8 | — | — | ||||||||||||||||||||||||||
Acquisitions | Acquisitions | 3 | — | 59 | 23 | — | — | Acquisitions | — | 3 | 75 | 59 | — | — | ||||||||||||||||||||||||||
Divestitures | Divestitures | — | — | (1 | ) | (5 | ) | — | — | Divestitures | — | — | — | (1 | ) | — | — | |||||||||||||||||||||||
Settlements | Settlements | — | — | (9 | ) | (33 | ) | — | — | Settlements | — | — | (46 | ) | (9 | ) | — | — | ||||||||||||||||||||||
Benefits paid | Benefits paid | (455 | ) | (412 | ) | (200 | ) | (191 | ) | (96 | ) | (85 | ) | Benefits paid | (493 | ) | (455 | ) | (211 | ) | (200 | ) | (90 | ) | (96 | ) | ||||||||||||||
Foreign exchange impact | Foreign exchange impact | — | — | 215 | 226 | — | — | Foreign exchange impact | — | — | (286 | ) | 215 | — | — | |||||||||||||||||||||||||
Plan assets at fair value at year end | Plan assets at fair value at year end | $ | 10,379 | $ | 9,427 | $ | 4,190 | $ | 3,237 | $ | 193 | $ | 210 | Plan assets at fair value at year end | $ | 10,981 | $ | 10,379 | $ | 4,784 | $ | 4,190 | $ | 179 | $ | 193 | ||||||||||||||
Reconciliation of prepaid (accrued) benefit cost and total amount recognized | Reconciliation of prepaid (accrued) benefit cost and total amount recognized | Reconciliation of prepaid (accrued) benefit cost and total amount recognized | ||||||||||||||||||||||||||||||||||||||
Funded status of the plan | Funded status of the plan | $ | 130 | $ | 395 | $ | (191 | ) | $ | (276 | ) | $ | (979 | ) | $ | (974 | ) | Funded status of the plan | $ | (3 | ) | $ | 130 | $ | 232 | $ | (191 | ) | $ | (982 | ) | $ | (979 | ) | ||||||
Unrecognized: | Unrecognized: | Unrecognized: | ||||||||||||||||||||||||||||||||||||||
Net transition obligation | — | — | 14 | 17 | — | — | Net transition obligation | — | — | 11 | 14 | — | — | |||||||||||||||||||||||||||
Prior service cost | (133 | ) | (158 | ) | 1,102 | 5 | (26 | ) | (29 | ) | Prior service cost (benefit) | (109 | ) | (133 | ) | 11 | 17 | (21 | ) | (26 | ) | |||||||||||||||||||
Net actuarial loss | 2,512 | 2,009 | 17 | 816 | 195 | 191 | Net actuarial loss | 2,613 | 2,512 | 799 | 1,102 | 191 | 195 | |||||||||||||||||||||||||||
Net amount recognized | Net amount recognized | $ | 2,509 | $ | 2,246 | $ | 942 | $ | 562 | ($ | 810 | ) | ($ | 812 | ) | Net amount recognized | $ | 2,501 | $ | 2,509 | $ | 1,053 | $ | 942 | $ | (812 | ) | $ | (810 | ) | ||||||||||
Amounts recognized on the balance sheet consist of | ||||||||||||||||||||||||||||||||||||||||
Prepaid benefit cost | $ | 2,509 | $ | 2,246 | $ | 901 | $ | 644 | $ | — | $ | — | ||||||||||||||||||||||||||||
Amounts recognized on the balance sheet consist ofPrepaid benefit cost | Amounts recognized on the balance sheet consist ofPrepaid benefit cost | $ | 2,501 | $ | 2,509 | $ | 1,176 | $ | 901 | $ | — | $ | — | |||||||||||||||||||||||||||
Accrued benefit liability | Accrued benefit liability | — | — | (58 | ) | (185 | ) | (810 | ) | (812 | ) | Accrued benefit liability | — | — | (212 | ) | (58 | ) | (812 | ) | (810 | ) | ||||||||||||||||||
Intangible asset | Intangible asset | — | — | 99 | 103 | — | — | Intangible asset | — | — | 21 | 99 | — | — | ||||||||||||||||||||||||||
Other changes in equity from nonowner sources | Other changes in equity from nonowner sources | — | — | 68 | — | — | — | |||||||||||||||||||||||||||||||||
Net amount recognized | Net amount recognized | $ | 2,509 | $ | 2,246 | $ | 942 | $ | 562 | ($ | 810 | ) | ($ | 812 | ) | Net amount recognized | $ | 2,501 | $ | 2,509 | $ | 1,053 | $ | 942 | $ | (812 | ) | $ | (810 | ) | ||||||||||
Accumulated benefit obligation at year end | Accumulated benefit obligation at year end | $ | 10,026 | $ | 8,837 | $ | 3,924 | $ | 3,148 | $ | 1,172 | $ | 1,184 | Accumulated benefit obligation at year end | $ | 10,734 | $ | 10,026 | $ | 4,121 | $ | 3,924 | $ | 1,161 | $ | 1,172 | ||||||||||||||
148
At the end of 20042005 and 20032004 for both qualified and non-qualified plans, and both funded and unfunded plans, the aggregate projected benefit obligation (PBO), the aggregate accumulated benefit obligation (ABO), and the aggregate fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets, and pension plans with an accumulated benefit obligation in excess of plan assets, were as follows:
| PBO Exceeds Fair Value of Plan Assets | ABO Exceeds Fair Value of Plan Assets | PBO Exceeds Fair Value of Plan Assets | ABO Exceeds Fair Value of Plan Assets | ||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Plans Outside U.S. | Plans U.S. | Plans Outside U.S. | U.S. Plans | Plans Outside U.S. | U.S. Plans | Plans Outside U.S. | ||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||||||||||
| In millions of dollars at year end | In millions of dollars | ||||||||||||||||||||||||||||||||||||||||||||||
Projected benefit obligation | $ | 625 | $ | 600 | $ | 2,255 | $ | 3,106 | $ | 625 | $ | 600 | $ | 772 | $ | 701 | $ | 11,655 | $ | 625 | $ | 1,613 | $ | 2,255 | $ | 671 | $ | 625 | $ | 691 | $ | 772 | ||||||||||||||||
Accumulated benefit obligation | 599 | 566 | 1,973 | 2,791 | 599 | 566 | 671 | 636 | 11,382 | 599 | 1,419 | 1,973 | 648 | 599 | 634 | 671 | ||||||||||||||||||||||||||||||||
Fair value of plan assets | — | — | 1,890 | 2,749 | — | — | 494 | 482 | 10,981 | — | 1,337 | 1,890 | — | — | 493 | 494 | ||||||||||||||||||||||||||||||||
Combined plan assets for the U.S. and non-U.S. pension plans, excluding U.S. non-qualified plans, exceeded the accumulated benefit obligations by $619$910 million and $679$619 million at December 31, 20042005 and December 31, 2003,2004, respectively.
Assumptions
The discount rate and future rate of compensation assumptions used in determining pension and postretirement benefit obligations and net benefit expense for the Company's plans are shown in the following table:
At year end | 2004 | 2003 | ||||
---|---|---|---|---|---|---|
Discount rate | ||||||
U.S. plans: | ||||||
Pension | 5.75 | % | 6.25 | % | ||
Postretirement | 5.50 | % | 6.25 | % | ||
Plans outside the U.S.(2) | ||||||
Range | 2.0% to 10.0 | % | 2.0% to 10.0 | % | ||
Weighted average | 5.3 | % | 5.4 | % | ||
Future compensation increase rate | ||||||
U.S. Plans(1)(3) | 4.0 | % | 4.0 | % | ||
Plans outside the U.S.(2) | ||||||
Range | 1.5% to 9.0 | % | 1.5% to 8.0 | % | ||
Weighted average | 2.9 | % | 2.6 | % |
During the current year | 2004 | 2003 | ||||
---|---|---|---|---|---|---|
Discount rate | ||||||
U.S. plans(1) | 6.25 | % | 6.75 | % | ||
Plans outside the U.S.(2) | ||||||
Range | 2.0% to 10.0 | % | 2.25% to 12.0 | % | ||
Weighted average | 5.4 | % | 5.6 | % | ||
Future compensation increase rate | ||||||
U.S. Plans(1)(3) | 4.0 | % | 4.0 | % | ||
Plans outside the U.S.(2) | ||||||
Range | 1.5% to 8.0 | % | 1.5% to 10.0 | % | ||
Weighted average | 2.6 | % | 2.3 | % |
At year end | 2005 | 2004 | |||
---|---|---|---|---|---|
Discount rate | |||||
U.S. plans:(1) | |||||
Pension | 5.6 | % | 5.75% | ||
Postretirement | 5.5 | 5.5 | |||
Plans outside the U.S. | |||||
Range | 2.0 to 12.0 | 2.0 to 10.0 | |||
Weighted average | 7.0 | 5.3 | |||
Future compensation increase rate | |||||
U.S. Plans(1)(2) | 4.0 | 4.0 | |||
Plans outside the U.S. | |||||
Range | 2.0 to 9.0 | 1.5% to 9.0 | |||
Weighted average | 4.2 | 2.9 | |||
During the year | 2005 | 2004 | |||
---|---|---|---|---|---|
Discount rate | |||||
U.S. plans(1) | |||||
Pension | 5.75 | % | 6.25% | ||
Postretirement | 5.5 | 6.25 | |||
Plan outside the U.S. | |||||
Range | 2.0 to 10.0 | 2.0 to 10.0 | |||
Weighted average | 5.3 | 5.4 | |||
Future compensation increase rate | |||||
U.S. Plans(1) (2) | 4.0 | 4.0 | |||
Plans outside the U.S. | |||||
Range | 1.5 to 9.0 | 1.5 to 8.0 | |||
Weighted average | 2.9 | 2.6 | |||
A one percentage-point change in the discount rates would have the following effects on pension expense:
| One Percentage-point Increase | One Percentage-point Decrease | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||
| In millions of dollars | |||||||||||||||||
Effect on pension expense for U.S. plans | $ | (146 | ) | $ | (140 | ) | $ | (52 | ) | $ | 146 | $ | 140 | $ | 120 | |||
Effect on pension expense for foreign plans | (68 | ) | (260 | ) | (43 | ) | 83 | 306 | 53 | |||||||||
Assumed health care cost trend rates were as follows:
| 2004 | 2003 | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Health care cost increase rate | ||||||||||
U.S. plans | ||||||||||
Following year | 10.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | ||
Decreasing to the year 2010 | 5.0 | % | — | |||||||
Decreasing to the year 2009 | — | 5.0 | % | |||||||
Ultimate rate to which cost increase is assumed to decline | 5.0 | % | 5.0 | % | ||||||
Year in which the ultimate rate is reached | 2011 | 2010 | ||||||||
149
A one percentage-point change in assumed health care cost trend rates would have the following effects:
| One Percentage-Point Increase | One Percentage-Point Decrease | One Percentage-point Increase | One Percentage-point Decrease | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||
| In millions of dollars | In millions of dollars | ||||||||||||||||||||||||
Effect on benefits earned and interest cost for U.S. plans | $ | 2 | $ | 3 | $ | (2 | ) | $ | (2 | ) | $ | 3 | $ | 2 | $ | (3 | ) | $ | (2 | ) | ||||||
Effect on accumulated postretirement benefit obligation for U.S. Plans | 43 | 42 | (38 | ) | (37 | ) | 54 | 43 | (48 | ) | (38 | ) |
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 for each asset class. Citigroup considers the expected rate of return to be a longer-term assessment of return expectations, based on each plan's expected asset allocation, and does not anticipate changing this assumption annually unless there are significant changes in economic conditions. 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 long-term rates of return on assets used in determining the Company's pension expense and postretirement expense are shown below:
| | 2004 | 2003 | | 2005 | 2004 | ||||
---|---|---|---|---|---|---|---|---|---|---|
Rate of return on assets | Rate of return on assets | Rate of return on assets | ||||||||
U.S. plans(1) | U.S. plans(1) | 8.0% | 8.0% | U.S. plans(1) | 8.0% | 8.0% | ||||
Plans outside the U.S.: | Plans outside the U.S.: | Plans outside the U.S.: | ||||||||
Range | 3.25% to 10.0% | 3.25% to 10.5% | Range | 3.25% to 10.0% | 3.25% to 10.0% | |||||
Weighted average | 6.5% | 6.6% | Weighted average | 6.6% | 6.5% | |||||
A one percentage-point change in the expected rates of return would have the following effects on pension expense:
| One Percentage-point Increase | One Percentage-point Decrease | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||
| In millions of dollars | |||||||||||||||||
Effect on pension expense for U.S. plans | $ | (101 | ) | $ | (94 | ) | $ | (88 | ) | $ | 101 | $ | 94 | $ | 88 | |||
Effect on pension expense for foreign plans | (45 | ) | (118 | ) | (24 | ) | 45 | 118 | 24 | |||||||||
Plan Assets
Citigroup's pension and postretirement plan asset allocation for the U.S. plans at the end of 20042005 and 2003,2004, and the target allocation for 20052006 by asset category based on asset fair values are as follows:
| Target Asset Allocation | U.S. Pension Assets at December 31 | U.S. Postretirement Assets at December 31 | Target Asset Allocation | U.S. Pension Assets at December 31 | U.S. Postretirement Assets at December 31 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Asset Category | ||||||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | 2006 | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Equity securities | 40.0% to 60.0% | 47.0 | % | 54.0 | % | 51.0 | % | 61.0 | % | 22.5% to 42.5% | 45.0 | % | 47.0 | % | 45.0 | % | 51.0 | % | ||||
Debt securities | 10.0% to 30.0% | 29.0 | % | 26.0 | % | 21.0 | % | 15.0 | % | 17.5 to 42.5 | 27.0 | 29.0 | 26.0 | 21.0 | ||||||||
Real estate | 5.0% to 10.0% | 5.0 | % | 5.0 | % | 6.0 | % | 6.0 | % | 5.5 to 11.5 | 6.0 | 5.0 | 6.0 | 6.0 | ||||||||
Other investments | 15.0% to 30.0% | 19.0 | % | 15.0 | % | 22.0 | % | 18.0 | % | 18.5 to 42.5 | 22.0 | 19.0 | 23.0 | 22.0 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||
Equity securities in the U.S. pension plans include Citigroup common stock with a fair value of $122 million or 1.1% of plan assets and $123 million or 1.2% of plan assets and $608 million or 6.45% of plan assets at the end of 20042005 and 2003,2004, respectively. The Citigroup Pension Plan sold approximately $500 million of Citigroup common stock in 2004.
Affiliated and third-party investment managers manageand affiliated advisors provide their respective services to Citigroup's U.S. pension plan assets.plans. Assets are rebalanced as the Company deems appropriate. Citigroup's investment strategy with respect to its pension assets is to maintain a globally diversified investment portfolio across several asset classes targeting an annual rate of return of 8%, while ensuring that the accumulated benefit obligation is fully funded.
Citigroup's pension and postretirement plans' weighted average asset allocations for the non-U.S. plans and the actual ranges at the end of 2004,2005 and 2003,2004, and the weighted average target allocations for 20052006 by asset category based on asset fair values are as follows:
| Non-U.S. Pension Assets | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Target Asset Allocation | Actual Range at December 31 | Weighted Average at December 31 | ||||||||
Asset Categories | |||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | |||||||
Equity securities | 58.6 | % | 0.0% to 77.8% | 0.0% to 91.4% | 55.1 | % | 52.8 | % | |||
Debt securities | 32.3 | % | 0.0% to 97.0% | 0.0% to 100.0% | 28.3 | % | 24.5 | % | |||
Real estate | 0.3 | % | 0.0% to 18.4% | 0.0% to 24.0% | 0.3 | % | 0.2 | % | |||
Other investments | 8.8 | % | 0.0% to 100.0% | 0.0% to 77.7% | 16.3 | % | 22.5 | % | |||
Total | 100 | % | 100 | % | 100 | % | |||||
| Non-U.S. Postretirement Plans | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Target Asset Allocation | Actual Range at December 31 | Weighted Average at December 31 | ||||||||
Asset Categories | |||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | |||||||
Equity securities | 50.0 | % | 17.5% to 49.3% | 0.0% to 50.0% | 49.3 | % | 50.0 | % | |||
Debt securities | 32.5 | % | 28.0% to 82.5% | 35.0% to 100.0% | 28.0 | % | 35.0 | % | |||
Real estate | — | — | — | — | — | ||||||
Other investments | 17.5 | % | 0.0% to 22.7% | 0.0% to 15.0% | 22.7 | % | 15.0 | % | |||
Total | 100 | % | 100 | % | 100 | % | |||||
| Non-U.S. Pension Plans | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average | Actual Range | Weighted Average | ||||||||
| Target Asset Allocation | | | | | ||||||
| at December 31 | at December 31 | |||||||||
Asset Category | |||||||||||
2006 | 2005 | 2004 | 2005 | 2004 | |||||||
Equity securities | 57.2 | % | 0.0% to 80.4% | 0.0% to 77.8% | 57.3 | % | 55.1 | % | |||
Debt securities | 32.3 | 0.0 to 96.0 | 0.0 to 97.0 | 37.9 | 28.3 | ||||||
Real estate | 0.2 | 0.0 to 21.2 | 0.0 to 18.4 | 3.0 | 0.3 | ||||||
Other investments | 10.3 | 0.0 to 100 | 0.0 to 100 | 1.8 | 16.3 | ||||||
Total | 100 | % | 100 | % | 100 | % | |||||
150
| Non-U.S. Postretirement Plans | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average | Actual Range | Weighted Average | ||||||||
| Target Asset Allocation | | | | | ||||||
| at December 31 | at December 31 | |||||||||
Asset Category | |||||||||||
2006 | 2005 | 2004 | 2005(1) | 2004(1) | |||||||
Equity securities | 50.0 | % | 17.5% to 46.5 | % | 17.5% to 49.3 | % | 46.5 | % | 49.3 | % | |
Debt securities | 32.5 | 43.0 to 82.5 | 28.0 to 82.5 | 43.0 | 28.0 | ||||||
Real estate | — | — | — | — | — | ||||||
Other investments | 17.5 | 0.0 to 10.5 | 0.0 to 22.7 | 10.5 | 22.7 | ||||||
Total | 100 | % | 100 | % | 100 | % | |||||
Citigroup's global pension and postretirement funds' investment strategies are to invest in a prudent manner for the exclusive purpose of providing benefits to participants. The investment strategies are targeted to produce a total return that, when combined with Citigroup's contributions to the funds, will maintain the funds' ability to meet all required benefit obligations. Risk is controlled through diversification of asset types and investments in domestic and international equities, fixed income securities and cash. The target asset allocation in most locations is 50% equities and 50% debt securities. These allocations may vary by geographic region and country depending on the nature of applicable obligations and various other regional considerations. The wide variation in the actual range of plan asset allocations for the funded non-U.S. plans is a result of differing 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.
Contributions
Citigroup's pension funding policy for U.S. plans and non-U.S. plans is generally to fund to the amounts of accumulated benefit obligations, subject to applicable minimum funding requirements. For the U.S. plans, the Company may increase its contributions above the minimum required contribution under ERISA, if appropriate, to its tax and cash position and the plan's funded position. At December 31, 2004,2005, there were no minimum required contributions, and no discretionary or non-cash contributions are currently planned. However, in 2005, the Company contributed $400$160 million to the U.S. pension plan to avoid an additional minimum liability at year end. For the non-U.S. plans, actual contributions increased by $395$206 million over previously estimated amounts, primarily to avoid an additional minimum liability, as well as to satisfy regulatory funding requirements in certain countries. Discretionary contributions in 20052006 are anticipated to be approximately $173$116 million. For 2005 for the post-retirement benefit plans,2006 there are no expected or required contributions tofor both the U.S. plans and estimated contributions of $72 million are expected for the non-U.S. postretirement benefit plans. These estimates are subject to change, since contribution decisions are affected by various factors, such as market performance and regulatory requirements, and management'srequirements; in addition, management has the ability to change funding policy.
Estimated Future Benefit Payments
The Company expects to pay the following estimated benefit payments in future years:
| U.S. Plans | Plans Outside U.S. | U.S. Plans | Plans Outside U.S. | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension Benefits | Pension Benefits | Postretirement Benefits | Pension Benefits | Pension Benefits | Postretirement Benefits | ||||||||||||
| In millions of dollars | In millions of dollars | ||||||||||||||||
2005 | $ | 525 | $ | 199 | $ | 25 | ||||||||||||
2006 | 548 | 212 | 26 | $ | 591 | $ | 206 | $ | 26 | |||||||||
2007 | 573 | 222 | 28 | 617 | 202 | 27 | ||||||||||||
2008 | 600 | 229 | 29 | 645 | 207 | 28 | ||||||||||||
2009 | 628 | 226 | 31 | 675 | 218 | 29 | ||||||||||||
2010-2014 | 3,649 | 1,334 | 186 | |||||||||||||||
2010 | 707 | 232 | 30 | |||||||||||||||
2011-2015 | 4,086 | 1,388 | 178 | |||||||||||||||
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act""Act of 2003") was enacted. The Act of 2003 established a prescription drug benefit under Medicare known as "Medicare Part D," and a federal subsidy to sponsors of U.S. retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company believes that benefits provided to certain participants will beare at least actuarially equivalent to Medicare Part D and, accordingly, the Company will beis entitled to a subsidy.
The CompanyWith respect to this, Citigroup adopted FSP FAS 106-2 retroactive to the beginning of 2004. The expected subsidy reduced the accumulated postretirement benefit obligation (APBO) by approximately $130 million and $100 million as of January 1, 2005 and 2004, respectively, and the 2005 and 2004 postretirement expense by $100approximately $19 million and $11 million, respectively, for all of the net periodic expensepostretirement welfare plans for 2004 by $11 million.2005 and 2004. Additionally, as of December 31, 2005, an additional reduction in the plans' APBO of approximately $45 million was recognized to reflect the expected impact of the final Medicare regulations issued during 2005.
The following table shows the estimated future benefit payments without the effect of the subsidy and the amounts of the expected subsidy in future years.
| Expected U.S. Postretirement Benefit Payments | Expected U.S. Postretirement Benefit Payments | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Before Medicare Part D Subsidy | After Medicare Part D Subsidy | Before Medicare Part D Subsidy | Medicare Part D Subsidy | ||||||||
| In millions of dollars | In millions of dollars | ||||||||||
2005 | $ | 102 | N/A | |||||||||
2006 | 105 | $ | 10 | $ | 112 | $ | 12 | |||||
2007 | 106 | 10 | 114 | 13 | ||||||||
2008 | 106 | 10 | 114 | 13 | ||||||||
2009 | 105 | 11 | 113 | 14 | ||||||||
2010-2014 | 485 | 50 | ||||||||||
2010 | 111 | 14 | ||||||||||
2011-2015 | 507 | 68 | ||||||||||
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Under the Citigroup 401(k) plan, eligible employees receive matching contributions of up to 3% of their compensation, subject to an annual maximum of $1,500, invested in the Citigroup common stock fund. The pretax expense associated with this plan amounted to approximately $70 million in 2005, $69 million in 2004, and $65 million in 2003, and $57 million in 2002.2003.
24.22. Derivatives and Other Activities
Citigroup enters into derivative and foreign exchange futures, forwards, options and swaps, whichto enable customers to transfer, modify or reduce their interest rate, foreign exchange and other market risks, andrisks; it also trades these products for its own account. In addition, Citigroup uses derivatives and other instruments, primarily interest rate products, as an end-user in connection with its risk management activities. Derivatives are used to manage interest rate risk relating to specific groups of on-balance sheet assets and liabilities, including investments, corporate commercial and consumer loans, deposit liabilities, long-term debt and other interest-sensitive assets and liabilities, as well as credit card securitizations, redemptions and sales. In addition, foreign exchange contracts are used to hedge non-U.S. dollar denominated debt, net capital exposures and foreign exchange transactions.
A derivative must be highly effective in accomplishing the hedge objective of offsetting either changes in the fair value or cash flows of the hedged item for the risk being hedged. Any ineffectiveness present in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes the changes in the value of the hedged item that are unrelated to the risks being hedged. Similarly, the assessment of effectiveness may exclude changes in the fair value of a derivative related to time value that, if excluded, are recognized in current earnings.
The following table summarizes certain information related to the Company's hedging activities for the years ended December 31, 2005, 2004, 2003, and 2002:2003:
| | 2004 | 2003(1) | 2002(1) | | 2005 | 2004 | 2003 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | In millions of dollars | | In millions of dollars | ||||||||||||||||||
Fair value hedges | Fair value hedges | Fair value hedges | ||||||||||||||||||||
Hedge ineffectiveness recognized in earnings | $ | (100 | ) | $ | 96 | $ | 698 | Hedge ineffectiveness recognized in earnings | $ | 38 | $ | (100 | ) | $ | 96 | |||||||
Net gain (loss) excluded from assessment of effectiveness(2) | 509 | (90 | ) | (252 | ) | Net gain (loss) excluded from assessment of effectiveness(1) | (32 | ) | 509 | (90 | ) | |||||||||||
Cash flow hedges | Cash flow hedges | Cash flow hedges | ||||||||||||||||||||
Hedge ineffectiveness recognized in earnings | 10 | (21 | ) | (56 | ) | Hedge ineffectiveness recognized in earnings | (18 | ) | 10 | (21 | ) | |||||||||||
Net gain excluded from assessment of effectiveness(2) | 8 | 10 | 1 | Net gain excluded from assessment of effectiveness (1) | 1 | 8 | 10 | |||||||||||||||
Net investment hedges | Net investment hedges | Net investment hedges | ||||||||||||||||||||
Net gain (loss) included in foreign currency translation adjustment within accumulated other changes in equity from nonowner sources | $ | (1,159 | ) | $ | (2,291 | ) | $ | (1,435 | ) | Net gain (loss) included in foreign currency translation adjustment in accumulated other changes in equity from nonowner sources | $ | 492 | $ | (1,159 | ) | $ | (2,291 | ) | ||||
For cash flow hedges, any changes in the fair value of the end-user derivative remain in accumulated other changes in equity from nonowner sources on the Consolidated Balance Sheet and are generally included in earnings of future periods when earnings are also affected by the variability of the hedged cash flow. The net gains associated with cash flow hedges expected to be reclassified from accumulated other changes in equity from nonowner sources within 12 months of December 31, 20042005 are $262$543 million.
The accumulated other changes in equity from nonowner sources from cash flow hedges for 2005, 2004, 2003, and 20022003 can be summarized as follows (after-tax):
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||||||||||
Beginning balance | $ | 751 | $ | 1,242 | $ | 168 | $ | 173 | $ | 751 | $ | 1,242 | ||||||||
Net gain (loss) from cash flow hedges | (251 | ) | 237 | 1,591 | 641 | (251 | ) | 237 | ||||||||||||
Net amounts reclassified to earnings | (327 | ) | (728 | ) | (517 | ) | (202 | ) | (327 | ) | (728 | ) | ||||||||
Ending balance | $ | 173 | $ | 751 | $ | 1,242 | $ | 612 | $ | 173 | $ | 751 | ||||||||
The Company enters into various types of derivative transactions in the course of its trading and non-trading activities. Futures and forward contracts are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Swap contracts are commitments to settle in cash at a future date or dates which may range from a few days to a number of years, based on differentials between specified financial indices, as applied to a notional principal amount. Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time, a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices.
Citigroup also sells various financial instruments that have not yet been purchased (short sales). In order to sell securities short, the securities are borrowed or received as collateral in conjunction with short-term financing agreements and, at a later date, must be delivered (i.e., replaced) with like or substantially the same financial instruments or commodities to the parties from which they were originally borrowed.
Derivatives and short sales may expose Citigroup to market risk or credit risk in excess of the amounts recorded on the Consolidated Balance Sheet. Market risk on a derivative, short sale or foreign exchange product is the exposure created by potential fluctuations in interest rates, foreign exchange rates and other values, and is a function of the type of product, the volume of transactions, the tenor and terms of the agreement, and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held if any, wasis not adequate to cover such losses. The recognition in earnings of unrealized gains on these transactions is subject to management's assessment as to collectibility. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted in timesperiods of high volatility and financial stress at a reasonable cost.
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25.23. Concentrations of Credit Risk
Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of counterparties whose aggregate credit exposure is material in relation to Citigroup's total credit exposure. Although Citigroup's portfolio of financial instruments is broadly diversified along industry, product, and geographic lines, material transactions are completed with other financial institutions, particularly in the securities trading, derivatives, and foreign exchange businesses.
In connection with the Company's efforts to maintain a diversified portfolio, the Company limits its exposure to any one geographic region, country or individual creditor and monitors this exposure on a continuous basis. At December 31, 2004,2005, Citigroup's most significant concentration of credit risk was with the U.S. Governmentgovernment and its agencies. The Company's exposure, which primarily results from trading assets and investment securities positions in instrumentsinvestments issued by the U.S. Governmentgovernment and its agencies, including its sponsored agencies, amounted to $88.1$78.0 billion and $112.7$88.1 billion at December 31, 20042005 and 2003,2004, respectively. After the U.S. Government,government, the Company's next largest exposure the Company has is to the Mexican Governmentgovernment and its agencies, which are rated investment grade by both Moody's and S&P. The Company's exposure amounted to $23.8$20.7 billion and $21.9$23.8 billion at December 31, 20042005 and 2003,2004, respectively, and is composed of investment securities, loans, and trading assets.
26.24. Fair Value of Financial Instruments
Estimated Fair Value of Financial Instruments
The table onin the following pagecolumn presents the carrying value and fair value of Citigroup's financial instruments, as defined in accordance with applicable requirements. Accordingly, as required, the disclosures excludeinstruments. The disclosure excludes leases, affiliate investments, and pension and benefit obligations, and insurance policy claimsclaim reserves. In addition, contractholder fundsfund amounts exclude certain insurance contracts. Also as required, the disclosures excludedisclosure excludes the effect of taxes, any premium or discount that could result from offering for sale at one time the entire holdings of a particular instrument, excess fair value associated with deposits with no fixed maturity and other expenses that would be incurred in a market transaction. In addition, the table excludes the values of nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values, which are integral to a full assessment of Citigroup's financial position and the value of its net assets.
The fair value represents management's best estimates based on a range of methodologies and assumptions. The carrying value of short-term financial instruments, as well as receivables and payables arising in the ordinary course of business,
approximates fair value because of the relatively short period of time between their origination and expected realization. Quoted market prices are used for most investments and for both trading and end-user derivatives, as well as for liabilities, such as long-term debt, with quoted prices. For performing loans, contractual cash flows are discounted at quoted secondary market rates or estimated market rates if available. Otherwise, sales of comparable loan portfolios or current market origination rates for loans with similar terms and risk characteristics are used. For loans with doubt as to collectibility, expected cash flows are discounted using an appropriate rate considering the time of collection and the premium for the uncertainty of the flows. The value of collateral is also considered. For liabilities such as long-term debt without quoted market prices, market borrowing rates of interest are used to discount contractual cash flows.
| 2004 | 2003 | 2005 | 2004(1) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||||
| In billions of dollars at year end | In billions of dollars at year end | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investments | $ | 213.2 | $ | 213.2 | $ | 182.9 | $ | 182.9 | $ | 180.6 | $ | 180.6 | $ | 213.2 | $ | 213.2 | ||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | 200.7 | 200.7 | 172.2 | 172.2 | 217.5 | 217.5 | 200.7 | 200.7 | ||||||||||||||||
Trading account assets | 280.2 | 280.2 | 235.3 | 235.3 | 295.8 | 295.8 | 280.2 | 280.2 | ||||||||||||||||
Loans | 525.5 | 549.5 | 449.8 | 469.8 | 563.7 | 583.0 | 525.5 | 549.5 | ||||||||||||||||
Other financial assets | 162.9 | 163.0 | 133.1 | 133.1 | $ | 137.1 | $ | 137.1 | $ | 162.9 | $ | 163.0 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits | 562.1 | 561.9 | 474.0 | 474.0 | $ | 592.6 | $ | 592.2 | $ | 562.1 | $ | 561.9 | ||||||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | 209.6 | 209.6 | 181.2 | 181.2 | 242.4 | 242.4 | 209.6 | 209.6 | ||||||||||||||||
Trading account liabilities | 135.5 | 135.5 | 121.9 | 121.9 | 121.1 | 121.1 | 135.5 | 135.5 | ||||||||||||||||
Contractholder funds | ||||||||||||||||||||||||
with defined maturities | 15.2 | 15.6 | 13.5 | 13.7 | ||||||||||||||||||||
without defined maturities | 14.4 | 14.1 | 13.1 | 12.8 | ||||||||||||||||||||
Long-term debt | 207.9 | 209.5 | 162.7 | 164.6 | ||||||||||||||||||||
Mandatorily redeemable securities of subsidiary trusts(3) | — | — | 6.1 | 6.4 | ||||||||||||||||||||
Other financial liabilities(4) | 167.0 | 167.0 | 147.3 | 147.3 | ||||||||||||||||||||
Long-term debt(4) | 217.5 | 218.9 | 207.9 | 209.5 | ||||||||||||||||||||
Other financial liabilities(5) | $ | 166.5 | $ | 166.5 | $ | 196.6 | $ | 196.7 | ||||||||||||||||
Fair values vary from period to period based on changes in a wide range of factors, including interest rates, credit quality, and market perceptions of value, and as existing assets and liabilities run off and new transactions are entered into.
The estimated fair values of loans reflect changes in credit status since the loans were made, changes in interest rates in the case of fixed-rate loans, and premium values at origination of certain loans. The estimated fair values of Citigroup's
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loans, in the aggregate, exceeded inthe carrying values (reduced by the allowance for credit losses) by $19.3 billion in 2005 and $24.0 billion in 2004, and $20.0 billion in 2003.respectively. Within these totals, estimated fair values exceeded carrying values for consumer loans net of the allowance by $16.5$11.8 billion, an increasea decrease of $0.2$4.7 billion from 2003,2004, and an increase for corporate loans net of the allowance by $7.5 billion, which was an increase of $3.8 billionconsistent from 2003.2004. The excess of the estimated fair value of loans over their carrying value reflects the decline in market interest rates since many of the loans were issued.
27.25. Pledged Assets, Collateral, Commitments and Guarantees
Pledged Assets
At December 31, 20042005 and 2003,2004, the approximate market valuesvalue of securities sold under agreements to repurchase and other assets pledged, excluding the impact of FIN 39 and FIN 41, were as follows:
| 2004 | 2003 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars | In millions of dollars | ||||||||||
For securities sold under agreements to repurchase | $ | 278,448 | $ | 253,728 | $ | 322,188 | $ | 278,448 | ||||
As collateral for securities borrowed of approximately equivalent value | 69,947 | 63,343 | ||||||||||
As collateral for securities borrowed for approximately equivalent value | 45,671 | 69,947 | ||||||||||
As collateral on bank loans | 41,567 | 30,801 | 51,841 | 41,567 | ||||||||
To clearing organizations or segregated under securities laws and regulations | 34,549 | 31,165 | 31,649 | 34,549 | ||||||||
For securities loaned | 39,606 | 28,597 | 49,666 | 39,606 | ||||||||
Other | 48,410 | 45,692 | 38,219 | 48,410 | ||||||||
Total | $ | 512,527 | $ | 453,326 | $ | 539,234 | $ | 512,527 | ||||
In addition, included in cash and due from banks at December 31, 2005 and 2004 and 2003 is $4.1$5.1 billion and $2.8$4.1 billion, respectively, of cash segregated under federal and other brokerage regulations or deposited with clearing organizations.
At December 31, 2005 and 2004, and 2003, $10.7$17.4 billion and $13.8$10.7 billion, respectively, of consumer loans were pledged as collateral in financing transactions.
At December 31, 20042005 and 2003,2004, the Company had $1.6$2.3 billion and $1.1$1.6 billion, respectively, of outstanding letters of credit from third-party banks to satisfy various collateral and margin requirements.
Collateral
At December 31, 20042005 and 2003,2004, the approximate market value of collateral received by the Company that may be sold or repledged by the Company, excluding amounts netted in accordance with FIN 39 and FIN 41, was $366.4$409.1 billion and $329.8$366.4 billion, respectively. This collateral was received in connection with resale agreements, securities borrowings and loans, derivative transactions, and margined broker loans, pledges to clearing organizations; segregation requirements under securities laws and regulations; derivative transactions; and bank loans. At December 31, 2005 and 2004, a substantial portion of this collateral received by the Company had been sold or repledged.
At December 31, 20042005 and 2003,2004, a substantial portion of the collateral received by the Company had been sold or repledged in connection with repurchase agreements; securities sold, not yet purchased; securities borrowings and loans; pledges to clearing organizations; segregation requirements under securities laws and regulations; derivative transactions,transactions; and bank loans.
In addition, at December 31, 20042005 and 2003,2004, the Company had pledged $121$295 billion and $102.5$121 billion, respectively, of collateral that may not be sold or repledged by the secured parties.
Lease Commitments
Rental expense (principally for offices and computer equipment) was $1.7$1.8 billion, $1.7 billion, and $1.5$1.7 billion for the years ended December 31, 2005, 2004, 2003, and 2002,2003, respectively.
Future minimum annual rentals under noncancelable leases, net of sublease income, are as follows:
| In millions of dollars | In millions of dollars | ||||
---|---|---|---|---|---|---|
2005 | $ | 1,297 | ||||
2006 | 988 | $ | 2,301 | |||
2007 | 861 | 1,664 | ||||
2008 | 743 | 987 | ||||
2009 | 626 | 872 | ||||
2010 | 750 | |||||
Thereafter | 2,967 | 4,074 | ||||
Total | $ | 7,482 | $ | 10,648 | ||
Loan Commitments
| 2004 | 2003 | 2005 | 2004(1) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions of dollars at year end | In millions of dollars at year-end | ||||||||||
One- to four-family residential mortgages | $ | 4,559 | $ | 3,599 | $ | 3,343 | $ | 4,559 | ||||
Revolving open-end loans secured by one- to four-family residential properties | 15,705 | 14,007 | ||||||||||
Revolving open-end loans secured by one- to four- family residential properties | 25,089 | 15,705 | ||||||||||
Commercial real estate, construction and land development | 2,084 | 1,382 | 2,283 | 2,084 | ||||||||
Credit card lines | 776,281 | 739,162 | 859,504 | 776,281 | ||||||||
Commercial and other consumer loan commitments(2) | 256,670 | 210,751 | ||||||||||
Commercial and other consumer loan commitments (1) (3) | 346,444 | 274,237 | ||||||||||
Total | $ | 1,055,299 | $ | 968,901 | $ | 1,236,663 | $ | 1,072,866 | ||||
The majority of unused commitments are contingent upon customers maintaining specific credit standards. Commercial commitments generally have floating interest rates and fixed expiration dates and may require payment of fees. Such fees (net of certain direct costs) are deferred and, upon exercise of the commitment, amortized over the life of the loan or, if exercise is deemed remote, amortized over the commitment period. The table does not include unfunded commercial letters of credit issued on behalf of customers and collateralized by the underlying shipment of goods whichthat totaled $5.8 billion and $4.4 billion at December 31, 20042005 and 2003, respectively.2004.
Obligations under Guarantees
The Company provides a variety of guarantees and indemnifications to Citigroup customers to enhance their credit standing and enable them to complete a wide variety of business transactions. The following table summarizes at December 31, 20042005 and 20032004 all of the Company's guarantees and indemnifications, where Managementmanagement believes the guarantees and indemnifications are related to an asset, liability, or equity security of the guaranteed parties at the inception of the contract. The maximum potential amount of future payments represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Such amounts bear no relationship to the anticipated losses on these guarantees and indemnifications and greatly exceed anticipated losses.
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The following tables present information about the Company's guarantees at December 31, 20042005 and 2003:
| Maximum Potential amount of Future Payments | | Maximum Potential Amount of Future Payments | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004: | Expire Within 1 Year | Expire After 1 Year | Total Amount Outstanding | Carrying Value (in millions) | ||||||||||||||||||||
| In billions of dollars at December 31, except carrying value in millions | | Expire Within 1 Year | Expire After 1 Year | Total Amount Outstanding | Carrying Value | ||||||||||||||||||
| In billions of dollars at December 31, except carrying value in millions | |||||||||||||||||||||||
2005 | ||||||||||||||||||||||||
Financial standby letters of credit | $ | 34.4 | $ | 11.4 | $ | 45.8 | $ | 199.4 | $ | 30.6 | $ | 21.8 | $ | 52.4 | $ | 175.2 | ||||||||
Performance guarantees | 5.0 | 4.1 | 9.1 | 16.4 | 10.0 | 3.9 | 13.9 | 18.2 | ||||||||||||||||
Derivative instruments | 23.8 | 291.3 | 315.1 | 15,129.0 | 24.5 | 217.0 | 241.5 | 11,837.4 | ||||||||||||||||
Guarantees of collection of contractual cash flows(1) | — | 0.2 | 0.2 | — | — | 0.1 | 0.1 | — | ||||||||||||||||
Loans sold with recourse | — | 1.2 | 1.2 | 42.6 | — | 1.3 | 1.3 | 58.4 | ||||||||||||||||
Securities lending indemnifications(1) | 60.5 | — | 60.5 | — | 68.4 | — | 68.4 | — | ||||||||||||||||
Credit card merchant processing(1) | 29.7 | — | 29.7 | — | 28.1 | — | 28.1 | — | ||||||||||||||||
Custody indemnifications(1) | — | 18.8 | 18.8 | — | — | 27.0 | 27.0 | — | ||||||||||||||||
Total | $ | 153.4 | $ | 327.0 | $ | 480.4 | $ | 15,387.4 | $ | 161.6 | $ | 271.1 | $ | 432.7 | $ | 12,089.2 | ||||||||
2003: | ||||||||||||||||||||||||
2004 | ||||||||||||||||||||||||
Financial standby letters of credit | $ | 18.4 | $ | 18.0 | $ | 36.4 | $ | 147.7 | $ | 34.4 | $ | 11.4 | $ | 45.8 | $ | 199.4 | ||||||||
Performance guarantees | 4.9 | 3.2 | 8.1 | 10.2 | 5.0 | 4.1 | 9.1 | 16.4 | ||||||||||||||||
Derivative instruments | 21.4 | 103.8 | 125.2 | 12,923.2 | 23.8 | 291.3 | 315.1 | 15,129.0 | ||||||||||||||||
Guarantees of collection of contractual cash flows(1) | — | 0.1 | 0.1 | — | — | 0.2 | 0.2 | — | ||||||||||||||||
Loans sold with recourse | — | 1.9 | 1.9 | 28.6 | — | 1.2 | 1.2 | 42.6 | ||||||||||||||||
Securities lending indemnifications(1) | 55.5 | — | 55.5 | — | 60.5 | — | 60.5 | — | ||||||||||||||||
Credit card merchant processing(1) | 22.6 | — | 22.6 | — | 29.7 | — | 29.7 | — | ||||||||||||||||
Custody indemnifications(1) | — | 18.0 | 18.0 | — | — | 18.8 | 18.8 | — | ||||||||||||||||
Total | $ | 122.8 | $ | 145.0 | $ | 267.8 | $ | 13,109.7 | $ | 153.4 | $ | 327.0 | $ | 480.4 | $ | 15,387.4 | ||||||||
Financial standby letters of credit include guarantees of payment of insurance premiums and reinsurance risks that support industrial revenue bond underwriting and settlement of payment obligations into clearing houses, and that support options and purchases of securities or in lieu of escrow deposit accounts. Financial standbys also backstop loans, credit facilities, promissory notes and trade acceptances. Performance guarantees and letters of credit are issued to guarantee a customer's tender bid on a construction or systems installation project or to guarantee completion of such projects in accordance with contract terms. They are also issued to support a customer's obligation to supply specified products, commodities, or maintenance or warranty services to a third party.
Derivative instruments include credit default swaps, total return swaps, written foreign exchange options, written put options, and written equity warrants. Guarantees of collection of contractual cash flows protect investors in credit card receivables securitization trusts from loss of interest relating to insufficient collections on the underlying receivables in the trusts. Loans sold with recourse represent the Company's obligations to reimburse the buyers for loan losses under certain circumstances. Securities lending indemnifications are issued to guarantee that a securities lending customer will be made whole in the event that the security borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. Credit card merchant processing guarantees represent the Company's indirect obligations in connection with the processing of credit cardprivate label and bankcard transactions on behalf of merchants. Custody indemnifications are issued to guarantee that custody clients will be made whole in the event that a third-party subcustodian fails to safeguard clients' assets.
At December 31, 20042005 and 2003,2004, the Company's maximum potential amount of future payments under these guarantees was approximately $480.4$433 billion and $267.8$480 billion, respectively. For this purpose, the maximum potential amount of future payments is considered to be the notional amounts of letters of credit, guarantees, written credit default swaps, written total return swaps, indemnifications, and recourse provisions of loans sold with recourse;recourse, and the fair values of foreign exchange options and other written put options, warrants, caps and floors.
Citigroup's primary credit card business is the issuance of credit cards to individuals. TheIn addition, the Company also provides transaction processing services to various merchants processing credit card transactions on their behalfwith respect to bankcard and managingprivate label cards. In the merchant's cash flow related to their credit card activity. In connection with these services,third quarter of 2005, the Company entered into a contingent liability arisespartnership under which a third party processes bankcard transactions. As a result, in the event of a billing dispute with respect to a bankcard transaction between thea merchant and a cardholder, that is ultimately resolved in the cardholder's favor, the third party holds the primary contingent liability to credit or refund the amount to the cardholder and generally extends between three and six months after the datecharge back the transaction is processed or the receipt of the product or service, depending on industry practice or statutory requirements. In this situation, the transaction is "charged back" to the merchant and the disputed amount is credited or otherwise refunded to the cardholder.merchant. If the Companythird party is unable to collect this amount from the merchant, it bears the loss for the amount of the credit or refund paid to the cardholder.
The Company continues to have the primary contingent liability with respect to its portfolio of private label merchants. The risk of loss is mitigated as the cash flows between the third party or the Company and the merchant are settled on a
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net basis and the third party or the Company has the right to offset any payments with cash flows otherwise due to the merchant. To further mitigate this risk, Citigroupthe third party or the Company may require thea merchant to make an escrow deposit, delay settlement, or include event triggers to provide the third party or the Company with more financial and operational control in the event of the financial deterioration of the merchant, or require various credit enhancements (including letters of credit and bank guarantees). At December 31, 2004 and 2003, respectively,In the Company held asunlikely event that a private label merchant is unable to deliver products, services or a refund to its private label cardholders, Citigroup is contingently liable to credit or refund cardholders. In addition, although a third party holds the primary contingent liability with respect to the processing of bankcard transactions, in the event that the third party does not have sufficient collateral approximately $6 million and $26 million, respectively, of merchant escrow deposits and also had $68 million and $109 million,
respectively, payable to merchants, which the Company has the right to set off against amounts due from the individual merchants.merchant or sufficient financial resources of its own to provide the credit or refunds to the cardholders, Citigroup would be liable to credit or refund the cardholders.
The Company's maximum potential contingent liability for this contingentrelated to both bankcard and private label merchant processing liabilityservices is estimated to be the total volume of credit card transactions that meet the associations' requirements to be valid chargeback transactions at any given time. At December 31, 20042005 and 2003,2004, this maximum potential exposure was estimated to be $29.7$28 billion and $22.6$30 billion, respectively.
However, the Company believes that the maximum exposure is not representative of the actual potential loss exposure, based on the Company's historical experience.experience and its position as a secondary guarantor (in the case of bankcards). In most cases, this contingent liability is unlikely to arise, as most products and services are delivered when purchased and amounts are refunded when items are returned to merchants. The Company assesses the probability and amount of its contingent liability related to merchant processing based on the financial strength of the primary guarantor (in the case of bankcards) and the extent and nature of unresolved chargebacks and its historical loss experience. At December 31, 2005 and 2004, the estimated losses incurred and the carrying amountamounts of the Company's contingent obligations related to merchant processing activities arewere immaterial.
In addition, the Company, through its credit card business, provides various cardholder protection programs on several of its card products, including programs that provide insurance coverage for rental cars, coverage for certain losses associated with purchased products, price protection for certain purchases and protection for lost luggage. These guarantees are not included in the table above, since the total outstanding amount of the guarantees and the Company's maximum exposure to loss cannot be quantified. The protection is limited to certain types of purchases and certain types of losses and it is not possible to quantify the purchases that would qualify for these benefits at any given time. Actual losses related to these programs were not material during 20042005 and 2003.2004. The Company assesses the probability and amount of its potential liability related to these programs based on the extent and nature of its historical loss experience. At December 31, 2004 and 2003,2005, the estimated losses incurred and the carrying value of the Company's obligations related to these programs were immaterial.
In the normal course of business, the Company provides standard representations and warranties to counterparties in contracts in connection with numerous transactions and also provides indemnifications that protect the counterparties to the contracts in the event that additional taxes are owed due either to a change in the tax law or an adverse interpretation of the tax law. Counterparties to these transactions provide the Company with comparable indemnifications. While such representations, warranties and tax indemnifications are essential components of many contractual relationships, they do not represent the underlying business purpose for the transactions. The indemnification clauses are often standard contractual terms related to the Company's own performance under the terms of a contract and are entered into in the normal course of business based on an assessment that the risk of loss is remote. Often these clauses are intended to ensure that terms of a contract are met at inception (for example, that loans transferred to a counterparty in a sales transaction did in fact meet the conditions specified in the contract at the transfer date). No compensation is received for these standard representations and warranties, and it is not possible to determine their fair value because they rarely, if ever, result in a payment. In many cases, there are no stated or notional amounts included in the indemnification clauses and the contingencies potentially triggering the obligation to indemnify have not occurred and are not expected to occur. There are no amounts reflected on the Consolidated Balance Sheet as of December 31, 2005 and December 31, 2004, or 2003, related to these indemnifications and they are not included in the table above.
In addition, the Company is a member of or shareholder in hundreds of value transfer networks (VTNs) (payment, clearing and settlement systems as well as securities exchanges) around the world. As a condition of membership, many of these VTNs require that members stand ready to backstop the net effect on the VTNs of a member's default on its obligations. The Company's potential obligations as a shareholder or member of VTN associations are excluded from the scope of FIN 45, since the shareholders and members represent subordinated classes of investors in the VTNs. Accordingly, the Company's participation in VTNs is not reported in the table above and there are no amounts reflected on the Consolidated Balance Sheet as of December 31, 20042005 or 20032004 for potential obligations that could arise from the Company's involvement with VTN associations.
At December 31, 20042005 and 2003,2004, the carrying amounts of the liabilities related to the guarantees and indemnifications included in the table above amounted to approximately $15.4$12 billion and $13.1 billion.$15 billion, respectively. The carrying value of derivative instruments is included in either trading liabilities or other liabilities, depending upon whether the derivative was entered into for trading or non-trading purposes. The carrying value of financial and performance guarantees is included in other liabilities. The carrying value of the guarantees of contractual cash flows is offset against the receivables from the credit card trusts. For loans sold with recourse, the carrying value of the liability is included in other liabilities. In addition, at December 31, 20042005 and 2003,2004, other liabilities includeson the Consolidated Balance Sheet include an allowance for credit losses of $850 million and $600 million, for both yearsrespectively, relating to letters of credit and unfunded lending commitments.
156
In addition to the collateral available in respect of the credit card merchant processing contingent liability discussed above, the Company has collateral available to reimburse potential losses on its other guarantees. Cash collateral available to the Company to reimburse losses realized under these guarantees and indemnifications amounted to $43.3$55 billion and $38.3$43 billion at December 31, 20042005 and 2003,2004, respectively. Securities and other marketable assets held as collateral amounted to $31.6$24 billion and $29.4$32 billion and letters of credit in favor of the Company held as collateral amounted to $635$681 million and $931$635 million at December 31, 20042005 and 2003,2004, respectively. Other property may also be available to the Company to cover losses under certain guarantees and indemnifications; however, the value of such property has not been determined.
Loans Sold with Credit Enhancements
| 2004 | 2003 | Form of Credit Enhancement | 2005 | 2004 | Form of Credit Enhancement | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In billions of dollars at year end | | In billions of dollars at year end | | ||||||||||||
Residential mortgages and other loans sold with recourse(1) | $ | 6.0 | $ | 6.2 | 2004: Recourse obligation of $1.2 2003: Recourse obligation of $1.9 | $ | 9.0 | $ | 6.0 | 2005: Recourse obligation of $1.3 2004: Recourse obligation of $1.2 | ||||||
GNMA sales/servicing agreements(2) | 34.2 | 21.0 | Secondary recourse obligation | 29.1 | 34.2 | Secondary recourse obligation | ||||||||||
Securitized credit card receivables | 82.3 | 74.8 | Includes net revenue over the life of the transaction. Also includes other recourse obligations of $5.1 in 2004 and $2.8 in 2003 | $ | 92.3 | $ | 82.3 | Includes net revenue over the life of the transaction. Also includes other recourse obligations of $7.3 in 2005 and $5.1 in 2004 | ||||||||
Citigroup and its subsidiaries are obligated under various credit enhancements related to certain sales of loans or sales of participations in pools of loans, as summarized above.
Net revenue on securitized credit card receivables is collected over the life of each sale transaction. The net revenue is based upon the sum of finance charges and fees received from cardholders and interchange revenue earned on cardholder transactions, less the sum of the yield paid to investors, credit losses, transaction costs, and a contractual servicing fee, which is also retained by certain Citigroup subsidiaries as servicers. As specified in certain of the sale agreements, the net revenue collected each month is accumulated up to a predetermined maximum amount, and is available over the remaining term of that transaction to make payments of yield, fees, and transaction costs in the event that net cash flows from the receivables are not sufficient. When the predetermined amount is reached, net revenue is passed directly to the Citigroup subsidiary that sold the receivables. The amount contained in these accounts is included in other assets and was $114 million at December 31, 2005 and $156 million at December 31, 2004 and $90 million at December 31, 2003.2004. Net revenue from securitized credit card receivables included in other revenue was $4.8 billion, $3.8 billion, $3.3 billion, and $2.7$3.3 billion for the years ended December 31, 2005, 2004, and 2003, and 2002, respectively.
Financial Guarantees
Financial guarantees are used in various transactions to enhance the credit standing of Citigroup customers. They represent irrevocable assurances, subject to the satisfaction of certain conditions, that Citigroup will make payment in the event that the customer fails to fulfill its obligations to third parties.
Citigroup issues financial standby letters of credit, which are obligations to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument, such as assuring payments by a foreign reinsurer to a U.S. insurer, to act as a substitute for an escrow account, to provide a payment mechanism for a customer's third-party obligations, and to assure payment of specified financial obligations of a customer. Fees are recognized ratably over the term of the standby letter of credit. The following table summarizes financial standby letters of credit issued by Citigroup. The table does not include securities lending indemnifications issued to customers, which are fully collateralized and totaled $68.4 billion at December 31, 2005 and $60.5 billion at December 31, 2004, and $55.5 billion at December 31, 2003, and performance standby letters of credit.
| | | 2004 | 2003 | | | 2005 | 2005 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expire Within 1 Year | Expire After 1 Year | Total Amount Outstanding | Total Amount Outstanding | Expire Within 1 Year | Expire After 1 Year | Total Amount Out- standing | Total Amount Out- Standing | ||||||||||||||||
| In billions of dollars at year end | In billions of dollars at year end | ||||||||||||||||||||||
Insurance, surety | $ | 10.1 | $ | 2.2 | $ | 12.3 | $ | 12.8 | $ | 2.9 | $ | 8.9 | $ | 11.8 | $ | 12.3 | ||||||||
Options, purchased securities, and escrow | 0.1 | — | 0.1 | 0.3 | — | — | — | 0.1 | ||||||||||||||||
Clean letters of credit | 4.0 | 2.4 | 6.4 | 6.2 | 5.3 | 3.7 | 9.0 | 6.4 | ||||||||||||||||
Other debt related | 15.6 | 5.4 | 21.0 | 13.5 | 20.8 | 7.6 | 28.4 | 21.0 | ||||||||||||||||
Total(1) | $ | 29.8 | $ | 10.0 | $ | 39.8 | $ | 32.8 | $ | 29.0 | $ | 20.2 | $ | 49.2 | $ | 39.8 | ||||||||
157
As described in the "Legal Proceedings" discussion on page 141,, the Company is a defendant in numerous lawsuits and other legal proceedings arising out of alleged misconduct in connection with:
During the 2004 second quarter, in connection with the settlement of the WorldCom class action, the Company reevaluated and increased its reserves for these matters. The Company recorded a charge of $7.915 billion ($4.95 billion after-tax) relating to (i) the settlement of class action litigation brought on behalf of purchasers of WorldCom securities, and (ii) an increase in litigation reserves for the other matters described above. Subject to the terms of the WorldCom class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.575$2.57 billion or $1.59 billion after-tax,pretax to the WorldCom settlement class. In addition, subject to the terms of the Enron class action settlement, and its eventual approval by the courts, the Company will make a payment of $2.01 billion pretax to the Enron settlement class. During the fourth quarter of 2005, in connection with an evaluation of these matters and as a result of the favorable resolution of certain WorldCom/Research litigation matters, the Company reevaluated its reserves for these matters and released $600 million ($375 million after-tax) from this reserve. As of December 31, 2004,2005, the Company's litigation reserve for these matters, net of settlement amounts previously paid, the amountamounts to be paid upon final approval of the WorldCom and Enron class action settlement,settlements and other settlements arising out of the matters above not yet paid, and the $600 million release that was $6.64 billion on a pretax basis.recorded during the 2005 fourth quarter was approximately $3.3 billion.
The Company believes that this reserve is adequate to meet all of its remaining exposure for these matters. However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, the novel issues presented, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve. The Company will continue to defend itself vigorously in these cases, and seek to resolve them in the manner management believes is in the best interests of the Company.
In addition, in the ordinary course of business, Citigroup and its subsidiaries are defendants or co-defendants or parties in various litigation and regulatory matters incidental to and typical of the businesses in which they are engaged. In the opinion of the Company's management, the ultimate resolution of these legal and regulatory proceedings would not be likely to have a material adverse effect on the consolidated financial condition of the Company but, if involving monetary liability, may be material to the Company's operating results for any particular period.
29. Citigroup (Parent Company Only)158
Condensed Statement of Income
| Year Ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | ||||||||
| In millions of dollars | ||||||||||
Revenues | |||||||||||
Interest | $ | 2,223 | $ | 1,693 | $ | 1,456 | |||||
Other | 236 | 447 | 348 | ||||||||
Total revenues | 2,459 | 2,140 | 1,804 | ||||||||
Expenses | |||||||||||
Interest | 2,022 | 1,459 | 1,660 | ||||||||
Other | 825 | 757 | 248 | ||||||||
Total expenses | 2,847 | 2,216 | 1,908 | ||||||||
Pretax loss | (388 | ) | (76 | ) | (104 | ) | |||||
Income tax benefit | 290 | 33 | 53 | ||||||||
Loss before equity in net income of subsidiaries | (98 | ) | (43 | ) | (51 | ) | |||||
Equity in net income of subsidiaries | 17,144 | 17,896 | 15,327 | ||||||||
Net income | $ | 17,046 | $ | 17,853 | $ | 15,276 | |||||
27. Condensed Balance SheetConsolidating Financial Statement Schedules
| December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | ||||||
| In millions of dollars | |||||||
Assets | ||||||||
Cash | $ | 28 | $ | 40 | ||||
Investments | 9,096 | 7,957 | ||||||
Investments in and advances to: | ||||||||
Bank and bank holding company subsidiaries | 143,157 | 122,057 | ||||||
Other subsidiaries | 44,723 | 36,734 | ||||||
Cost of acquired businesses in excess of net assets | 368 | 368 | ||||||
Other | 4,398 | 3,769 | ||||||
Total assets | $ | 201,770 | $ | 170,925 | ||||
Liabilities | ||||||||
Advances from and payables to subsidiaries | $ | 2,783 | $ | 1,219 | ||||
Commercial paper | — | 381 | ||||||
Junior subordinated debentures, held by subsidiary trusts(1) | — | 5,309 | ||||||
Long-term debt | 87,913 | 64,386 | ||||||
Other liabilities | 1,557 | 1,390 | ||||||
Redeemable preferred stock, held by subsidiary | 226 | 226 | ||||||
Stockholders' equity | ||||||||
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value | 1,125 | 1,125 | ||||||
Common stock ($.01 par value; authorized shares: 15 billion), issued shares: 2004—5,477,416,086 shares and 2003—5,477,416,254 shares | 55 | 55 | ||||||
Additional paid-in capital | 18,851 | 17,531 | ||||||
Retained earnings | 102,154 | 93,483 | ||||||
Treasury stock, at cost: 2004—282,773,501 shares and 2003—320,466,849 shares | (10,644 | ) | (11,524 | ) | ||||
Accumulated other changes in equity from nonowner sources | (304 | ) | (806 | ) | ||||
Unearned compensation | (1,946 | ) | (1,850 | ) | ||||
Total stockholders' equity | 109,291 | 98,014 | ||||||
Total liabilities and stockholders' equity | $ | 201,770 | $ | 170,925 | ||||
These condensed consolidating financial statement schedules are presented for purposes of additional analysis but should be considered in relation to the audited consolidated financial statements of Citigroup taken as a whole.
Merger of Bank Holding Companies
On August 1, 2005, Citigroup merged its two intermediate bank holding companies, Citigroup Holdings Company and Citicorp, into Citigroup Inc. Coinciding with this merger, Citigroup assumed all existing indebtedness and outstanding guarantees of Citicorp.
During the 2005 second quarter, Citigroup consolidated its capital markets funding activities into two legal entities:
As part of the funding consolidation, Citigroup unconditionally guaranteed Citigroup Global Markets Holdings Inc.'s (CGMHI) outstanding SEC-registered indebtedness. CGMHI no longer files periodic reports with the SEC and continues to be rated on the basis of a guarantee of its financial obligations from Citigroup.
The condensed financial statements on pages XX include the financial results of the following Citigroup entities:
Citigroup Parent Company
The holding company, Citigroup Inc.
Citigroup Global Markets Holdings Inc. (CGMHI)
Citigroup has issued a full and unconditional guarantee for all of the outstanding SEC-registered indebtedness of CGMHI.
Citigroup Funding Inc. (CFI)
CFI is a newly formed first-tier subsidiary of Citigroup, which issues commercial paper and medium-term notes. Citigroup has issued a full and unconditional guarantee for all of the commercial paper and SEC-registered indebtedness issued by CFI.
CitiFinancial Credit Company (CCC)
An indirect wholly owned subsidiary of Citigroup. CCC is a wholly owned subsidiary of Associates. The operations of WMF were integrated into CCC. Citigroup has issued a full and unconditional guarantee of the outstanding indebtedness of CCC.
Associates First Capital Corporation (Associates)
A wholly owned subsidiary of Citigroup. Citigroup has issued a full and unconditional guarantee of the outstanding long-term debt securities and commercial paper of Associates and Associates Corporation of North America (ACONA), a subsidiary of Associates. Associates is the immediate parent company of CCC.
Other Citigroup Subsidiaries
Includes all other subsidiaries of Citigroup, intercompany eliminations, and income/loss from discontinued operations.
Consolidating Adjustments
Includes Citigroup parent company elimination of distributed and undistributed income of subsidiaries, investment in subsidiaries and the elimination of CCC, which is included in the Associates column.
159
CONDENSED CONSOLIDATING STATEMENT OF INCOME
| Year ended December 31, 2005 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries, eliminations and income from discontinued operations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||
Dividends from subsidiary banks and bank holding companies | $ | 28,220 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (28,220 | ) | $ | — | ||||||||
Loan interest, including fees | — | — | — | 7,882 | 8,932 | 38,256 | (7,882 | ) | 47,188 | ||||||||||||||||
Loan interest, including fees— intercompany | 2,963 | — | 190 | (77 | ) | 211 | (3,364 | ) | 77 | — | |||||||||||||||
Other interest and dividends | 323 | 16,382 | — | 156 | 188 | 11,940 | (156 | ) | 28,833 | ||||||||||||||||
Other interest and dividends— intercompany | — | 417 | 486 | — | 3 | (906 | ) | — | — | ||||||||||||||||
Commissions and fees | — | 8,287 | — | 29 | 82 | 8,774 | (29 | ) | 17,143 | ||||||||||||||||
Commissions and fees— intercompany | — | 234 | — | 7 | 4 | (238 | ) | (7 | ) | — | |||||||||||||||
Principal transactions | 8 | 4,313 | (25 | ) | — | (7 | ) | 2,154 | — | 6,443 | |||||||||||||||
Principal transactions—intercompany | 6 | (2,208 | ) | 19 | 2 | 2 | 2,181 | (2 | ) | — | |||||||||||||||
Other income | 1,085 | 3,158 | 30 | 682 | 607 | 15,831 | (682 | ) | 20,711 | ||||||||||||||||
Other income—intercompany | 105 | 558 | (33 | ) | (25 | ) | (18 | ) | (612 | ) | 25 | — | |||||||||||||
Total revenues | $ | 32,710 | $ | 31,141 | $ | 667 | $ | 8,656 | $ | 10,004 | $ | 74,016 | $ | (36,876 | ) | $ | 120,318 | ||||||||
Interest expense | 4,691 | 12,602 | 515 | 355 | 828 | 18,040 | (355 | ) | 36,676 | ||||||||||||||||
Interest expense—intercompany | — | 986 | 155 | 2,176 | 2,514 | (3,655 | ) | (2,176 | ) | — | |||||||||||||||
Total revenues, net of interest expense | $ | 28,019 | $ | 17,553 | $ | (3 | ) | $ | 6,125 | $ | 6,662 | $ | 59,631 | $ | (34,345 | ) | $ | 83,642 | |||||||
Provisions for credit losses and for benefits and claims | $ | — | $ | 27 | $ | — | $ | 2,048 | $ | 2,228 | $ | 6,791 | $ | (2,048 | ) | $ | 9,046 | ||||||||
Expenses | |||||||||||||||||||||||||
Compensation and benefits | $ | 108 | $ | 9,392 | $ | — | $ | 954 | $ | 1,102 | $ | 15,170 | $ | (954 | ) | $ | 25,772 | ||||||||
Compensation and benefits— intercompany | — | 1 | — | 131 | 132 | (133 | ) | (131 | ) | — | |||||||||||||||
Other expense | 225 | 2,441 | 1 | 596 | 709 | 16,015 | (596 | ) | 19,391 | ||||||||||||||||
Other expense—intercompany | 110 | 1,365 | 6 | 188 | 240 | (1,721 | ) | (188 | ) | — | |||||||||||||||
Total operating expenses | $ | 443 | $ | 13,199 | $ | 7 | $ | 1,869 | $ | 2,183 | $ | 29,331 | $ | (1,869 | ) | $ | 45,163 | ||||||||
Income from continuing operations before taxes, minority interest, cumulative effect of accounting change, and equity in undistributed income of subsidiaries | $ | 27,576 | $ | 4,327 | $ | (10 | ) | $ | 2,208 | $ | 2,251 | $ | 23,509 | $ | (30,428 | ) | $ | 29,433 | |||||||
Income taxes (benefits) | (283 | ) | 1,441 | (4 | ) | 837 | 842 | 7,082 | (837 | ) | 9,078 | ||||||||||||||
Minority interest, net of taxes | — | — | — | — | — | 549 | — | 549 | |||||||||||||||||
Equities in undistributed income of subsidiaries | (3,258 | ) | — | — | — | — | — | 3,258 | — | ||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | $ | 24,601 | $ | 2,886 | $ | (6 | ) | $ | 1,371 | $ | 1,409 | $ | 15,878 | $ | (26,333 | ) | $ | 19,806 | |||||||
Income from discontinued operations, net of taxes | — | 2,198 | — | — | — | 2,634 | — | 4,832 | |||||||||||||||||
Cumulative effect of accounting change, net of tax | (12 | ) | — | — | — | — | (37 | ) | — | (49 | ) | ||||||||||||||
Net income | $ | 24,589 | $ | 5,084 | $ | (6 | ) | $ | 1,371 | $ | 1,409 | $ | 18,475 | $ | (26,333 | ) | $ | 24,589 | |||||||
160
161
CONDENSED CONSOLIDATING STATEMENT OF INCOME
| Year ended December 31, 2004 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries, eliminations and income from discontinued operations | Consolidating adjustments | Citigroup Consolidated | ||||||||||||||||
| In millions of dollars | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Dividends from subsidiary banks and bank holding companies | $ | 7,503 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (7,503 | ) | $ | — | |||||||
Loan interest, including fees | — | — | — | 7,502 | 8,653 | 35,143 | (7,502 | ) | 43,796 | |||||||||||||||
Loan interest, including fees—intercompany | 2,223 | — | — | (30 | ) | 85 | (2,308 | ) | 30 | — | ||||||||||||||
Other interest and dividends | 305 | 9,843 | — | 161 | 195 | 9,544 | (161 | ) | 19,887 | |||||||||||||||
Other interest and dividends—intercompany | — | 165 | — | — | 2 | (167 | ) | — | — | |||||||||||||||
Commissions and fees | — | 7,704 | — | 29 | 79 | 8,198 | (29 | ) | 15,981 | |||||||||||||||
Commissions and fees—intercompany | — | 241 | — | 1 | 1 | (242 | ) | (1 | ) | — | ||||||||||||||
Principal transactions | — | 1,649 | — | — | 14 | 2,053 | — | 3,716 | ||||||||||||||||
Principal transactions—intercompany | (40 | ) | (802 | ) | — | (5 | ) | (5 | ) | 847 | 5 | — | ||||||||||||
Other income | (169 | ) | 2,865 | — | 640 | 669 | 14,894 | (640 | ) | 18,259 | ||||||||||||||
Other income—intercompany | 140 | 612 | — | 9 | 18 | (770 | ) | (9 | ) | — | ||||||||||||||
Total revenues | $ | 9,962 | $ | 22,277 | $ | — | $ | 8,307 | $ | 9,711 | $ | 67,192 | $ | (15,810 | ) | $ | 101,639 | |||||||
Interest expense | 2,022 | 6,162 | — | 309 | 878 | 12,942 | (309 | ) | ||||||||||||||||
Interest expense—intercompany | — | 204 | — | 1,916 | 1,553 | (1,757 | ) | (1,916 | ) | — | ||||||||||||||
Total revenues, net of interest expense | $ | 7,940 | $ | 15,911 | $ | — | $ | 6,082 | $ | 7,208 | $ | 56,007 | (13,585 | ) | 79,635 | |||||||||
Provisions for credit losses and for benefits and claims | $ | — | $ | (2 | ) | $ | — | $ | 1,992 | $ | 2,195 | $ | 4,924 | $ | (1,992 | ) | $ | 7,117 | ||||||
Expenses | ||||||||||||||||||||||||
Compensation and benefits | $ | 49 | $ | 8,546 | $ | — | $ | 1,061 | $ | 1,185 | $ | 13,154 | $ | (1,061 | ) | $ | 22,934 | |||||||
Compensation and benefits—intercompany | — | (5 | ) | — | (1 | ) | — | 5 | 1 | — | ||||||||||||||
Other expense | 621 | 8,913 | — | 695 | 825 | 16,489 | (695 | ) | 26,848 | |||||||||||||||
Other expense—intercompany | 155 | 1,057 | — | 188 | 209 | (1,421 | ) | (188 | ) | — | ||||||||||||||
Total operating expenses | $ | 825 | $ | 18,511 | $ | — | $ | 1,943 | $ | 2,219 | $ | 28,227 | $ | (1,943 | ) | $ | 49,782 | |||||||
Income from continuing operations before taxes, minority interest, and equity in undistributed income of subsidiaries | $ | 7,115 | $ | (2,598 | ) | $ | — | $ | 2,147 | $ | 2,866 | $ | 22,854 | $ | (9,650 | ) | $ | 22,736 | ||||||
Income taxes (benefits) | (290 | ) | (1,042 | ) | — | 791 | 863 | 6,933 | (791 | ) | 6,464 | |||||||||||||
Minority interest, net of taxes | — | — | — | — | — | 218 | — | 218 | ||||||||||||||||
Equities in undistributed income of subsidiaries | 9,641 | — | — | — | — | — | (9,641 | ) | — | |||||||||||||||
Income from continuing operations | 17,046 | $ | (1,556 | ) | $ | — | $ | 1,356 | $ | 2,003 | $ | 15,703 | $ | (18,500 | ) | $ | 16,054 | |||||||
Income from discontinued operations, net of taxes | — | 115 | — | — | — | 877 | — | 992 | ||||||||||||||||
Net income | $ | 17,046 | $ | (1,441 | ) | $ | — | $ | 1,356 | $ | 2,003 | $ | 16,582 | $ | (18,500 | ) | $ | 17,046 | ||||||
162
CONDENSED CONSOLIDATING STATEMENT OF INCOME
| Year ended December 31, 2003 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries, eliminations and income from discontinued operations | Consolidating adjustments | Citigroup Consolidated | ||||||||||||||||
| In millions of dollars | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Dividends from subsidiary banks and bank holding companies | $ | 6,015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (6,015 | ) | $ | — | |||||||
Loan interest, including fees | — | — | — | 6,825 | 7,973 | 29,979 | (6,825 | ) | 37,952 | |||||||||||||||
Loan interest, including fees—intercompany | 1,693 | — | — | 42 | 82 | (1,775 | ) | (42 | ) | — | ||||||||||||||
Other interest and dividends | 273 | 7,805 | — | 161 | 230 | 8,254 | (161 | ) | 16,562 | |||||||||||||||
Other interest and dividends—intercompany | — | 116 | — | — | 3 | (119 | ) | — | — | |||||||||||||||
Commissions and fees | — | 7,221 | — | 35 | 72 | 8,364 | (35 | ) | 15,657 | |||||||||||||||
Commissions and fees—intercompany | — | 248 | — | 7 | 7 | (255 | ) | (7 | ) | — | ||||||||||||||
Principal transactions | — | 2,542 | — | — | (8 | ) | 2,351 | — | 4,885 | |||||||||||||||
Principal transactions—intercompany | — | (655 | ) | — | (7 | ) | (7 | ) | 662 | 7 | — | |||||||||||||
Other income | 105 | 2,353 | — | 617 | 743 | 10,521 | (617 | ) | 13,722 | |||||||||||||||
Other income—intercompany | 69 | 324 | — | 12 | 42 | (435 | ) | (12 | ) | — | ||||||||||||||
Total revenues | $ | 8,155 | $ | 19,954 | $ | — | $ | 7,692 | $ | 9,137 | $ | 57,547 | $ | (13,707 | ) | $ | 88,778 | |||||||
Interest expense | 1,459 | 5,522 | — | 233 | 1,138 | 9,065 | (233 | ) | 17,184 | |||||||||||||||
Interest expense—intercompany | — | (463 | ) | — | 2,115 | 1,188 | (725 | ) | (2,115 | ) | — | |||||||||||||
Total revenues, net of interest expense | $ | 6,696 | $ | 14,895 | $ | — | $ | 5,344 | $ | 6,811 | $ | 49,207 | $ | (11,359 | ) | $ | 71,594 | |||||||
Provisions for credit losses and for benefits and claims | $ | — | $ | 2 | $ | — | $ | 1,915 | $ | 2,163 | $ | 6,759 | $ | (1,915 | ) | $ | 8,924 | |||||||
Expenses | ||||||||||||||||||||||||
Compensation and benefits | $ | 135 | $ | 7,754 | $ | — | $ | 904 | $ | 1,064 | $ | 11,766 | $ | (904 | ) | $ | 20,719 | |||||||
Compensation and benefits—intercompany | — | (5 | ) | — | (1 | ) | — | 5 | 1 | — | ||||||||||||||
Other expense | 177 | 2,343 | — | 718 | 1,007 | 13,254 | (718 | ) | 16,781 | |||||||||||||||
Other expense—intercompany | 445 | 506 | — | 143 | 169 | (1,120 | ) | (143 | ) | — | ||||||||||||||
Total operating expenses | $ | 757 | $ | 10,598 | $ | — | $ | 1,764 | $ | 2,240 | $ | 23,905 | $ | (1,764 | ) | $ | 37,500 | |||||||
Income from continuing operations before taxes, minority interest, and equity in undistributed income of subsidiaries | $ | 5,939 | $ | 4,295 | $ | — | $ | 1,665 | $ | 2,408 | $ | 18,543 | $ | (7,680 | ) | $ | 25,170 | |||||||
Income taxes (benefits) | (33 | ) | 1,642 | — | 608 | 808 | 5,421 | (608 | ) | 7,838 | ||||||||||||||
Minority interest, net of tax | — | — | — | — | — | 274 | — | 274 | ||||||||||||||||
Equities in undistributed income of subsidiaries | 11,881 | — | — | — | — | — | (11,881 | ) | — | |||||||||||||||
Income from continuing operations | $ | 17,853 | $ | 2,653 | $ | — | $ | 1,057 | $ | 1,600 | $ | 12,848 | $ | (18,953 | ) | $ | 17,058 | |||||||
Income from discontinued operations, net of taxes | — | 240 | — | — | — | 555 | — | 795 | ||||||||||||||||
Net income | $ | 17,853 | $ | 2,893 | $ | — | $ | 1,057 | $ | 1,600 | $ | 13,403 | $ | (18,953 | ) | $ | 17,853 | |||||||
163
CONDENSED CONSOLIDATING BALANCE SHEET
| December 31, 2005 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries and eliminations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||
Cash and due from banks | $ | — | $ | 8,266 | $ | — | $ | 296 | $ | 421 | $ | 19,686 | $ | (296 | ) | $ | 28,373 | ||||||||
Cash and due from banks—intercompany | 300 | 5,341 | 1 | 63 | 77 | (5,719 | ) | (63 | ) | — | |||||||||||||||
Federal funds sold and resale agreements | — | 204,371 | — | — | — | 13,093 | — | 217,464 | |||||||||||||||||
Federal funds sold and resale agreements— intercompany | — | 5,870 | — | — | — | (5,870 | ) | — | — | ||||||||||||||||
Trading account assets | — | 207,682 | — | 1 | 44 | 88,094 | (1 | ) | 295,820 | ||||||||||||||||
Trading account assets—intercompany | — | 2,350 | — | — | 17 | (2,367 | ) | — | — | ||||||||||||||||
Investments | 8,215 | — | — | 2,801 | 3,548 | 168,834 | (2,801 | ) | 180,597 | ||||||||||||||||
Loans, net of unearned income | — | 1,120 | — | 75,330 | 84,147 | 498,236 | (75,330 | ) | 583,503 | ||||||||||||||||
Loans, net of unearned income—intercompany | — | — | 18,057 | 5,443 | 7,976 | (26,033 | ) | (5,443 | ) | — | |||||||||||||||
Allowance for loan losses | — | (66 | ) | — | (1,434 | ) | (1,589 | ) | (8,127 | ) | 1,434 | (9,782 | ) | ||||||||||||
Total loans, net | $ | — | $ | 1,054 | $ | 18,057 | $ | 79,339 | $ | 90,534 | $ | 464,076 | $ | (79,339 | ) | $ | 573,721 | ||||||||
Advances to subsidiaries | 71,784 | — | — | — | — | (71,784 | ) | — | — | ||||||||||||||||
Investments in subsidiaries | 132,214 | — | — | — | — | — | (132,214 | ) | — | ||||||||||||||||
Other assets | 8,751 | 60,710 | 8 | 7,224 | 8,846 | 119,747 | (7,224 | ) | 198,062 | ||||||||||||||||
Other assets— intercompany | — | 4,122 | 32,872 | 261 | 388 | (37,382 | ) | (261 | ) | — | |||||||||||||||
Total assets | $ | 221,264 | $ | 499,766 | $ | 50,938 | $ | 89,985 | $ | 103,875 | $ | 750,408 | $ | (222,199 | ) | $ | 1,494,037 | ||||||||
Liabilities and stockholders' equity | |||||||||||||||||||||||||
Deposits | $ | — | $ | — | $ | — | $ | 1,075 | $ | 1,075 | $ | 591,520 | $ | (1,075 | ) | $ | 592,595 | ||||||||
Federal funds purchased and securities loaned or sold | — | 202,490 | — | — | — | 39,902 | — | 242,392 | |||||||||||||||||
Federal funds purchased and securities loaned or sold—intercompany | — | 2,132 | — | — | — | (2,132 | ) | — | — | ||||||||||||||||
Trading account liabilities | — | 79,020 | 97 | — | — | 41,991 | — | 121,108 | |||||||||||||||||
Trading account liabilities—intercompany | — | 2,572 | 85 | — | — | (2,657 | ) | — | — | ||||||||||||||||
Short-term borrowings | — | 10,391 | 33,440 | 1,520 | 3,103 | 19,996 | (1,520 | ) | 66,930 | ||||||||||||||||
Short-term borrowings—intercompany | — | 29,181 | 11,209 | 7,626 | 10,461 | (50,851 | ) | (7,626 | ) | — | |||||||||||||||
Long-term debt | 100,600 | 39,214 | 5,963 | 8,901 | 19,148 | 52,574 | (8,901 | ) | 217,499 | ||||||||||||||||
Long-term debt—intercompany | — | 17,671 | — | 55,878 | 59,000 | (76,671 | ) | (55,878 | ) | — | |||||||||||||||
Advances from subsidiaries | — | — | — | — | — | — | — | — | |||||||||||||||||
Other liabilities | 4,436 | 89,774 | 31 | 1,930 | 1,661 | 45,074 | (1,930 | ) | 140,976 | ||||||||||||||||
Other liabilities—intercompany | 3,691 | 5,778 | 42 | 1,028 | 566 | (10,077 | ) | (1,028 | ) | — | |||||||||||||||
Stockholders' equity | 112,537 | 21,543 | 71 | 12,027 | 8,861 | 101,739 | (144,241 | ) | 112,537 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 221,264 | $ | 499,766 | $ | 50,938 | $ | 89,985 | $ | 103,875 | $ | 750,408 | $ | (222,199 | ) | $ | 1,494,037 | ||||||||
164
CONDENSED CONSOLIDATING BALANCE SHEET
| December 31, 2004(1) | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries and eliminations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||
Cash and due from banks | $ | — | $ | 5,892 | $ | — | $ | 332 | $ | 458 | $ | 17,206 | $ | (332 | ) | $ | 23,556 | ||||||||
Cash and due from banks—intercompany | 28 | 3,651 | — | 99 | 106 | (3,785 | ) | (99 | ) | — | |||||||||||||||
Federal funds sold and resale agreements | — | 189,023 | — | — | — | 11,716 | — | 200,739 | |||||||||||||||||
Federal funds sold and resale agreements—intercompany | — | 3,636 | — | — | 20 | (3,656 | ) | — | — | ||||||||||||||||
Trading account assets | — | 178,987 | — | — | 44 | 101,136 | — | 280,167 | |||||||||||||||||
Trading account assets—intercompany | — | 2,312 | — | — | — | (2,312 | ) | — | — | ||||||||||||||||
Investments | 9,096 | — | — | 2,929 | 3,636 | 200,511 | (2,929 | ) | 213,243 | ||||||||||||||||
Loans, net of unearned income | — | 10 | — | 70,632 | 80,757 | 468,062 | (70,632 | ) | 548,829 | ||||||||||||||||
Loans, net of unearned income—intercompany | — | — | — | 4,174 | 4,786 | (4,786 | ) | (4,174 | ) | — | |||||||||||||||
Allowance for loan losses | — | — | — | (1,188 | ) | (1,373 | ) | (9,896 | ) | 1,188 | (11,269 | ) | |||||||||||||
Total loans, net | $ | — | $ | 10 | $ | — | $ | 73,618 | $ | 84,170 | $ | 453,380 | $ | (73,618 | ) | $ | 537,560 | ||||||||
Advances to subsidiaries | 63,820 | — | — | — | — | (63,820 | ) | — | — | ||||||||||||||||
Investments in subsidiaries | 124,060 | — | — | — | — | — | (124,060 | ) | — | ||||||||||||||||
Other assets | 4,766 | 54,561 | — | 5,463 | 8,437 | 161,072 | (5,463 | ) | 228,836 | ||||||||||||||||
Other assets—intercompany | — | 2,530 | — | 245 | 300 | (2,830 | ) | (245 | ) | — | |||||||||||||||
Total assets | $ | 201,770 | $ | 440,602 | $ | — | $ | 82,686 | $ | 97,171 | $ | 868,618 | $ | (206,746 | ) | $ | 1,484,101 | ||||||||
Liabilities and stockholders' equity | |||||||||||||||||||||||||
Deposits | $ | — | $ | 1 | $ | — | $ | 1,094 | $ | 1,343 | $ | 560,737 | $ | (1,094 | ) | $ | 562,081 | ||||||||
Federal funds purchased and securities loaned or sold | — | 175,208 | — | 42 | 42 | 34,305 | (42 | ) | 209,555 | ||||||||||||||||
Federal funds purchased and securities loaned or sold—intercompany | — | 2,248 | — | 2 | 2 | (2,250 | ) | (2 | ) | — | |||||||||||||||
Trading account liabilities | — | 82,143 | — | — | — | 53,344 | — | 135,487 | |||||||||||||||||
Trading account liabilities—intercompany | — | 2,385 | — | 6 | 6 | (2,391 | ) | (6 | ) | — | |||||||||||||||
Short-term borrowings | — | 25,799 | — | 28 | 1,312 | 29,656 | (28 | ) | 56,767 | ||||||||||||||||
Short-term borrowings—intercompany | — | 171 | — | 10,619 | 2,627 | (2,798 | ) | (10,619 | ) | — | |||||||||||||||
Long-term debt | 87,913 | 45,237 | — | 7,094 | 19,182 | 55,578 | (7,094 | ) | 207,910 | ||||||||||||||||
Long-term debt—intercompany | — | 14,070 | — | 50,168 | 62,919 | (76,989 | ) | (50,168 | ) | — | |||||||||||||||
Advances from subsidiaries | — | — | — | — | — | — | — | — | |||||||||||||||||
Other liabilities | 1,557 | 67,080 | — | 2,006 | 1,875 | 132,498 | (2,006 | ) | 203,010 | ||||||||||||||||
Other liabilities—intercompany | 3,009 | 9,103 | — | 868 | 375 | (12,487 | ) | (868 | ) | — | |||||||||||||||
Stockholders' equity | 109,291 | 17,157 | — | 10,759 | 7,488 | 99,415 | (134,819 | ) | 109,291 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 201,770 | $ | 440,602 | $ | — | $ | 82,686 | $ | 97,171 | $ | 868,618 | $ | (206,746 | ) | $ | 1,484,101 | ||||||||
165
Condensed StatementConsolidating Statements of Cash Flows
| Year Ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||||
| In millions of dollars | |||||||||
Cash flows from operating activities | ||||||||||
Net income | $ | 17,046 | $ | 17,853 | $ | 15,276 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||
Equity in net income of subsidiaries | (17,144 | ) | (17,896 | ) | (15,327 | ) | ||||
Dividends received from: | ||||||||||
Bank and bank holding company subsidiaries | 4,629 | 4,210 | 6,744 | |||||||
Other subsidiaries | 2,874 | 1,805 | 5,770 | |||||||
Other, net | (1,443 | ) | 788 | (739 | ) | |||||
Net cash provided by operating activities | 5,962 | 6,760 | 11,724 | |||||||
Cash flows from investing activities | ||||||||||
Capital contributions to subsidiaries | — | — | — | |||||||
Change in investments | (1,101 | ) | (182 | ) | (6,350 | ) | ||||
Advances to subsidiaries, net | (13,687 | ) | (19,532 | ) | (4,908 | ) | ||||
Other investing activities, net | — | 200 | (200 | ) | ||||||
Net cash used in investing activities | (14,788 | ) | (19,514 | ) | (11,458 | ) | ||||
Cash flows from financing activities | ||||||||||
Proceeds from (repayment of) advances from subsidiaries, net | 1,332 | (196 | ) | 278 | ||||||
Dividends paid | (8,375 | ) | (5,773 | ) | (3,676 | ) | ||||
Issuance of common stock | 912 | 686 | 483 | |||||||
Redemption of preferred stock | — | (275 | ) | (125 | ) | |||||
Stock tendered for payment of withholding taxes | (511 | ) | (499 | ) | (475 | ) | ||||
Treasury stock acquired | (779 | ) | (2,416 | ) | (5,483 | ) | ||||
Issuance of long-term debt | 30,365 | 24,794 | 16,282 | |||||||
Issuance of (proceeds from) junior subordinated debentures | — | 858 | — | |||||||
Payments and redemptions of long-term debt | (13,749 | ) | (4,500 | ) | (7,362 | ) | ||||
Change in short-term borrowings | (381 | ) | 14 | (114 | ) | |||||
Net cash provided by (used in) financing activities | 8,814 | 12,693 | (192 | ) | ||||||
Change in cash | (12 | ) | (61 | ) | 74 | |||||
Cash at beginning of period | 40 | 101 | 27 | |||||||
Cash at end of period | $ | 28 | $ | 40 | $ | 101 | ||||
Supplemental disclosure of cash flow information | ||||||||||
Cash paid during the period for interest | $ | 2,876 | $ | 1,588 | $ | 2,303 | ||||
Cash received during the period for taxes | $ | 403 | $ | 691 | $ | 308 | ||||
| Year Ended December 31, 2005 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries and eliminations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities of continuing operations | $ | 26,493 | $ | (10,669 | ) | $ | (98 | ) | $ | 2,652 | $ | 3,039 | $ | 13,080 | $ | (2,652 | ) | $ | 31,845 | ||||||
Cash flows from investing activities | |||||||||||||||||||||||||
Change in loans | $ | — | $ | (59 | ) | $ | — | $ | (7,191 | ) | $ | (6,877 | ) | $ | (61,164 | ) | $ | 7,191 | $ | (68,100 | ) | ||||
Proceeds from sales of loans | — | — | — | — | — | 22,435 | — | 22,435 | |||||||||||||||||
Purchases of investments | (9,790 | ) | — | — | (8,515 | ) | (10,169 | ) | (183,064 | ) | 8,515 | (203,023 | ) | ||||||||||||
Proceeds from sales of investments | 7,140 | — | — | 7,201 | 7,679 | 67,784 | (7,201 | ) | 82,603 | ||||||||||||||||
Proceeds from maturities of investments | 3,200 | — | — | 1,368 | 2,516 | 91,797 | (1,368 | ) | 97,513 | ||||||||||||||||
Changes in investments and advances—intercompany | (14,438 | ) | — | (50,721 | ) | (1,549 | ) | (3,191 | ) | 68,350 | 1,549 | — | |||||||||||||
Business acquisitions | — | (138 | ) | — | — | — | (464 | ) | — | (602 | ) | ||||||||||||||
Other investing activities | — | 1,969 | — | 3 | 1,105 | 7,675 | (3 | ) | 10,749 | ||||||||||||||||
Net cash (used in) provided by investing activities | $ | (13,888 | ) | $ | 1,772 | $ | (50,721 | ) | $ | (8,683 | ) | $ | (8,937 | ) | $ | 13,349 | $ | 8,683 | $ | (58,425 | ) | ||||
Cash flows from financing activities | |||||||||||||||||||||||||
Dividends paid | $ | (9,188 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (9,188 | ) | |||||||
Dividends paid-intercompany | — | (1,6460 | — | — | — | 1,646 | — | — | |||||||||||||||||
Issuance of common stock | 1,400 | — | — | — | — | — | — | 1,400 | |||||||||||||||||
Treasury stock acquired | (12,794 | ) | — | — | — | — | — | — | (12,794 | ) | |||||||||||||||
Proceeds from issuance of long-term debt—third-party, net | 7,355 | (3,581 | ) | 6,097 | 1,830 | (33 | ) | 6,650 | (1,830 | ) | 16,488 | ||||||||||||||
Proceeds from issuance of long-term debt-intercompany, net | — | 4,585 | — | 4,547 | (3,918 | ) | (667 | ) | (4,547 | ) | — | ||||||||||||||
Change in deposits | — | — | — | (19 | ) | — | 27,912 | 19 | 27,912 | ||||||||||||||||
Net change in short-term borrowings and other investment banking and brokerage borrowings—third-party | — | (15,407 | ) | 33,440 | 1,426 | 1,764 | (9,634 | ) | (1,426 | ) | 10,163 | ||||||||||||||
Net change in short-term borrowings and other advances — intercompany | 1,590 | 29,010 | 11,208 | (1,830 | ) | 8,016 | (49,824 | ) | 1,830 | — | |||||||||||||||
Capital contributions from parent | — | — | 75 | — | — | (75 | ) | — | — | ||||||||||||||||
Other financing activities | (696 | ) | — | — | 5 | 3 | (5 | ) | (5 | ) | (698 | ) | |||||||||||||
Net cash (used in) provided by financing activities | $ | (12,333 | ) | $ | 12,961 | $ | 50,820 | $ | 5,959 | $ | 5,832 | $ | (23,997 | ) | $ | (5,959 | ) | $ | 33,283 | ||||||
Effect of exchange rate changes on cash and due from banks | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,840 | ) | $ | — | $ | (1,840 | ) | |||||||
Net cash used in discontinued operations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (46 | ) | $ | — | $ | (46 | ) | |||||||
Net increase (decrease) in cash and due from banks | $ | 272 | $ | 4,064 | $ | 1 | $ | (72 | ) | $ | (66 | ) | $ | 546 | $ | 72 | $ | 4,817 | |||||||
Cash and due from banks at beginning of period | 28 | 9,543 | — | 431 | 564 | 13,421 | (431 | ) | 23,556 | ||||||||||||||||
Cash and due from banks at end of period from continuing operations | $ | 300 | $ | 13,607 | $ | 1 | $ | 359 | $ | 498 | $ | 13,967 | $ | (359 | ) | $ | 28,373 | ||||||||
Supplemental disclosure of cash flow information | |||||||||||||||||||||||||
Cash paid during the year for: | |||||||||||||||||||||||||
Income taxes | $ | (544 | ) | $ | 977 | — | $ | 763 | $ | 453 | $ | 7,735 | $ | (763 | ) | $ | 8,621 | ||||||||
Interest | 4,095 | 12,889 | 608 | 1,157 | 550 | 13,939 | (1,157 | ) | 32,081 | ||||||||||||||||
Non-cash investing activities: | |||||||||||||||||||||||||
Transfers to repossessed assets | $ | — | $ | — | $ | — | $ | 1,044 | $ | 1,120 | $ | 148 | $ | (1,044 | ) | $ | 1,268 | ||||||||
166
30.Condensed Consolidating Statements of Cash Flows
| Year Ended December 31, 2004 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries and eliminations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities of continuing operations | $ | 6,075 | $ | (18,062 | ) | $ | — | $ | 3,193 | $ | 3,154 | $ | 6,557 | $ | (3,193 | ) | $ | (2,276 | ) | ||||||
Cash flows from investing activities | |||||||||||||||||||||||||
Change in loans | $ | — | $ | (233 | ) | $ | — | $ | (9,947 | ) | $ | (13,276 | ) | $ | (54,942 | ) | $ | 9,947 | $ | (68,451 | ) | ||||
Proceeds from sales of loans | — | — | — | — | — | 15,121 | — | 15,121 | |||||||||||||||||
Purchases of investments | (17,092 | ) | — | — | (422 | ) | (4,432 | ) | (174,379 | ) | 422 | (195,903 | ) | ||||||||||||
Proceeds from sales of investments | 10,161 | — | — | 563 | 3,086 | 99,223 | (563 | ) | 112,470 | ||||||||||||||||
Proceeds from maturities of investments | 5,830 | — | — | 135 | 1,694 | 55,794 | (135 | ) | 63,318 | ||||||||||||||||
Changes in investments and advances—intercompany | (13,687 | ) | — | — | (51 | ) | (673 | ) | 14,360 | 51 | — | ||||||||||||||
Business acquisitions | — | (590 | ) | — | (1,250 | ) | — | (3,087 | ) | 1,250 | (3,677 | ) | |||||||||||||
Other investing activities | — | (420 | ) | — | (69 | ) | 188 | (1,877 | ) | 69 | (2,109 | ) | |||||||||||||
Net cash used in investing activities | $ | (14,788 | ) | $ | (1,243 | ) | $ | — | $ | (11,041 | ) | $ | (13,413 | ) | $ | (49,787 | ) | $ | 11,041 | $ | (79,231 | ) | |||
Cash flows from financing activities | |||||||||||||||||||||||||
Dividends paid | $ | (8,375 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (8,375 | ) | |||||||
Dividends paid—intercompany | — | (1,292 | ) | — | — | — | 1,292 | — | — | ||||||||||||||||
Issuance of common stock | 912 | — | — | — | — | — | — | 912 | |||||||||||||||||
Treasury stock acquired | (779 | ) | — | — | — | — | — | — | (779 | ) | |||||||||||||||
Proceeds from issuance of long-term debt—third-party, net | 16,616 | 8,373 | — | 1,742 | 1,522 | (433 | ) | (1,742 | ) | 26,078 | |||||||||||||||
Proceeds from issuance of long-term debt-intercompany, net | — | 5,948 | — | 5,887 | 7,208 | (13,156 | ) | (5,887 | ) | — | |||||||||||||||
Change in deposits | — | — | — | 84 | — | 65,818 | (84 | ) | 65,818 | ||||||||||||||||
Net change in short-term borrowings and other investment banking and brokerage borrowings—third-party | (381 | ) | 3,357 | — | (46 | ) | (370 | ) | (6,969 | ) | 46 | (4,363 | ) | ||||||||||||
Net change in short-term borrowings and other advances—intercompany | 1,219 | (31 | ) | — | 145 | 1,808 | (2,996 | ) | (145 | ) | — | ||||||||||||||
Capital contributions from parent | �� | — | 4,100 | — | — | — | (4,100 | ) | — | — | |||||||||||||||
Other financing activities | (511 | ) | — | — | 9 | — | 4,531 | (9 | ) | 4,020 | |||||||||||||||
Net cash provided by financing activities | $ | 8,701 | $ | 20,455 | $ | — | $ | 7,821 | $ | 10,168 | $ | 43,987 | $ | (7,821 | ) | $ | 83,311 | ||||||||
Effect of exchange rate changes on cash and due from banks | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 731 | $ | — | $ | 731 | |||||||||
Net cash used in discontinued operations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (128 | ) | $ | — | $ | (128 | ) | |||||||
Net (decrease) increase in cash and due from banks | $ | (12 | ) | $ | 1,150 | $ | — | $ | (27 | ) | $ | (91 | ) | $ | 1,360 | $ | 27 | $ | 2,407 | ||||||
Cash and due from banks at beginning of period | 40 | 8,393 | — | 458 | 655 | 12,061 | (458 | ) | 21,149 | ||||||||||||||||
Cash and due from banks at end of period from continuing operations | $ | 28 | $ | 9,543 | $ | — | $ | 431 | $ | 564 | $ | 13,421 | $ | (431 | ) | $ | 23,556 | ||||||||
Supplemental disclosure of cash flow information | |||||||||||||||||||||||||
Cash paid during the year for: | |||||||||||||||||||||||||
Income taxes | $ | (403 | ) | $ | 1,695 | — | $ | 715 | $ | 87 | $ | 5,429 | $ | (715 | ) | $ | 6,808 | ||||||||
Interest | 2,876 | 5,600 | — | 1,971 | 478 | 9,590 | (1 ,971 | ) | 18,544 | ||||||||||||||||
Non-cash investing activities: | |||||||||||||||||||||||||
Transfers to repossessed assets | $ | — | $ | — | $ | — | $ | 1,166 | $ | 1,166 | $ | (120 | ) | $ | (1,166 | ) | $ | 1,046 | |||||||
167
Condensed Consolidating Statements of Cash Flows
| Year Ended December 31, 2003 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Citigroup parent company | CGMHI | CFI | CCC | Associates | Other Citigroup subsidiaries and eliminations | Consolidating adjustments | Citigroup Consolidated | |||||||||||||||||
| (In millions of dollars) | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities of continuing operations | $ | 6,760 | $ | (4,850 | ) | $ | — | $ | 4,043 | $ | 2,136 | $ | (18,908 | ) | $ | (4,043 | ) | $ | (14,862 | ) | |||||
Cash flows from investing activities | |||||||||||||||||||||||||
Change in loans | $ | — | $ | (766 | ) | $ | — | $ | (4,373 | ) | $ | (4,059 | ) | $ | (25,187 | ) | $ | 4,373 | $ | (30,012 | ) | ||||
Proceeds from sales of loans | — | — | — | — | — | 18,553 | — | 18,553 | |||||||||||||||||
Purchases of investments | (21,353 | ) | — | — | (3,464 | ) | (2,951 | ) | (183,736 | ) | 3,464 | (208,040 | ) | ||||||||||||
Proceeds from sales of investments | 17,502 | — | — | 2,770 | 2,718 | 107,057 | (2,770 | ) | 127,277 | ||||||||||||||||
Proceeds from maturities of investments | 3,669 | — | — | 84 | 236 | 67,825 | (84 | ) | 71,730 | ||||||||||||||||
Changes in investments and advances—intercompany | (19,532 | ) | — | — | (901 | ) | 408 | 19,124 | 901 | — | |||||||||||||||
Business acquisitions | 200 | — | — | — | — | (21,656 | ) | — | (21,456 | ) | |||||||||||||||
Other investing activities | — | (740 | ) | — | — | 1,420 | (5,039 | ) | — | (4,359 | ) | ||||||||||||||
Net cash used in investing activities | $ | (19,514 | ) | $ | (1,506 | ) | $ | — | $ | (5,884 | ) | $ | (2,228 | ) | $ | (23,059 | ) | $ | 5,884 | $ | (46,307 | ) | |||
Cash flows from financing activities | |||||||||||||||||||||||||
Dividends paid | $ | (5,773 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (5,773 | ) | |||||||
Dividends paid—intercompany | — | (1,056 | ) | — | — | — | 1,056 | — | — | ||||||||||||||||
Issuance of common stock | 686 | — | — | — | — | — | — | 686 | |||||||||||||||||
Treasury stock acquired | (2,416 | ) | — | — | — | — | — | — | (2,416 | ) | |||||||||||||||
Proceeds from issuance of long-term debt—third-party, net | 20,294 | 5,184 | — | (13,825 | ) | (4,965 | ) | 741 | 13,825 | 21,254 | |||||||||||||||
Proceeds from issuance of long-term debt—intercompany, net | — | 5,122 | — | 8,303 | 4,473 | (9,595 | ) | (8,303 | ) | — | |||||||||||||||
Change in deposits | — | — | — | 5 | — | 42,136 | (5 | ) | 42,136 | ||||||||||||||||
Net change in short-term borrowings and other investment banking and brokerage borrowings—third-party | 14 | 348 | — | 95 | 176 | 6,109 | (95 | ) | 6,647 | ||||||||||||||||
Net change in short-term borrowings and other advances—intercompany | 662 | (256 | ) | — | 6,602 | 214 | (620 | ) | (6,602 | ) | — | ||||||||||||||
Capital contributions from parent | — | 500 | — | 586 | — | (500 | ) | (586 | ) | — | |||||||||||||||
Other financing activities | (774 | ) | (426 | ) | — | 3 | — | 3,071 | (3 | ) | 1,871 | ||||||||||||||
Net cash provided by (used in) financing activities | $ | 12,693 | $ | 9,416 | $ | — | $ | 1,769 | $ | (102 | ) | $ | 42,398 | $ | (1,769 | ) | $ | 64,405 | |||||||
Effect of exchange rate changes on cash and due from banks | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 579 | $ | — | $ | 579 | |||||||||
Net cash used in discontinued operations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 8 | $ | — | $ | 48 | |||||||||
Net (decrease) increase in cash and due from banks | $ | (61 | ) | $ | 3,060 | $ | — | $ | (72 | ) | $ | (194 | ) | $ | 1,018 | $ | 72 | $ | 3,823 | ||||||
Cash and due from banks at beginning of period | 101 | 5,333 | — | 530 | 849 | 11,043 | (530 | ) | 17,326 | ||||||||||||||||
Cash and due from banks at end of period from continuing operations | $ | 40 | $ | 8,393 | $ | — | $ | 458 | $ | 655 | $ | 12,061 | $ | (458 | ) | $ | 21,149 | ||||||||
Supplemental disclosure of cash flow information | |||||||||||||||||||||||||
Cash paid during the year for: | |||||||||||||||||||||||||
Income taxes | $ | (691 | ) | $ | 1,518 | $ | — | $ | 507 | $ | — | $ | 5,286 | $ | (507 | ) | $ | 6,113 | |||||||
Interest | 1,588 | 5,100 | — | 2,476 | 2,616 | 6,428 | (2,476 | ) | 15,732 | ||||||||||||||||
Non-cash investing activities: | |||||||||||||||||||||||||
Transfers to repossessed assets | $ | — | $ | — | $ | — | $ | 1,154 | $ | 844 | $ | 233 | $ | (1,154 | ) | $ | 1,077 | ||||||||
168
28. Citibank, N.A. Stockholder's Equity
Statement of Changes in Stockholder's Equity
| Year Ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004(1) | 2003(1) | |||||||
| In millions of dollars | |||||||||
Preferred stock ($100 par value) | ||||||||||
Balance, beginning of year | $ | 1,950 | $ | 1,950 | $ | 1,950 | ||||
Redemption or retirement of preferred stock | (1,950 | ) | — | — | ||||||
Balance, end of year | $ | — | $ | 1,950 | $ | 1,950 | ||||
Common stock ($20 par value) | ||||||||||
Balance, beginning of year—Shares: 37,534,553 in 2005, 2004 and 2003 | $ | 751 | $ | 751 | $ | 751 | ||||
Balance, end of year—Shares: 37,534,553 in 2005, 2004 and 2003 | $ | 751 | $ | 751 | $ | 751 | ||||
Surplus | ||||||||||
Balance, beginning of year | $ | 25,972 | $ | 24,831 | $ | 21,606 | ||||
Capital contribution from parent company | 1,000 | 754 | 2,407 | |||||||
Employee benefit plans | 155 | 336 | 220 | |||||||
Other(2) | 117 | 51 | 598 | |||||||
Balance, end of year | $ | 27,244 | $ | 25,972 | $ | 24,831 | ||||
Retained earnings | ||||||||||
Balance, beginning of year | $ | 25,935 | $ | 19,515 | $ | 17,523 | ||||
Net income | 8,830 | 9,413 | 7,919 | |||||||
Dividends paid | (4,114 | ) | (2,993 | ) | (6,812 | ) | ||||
Other(2) | — | — | 885 | |||||||
Balance, end of year | $ | 30,651 | $ | 25,935 | $ | 19,515 | ||||
Accumulated other changes in equity from nonowner sources | ||||||||||
Balance, beginning of year | $ | (467 | ) | $ | (1,094 | ) | $ | (521 | ) | |
Net change in unrealized gains (losses) on investment securities, available-for-sale, net of tax | (558 | ) | 147 | (207 | ) | |||||
Net change in foreign currency translation adjustment, net of tax | (1,501 | ) | 1,148 | 61 | ||||||
Net change for cash flow hedges, net of tax | 258 | (668 | ) | (427 | ) | |||||
Minimum pension liability adjustment, net of tax | (114 | ) | — | — | ||||||
Balance, end of year | $ | (2,382 | ) | $ | (467 | ) | $ | (1,094 | ) | |
Total stockholder's equity | ||||||||||
Balance, beginning of year | $ | 54,141 | $ | 45,953 | $ | 41,309 | ||||
Changes during the year, net | 2,123 | 8,188 | 4,644 | |||||||
Balance, end of year | $ | 56,264 | $ | 54,141 | $ | 45,953 | ||||
Summary of changes in equity from nonowner sources | ||||||||||
Net income | $ | 8,830 | $ | 9,413 | $ | 7,919 | ||||
Other changes in equity from nonowner sources, net of tax | (1,915 | ) | 627 | (573 | ) | |||||
Total changes in equity from nonowner sources | $ | 6,915 | $ | 10,040 | $ | 7,346 | ||||
169
29. Selected Quarterly Financial Data (Unaudited)
| 2004 | 2003 | 2005 | 2004(1) | ||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fourth | Third | Second | First | Fourth | Third | Second | First | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||||||
| In millions of dollars, except per share amounts | In millions of dollars, except per share amounts | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues, net of interest expense | $ | 21,886 | $ | 20,514 | $ | 22,302 | $ | 21,488 | $ | 20,154 | $ | 19,398 | $ | 19,354 | $ | 18,536 | $ | 20,779 | $ | 21,498 | $ | 20,169 | $ | 21,196 | $ | 20,110 | $ | 18,738 | $ | 20,855 | $ | 19,932 | ||||||||||||||||
Operating expenses | 11,955 | 10,744 | 18,633 | 10,642 | 10,032 | 9,613 | 9,971 | 9,552 | 11,374 | 11,413 | 10,972 | 11,404 | 11,255 | 10,179 | 18,172 | 10,176 | ||||||||||||||||||||||||||||||||
Benefits, claims, and credit losses | 2,402 | 2,088 | 2,438 | 3,106 | 3,209 | 2,721 | 3,087 | 2,924 | ||||||||||||||||||||||||||||||||||||||||
Income before income taxes and minority interest | 7,529 | 7,682 | 1,231 | 7,740 | 6,913 | 7,064 | 6,296 | 6,060 | ||||||||||||||||||||||||||||||||||||||||
Provisions for credit losses and for benefits and claims | 2,144 | 2,840 | 2,032 | 2,030 | 1,614 | 1,235 | 1,811 | 2,457 | ||||||||||||||||||||||||||||||||||||||||
Income from continuing operations before income taxes, minority interest, and cumulative effect of accounting change | $ | 7,261 | $ | 7,245 | $ | 7,165 | $ | 7,762 | $ | 7,241 | $ | 7,324 | $ | 872 | $ | 7,299 | ||||||||||||||||||||||||||||||||
Income taxes | 2,157 | 2,305 | 49 | 2,398 | 2,112 | 2,208 | 1,956 | 1,919 | 2,251 | 2,164 | 2,179 | 2,484 | 2,047 | 2,229 | (83 | ) | 2,271 | |||||||||||||||||||||||||||||||
Minority interest, after-tax | 51 | 69 | 38 | 69 | 41 | 165 | 41 | 38 | ||||||||||||||||||||||||||||||||||||||||
Minority interest, net of taxes | 38 | 93 | 255 | 163 | 46 | 69 | 39 | 64 | ||||||||||||||||||||||||||||||||||||||||
Income from continuing operations before cumulative effect of accounting change | $ | 4,972 | $ | 4,988 | $ | 4,731 | $ | 5,115 | $ | 5,148 | $ | 5,026 | $ | 916 | $ | 4,964 | ||||||||||||||||||||||||||||||||
Income from discontinued operations, net of taxes | 2,009 | 2,155 | 342 | 326 | 173 | 282 | 228 | 309 | ||||||||||||||||||||||||||||||||||||||||
Cumulative effect of accounting change, net of taxes(2) | (49 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 5,321 | $ | 5,308 | $ | 1,144 | $ | 5,273 | $ | 4,760 | $ | 4,691 | $ | 4,299 | $ | 4,103 | $ | 6,932 | $ | 7,143 | $ | 5,073 | $ | 5,441 | $ | 5,321 | $ | 5,308 | $ | 1,144 | $ | 5,273 | ||||||||||||||||
Earnings per share(1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Earnings per share(3) | ||||||||||||||||||||||||||||||||||||||||||||||||
Basic earnings per share | ||||||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 1.00 | $ | 0.98 | $ | 0.92 | $ | 0.99 | $ | 1.00 | $ | 0.98 | $ | 0.18 | $ | 0.97 | ||||||||||||||||||||||||||||||||
Net income | $ | 1.04 | $ | 1.03 | $ | 0.22 | $ | 1.03 | $ | 0.93 | $ | 0.92 | $ | 0.84 | $ | 0.80 | 1.39 | 1.41 | 0.99 | 1.06 | 1.04 | 1.03 | 0.22 | 1.03 | ||||||||||||||||||||||||
Diluted earnings per share | ||||||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.98 | $ | 0.97 | $ | 0.91 | $ | 0.98 | $ | 0.98 | $ | 0.96 | $ | 0.17 | $ | 0.95 | ||||||||||||||||||||||||||||||||
Net income | $ | 1.02 | $ | 1.02 | $ | 0.22 | $ | 1.01 | $ | 0.91 | $ | 0.90 | $ | 0.83 | $ | 0.79 | 1.37 | 1.38 | 0.97 | 1.04 | 1.02 | 1.02 | 0.22 | 1.01 | ||||||||||||||||||||||||
Common stock price per share | ||||||||||||||||||||||||||||||||||||||||||||||||
High | $ | 48.75 | $ | 47.24 | $ | 52.29 | $ | 51.94 | $ | 49.00 | $ | 47.17 | $ | 45.56 | $ | 37.93 | $ | 49.64 | $ | 46.51 | $ | 47.84 | $ | 49.78 | $ | 48.75 | $ | 47.24 | $ | 52.29 | $ | 51.94 | ||||||||||||||||
Low | 42.56 | 43.19 | 44.86 | 48.11 | 45.56 | 42.92 | 35.60 | 31.42 | 44.31 | 43.05 | 44.59 | 44.35 | 42.56 | 43.19 | 44.86 | 48.11 | ||||||||||||||||||||||||||||||||
Close | 48.18 | 44.12 | 46.50 | 51.70 | 48.54 | 45.51 | 42.80 | 34.45 | 48.53 | 45.52 | 46.23 | 44.94 | 48.18 | 44.12 | 46.50 | 51.70 | ||||||||||||||||||||||||||||||||
Dividends per share of common stock | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.35 | $ | 0.35 | $ | 0.20 | $ | 0.20 | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||||||||||||
31. Subsequent Event (Unaudited)170
Sale of Travelers Life & Annuity and Substantially All International Insurance Businesses
On January 31, 2005, the Company announced an agreement for the sale of Citigroup's Travelers Life & Annuity, and substantially all of Citigroup's international insurance businesses, to MetLife, Inc. (MetLife) for $11.5 billion, subject to closing adjustments.
The businesses being acquired by MetLife generated total revenues of $5.2 billion and net income of $901 million for the twelve months ended December 31, 2004. The businesses had total assets of $96 billion at December 31, 2004.
The transaction has been approved by the Boards of Directors of both companies. Under the terms of the transaction, Citigroup will receive $1.0 billion to $3.0 billion in MetLife equity securities and the balance in cash, which will result in an after-tax gain of approximately $2.0 billion, subject to closing adjustments.
The transaction encompasses Travelers Life & Annuity's U.S. businesses and its international operations other than Citigroup's life business in Mexico. International operations include wholly owned insurance companies in the United Kingdom, Belgium, Australia, Brazil, Argentina, and Poland; joint ventures in Japan and Hong Kong; and offices in China.
In connection with the transaction, Citigroup and MetLife have entered into ten-year agreements under which MetLife will make products available through certain Citigroup distribution channels.
The transaction is subject to certain domestic and international regulatory approvals, as well as other customary conditions to closing and is expected to close during the 2005 second or third quarter.
FINANCIAL DATA SUPPLEMENT (Unaudited)
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS(1)(2)(3)(4)
| Average Volume | Interest Revenue | % Average Rate | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||
In millions of dollars | |||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||
Cash and due from banks | |||||||||||||||||||||||||
In U.S. offices | $ | 4,093 | $ | 2,395 | $ | 2,176 | $ | 35 | $ | 22 | $ | 9 | 0.86 | 0.92 | 0.41 | ||||||||||
In offices outside the U.S.(5) | 2,126 | 1,737 | 1,545 | 28 | 24 | 12 | 1.32 | 1.38 | 0.78 | ||||||||||||||||
Total | 6,219 | 4,132 | 3,721 | 63 | 46 | 21 | 1.01 | 1.11 | 0.56 | ||||||||||||||||
Deposits at interest with banks(5) | 25,882 | 19,608 | 17,418 | 525 | 810 | 1,025 | 2.03 | 4.13 | 5.88 | ||||||||||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell(6) | |||||||||||||||||||||||||
In U.S. offices | 129,538 | 105,425 | 91,241 | 2,979 | 2,156 | 3,476 | 2.30 | 2.05 | 3.81 | ||||||||||||||||
In offices outside the U.S.(5) | 73,829 | 64,471 | 57,382 | 1,884 | 1,879 | 1,868 | 2.55 | 2.91 | 3.26 | ||||||||||||||||
Total | 203,367 | 169,896 | 148,623 | 4,863 | 4,035 | 5,344 | 2.39 | 2.37 | 3.60 | ||||||||||||||||
Brokerage receivables | |||||||||||||||||||||||||
In U.S. offices | 28,715 | 26,884 | 19,691 | 650 | 483 | 612 | 2.26 | 1.80 | 3.11 | ||||||||||||||||
In offices outside the U.S.(5) | 8,814 | 5,531 | 2,866 | 230 | 245 | 183 | 2.61 | 4.43 | 6.39 | ||||||||||||||||
Total | 37,529 | 32,415 | 22,557 | 880 | 728 | 795 | 2.34 | 2.25 | 3.52 | ||||||||||||||||
Trading account assets(7)(8) | |||||||||||||||||||||||||
In U.S. offices | 127,231 | 95,209 | 81,815 | 4,326 | 3,230 | 3,067 | 3.40 | 3.39 | 3.75 | ||||||||||||||||
In offices outside the U.S.(5) | 70,644 | 45,856 | 38,344 | 2,013 | 1,541 | 2,060 | 2.85 | 3.36 | 5.37 | ||||||||||||||||
Total | 197,875 | 141,065 | 120,159 | 6,339 | 4,771 | 5,127 | 3.20 | 3.38 | 4.27 | ||||||||||||||||
Investments | |||||||||||||||||||||||||
In U.S. offices | |||||||||||||||||||||||||
Taxable | 114,630 | 111,615 | 81,255 | 4,929 | 4,550 | 4,122 | 4.30 | 4.08 | 5.07 | ||||||||||||||||
Exempt from U.S. income tax | 8,587 | 7,434 | 6,343 | 540 | 502 | 460 | 6.29 | 6.75 | 7.25 | ||||||||||||||||
In offices outside the U.S.(5) | 76,673 | 60,358 | 53,155 | 3,650 | 2,648 | 3,086 | 4.76 | 4.39 | 5.81 | ||||||||||||||||
Total | 199,890 | 179,407 | 140,753 | 9,119 | 7,700 | 7,668 | 4.56 | 4.29 | 5.45 | ||||||||||||||||
Loans (net of unearned income)(9) | |||||||||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||
In U.S. offices | 283,659 | 245,013 | 203,228 | 24,053 | 20,844 | 19,826 | 8.48 | 8.51 | 9.76 | ||||||||||||||||
In offices outside the U.S.(5) | 117,602 | 96,394 | 89,387 | 12,650 | 10,866 | 10,664 | 10.76 | 11.27 | 11.93 | ||||||||||||||||
Total consumer loans | 401,261 | 341,407 | 292,615 | 36,703 | 31,710 | 30,490 | 9.15 | 9.29 | 10.42 | ||||||||||||||||
Corporate loans | |||||||||||||||||||||||||
In U.S. offices | |||||||||||||||||||||||||
Commercial and industrial | 13,695 | 18,676 | 19,574 | 795 | 889 | 985 | 5.81 | 4.76 | 5.03 | ||||||||||||||||
Lease financing | 1,998 | 2,052 | 1,850 | 120 | 132 | 145 | 6.01 | 6.43 | 7.84 | ||||||||||||||||
Mortgage and real estate | 2,035 | 2,172 | 2,469 | 188 | 170 | 189 | 9.24 | 7.83 | 7.65 | ||||||||||||||||
In offices outside the U.S.(5) | 91,644 | 80,890 | 84,028 | 6,175 | 5,209 | 6,096 | 6.74 | 6.44 | 7.25 | ||||||||||||||||
Total corporate loans | 109,372 | 103,790 | 107,921 | 7,278 | 6,400 | 7,415 | 6.65 | 6.17 | 6.87 | ||||||||||||||||
Total loans | 510,633 | 445,197 | 400,536 | 43,981 | 38,110 | 37,905 | 8.61 | 8.56 | 9.46 | ||||||||||||||||
Other interest-earning assets | 14,079 | 15,413 | 13,252 | 1,089 | 996 | 1,201 | 7.73 | 6.46 | 9.06 | ||||||||||||||||
Total interest-earning assets | 1,195,474 | 1,007,133 | 867,019 | $ | 66,859 | $ | 57,196 | $ | 59,086 | 5.59 | 5.68 | 6.81 | |||||||||||||
Non-interest earning assets(7) | 208,260 | 175,981 | 156,503 | ||||||||||||||||||||||
Total assets from discontinued operations | — | — | 37,083 | ||||||||||||||||||||||
Total assets | $ | 1,403,734 | $ | 1,183,114 | $ | 1,060,605 | |||||||||||||||||||
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS(1)(2)(3)(4)
| Average Volume | Interest Expense | % Average Rate | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||
In millions of dollars | |||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||
Deposits | |||||||||||||||||||||||||
In U.S. offices | |||||||||||||||||||||||||
Savings deposits(5) | $ | 125,659 | $ | 115,614 | $ | 95,256 | $ | 1,077 | $ | 992 | $ | 1,079 | 0.86 | 0.86 | 1.13 | ||||||||||
Other time deposits | 30,544 | 26,390 | 24,861 | 758 | 512 | 674 | 2.48 | 1.94 | 2.71 | ||||||||||||||||
In offices outside the U.S.(6) | 308,106 | 252,145 | 228,248 | 7,037 | 5,384 | 6,301 | 2.28 | 2.14 | 2.76 | ||||||||||||||||
Total | 464,309 | 394,149 | 348,365 | 8,872 | 6,888 | 8,054 | 1.91 | 1.75 | 2.31 | ||||||||||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase(7) | |||||||||||||||||||||||||
In U.S. offices | 147,303 | 124,108 | 126,343 | 3,053 | 2,216 | 3,706 | 2.07 | 1.79 | 2.93 | ||||||||||||||||
In offices outside the U.S.(6) | 66,806 | 56,057 | 42,672 | 2,821 | 2,639 | 2,933 | 4.22 | 4.71 | 6.87 | ||||||||||||||||
Total | 214,109 | 180,165 | 169,015 | 5,874 | 4,855 | 6,639 | 2.74 | 2.69 | 3.93 | ||||||||||||||||
Brokerage payables | |||||||||||||||||||||||||
In U.S. offices | 38,457 | 31,608 | 22,213 | 94 | 48 | 68 | 0.24 | 0.15 | 0.31 | ||||||||||||||||
In offices outside the U.S.(6) | 4,923 | 1,720 | 1,452 | 15 | 4 | 4 | 0.30 | 0.23 | 0.28 | ||||||||||||||||
Total | 43,380 | 33,328 | 23,665 | 109 | 52 | 72 | 0.25 | 0.16 | 0.30 | ||||||||||||||||
Trading account liabilities(8)(9) | |||||||||||||||||||||||||
In U.S. offices | 37,809 | 25,217 | 25,614 | 70 | 48 | 42 | 0.19 | 0.19 | 0.16 | ||||||||||||||||
In offices outside the U.S.(6) | 39,669 | 38,455 | 25,357 | 29 | 15 | 13 | 0.07 | 0.04 | 0.05 | ||||||||||||||||
Total | 77,478 | 63,672 | 50,971 | 99 | 63 | 55 | 0.13 | 0.10 | 0.11 | ||||||||||||||||
Investment banking and brokerage borrowings | |||||||||||||||||||||||||
In U.S. offices | 24,501 | 19,670 | 16,839 | 437 | 305 | 404 | 1.78 | 1.55 | 2.40 | ||||||||||||||||
In offices outside the U.S.(6) | 1,520 | 876 | 571 | 216 | 149 | 68 | 14.21 | 17.01 | 11.91 | ||||||||||||||||
Total | 26,021 | 20,546 | 17,410 | 653 | 454 | 472 | 2.51 | 2.21 | 2.71 | ||||||||||||||||
Short-term borrowings | |||||||||||||||||||||||||
In U.S. offices | 23,098 | 24,910 | 21,876 | 815 | 420 | 756 | 3.53 | 1.69 | 3.46 | ||||||||||||||||
In offices outside the U.S.(6) | 11,731 | 6,912 | 4,760 | 307 | 259 | 420 | 2.62 | 3.75 | 8.82 | ||||||||||||||||
Total | 34,829 | 31,822 | 26,636 | 1,122 | 679 | 1,176 | 3.22 | 2.13 | 4.42 | ||||||||||||||||
Long-term debt | |||||||||||||||||||||||||
In U.S. offices(10) | 161,706 | 162,262 | 122,514 | 4,429 | 3,525 | 3,704 | 2.74 | 2.17 | 3.02 | ||||||||||||||||
In offices outside the U.S.(6) | 26,650 | 13,546 | 10,787 | 928 | 321 | 656 | 3.48 | 2.37 | 6.08 | ||||||||||||||||
Total | 188,356 | 175,808 | 133,301 | 5,357 | 3,846 | 4,360 | 2.84 | 2.19 | 3.27 | ||||||||||||||||
Mandatorily redeemable securities of subsidiary trusts(10) | — | 6,300 | 5,858 | — | 434 | 420 | — | 6.89 | 7.17 | ||||||||||||||||
Total interest-bearing liabilities | 1,048,482 | 905,790 | 775,221 | $ | 22,086 | $ | 17,271 | $ | 21,248 | 2.11 | 1.91 | 2.74 | |||||||||||||
Demand deposits in U.S. offices | 4,348 | 7,382 | 8,218 | ||||||||||||||||||||||
Other non-interest bearing liabilities(8) | 249,708 | 178,852 | 161,921 | ||||||||||||||||||||||
Total liabilities from discontinued operations | — | — | 31,881 | ||||||||||||||||||||||
Total stockholders' equity(11) | 101,196 | 91,090 | 83,364 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,403,734 | $ | 1,183,114 | $ | 1,060,605 | |||||||||||||||||||
Net interest revenue as a percentage of average interest-earning assets(12) | |||||||||||||||||||||||||
In U.S. offices | $ | 728,365 | $ | 632,317 | $ | 522,766 | $ | 28,400 | $ | 25,175 | $ | 23,063 | 3.90 | 3.98 | 4.41 | ||||||||||
In offices outside the U.S. | 467,109 | 374,816 | 344,253 | 16,373 | 14,750 | 14,775 | 3.51 | 3.94 | 4.29 | ||||||||||||||||
Total | $ | 1,195,474 | $ | 1,007,133 | $ | 867,019 | $ | 44,773 | $ | 39,925 | $ | 37,838 | 3.75 | 3.96 | 4.36 | ||||||||||
ANALYSIS OF CHANGES IN NET INTEREST REVENUE, TAXABLE EQUIVALENT BASIS(1)(2)(3)
| 2004 vs. 2003 | 2003 vs. 2002 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to Change in: | | Increase (Decrease) Due to Change in: | | |||||||||||||||
| Average "Volume" | Average "Rate" | Net Change(2) | Average Volume | Average Rate | Net Change(2) | |||||||||||||
In millions of dollars | |||||||||||||||||||
Cash and due from banks | $ | 20 | $ | (3 | ) | $ | 17 | $ | 3 | $ | 22 | $ | 25 | ||||||
Deposits at interest with banks(4) | 208 | (493 | )) | (285 | ) | 117 | (332 | )) | (215 | ) | |||||||||
Federal funds sold and securities borrowed or purchased under agreements to resell | |||||||||||||||||||
In U.S. offices | 533 | 290 | 823 | 477 | (1,797 | ) | (1,320 | ) | |||||||||||
In offices outside the U.S.(4) | 254 | (249 | ) | 5 | 218 | (207 | ) | 11 | |||||||||||
Total | 787 | 41 | 828 | 695 | (2,004 | ) | (1,309 | ) | |||||||||||
Brokerage receivables | |||||||||||||||||||
In U.S. offices | 35 | 132 | 167 | 180 | (309 | ) | (129 | ) | |||||||||||
In offices outside the U.S.(4) | 110 | (125 | ) | (15 | ) | 131 | (69 | ) | 62 | ||||||||||
Total | 145 | 7 | 152 | 311 | (378 | ) | (67 | ) | |||||||||||
Trading account assets(5) | |||||||||||||||||||
In U.S. offices | 1,089 | 7 | 1,096 | 472 | (309 | ) | 163 | ||||||||||||
In offices outside the U.S.(4) | 734 | (262 | ) | 472 | 352 | (871 | ) | (519 | ) | ||||||||||
Total | 1,823 | (255 | ) | 1,568 | 824 | (1,180 | ) | (356 | ) | ||||||||||
Investments | |||||||||||||||||||
In U.S. offices | 180 | 237 | 417 | 1,441 | (971 | ) | 470 | ||||||||||||
In offices outside the U.S.(4) | 762 | 240 | 1,002 | 382 | (820 | ) | (438 | ) | |||||||||||
Total | 942 | 477 | 1,419 | 1,823 | (1,791 | ) | 32 | ||||||||||||
Loans—consumer | |||||||||||||||||||
In U.S. offices | 3,277 | (68 | ) | 3,209 | 3,755 | (2,737 | ) | 1,018 | |||||||||||
In offices outside the U.S.(4) | 2,300 | (516 | ) | 1,784 | 809 | (607 | ) | 202 | |||||||||||
Total | 5,577 | (584 | ) | 4,993 | 4,564 | (3,344 | ) | 1,220 | |||||||||||
Loans—corporate | |||||||||||||||||||
In U.S. offices | (297 | ) | 209 | (88 | ) | (54 | ) | (74 | ) | (128 | ) | ||||||||
In offices outside the U.S.(4) | 716 | 250 | 966 | (221 | ) | (666 | ) | (887 | ) | ||||||||||
Total | 419 | 459 | 878 | (275 | ) | (740 | ) | (1,015 | ) | ||||||||||
Total loans | 5,996 | (125 | ) | 5,871 | 4,289 | (4,084 | ) | 205 | |||||||||||
Other interest-earning assets | (92 | ) | 185 | 93 | 176 | (381 | ) | (205 | ) | ||||||||||
Total interest revenue | 9,829 | (166 | ) | 9,663 | 8,238 | (10,128 | ) | (1,890 | ) | ||||||||||
ANALYSIS OF CHANGES IN NET INTEREST REVENUE, TAXABLE EQUIVALENT BASIS (Continued)(1)(2)(3)
| 2004 vs. 2003 | 2003 vs. 2002 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to Change in: | | Increase (Decrease) Due to Change in: | | |||||||||||||||
| Average Volume | Average Rate | Net Change(2) | Average Volume | Average Rate | Net Change(2) | |||||||||||||
In millions of dollars | |||||||||||||||||||
Deposits | |||||||||||||||||||
In U.S. offices | 158 | 173 | 331 | 284 | (533 | ) | (249 | ) | |||||||||||
In offices outside the U.S.(4) | 1,258 | 395 | 1,653 | 612 | (1,529 | ) | (917 | ) | |||||||||||
Total | 1,416 | 568 | 1,984 | 896 | (2,062 | ) | (1,166 | ) | |||||||||||
Federal funds purchased and securities loaned or sold under agreements to repurchase | |||||||||||||||||||
In U.S. offices | 450 | 387 | 837 | (65 | ) | (1,425 | ) | (1,490 | ) | ||||||||||
In offices outside the U.S.(4) | 472 | (290 | ) | 182 | 775 | (1,069 | ) | (294 | ) | ||||||||||
Total | 922 | 97 | 1,019 | 710 | (2,494 | ) | (1,784 | ) | |||||||||||
Brokerage payables | �� | ||||||||||||||||||
In U.S. offices | 12 | 34 | 46 | 22 | (42 | ) | (20 | ) | |||||||||||
In offices outside the U.S.(4) | 9 | 2 | 11 | 1 | (1 | ) | — | ||||||||||||
Total | 21 | 36 | 57 | 23 | (43 | ) | (20 | ) | |||||||||||
Trading account liabilities(5) | |||||||||||||||||||
In U.S. offices | 24 | (2 | ) | 22 | (1 | ) | 7 | 6 | |||||||||||
In offices outside the U.S.(4) | — | 14 | 14 | 6 | (4 | ) | 2 | ||||||||||||
Total | 24 | 12 | 36 | 5 | 3 | 8 | |||||||||||||
Investment banking and brokerage borrowings | |||||||||||||||||||
In U.S. offices | 82 | 50 | 132 | 60 | (159 | ) | (99 | ) | |||||||||||
In offices outside the U.S.(4) | 95 | (28 | ) | 67 | 45 | 36 | 81 | ||||||||||||
Total | 177 | 22 | 199 | 105 | (123 | ) | (18 | ) | |||||||||||
Short-term borrowings | |||||||||||||||||||
In U.S. offices | (33 | ) | 428 | 395 | 93 | (429 | ) | (336 | ) | ||||||||||
In offices outside the U.S.(4) | 143 | (95 | ) | 48 | 142 | (303 | ) | (161 | ) | ||||||||||
Total | 110 | 333 | 443 | 235 | (732 | ) | (497 | ) | |||||||||||
Long-term debt(6) | |||||||||||||||||||
In U.S. offices | (12 | ) | 916 | 904 | 1,020 | (1,199 | ) | (179 | ) | ||||||||||
In offices outside the U.S.(4) | 409 | 198 | 607 | 138 | (473 | ) | (335 | ) | |||||||||||
Total | 397 | 1,114 | 1,511 | 1,158 | (1,672 | ) | (514 | ) | |||||||||||
Mandatorily redeemable securities of subsidiary trusts(6) | (217 | ) | (217 | ) | (434 | ) | 31 | (17 | ) | 14 | |||||||||
Total interest expense | 2,850 | 1,965 | 4,815 | 3,163 | (7,140 | ) | (3,977 | ) | |||||||||||
Net interest revenue | $ | 6,979 | ($ | 2,131 | ) | $ | 4,848 | $ | 5,075 | $ | (2,988 | ) | $ | 2,087 | |||||
RATIOS
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income to average assets | 1.21 | % | 1.51 | % | 1.44 | % | 1.66 | % | 1.21 | % | 1.51 | % | ||
Return on common stockholders' equity(1) | 17.0 | % | 19.8 | % | 18.6 | % | 22.3 | 17.0 | 19.8 | |||||
Return on total stockholders' equity(2) | 16.8 | % | 19.5 | % | 18.3 | % | 22.1 | 16.8 | 19.5 | |||||
Total average equity to average assets | 7.21 | % | 7.70 | % | 7.86 | % | 7.48 | 7.21 | 7.70 | |||||
Dividends declared per common share as a percentage of income per diluted common share | 49.1 | % | 32.2 | % | 23.8 | % | 37.1 | 49.1 | 32.2 | |||||
AVERAGE DEPOSIT LIABILITIES IN OFFICES OUTSIDE THE U.S.(1)
| 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Average Interest Rate | Average Balance | Average Interest Rate | Average Balance | Average Interest Rate | 2005 | 2004 | 2003 | |||||||||||||||||||||||
In millions of dollars at year end | Average Balance | Average Interest Rate | Average Balance | Average Interest Rate | Average Balance | Average Interest Rate | ||||||||||||||||||||||||||
Banks(2) | $ | 32,067 | 2.99 | % | $ | 28,495 | 2.84 | % | $ | 28,492 | 3.84 | % | ||||||||||||||||||||
Banks | $ | 29,794 | 5.21 | % | $ | 32,067 | 2.99 | % | $ | 28,495 | 2.84 | % | ||||||||||||||||||||
Other demand deposits | 121,588 | 1.11 | % | 85,556 | 1.54 | % | 85,545 | 1.54 | % | 140,105 | 1.65 | 121,588 | 1.11 | 85,556 | 1.54 | |||||||||||||||||
Other time and savings deposits(2) | 179,916 | 2.43 | % | 159,448 | 2.11 | % | 159,463 | 2.11 | % | 203,041 | 2.92 | 179,916 | 2.43 | 159,448 | 2.11 | |||||||||||||||||
Total | $ | 333,571 | 2.00 | % | $ | 273,499 | 2.01 | % | $ | 273,500 | 2.01 | % | $ | 372,940 | 2.62 | % | $ | 333,571 | 2.00 | % | $ | 273,499 | 2.01 | % | ||||||||
MATURITY PROFILE OF TIME DEPOSITS ($100,000 OR MORE) IN U.S. OFFICES
| Under 3 Months | Over 3 to 6 Months | Over 6 to 12 Months | Over 12 Months | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions of dollars at year end 2004 | ||||||||||||||||||||||||
In millions of dollars at year end 2005 | Under 3 Months | Over 3 to 6 Months | Over 6 to 12 Months | Over 12 Months | ||||||||||||||||||||
Certificates of deposit | $ | 3,809 | $ | 840 | $ | 1,046 | $ | 3,234 | $ | 19,848 | $ | 1,843 | $ | 2,572 | $ | 4,112 | ||||||||
Other time deposits | 14,006 | 70 | 15 | 205 | 993 | 67 | 35 | 9 | ||||||||||||||||
SHORT-TERM AND OTHER BORROWINGS(1)
| Federal Funds Purchased and Securities Sold Under Agreements to Repurchase(2) | Commercial Paper(6) | Other Funds Borrowed(2) | Investment Banking and Brokerage Borrowings | Federal Funds Purchased and Securities Sold Under Agreements to Repurchase(2) | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | Commercial Paper | Other Funds Borrowed(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
In millions of dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In millions of dollars | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 209,555 | $ | 181,156 | $ | 162,643 | $ | 8,270 | $ | 15,093 | $ | 16,854 | $ | 22,698 | $ | 21,094 | $ | 13,775 | $ | 25,799 | $ | 22,442 | $ | 21,353 | $ | 242,392 | $ | 209,555 | $ | 181,156 | $ | 34,159 | $ | 25,638 | $ | 32,719 | $ | 32,771 | $ | 31,129 | $ | 25,910 | ||||||||||||||||||||||||
Average outstanding during the year(5) | 214,109 | 180,165 | 169,015 | 13,220 | 14,994 | 13,567 | 21,609 | 16,828 | 13,069 | 26,021 | 20,546 | 17,410 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Average outstanding during the year(3) | 245,595 | 212,132 | 178,537 | 26,106 | 32,799 | 30,866 | 31,725 | 28,051 | 21,502 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Maximum month-end outstanding | 240,169 | 198,339 | 199,010 | 19,265 | 17,400 | 16,854 | 27,190 | 25,196 | 24,201 | 30,986 | 25,185 | 22,104 | 279,021 | 240,169 | 198,339 | 34,751 | 39,469 | 32,932 | 33,907 | 34,719 | 30,435 | ||||||||||||||||||||||||||||||||||||||||||||
Weighted-average interest rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
During the year | 2.74 | % | 2.69 | % | 3.93 | % | 1.18 | % | 1.09 | % | 1.63 | % | 4.47 | % | 3.07 | % | 7.31 | % | 2.51 | % | 2.21 | % | 2.71 | % | 4.71 | % | 2.77 | % | 2.72 | % | 3.11 | % | 1.28 | % | 1.14 | % | 6.92 | % | 4.83 | % | 2.59 | % | |||||||||||||||||||||||
At year end(4) | 2.37 | % | 3.11 | % | 2.37 | % | 2.28 | % | 1.24 | % | 1.56 | % | 2.56 | % | 1.81 | % | 3.07 | % | 2.33 | % | 1.45 | % | 2.07 | % | |||||||||||||||||||||||||||||||||||||||||
At year-end(5) | 3.77 | % | 2.37 | 3.11 | 4.30 | 2.26 | 1.15 | 3.85 | % | 2.54 | 2.00 | % |
171
Regulation and SupervisionLEGAL AND REGULATORY REQUIREMENTS
Bank Holding Company Regulationholding company/Financial holding company
The Company is a bank holding company within the meaningCitigroup's ownership 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). The subsidiary depository institutions of the Company (the banking subsidiaries), including its principal bank subsidiary, Citibank, N.A. (Citibank), are subject to supervision and examination by their respective federal and state banking authorities. The nationally chartered subsidiaryother banks including Citibank, are supervised and examined by the Office of the Comptroller of the Currency (OCC); federal savings association subsidiaries are regulated by the Office of Thrift Supervision (OTS); and state-chartered depository institutions are supervised by the banking departments within their respective states (California, Delaware, and Utah), as well as the Federal Deposit Insurance Corporation (FDIC). The FDIC also has back-up enforcement authority with respect to each of the banking subsidiaries, the deposits of which are insured by the FDIC, up to applicable limits. The Company also controls (either directly or indirectly) overseas banks, branches, and agencies. In general, the Company's overseas activities are regulated by the FRB and OCC, and are also regulated by supervisory authorities of the host countries.
The Company's banking subsidiaries are also subject to requirements and restrictionsmakes Citigroup a "bank holding company" under federal, state, and foreign law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Company's banking subsidiaries.
The activities of U.S. banklaw. Bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB determines to be so closely related to banking or managing or controllingclosely-related activities. Because Citigroup's subsidiary banks as to be a proper incident thereto. In addition, under the Gramm-Leach-Bliley Act (the GLB Act), bank holding companies, such as the Company, all of whose controlled depository institutions are "well capitalized" and "well managed," as defined in Federal Reserve Regulation Y,managed" under U.S. banking regulations, and which obtainhave satisfactory ratings under the U.S. Community Reinvestment Act, ratings, have the ability to declare themselves to beCitigroup has qualified as a "financial holding companies" and engage in a broader spectrum of activities, including insurance underwriting and brokerage (including annuities), and underwriting and dealing securities. Thecompany," which permits the Company has declared itself to be a financial holding company. Financial holding companies that do not continue to meet all of the requirements for such status will, depending on which requirement they fail to meet, face not being able to undertake new activities or acquisitions that are financial in nature, or losing their ability to continue those activities that are not generally permissible for bank holding companies.
Under the GLB Act, financial holding companies are able to make acquisitions of companies that engage in activities that are financial in nature, both in the United States and outside of the United States. No prior approval of the FRB is generally required for such acquisitions except for the acquisition of U.S. depository institutions and, in some cases, foreign banks. In addition, under merchant banking authority added by the GLB Act, financial holding companies are authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the investment in duration, does not manage the company on a day-to-day basis, and the investee company does not cross-market with any of the financial holding company's controlled depository institutions. This authority applies to investments both in the United States and outside the United States. Regulations interpreting and conditioning this authority have been promulgated. Bank holding companies also retain their authority, subject to prior specific or general FRB consent, to acquire less than 20% of the voting securities of a company that does not do business in the United States, and 20% or more of the voting securities of any such company if the FRB finds by regulation or order that its activities are usual in connection with banking or finance outside the United States. In general, bank holding companies that are not financial holding companies may engage in a broader range of financial activities outsidein the United States than they may engage in inside the United States, including sponsoring, distributing,U.S. and advising open-end mutual funds, andabroad. These activities include underwriting and dealing in debtsecurities, insurance underwriting and to a limited extent, equity securities, subject to local country laws.brokerage, and making temporary investments in non-financial companies, as long as the Company does not manage the non-financial company's day-to-day activities, and the non-financial company does not cross-market with the Company's banking subsidiaries.
SubjectIf Citigroup ceases to certain limitationsqualify as a financial holding company, it could be barred from new financial activities or acquisitions, and restrictions,have to discontinue the broader range of activities permitted to financial holding companies.
Regulators
As a U.S. bank holding company, withCitigroup is regulated and supervised by the FRB. Nationally chartered subsidiary banks, such as Citibank, are regulated and supervised by the Office of the Comptroller of the Currency (occ); federal savings associations by the Office of Thrift Supervision; and state-chartered depository institutions by state banking departments and the Federal Deposit Insurance Corporation (FDIC). The FDIC has back-up enforcement authority for banking subsidiaries whose deposits it insures. Overseas branches of Citibank are regulated and supervised by the FRB and OCC and overseas subsidiary banks by the FRB. Such overseas branches and subsidiary banks are also regulated and supervised by regulatory authorities in the host countries.
Internal growth and acquisitions
Financial holding companies generally can engage, directly or indirectly in the U.S. and abroad, in financial activities, either de novo or by acquisition, by providing after-the-fact notice to the FRB. However, the Company must obtain the prior approval of the FRB maybefore acquiring more than five percent of any class of voting stock of a U.S. depository institution or bank holding company.
Subject to certain restrictions and the prior approval of the appropriate federal banking regulatory agency, the Company can acquire anU.S. depository institutions, including out-of-state bank. Banksbanks. In addition, intrastate bank mergers are permitted and banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal bank regulatory agency.merge. A national or state bank maycan establish a de novonew branch out ofin another state if such branching is expressly permitted by the other state. Astate, and a federal savings association iscan generally permitted to open a de novo branchnew branches in any state.
Outside the U.S., subjectThe FRB must approve certain additional capital contributions to an existing non-U.S. investment and certain requirements for prior FRB consent or notice,acquisitions by the Company may acquire banks andof an interest in a non-U.S. company, including in a foreign bank, as well as the establishment by Citibank may establish branches subject to local laws and to U.S. laws prohibiting companies from doing business in certain countries.of foreign branches.
Dividends
The Company's earningsbank holding companies and activitiesbanking subsidiaries are affected by legislation, by actions of its regulators, and by local legislative and administrative bodies and decisions of courtslimited in their ability to pay dividends. (See Note 17 to the foreign and domestic jurisdictions in which the Company and its subsidiaries conduct business. For example, these includeconsolidated financial statements on page 140.) In addition to specific limitations on the ability of certain subsidiaries todividends that subsidiary banks can pay dividends to their intermediate holding companies, and on the abilities of those holding companies to pay dividends to the Company (see Note 19 to the Consolidated Financial Statements).federal regulators could prohibit a dividend that would be an unsafe or unsound banking practice.
It is theFRB policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides thatMoreover, bank holding companies should not maintain a level of cash dividendsdividend levels that underminesundermine the bank holding company's ability to serve asbe a source of strength to its banking subsidiaries.
Various federal and state statutory provisions limit the amount of dividends that subsidiary banks and savings associations can pay to their holding companies without regulatory approval. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit aTransactions with nonbank subsidiaries
A banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
Numerous other federal and state laws also affect the Company's earnings and activities, including federal and state consumer protection laws. Legislation may be enacted or regulation imposed in the U.S. or its political subdivisions, or in any other jurisdiction in which the Company does business, to further regulate banking and financial services or to limit finance charges or other fees or charges earned in such activities. There can be no assurance whether any such legislation or regulation will place additional limitations on the Company's operations or adversely affect its earnings. The preceding statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73.
There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in certain othersubsidiary's transactions with or involving those banking subsidiaries. In general, these restrictions require that any such transactions must be on terms that would ordinarily be offered to unaffiliated entities and secured by designated amounts of specified collateral. Transactions between a banking subsidiary and the holding company or any nonbank subsidiary generally are limited to 10% of the banking subsidiary's capital stock and surplus, and, as to the holding company and all such nonbank subsidiaries in thewith an aggregate tolimit of 20% of the bank'sbanking subsidiary's capital stock and surplus.surplus for all such transactions. Such transactions must be on arm's-length terms, and certain credit transactions must be fully secured by approved forms of collateral.
Liquidation
The Company's right to participate in the distribution of assets of anya subsidiary upon the subsidiary's liquidation or reorganization will be subjectsubordinate to the prior claims of the subsidiary's creditors. InIf the event of a liquidation or other resolution ofsubsidiary is an insured depository institution, the Company's claim as a stockholder or creditor will be subordinated to the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its stockholders, including any depository institution holding company (such as the Company) or any stockholder or creditor thereof.creditors.
In the liquidation or other resolution of a failed U.S. insured depository institution, deposits in U.S. offices and certain claims for administrative expenses and employee compensation are afforded awill have priority over other general unsecured claims, including deposits in offices outside the U.S., non-deposit claims in all offices, and claims of a parent such as the Company. Such priority creditors would include theThe FDIC, which succeeds to the position of insured depositors.depositors, would be a priority creditor.
AAn FDIC-insured financial institution insured by the FDIC that is under common controlaffiliated with a failed or failing FDIC-insured institution can be requiredmay have to indemnify the FDIC for losses resulting from the insolvency of the failed institution, even if this causes the affiliatedindemnifying institution also to become insolvent. Any obligations or liability owed byObligations of a subsidiary depository institution to itsa parent company isare subordinate to the subsidiary's cross-guaranteeindemnity liability with respect to commonly controlled insured depository institutions and to the rightsclaims of its depositors.
Under FRB policy, aOther bank and bank holding company is expected to act as a source of financial strength to each ofregulation
The Company and its banking subsidiaries are subject to other regulatory limitations, including requirements for banks to maintain reserves against deposits; requirements as to risk-based capital and commit resourcesleverage (see Capital Resources and Liquidity on page 83, and Note 17 to their support. As a resultthe Consolidated Financial Statements on page 140); restrictions on the types and amounts of loans that policy,may be made and the interest that may be charged; and limitations on investments that can be made and services that can be offered.
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The FRB may also expect the Company may be required to commit resources to its subsidiary banks in certain circumstances. However, under the GLB Act, the FRB ismay not able to compel a bank holding company to remove capital from its regulated securities orand insurance subsidiaries in order to commit such resources to its subsidiary banks.
The Company and its U.S. insured depository institution subsidiaries are subject to risk-based capital and leverage guidelines issued by U.S. regulators for banks, savings associations, and bank holding companies. The regulatory agencies are required by law to take specific prompt actions with respect to institutions that do not meet minimum capital standards and have defined five capital tiers, the highest of which is "well capitalized." As of December 31, 2004, the Company's bank and thrift subsidiaries, including Citibank, were "well-capitalized." See "Management's Discussion and Analysis" and Note 19 to the Consolidated Financial Statements for capital analysis.this purpose.
A U.S. bank is not required to repay a deposit at a branch outside the U.S. if the branch cannot repay the deposit due to an act of war, civil strife, or action taken by the government in the host country, unlesscountry.
Privacy and data security
Under U.S. federal law, the bank has expressly agreed to do so in writing.
The GLB Act included extensive consumer privacy provisions. These provisions, among other things, require full disclosure of the Company'sCompany must disclose its privacy policy to consumers, and mandate offeringpermit consumers the ability to "opt out" of having non-public customer information disclosed to third parties. Pursuantparties, and allow customers to these provisions,opt out of receiving marketing solicitations based on information about the federal banking regulators and the SEC and FTC have adopted privacy regulations. In addition, the states are permitted tocustomer received from another subsidiary. States may adopt more extensive privacy protections through legislation or regulation. There canprotections.
The Company is similarly required to have an information security program to safeguard the confidentiality and security of customer information and to ensure its proper disposal. Customers must be no assurance whether any such legislation ornotified when unauthorized disclosure involves sensitive customer information that may be misused.
Non-U.S. regulation will place additional limitations on
A substantial portion of the Company's revenues is derived from its operations or adversely affect its earnings. The preceding statement is a forward-looking statement withinoutside the meaningU.S., which are subject to the local laws and regulations of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 73. A recent amendment tohost country. Those requirements affect how the Fair Credit Reporting Act requires the Company's subsidiaries to give their customers the opportunity not to receive marketing solicitations thatlocal activities are based on the use of information from another subsidiary of the Company regarding the customer. This requirement is expected to become effective within six months after pending implementing regulations become effective.
The earnings of the Company, Citibank, and their subsidiaries and affiliates are affected by general economic conditionsorganized and the conduct of monetary and fiscal policy by the U.S. government and by governments in other countriesmanner in which they do business.
Legislation is from time to time introduced in Congress or in the States that may change banking statutes and the operating environment of the Company and its banking subsidiaries in substantial and unpredictable ways. The Company cannot determine whether any such proposed legislation will be enacted and, if enacted, the ultimate effect that any such potential legislation or implementing regulations would have upon the financial condition or results of operations of the Company or its subsidiaries.
Insurance—State Regulation
are conducted. The Company's insurance subsidiariesforeign activities are thus subject to regulation in the various statesboth U.S. and jurisdictions in which they transact business. The regulation, supervision and administration relate, among other things, to the standards of solvency that must be met and maintained, the licensing of insurers and their agents, the lines of insurance in which they may engage, the nature of and limitations on investments, premium rates, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, approval of policy forms and the regulation of market conduct, including the use of credit information in underwriting as well as other underwriting and claims practices. In addition, many states have enacted variations of competitive rate-making laws which allow insurers to set certain premium rates for certain classes of insurance without having to obtain the prior approval of the state insurance department. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of companies and other matters.
Although the Company is not regulated as an insurance company, it is the owner, through various holding company subsidiaries, of the capital stock of its insurance subsidiaries and as such is subject to state insurance holding company statutes, as well as certain other laws, of each of the states of domicile of its insurance subsidiaries. All holding company statutes, as well as certain other laws, require disclosure and, in some instances, prior approval of material transactions between an insurance company and an affiliate.
The Company's insurance subsidiaries are subject to various state statutoryforeign legal and regulatory restrictionsrequirements and supervision, including U.S. laws prohibiting companies from doing business in each company's state of domicile, which limit the amount of dividends or distributions by an insurance company to its stockholders.
Many state insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by state agencies of any change in control of an insurance company that is domiciled (or, in some cases, having such substantial business that it is deemed to be commercially domiciled) in that state. "Control" is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. In addition, many state insurance regulatory laws contain provisions that require prenotification to state agencies of a change in control of a nondomestic admitted insurance company in that state. Such requirements may deter, delay or prevent certain transactions affecting the control of or the ownership of the Company's common stock, including transactions that could be advantageous to the stockholders of the Company.countries.
Securities Regulation
Certain U.S. and non-U.S.of Citigroup's subsidiaries are subject to various securities and commodities regulations and capital adequacy requirements promulgated byof the regulatory and exchange authorities of the countriesjurisdictions in which they operate.
Subsidiaries' registrations include as broker-dealer and as investment adviser with the SEC and as futures commission merchant and commodity pool operator with the Commodity Futures Trading Commission (CFTC). Subsidiaries' memberships include the New York Stock Exchange, Inc. (NYSE) and other principal United States securities exchanges, as well as the National Association of Securities Dealers, Inc. (NASD) and the National Futures Association (NFA).
Citigroup's primary U.S. broker-dealer subsidiary, Citigroup Global Markets Inc. (CGMI), is registered as a broker-dealer in all 50 states, the District of Columbia, Puerto Rico, Taiwan and Guam. CGMI is also a primary dealer in U.S. Treasury securities and a member of the principal United States futures exchanges. CGMI is subject to extensive regulation, including minimum capital requirements, which are issued and enforced by, among others, the SEC, the CFTC, the NFA, the NASD, the NYSE, various other self-regulatory organizations of which CGMI is a member and the securities administrators of the 50 states, the District of Columbia, Puerto Rico and Guam. The Company's U.S.SEC and the CFTC also require certain registered broker/dealerbroker-dealers (including CGMI) to maintain records concerning certain financial and securities activities of affiliated companies that may be material to the broker-dealer, and to file certain financial and other information regarding such affiliated companies.
Citigroup's securities operations abroad are conducted through various subsidiaries and affiliates, principally Citigroup Global Markets Limited in London and Nikko Citigroup Limited (a joint venture between CGMHI and Nikko Cordial) in Tokyo. Its securities activities in the United Kingdom, which include investment banking, trading, and brokerage services, are subject to the Financial Services and Markets Act of 2000, which regulates organizations that conduct investment businesses and to the rules of the Financial Services Authority (including capital and liquidity requirements) in the United Kingdom (in the United Kingdom) including capital and liquidity requirements and to the rules of the Financial Services Authority, Nikko Citigroup Limited is a registered foreign securities company in Japan and, as such, its activities in Japan are subject to Japanese law applicable to non-Japanese securities firms and are regulated principally by the Financial Services Agency. These and other subsidiaries of Citigroup are also members of various securities and commodities exchanges and are subject to the rules and regulations of those exchanges. Citigroup's other offices abroad are also subject to the jurisdiction of foreign financial services regulatory authorities.
CGMI is a member of the Securities Investor Protection Corporation (SIPC), which, in the event of the liquidation of a broker-dealer, provides protection for customers' securities accounts held by the firm of up to $500,000 for each eligible customer, subject to a limitation of $100,000 for claims for cash balances. To supplement the SIPC coverage, CGMI has purchased for the benefit of its customers additional protection, subject to an aggregate loss limit of $600 million and Exchange Commission's (the SEC)a per client cash loss limit of up to $1.9 million.
Capital Requirements
As a registered broker-dealer, CGMI is subject to the SEC's Net Capital Rule. CGMI computes net capital under the alternative method of the Net Capital Rule, Rule 15c3-1 (the Net Capital Rule), promulgated under the Exchange Act. The Net Capital Rulewhich requires the maintenance of minimum net capital as defined.equal to 2% of aggregate debit items (as defined). A member of the NYSE may be required to reduce its business if its net capital is less than 4% of aggregate debit balances (as defined) and may also be prohibited from expanding its business or paying cash dividends if resulting net capital would be less than 5% of aggregate debit balances. Furthermore, the Net Capital Rule does not permit withdrawal of equity or subordinated capital if the resulting net capital would be less than 5% of such aggregate debit balances.
The Net Capital Rule also limits the ability of broker/dealersbroker-dealers to transfer large amounts of capital to parent companies and other affiliates. Compliance withUnder the Net Capital Rule, could limit those operationsequity capital cannot be withdrawn from a broker-dealer without the prior approval of that broker-dealer's designated examining authority (in the case of CGMI, the NYSE) in certain circumstances, including when net capital after the withdrawal would be less than (i) 120% of the Companyminimum net capital required by the Net Capital Rule, or (ii) 25% of the broker-dealer's securities position "haircuts." "Haircuts" is the term used for deductions from capital of certain specified percentages of the market value of securities to reflect the possibility of a market decline prior to disposition. In addition, the Net Capital Rule requires broker-dealers to notify
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the SEC and the appropriate self-regulatory organization two business days before any withdrawals of excess net capital if the withdrawals (in the aggregate over any 30-day period) would exceed the greater of $500,000 or 30% of the broker-dealer's excess net capital, and two business days after any withdrawals (in the aggregate over any 30-day period) that requireexceeds the intensive usegreater of $500,000 or 20% of excess net capital. The Net Capital Rule also authorizes the SEC to order a freeze (for up to 20 business days) on the transfer of capital such as underwriting and trading activitiesif a broker-dealer plans a withdrawal of more than 30% of its excess net capital (when aggregated with all other withdrawals during the previous 30 days) and the financingSEC believes that such a withdrawal may be detrimental to the financial integrity of customer account balances, and also could restrict CGMHI's ability to withdraw capital from its broker/dealer subsidiaries, which in turn could limit CGMHI'sthe broker-dealer or may jeopardize the broker-dealer's ability to pay dividends and make payments on its debt. See Notes 13 and 19 to the Consolidated Financial Statements. Certain of the Company's broker/dealer subsidiaries are also subject to regulation in the countries outside of the U.S. in which they do business. Such regulations may include requirements to maintain specified levels of net capital or its equivalent.
The Company is the indirect parent of investment advisers registered and regulated under the Investment Advisers Act of 1940 who provide investment advice to investment companies subject to regulation under the Investment Company Act of 1940. Under the Investment Company Act of 1940, advisory contracts between the Company's investment adviser subsidiaries and these investment companies (Affiliated Funds) would automatically terminate upon an assignment of such contracts by the investment adviser. Such an assignment would be presumed to have occurred if any party were to acquire more than 25% of the Company's voting securities. In that event, consent to the assignment from the stockholders of the Affiliated Funds involved would be needed for the advisory relationship to continue. In addition, subsidiaries of the Company and the Affiliated Funds are subject to certain restrictions in their dealings with each other.customers.
Competition
The Company and its subsidiaries are subject to intense competition in all aspects of their businesses from both bank and non-bank institutions that provide financial services and, in some of their activities, from government agencies.
General Business FactorsGENERAL BUSINESS FACTORS
In the Company's judgment, of the Company, no material part of the Company's business of the Company and its subsidiaries is dependentdepends upon a single customer or group of customers, the loss of any one of which would have a materially adverse effect on the Company, and no one customer or group of affiliated customers accounts for as much as 10% of the Company's consolidated revenues.
PropertiesPROPERTIES
The Company's Citigroup's and Citibank's principal executive offices are located at 399 Park Avenue in New York New York. 399 Park Avenue is a 39-story building that is partially leased by the CompanyCity. Citigroup and certain of its subsidiaries includingare the principal officeslargest tenant of Citicorp and Citibank.this building. The Company and certain of its subsidiaries occupyalso has office space in Citigroup Center (153 E. 53rd53rd St., in New York NY)City) under a long-term lease. Citibank owns a building in Long Island City, New York, and leases a building underhas a long-term lease locatedon a building at 111 Wall Street in New York City, which are totally occupied by the Company and certain of its subsidiaries.
The principal offices of TIC and TLAC are located in Hartford, Connecticut. The majority of such office space in Hartford is leased from third parties.
Additionally, the Company's life insurance subsidiaries lease certain other non-material office space throughout the United States.
CGMHI owns two buildings locatedits principal offices in a building at 388 and 390 Greenwich Street in New York City. The principal offices of CGMHI are locatedCity, and also owns the neighboring building at 388390 Greenwich Street, New York, New York.both of which it fully occupies.
Associates maintainshas its principal offices in Irving, Texas, in facilities whichthat are in part owned and in part leased by it. Associates has office and branch sites for its business units throughout the United States, Canada, Asia (Japan, Taiwan, Philippines and Hong Kong), Europe and Latin America. The majority of these sites are leased and, although numerous,leased; none is material to Associates' operations.
Banamex maintainshas its principal offices in Mexico City in facilities whichthat are in part owned and in part leased by it. Banamex has office and branch sites throughout Mexico.Mexico, most of which it owns.
The majority of these sites are owned.
OtherCompany owns other offices and certain warehouse space, are owned, none of which is material to the Company's financial condition or operations.
The Company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained. For further information concerning leases, see Note 2725 to the Consolidated Financial Statements.Statements on page 154.
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Enron Corp.
In April 2002, Citigroup was named as a defendant along with, among others, commercial and/or investment banks, certain current and former Enron officers and directors, lawyers and accountants in a putative consolidated class action complaint that was filed in the United States District Court for the Southern District of Texas seeking unspecified damages. The action, brought on behalf of individuals who purchased Enron securities (NEWBY, ET AL. V. ENRON CORP., ET AL.), alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. In May 2003, plaintiffs filed an amended consolidated class action complaint. Citigroup filed a motion to dismiss in June 2003, which motion was denied in April 2004. Citigroup answered the operative complaint in May 2004. Plaintiffs filed a motion for class certification in May 2003, which motion remains pending. On June 10, 2005, Citigroup and certain of its subsidiaries agreed to a settlement of this action. Under the terms of the settlement, Citigroup will make a pretax payment of $2.01 billion to the settlement class, which consists of all purchasers of all publicly traded equity and debt securities issued by Enron and Enron-related entities between September 9, 1997 and December 2, 2001. The parties are engagingamount to be paid in discovery.settlement of this action, which was preliminarily approved by the court on February 22, 2006, is covered by existing litigation reserves.
Additional actions have been filed against Citigroup and certain of its affiliates, along with other parties, including (i) actions (including putative class actions) brought by a number of pension and benefit plans, investment funds, mutual funds, and other individual and institutional investors in connection with the purchase and/or holding of Enron and Enron-related equity and debt securities, alleging violations of various state and federal securities laws, state unfair competition statutes, common law fraud, misrepresentation, negligence, unjust enrichment, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, conspiracy and other violations of state law; (ii) actions by banks that participated in Enron revolving credit facilities and/or purchasers of Enron bank debt in the secondary market, alleging fraud, negligence, gross negligence, breach of fiduciary duty, breach of implied duties, aiding and abetting and civil conspiracy in connection with defendants' administration of a credit facility with Enron; (iii) an action brought by several funds in connection with secondary market purchases of Enron debt securities, alleging violations of the federal securities laws, including Section 11 of the Securities Act of 1933, as amended, and claims for fraud and misrepresentation; (iv) a series of putative class actions by purchasers of NewPower Holdings common stock, alleging violations of various federal securities laws; the Citigroup defendant (along with all other defendants) settled all claims without admitting any wrongdoing, and the settlement was preliminarily approved by the United States District Court for the Southern District of New York in September 2004; (v) a putative class action brought by clients of CGMI in connection with research reports concerning Enron, alleging breach of contract; (vi) anthis action brought by purchasers in the secondary market of Enron bank debt, alleging claims for common law fraud, conspiracy, gross negligence, negligence and breach of fiduciary duty; (vii)was voluntary dismissed with prejudice on December 14, 2005; (iv) an action brought by an investment company, alleging that Citigroup and others aided Enron in fraudulently inducing it to enter into a commodity sales contract; (viii)(v) five adversary proceedings filed by Enron in its chapter 11 bankruptcy proceedings to recover alleged preferential payments and fraudulent transfers involving Citigroup, certain of its affiliates and other entities, and to disallow or to subordinate claims that Citigroup and other entities have filed against Enron; in one such proceeding, Enron also alleges various common law claims, including a claim for aiding and abetting ofa breach of fiduciary duty; (ix)(vi) third-party actions broughtclaims asserted by Arthur Andersen and former Enron officers and directors, alleging violation of state securities and other laws and a right to contribution from Citigroup, in connection with claims under state securities and common law brought against the officers and directors; (x)them; (vii) a purported class action brought on behalf of Connecticut municipalities, alleging violation of state statutes, conspiracy to commit fraud, aiding and abetting a breach of fiduciary duty and unjust enrichment; (xi)(viii) actions brought by the Attorney General of Connecticut in connection with various commercial and investment banking services provided to Enron; (xii) third-party actions brought by Arthur Andersen as a defendant in Enron-related litigations, alleging a right to contribution from Citigroup; (xiii)(ix) an action brought by the indenture trustee for the Yosemite and ECLN Trusts and the Yosemite Securities Co., alleging fifteen causes of action sounding in tort and contract and relating to the initial notes offerings and the post-bankruptcy settlement of the notes; (xiv) putative class actions brought by investors that purchased and held Enron and Enron-related securities, alleging negligence, misrepresentation, fraud, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty; (xv)(x) actions brought by utilities concerns, alleging that Citigroup and others aided Enron in fraudulently overcharging for electricity; and (xvi)(xi) adversary proceedings filed by Enron in its chapter 11 bankruptcy proceedings against entities that purchased Enron bankruptcy claims from Citigroup, seeking to disallow or to subordinate those claims.claims; and (xii) actions by a bank that entered into credit derivative swap transactions with Citibank, alleging breach of contract, fraud, fraudulent concealment, aiding and abetting and civil conspiracy. Several of these cases have been consolidated or coordinated with the NEWBY action and are stayed, except for certain discovery, pending the Court's decision on the pending motion for class certification in NEWBY. Fact discovery closed on November 30, 2005, with certain limited exceptions.
Dynegy Inc.
Certain of these cases have been settled and dismissed. In April 2005, Citigroup, along with other financial institution defendants, reached an agreement-in-principle to settle four state-court actions brought by various investment funds, which were not previously consolidated or coordinated with the NEWBY action. The four cases are OCM OPPORTUNITIES FUND III, L.P., et al. v. CITIGROUP INC., et al.; PACIFIC INVESTMENT MANAGEMENT CO. LLC, et al. v. CITIGROUP INC., et al.; AUSA LIFE INSURANCE v. CITIGROUP INC., et al. and PRINCIPAL GLOBAL INVESTORS v. CITIGROUP INC., et al. On June 6, 2003, the complaint3, 2005, Citigroup, along with other financial institution defendants, reached an agreement in principle to settle a pre-existing putative classstate-court action, pending in the United States District Court for the Southern District of Texas (IN RE: DYNEGY INC. SECURITIES LITIGATION)RETIREMENT SYSTEMS OF ALABAMA v. MERRILL LYNCH, et al., brought by purchasers of publicly traded debt and equityan Alabama public corporation comprising various state employee pension funds that had purchased Enron securities of Dynegy Inc. was amended to add Citigroup, Citibank and CGMI as defendants. The plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the Citigroup defendants. The Citigroup defendants filed a motion to dismiss in March 2004, which motion was granted by the District Court in October 2004.from (among others) CGMI. The court denied lead plaintiff's request for leaveapproved the settlement on July 5, 2005. On October 18, 2005, Citigroup, along with one other financial institution defendant, reached an agreement in principle to appeal.settle a state court action, CITY OF MONTGOMERY, ALABAMA EMPLOYEES RETIREMENT SYSTEM v. LAY, et al.
WorldCom, Inc.
Citigroup, CGMI and certain executive officers and current and former employees were named as defendants—along with twenty-two other investment banks, certain current and former WorldCom officers and directors, and WorldCom's former auditors—in a consolidated class action (IN RE WORLDCOM, INC. SECURITIES LITIGATION) brought on behalf of individuals and entities who purchased or acquired publicly traded securities of WorldCom between April 29, 1999 and June 25, 2002. The class action complaint asserted claims against CGMI under (i) Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, in
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connection with certain bond offerings in which it served as underwriter, and (ii) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated under Section 10(b), alleging that it participated in the preparation and/or issuance of misleading WorldCom registration statements and disseminated misleading research reports concerning WorldCom stock. In 2003, the Court denied CGMI's motion to dismiss the consolidated class action complaint and granted the plaintiffs' motion for class certification.
On May 10, 2004, Citigroup announced that it had agreed to settle all claims against it in the consolidated class action. Under the terms of the settlement, Citigroup will make a payment of $2.58$2.57 billion ($1.59 billion after-tax) to the settlement class. Citigroup reached this settlement agreement without admitting any wrongdoing or liability, and the agreement reflects that Citigroup denies that it or its subsidiaries committed any act or omission giving rise to any liability or violation of the law. On November 10, 2004, the United States District Court for the Southern District of New York entered an order granting final approval of the settlement.
The District Court also consolidated with the consolidated class action two other putative class actions which assert claims (i) under federal securities laws against Citigroup, CGMI and certain former employees on behalf of purchasers and acquirers of Targeted Growth Enhanced Terms Securities With Respectamount to the Common Stock of MCI WorldCom, Inc. ("TARGETS"), based on CGMI's research reports concerning WorldCom and its role as underwriter of TARGETS (IN RE TARGETS SECURITIES LITIGATION); and (ii) under common law against CGMI and certain former employees on behalf of persons who held WorldCom securities based on CGMI's research reports concerning WorldCom (WEINSTEIN, ET AL. V. EBBERS, ET AL.). On June 28, 2004, the District Court dismissed all claims under the Securities Act of 1933 and certain claims under the Securities Exchange Act of 1934be paid in IN RE TARGETS SECURITIES LITIGATION, leaving only claims under the 1934 Act for purchases of TARGETS after July 30, 1999. On October 20, 2004, the parties signed a Memorandum of Understanding setting forth the terms of a settlement of all remaining claims in this action. The settlement was preliminarily approved by the Court on January 11, 2005. On September 17, 2004, the District Court dismissed WEINSTEIN, ET AL. v. EBBERS, ET AL. with prejudice, and in its entirety. On October 15, 2004, the plaintiffs noticed their appeal of this decision to the United States Court of Appeals for the Second Circuit. The parties have reached an agreement in principle on the terms of a settlement of this action.action is covered by existing litigation reserves.
Approximately seventysixty-five WorldCom individual actions remain pending in various federal and state courts. Pursuant to an order entered on May 28, 2003, the District Court presently has before it approximately two-thirds of these individual actions that have been consolidated with the class action for pretrial proceedings. The claims asserted in these individual actions are substantially similar to the claims alleged in the class action and assert state and federal securities law claims based on CGMI's research reports concerning WorldCom and/or CGMI's role as an underwriter in WorldCom offerings. Plaintiffs in certain of these actions filed motions to remand their cases to state court. The District Court denied these motions and its rulings were upheld on appeal. Citigroup has settled approximately thirty-five of the WorldCom individual actions. Those settlements include a global settlement by Citigroup, along with other financial institutions and other defendants, dated October 27, 2005, of thirty-two individual actions brought on behalf of seventy institutional plaintiffs that opted out of the WorldCom class action settlement, all of which actions were brought by one law firm.
A number of other individual actions asserting claims against CGMI in connection with its research reports about WorldCom and/or its role as an investment banker for WorldCom are pending in other federal and state courts. These actions have been remanded to various state courts, are pending in other federal courts, or have been conditionally transferred to the United States District Court for the Southern District of New York to be consolidated with the class action. In addition to the court suits, actions asserting claims against Citigroup and certain of its affiliates relating to its WorldCom research reports are pending in numerous arbitrations around the country. These actions assert claims that are substantially similar to the claims asserted in the class action. In one such arbitration, STURM, et al. v. CITIGROUP, et al., claimants sought $901million in compensatory damages, in addition to unspecified punitive damages. Following a NASD arbitration hearing, the arbitration panel denied claimants' claims in their entirety in November 2005. In February 2006, claimants filed a motion to vacate the award in Colorado federal district court.
Global Crossing
On or about January 28, 2003, lead plaintiff in a consolidated putative class action in the United States District Court for the Southern District of New York (IN RE GLOBAL CROSSING, LTD. SECURITIES LITIGATION) filed a consolidated complaint on behalf of purchasers of the securities of Global Crossing and its subsidiaries, which named as defendants, among others, Citigroup, CGMI and certain executive officers and current and former employees, asserting claims under the federal securities laws for allegedly issuing research reports without a reasonable basis in fact and for allegedly failing to disclose conflicts of interest with Global Crossing in connection with published investment research. On March 22, 2004, lead plaintiff amended its consolidated complaint to add claims on behalf of purchasers of the securities of Asia Global Crossing. The added claims assert causes of action under the federal securities laws and common law in connection with CGMI's research reports about Global Crossing and Asia Global Crossing and for CGMI's roles as an investment banker for Global Crossing and as an underwriter in the Global Crossing and Asia Global Crossing offerings. The Citigroup-Related Defendants moved to dismiss all of the claims against them on July 2, 2004.2004. The plaintiffs and the Citigroup RelatedCitigroup-Related Defendants have reached an agreement in principle on the terms ofentered into a settlement of this action.agreement that was preliminarily approved by the Court on March 8, 2005, and was finally approved on June 30, 2005. The amount to be paid in settlement is covered by existing litigation reserves.
In addition, on or about January 27, 2004, the Global Crossing Estate Representative filed in the United States Bankruptcy Court for the Southern District of New York (i) an adversary proceeding against, among others, Citigroup, CGMI and certain executive officers and current and former employees, asserting claims under federal bankruptcy law and common law in connection with CGMI's research reports about Global Crossing and for its role as an underwriter in Global Crossing offerings, and (ii) an adversary proceeding against Citigroup and several other financial institutions seeking to rescind the payment of a $1 billion loan made to a subsidiary of Global Crossing. The Citigroup-Related Defendants moved to dismiss the formerlatter action on June 26, 2004, and the latter on May 28, 2004.2004, which motion remains pending. In addition, actions asserting claims against Citigroup and certain of its affiliates relating to CGMI Global Crossing research reports are pending in numerous arbitrations around the country.
Research
Since May 2002, Citigroup, CGMI and certain executive officers and current and former employees have been named as defendants in numerous putative class action complaints and arbitration demands by purchasers of various securities, alleging that they violated federal securities law, including Sections 10 and 20 of the Securities Exchange Act of 1934, as amended, for allegedly issuing research reports without a reasonable basis in fact and for allegedly failing to disclose conflicts of interest with companies in connection with published investment research, including AT&T Corp. ("AT&T"), Winstar Communications, Inc. ("Winstar"), Level 3 Communications, Inc. ("Level 3"), Metromedia Fiber Network, Inc. ("MFN"), XO Communications, Inc. ("XO"), Williams Communications Group Inc. ("Williams"), and Focal Communications, Inc. Almost all of these putative class actions are pending before a single judge in the United States District Court for the Southern District of New York for coordinated proceedings. The Court has consolidated these actions into separate proceedings corresponding to the companies named above. On December 2, 2004, the Court granted in part and denied in part the Citigroup-Related Defendants' motions to dismiss the claims against it in the AT&T, Level 3, XO and Williams actions. On January 5,
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2005, the Court dismissed the Winstar action in its entirety with prejudice. On January 6, 2005, the Court granted in part and denied in part Citigroup's motion to dismiss the claims against it in the MFN action. The plaintiffs in the MFN action have moved for class certification; that motion was fully briefed on August 29, 2005 and is pending before the District Court.
Citigroup has signed memoranda of agreement settling four putative class actions alleging research analyst conflicts of interest: IN RE SALOMON ANALYST LEVEL 3 LITIGATION, IN RE SALOMON ANALYST XO LITIGATION, IN RE SALOMON ANALYST WILLIAMS LITIGATION, and IN RE SALOMON ANALYST AT&T LITIGATION. In addition, Citigroup has reached a settlement in principle of LOS ANGELES CITY EMPLOYEES RETIREMENT ASSOCIATION v. CITIGROUP, the putative class action brought by shareholders of Focal Communications, Inc. Each of these five settlements is subject to court approval; the amounts to be paid in settlement of each are covered by existing litigation reserves.
In addition to the putative research class actions, several individual actions have been filed against Citigroup and CGMI relating to, among other things, research on Qwest Communications International, Inc. These actions allege violations of state and federal securities laws in connection with CGMI's publication of research about Qwest and its underwriting of Qwest securities. On January 17, 2005, Citigroup settled two such actions (NEW YORK CITY EMPLOYEES RETIREMENT SYSTEM, et al. v. CITIGROUP, et al. and STICHTING PENSIOENFONDS ABP, et al. v. CITIGROUP, et al.). The amounts to be paid in settlement of these two actions are covered by existing litigation reserves.
Two putative class actions against CGMI asserting common law claims on behalf of CGMI customers in connection with published investment research have been dismissed by United States District Courts, one of which was affirmed by the United States Court of Appeals for the Ninth Circuit, and one of which is pending on appealOn September 22, 2005, Citigroup agreed to
the United States Courts of Appeals for the Third Circuit. Two more putative class actions raising similar claims are pending against CGMI, one in the United States District Court for the Southern District of New York (NORMAN V. settle NORMAN v. SALOMON SMITH BARNEY, ET AL.) and the other in Illinois state court (DISHER V. CITIGROUP GLOBAL MARKETS INC.). On June 9, 2004, the District Court denied CGMI's motion to dismiss NORMAN V. SALOMON SMITH BARNEY, ET AL., a case which assertsputative class action asserting violations of the Investment Advisers Act of 1940 and various common law claims in connection with certain investors who maintained guided portfolio management accounts at Smith Barney. The District Court preliminarily approved the settlement on January 20, 2006. The amount to be paid in settlement is covered by existing litigation reserves. In August 2004, the United States District Court remanded DISHER v. CITIGROUP GLOBAL MARKETS INC. to Illinois state court. This is a putative class action asserting common law claims on behalf of Smith Barney. customers in connection with published investment research. On August 17, 2005, the United States Court of Appeals for the Seventh Circuit reversed the District Court and held that the action was preempted and thus must be dismissed. On December 16, 2005, plaintiffs filed a petition for a writ of certiorari in the United States Supreme Court, which remains pending.
Parmalat
On July 29, 2004, Enrico Bondi, as extraordinary commissioner of Parmalat and other affiliated entities, filed a lawsuit in New Jersey Superior Court against Citigroup, Citibank, N.A. and others, alleging that the defendants participated in fraud committed by the officers and directors of Parmalat and seeking unspecified damages. The action alleges a variety of claims under New Jersey state law, including fraud, negligent misrepresentation, violations of the New Jersey Fraudulent Transfer Act and violations of the New Jersey RICO statute. On December 20, 2004, defendantsDefendants filed a motion to dismiss the action. Thataction, which was granted in part and denied in part. Defendants answered and Citibank filed counterclaims alleging causes of action for fraud, negligent misrepresentation, conversion and breach of warranty. Plaintiff/counterclaim-defendant then moved to dismiss the counterclaims, which was denied. On July 11, 2005, the New Jersey Supreme Court granted defendants' motion remains pending.for leave to appeal the denial of its motion to dismiss; that appeal is fully briefed. Discovery is effectively stayed pending appeal.
Citigroup, Citibank, N.A. and others also are defendants in three class action complaints filed in the United States District Court for the Southern District of New York relating to the collapse of Parmalat Finanziaria S.P.A. On May 21, 2004, the court issued an order consolidating the complaints under the caption IN RE PARMALAT SECURITIES LITIGATION. The consolidated amended complaint was filed on October 18, 2004 on behalf of purchasers of Parmalat securities between January 5, 1999 and December 18, 2003. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and seeks unspecified damages. On January 10, 2005, the Citigroup defendants filed a motion to dismiss the action. ThatThe court granted in part and denied in part the motion remains pending.on July 13, 2005. Plaintiff filed a second amended consolidated complaint on August 25, 2005. Defendants answered and discovery is ongoing.
Adelphia Communications Corporation
On July 6, 2003, an adversary proceeding was filed by the Official Committee of Unsecured Creditors on behalf of Adelphia Communications Corporation against certain lenders and investment banks, including CGMI, Citibank, N.A., Citicorp USA, Inc., and Citigroup Financial Products, Inc. (together, the Citigroup Parties)"Citigroup Parties"). The complaint alleges that the Citigroup Parties and numerous other defendants committed acts in violation of the Bank Holding Company Act and common law. The complaints seek equitable relief and an unspecified amount of compensatory and punitive damages. In November 2003, a similar adversary proceeding was filed by the Equity Holders Committee of Adelphia. In June 2004, motions to dismiss were filed with respect to the complaints of the Official Committee of Unsecured Creditors and the Equity Holders Committee. The motions are currently pending.
In addition, CGMI is among the underwriters named in numerous civil actions brought to date by investors in Adelphia debt securities in connection with Adelphia securities offerings between September 1997 and October 2001. Three of the complaints also assert claims against Citigroup Inc. and Citibank, N.A. All of the complaints allege violations of federal securities laws, and certain of the complaints also allege violations of state securities laws and the common law. The complaint seeks unspecified damages. In December 2003, a second amended complaint was filed and consolidated before the same judge of the United States District Court for the Southern District of New York. In February 2004, motions to dismiss the class and individual actions pending in the United States District Court for the Southern District of New York were filed. In May and July of 2005, the United States District Court for the Southern District of New York granted motions to dismiss several
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claims, based on the running of applicable statute of limitations, asserted in the putative class and individual actions being coordinated under IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION. With the exception of one individual action that was dismissed with prejudice, the court granted the putative class and individual plaintiffs leave to re-plead certain of those claims the court found to be time-barred. Additional motions to dismiss the class complaint and the remaining individual complaints on other grounds remain pending.
Allied Irish Bank
On January 31, 2006, the United States District Court for the Southern District of New York partially denied motions filed by Citibank and a co-defendant to dismiss a complaint filed by Allied Irish Bank, P.L.C. ("AIB") in May 2003, seeking compensatory and punitive damages in connection with losses sustained by a subsidiary of AIB in 2000-2002. The complaint alleges that defendants are liable for fraudulent and fictitious foreign currency trades entered by one of AIB's traders through defendants, who provided prime brokerage services. The court's ruling on the motions are currently pending.to dismiss allowed plaintiff's common law claims, including fraudulent concealment and aiding and abetting fraud, to proceed.
Foreign Currency Conversion
Citigroup and certain of its affiliates as well as VISA, U.S.A., Inc., VISA International Service Association, MasterCard International, Incorporated and other banks are defendants in a consolidated class action lawsuit (IN RE CURRENCY CONVERSION FEE ANTITRUST LITIGATION) pending in the United States District Court for the Southern District of New York, which seeks unspecified damages and injunctive relief. The action, brought on behalf of certain United States holders of VISA, MasterCard and Diners Club branded general purpose credit cards who used those cards since March 1, 1997 for foreign currency transactions, asserts, among other things, claims for alleged violations of (i) Section 1 of the Sherman Act, (ii) the federal Truth in Lending Act (TILA), and (iii) as to Citibank (South Dakota), N.A., the South Dakota Deceptive Trade Practices Act. On October 15, 2004, the Court granted the plaintiffs' motion for class certification of their Sherman Act and TILA claims but denied the motion as to the South Dakota Deceptive Trade Practices Act claim against Citibank (South Dakota), N.A.
Transfer Agency
Citigroup's 2004 results reflect an aggregate reserve of $196 million ($151 million after-tax) related to On December 7, 2005, the expected resolutionDistrict Court certified a Diners Club damages subclass, as well as Diners Club antitrust and TILA injunctive relief subclasses. The Citigroup defendants, J.P. Morgan Chase & Co. and the plaintiffs have appealed certain aspects of the previously disclosed SEC investigation into mutual fund transfer agent matters that began in November 2003.District Court's class action rulings.
In 1999, Citigroup Asset Management ("CAM") recommended that an affiliate become the transfer agent for certain mutual funds managed by CAM. The affiliate that became the transfer agent, Citicorp Trust Bank ("CTB"), subcontracted transfer agency work to the previous (unaffiliated) transfer agent. At the time CAM entered the business, CAM concluded a separate agreement with the sub-transfer agent that guaranteed certain benefits to CAM and its affiliates. That agreement, and a one-time payment related to termination of the agreement, were not disclosed to the boards of the mutual funds that approved the retention of the affiliated transfer agent.
As previously discussed, in July 2004, the staff of the SEC indicated that it was considering recommending an enforcement proceeding against CAM and certain of its affiliates relating to the transfer agency and sub-transfer agency arrangements, including the creation and operation of this transfer agency, the compensation received by CTB and the adequacy of CAM's disclosures to the fund boards. The staff subsequently informed four individuals (none of whom remains in his or her prior position with CAM) that it was also considering similar enforcement proceedings against them. The Company is cooperating with the SEC in its investigation. The reserve fully covers the financial terms that the SEC staff has agreed to recommend to the Commission for resolution of this matter. The Citigroup offer of settlement is subject to final negotiation, and any settlement of this matter with the SEC will require approval by the Board of Directors of Citigroup and acceptance by the SEC.
Mutual Funds
Citigroup and certain of its affiliates have been named in several class action litigations pending in various Federal District Courts arising out of alleged violations of the federal securities laws, including the Investment Company Act, and common law (including breach of fiduciary duty and unjust enrichment). The claims concern practices in connection with the sale of mutual funds, including allegations involving market timing, revenue sharing, incentive payments for the sale of proprietary funds, undisclosed breakpoint discounts for the sale
of certain classes of funds, inappropriate share class recommendations and inappropriate fund investments. The litigations involving market timing have been consolidated under the MDLMulti District rules in the United States District Court for the District of Maryland (the "MDL action"), and the litigations involving revenue sharing, incentive payment and other issues are pending in the United States District Court for the Southern District of New York. The plaintiffs in these litigations generally seek unspecified compensatory damages, recessionary damages, injunctive relief, costs and fees. In the principal market timing cases that name the Company, a lead plaintiff has been appointed but that plaintiff has not yet filed an amended complaint. In the principal cases concerning revenue sharing, incentive payment and other issues, the lead plaintiff filed a consolidated and amended complaint on December 15, 2004. Several derivative actions and class actions were dismissed against Citigroup defendants in the MDL action (the class actions were dismissed with leave to replead state law claims of unjust enrichment).
Several issuesIssues in the mutual fund industry have come undercontinue to receive scrutiny of federalby various government regulators and state regulators.SROs. The Company has receivedcontinues to cooperate and respond to subpoenas and other requests for information from various government regulators regarding market timing financing, fees, sales practices and other mutual fund issues and it entered into a settlement in connectionMarch 2005 with various investigations. The Company is cooperatingthe SEC and NASD with all such reviews.respect to revenue sharing and sales of classes of funds.
IPO AllocationSecurities Litigation
In April 2002, consolidated amended complaints were filed against CGMI and other investment banks named in numerous putative class actions filed in the United States District Court for the Southern District of New York, alleging violations of certain federal securities laws (including Section 11 of the Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934, as amended) with respect to the allocation of shares for certain initial public offerings and related aftermarket transactions and damage to investors caused by allegedly biased research analyst reports. On February 19, 2003, the Court issued an opinion denying defendants' motionDefendants moved to dismiss.dismiss, which was denied. On October 13, 2004, the court granted in part the motion to certify class actions for six focus cases in the securities litigation. CGMI is not a defendant in any of the six focus cases. TheOn October 27, 2004, the underwriter defendants in the six focus cases have filed a petition tofor review of the class certification order in the United States Court of Appeals for the Second Circuit. The Second Circuit seeking review of this decision.allowed the underwriter defendants to appeal the class certification order, which is fully briefed. Discovery is ongoing.
IPO Antitrust Litigation
Also filed in the Southern District of New York against CGMI and other investment banks were several putative class actions that were consolidated into a single class action, alleging violations of certain federal and state antitrust laws in connection with the allocation of shares in initial public offerings when acting as underwriters. A separate putative class action was filed against the same underwriter defendants as well as certain institutional investors alleging commercial bribery claims under the Robinson Patman Act arising out of similar allegations regarding IPO allocation conduct. On November 3, 2003, the Courtdistrict court granted CGMI's motion to dismiss the consolidated amended complaint in the antitrust case. Plaintiff has case and the Robinson Patman complaint. Plaintiffs thereafter
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appealed the district court's order dismissing the two actions. In a decision dated September 28, 2005, the Second Circuit vacated the district court's decision and remanded the cases to the district court. Before the cases could be remanded to the district court, the underwriter defendants filed a petition for rehearing en banc, which was denied by the Second Circuit on January 12, 2006. The underwriter defendants have filed a motion in the Second Circuit to dismissstay the issuance of the mandate remanding the cases to the district court pending the filing of a petition for writ of certiorari to the United States Court of Appeals for the Second Circuit in New York.Supreme Court. That appeal ismotion remains pending.
Investigations of Euro Zone Government Bonds Trade
On August 2, 2004, Citigroup Global Markets Limited executed certain large trades in Euro Zone Government bonds in London that were carried out on the MTS trading platform. On August 19, 2004, the UK Financial Services Authority commenced an enforcement investigation into certain aspects of these trades. Other European regulators have also commenced similar investigations. Recently, theThe German regulator, BaFin, referred the results of its investigation into the trades to prosecutors for possible prosecution against employees of the Company. The German prosecutors have declined to take any action against the employees and the BaFin declined to pursue the matter. Eurex found the firm not liable on the substantive charge but found the firm liable for a registration violation. Citigroup is cooperating with these investigations.
California Employment Actions
Numerous financial services firms, including Citigroup and its affiliates, have been named in purported class actions alleging that certain present and former employees in California were entitled to overtime pay under California and federal law and were subject to certain allegedly unlawful deductions in violation of California law. One of these class actions filed in the United States District Court for the Northern District of California, BAHRAMIPOUR v. CITIGROUP GLOBAL MARKETS INC., is seeking damages and injunctive relief. Similar complaints have been filed in other jurisdictions. In addition, complaints asserting similar allegations were filed in the United States District Court, Southern District of New York and the United States District Court for the District of New Jersey.
Other
The Securities and Exchange Commission is conducting a non-public investigation, which the Company believes originated with the Company's accounting treatment regarding its investments and business activities, and loan loss allowances, with respect to Argentina in the 4th quarterQuarter of 2001 and the 1st quarter1st Quarter of 2002. The investigation is also addressing the timing and support documentation for certain other accounting entries or adjustments. In connection with these matters, the SEC has subpoenaed witness testimony and certain accounting and internal controls-related information for the years 20011997 - 2004. The Company is cooperating with the SEC in its investigation. The Company cannot predict the outcome of the investigation.
Beginning in April 2003, two putative class actions on behalf of participants in, and beneficiaries of, the Citigroup 401(k) plan were filed in the Southern District of New York and later consolidated under the caption IN RE: CITIGROUP ERISA LITIGATION. Citigroup filed a motion to dismiss in January 2004. The parties have reached an agreement in principle to settle this action.action, subject to court approval.
Beginning in July 2002, Citigroup and certain officers were named as defendants in putative class actions filed in the United States District Court for the Southern District of New York brought on behalf of purchasers of Citigroup common stock, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and, in approximately half of the actions, claims for common law fraud. In November 2002, these actions were consolidated under the caption IN RE: CITIGROUP INC. SECURITIES LITIGATION. On June 2, 2003, Citigroup filed a motion to dismissIn August 2004, the consolidated amended complaint, which motion was granted byDistrict Court dismissed the district court in August 2004. Plaintiff filed a noticeaction, and on February 6, 2006, the United States Court of appeal in October 2004.Appeals for the Second Circuit affirmed the dismissal.
In December 2002, Citigroup and certain members of the Citigroup Board of Directors were named as defendants in a derivative action brought by an individual Citigroup shareholder in the United States District Court for the Southern District of New York (FINK V. WEILL, ET AL.). The complaint alleges state law claims of breach of fiduciary duty, gross mismanagement and corporate waste, as well as violations of the federal securities laws. Citigroup filed a motion to dismiss in October 2003. In July 2004,2003 and plaintiff later filed a motion for leave to amend. On September 15, 2005, the court denied plaintiff's motion for leave to amend whichthe complaint and granted defendants' motion Citigroup opposedto dismiss the complaint in August 2004. That motion is pending.its entirety.
In May 2004, in CARROLL V. WEILL, ET AL., a shareholder derivative action in New York state court alleging claims against Citigroup directors in connection with Citigroup's activities with Enron and other matters, the New York Court of Appeals denied the principal plaintiff's motion for leave to appeal from the Appellate Division's affirmance of the dismissal of the complaint. Since that date, Citigroup has received a shareholder demand containing allegations similar to those set forth in the CARROLL action referred to above, as well asand a supplemental letter containing various additional allegations relating to other activities of Citigroup. In February 2006, the parties reached an agreement in principle to settle this action.
On June 22, 2005, a shareholder derivative action was filed in Delaware state court, DAVID B. SHAEV PROFIT SHARING ACCOUNT v. ARMSTRONG, ETAL., alleging claims against Citigroup directors in connection with Citigroup's activities with Enron, WorldCom, and research analyst-related matters. Defendants' motion to dismiss the complaint was granted on January 25, 2006.
Additional lawsuits containing claims similar to those described above may be filed in the future.
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Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
Under its long-standing repurchase program (which was expanded in the 2005 second quarter as noted below), the Company buys back common shares in the market or otherwise from time to time.
The following table summarizes the Company's share repurchases during 2005:
| Total Shares Repurchased | Average Price Paid per Share | Dollar Value of Remaining Authorized Repurchase Program | ||||||
---|---|---|---|---|---|---|---|---|---|
| In millions, except per share amounts | ||||||||
First quarter 2005 | |||||||||
Open market repurchases(1) | 19.0 | $ | 47.65 | $ | 1,300 | ||||
Employee transactions(2) | 10.2 | 49.06 | NA | ||||||
Total first quarter 2005 | 29.2 | $ | 48.15 | $ | 1,300 | ||||
Second quarter 2005 | |||||||||
Open market repurchases(1) | 41.8 | $ | 47.06 | $ | 14,335 | ||||
Employee transactions | 0.7 | 46.67 | NA | ||||||
Total second quarter 2005 | 42.5 | $ | 47.05 | $ | 14,335 | ||||
Third quarter 2005 | |||||||||
Open market repurchases | 124.2 | $ | 44.27 | $ | 8,835 | ||||
Employee transactions | 2.1 | 45.76 | NA | ||||||
Total third quarter 2005 | 126.3 | $ | 44.30 | $ | 8,835 | ||||
October 2005 | |||||||||
Open market repurchases | 18.5 | $ | 45.13 | $ | 8,000 | ||||
Employee transactions | 0.7 | 45.62 | NA | ||||||
November 2005 | |||||||||
Open market repurchases | 40.1 | $ | 47.54 | $ | 6,094 | ||||
Employee transactions | 0.7 | 48.37 | NA | ||||||
December 2005 | |||||||||
Open market repurchases | 34.3 | $ | 48.98 | $ | 4,412 | ||||
Employee transactions | 1.1 | $ | 48.96 | NA | |||||
Fourth quarter 2005 | |||||||||
Open market repurchases | 92.9 | $ | 47.60 | $ | 4,412 | ||||
Employee transactions | 2.5 | 47.90 | NA | ||||||
Total fourth quarter 2005 | 95.4 | $ | 47.60 | $ | 4,412 | ||||
Year-to-date 2005 | |||||||||
Open market repurchases | 277.9 | $ | 46.03 | $ | 4,412 | ||||
Employee transactions | 15.5 | 48.32 | NA | ||||||
Total year-to-date 2005 | 293.4 | $ | 46.16 | $ | 4,412 | ||||
NA Not applicable
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Equity Compensation Plan Information
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 296,535,557 | $46.93(2) | 370,176,147(3) | |||
Equity compensation plans not approved by security holders | 20,281,224(4) | $39.82(5) | —(6) | |||
Total | 316,816,781 | $40.27 | 370,176,147 | |||
Most of Citigroup's outstanding equity awards were granted under four stockholder approved plans—the Citigroup 1999 Stock Incentive Plan (the 1999 Plan); the Travelers Group Capital Accumulation Plan; the 1997 Citicorp Stock Incentive Plan; and the Citigroup 2000 Stock Purchase Plan. A small percentage of equity awards have been granted under several plans that have not been approved by stockholders, primarily the Citigroup Employee Incentive Plan. Generally, awards were made to employees participating in Citigroup's stock option, stock award or stock purchase programs.
All of the plans are administered by the Personnel and Compensation Committee of the Citigroup Board of Directors (the Committee), which is comprised entirely of non-employee independent directors. Persons eligible to participate in Citigroup's equity plans are selected by management from time to time subject to the Committee's approval.
Effective April 19, 2005, stockholders approved amendments to the 1999 Plan, and the other plans mentioned above were terminated as a source of shares for future awards. Outstanding awards under the Travelers Life & Annuity Agency Capital Accumulation Plan vested, and the plan was terminated, effective upon the sale of Travelers Life & Annuity Company to MetLife on July 1, 2005.
The following disclosure is provided with respect to plans that have not been submitted to stockholders for approval, and which remain active only with respect to previously granted awards. Additional information regarding Citigroup's equity compensation programs can be found in Note 20 to the Company Consolidated Financial Statements.
Non-Stockholder Approved Plans
The Citigroup Employee Incentive Plan, originally adopted by the Board of Directors in 1991, was amended by the Board of Directors on April 17, 2001. This plan was used to grant stock options and restricted or deferred stock awards to participants in the Citigroup Capital Accumulation Program (CAP) and to new hires. Executive officers and directors of the Company were not eligible to participate in this plan. CAP is an incentive and retention award program pursuant to which a specified portion of a participant's incentive compensation (or commissions) is delivered in the form of a restricted or deferred stock award, or in some cases, restricted or deferred stock and stock options. Vesting periods for restricted and deferred stock awards under this plan, including awards pursuant to CAP, were generally from three to five years. Stock options awarded under this plan, including CAP options, are non-qualified stock options. Options granted prior to January 1, 2003 have ten-year terms and vest at a rate of 20% per year, with the first vesting date generally occurring 12 to 18 months following the grant date. Options granted on or after January 1, 2003, but prior to January 1, 2005, generally have six-year terms and vest at a rate of one-third per year, with the first vesting date generally occurring 12 to 18 months following the grant date. Options granted under this plan in 2005 generally have six-year terms and vest at a rate of 25% per year. Generally, the terms of restricted and deferred stock awards and options granted under the Citigroup Employee Incentive Plan provide that the awards will be canceled if an employee leaves the Company, except in cases of disability or death, or after satisfying certain age and years of service requirements.
Additionally, since December 2001, deferred stock awards that used to be made under certain deferred compensation plans administered by Citigroup Global Markets Holdings Inc. were made under the Citigroup Employee Incentive Plan. These plans provide for deferred stock awards to employees who meet certain specified performance
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targets. Generally, the awards vest in five years. Awards are canceled if an employee voluntarily leaves the Company prior to vesting. Effective April 19, 2005, all equity awards provided for by these deferred compensation plans are being granted under the 1999 Plan. Deferred stock awards granted under the Salomon Smith Barney Inc. Branch Managers Asset Deferred Bonus Plan, the Salomon Smith Barney Inc. Asset Gathering Bonus Plan, the Salomon Smith Barney Inc. Directors' Council Milestone Bonus Plan and the Salomon Smith Barney Inc. Stock Bonus Plan for FC Associates prior to December 2001 remain outstanding.
The Travelers Group Capital Accumulation Plan for PFS Representatives, the Travelers Property Casualty Corp. Agency Capital Accumulation Plan for Citigroup Stock, the Travelers Life & Annuity Agency Capital Accumulation Plan, and the Travelers Life & Annuity (Producers Group) Agency Stock Incentive Program were adopted by Citigroup at various times. These plans provided for CAP awards and other restricted stock awards to agents of certain subsidiaries or affiliates of Citigroup. The Travelers Property Casualty Corp. plan was terminated with respect to new awards upon the spin-off of Travelers Property Casualty Corp. in August 2002. The Travelers Life & Annuity Agency Stock Incentive Program was terminated with respect to new awards following a one-time award in 2001. Beginning in July 2002, awards pursuant to the Travelers Group Capital Accumulation Program for PFS Representatives were made under the Employee Incentive Plan, and are now being made under the 1999 Plan. Effective upon the sale of Travelers Life & Annuity Company to MetLife, Inc., on July 1, 2005, the outstanding awards under the Travelers Life & Annuity Agency Capital Accumulation Plan vested and the plan was terminated.
The Travelers Group Stock Option Plan for PFS Representatives was adopted in 1991. The plan provided for non-qualified stock option grants to certain exclusive insurance agents. The plan is terminated with respect to new awards. All options that were outstanding under the plan as of December 31, 2004, expired in January 2005.
In connection with the acquisition of Associates in 2001, Citigroup assumed options granted to former Associates directors pursuant to the Associates First Capital Corporation Deferred Compensation Plan for Non-Employee Directors. Upon the acquisition, the options vested and were converted to options to purchase Citigroup common stock, and the plan was terminated. All options that remain outstanding under the plan will expire by no later than January 2010.
The Citigroup 2000 International Stock Purchase Plan was adopted in 2000 to allow employees outside the United States to participate in Citigroup's stock purchase programs. The terms of the international plan are identical to the terms of the stockholder-approved Citigroup 2000 Stock Purchase Plan, except that it is not intended to be qualified under Section 423 of the United States Internal Revenue Code. The number of shares available for issuance under both plans may not exceed the number authorized for issuance under the stockholder-approved plan.
Executive Officers
The following information with respect to each executive officer of Citigroup is set forth below as ofCitigroup's Executive Officers on February 28, 2005: name, age, and the position held with Citigroup.23, 2006 are:
Name | Age | Position and office held | ||
---|---|---|---|---|
Ajay Banga | 46 | Chairman & CEO—Global Consumer Group, International | ||
Sir Winfried F.W. Bischoff | 64 | Chairman, Citigroup Europe | ||
David C. Bushnell | 51 | Senior Risk Officer | ||
Michael A. Carpenter | 58 | Chairman & CEO, Citigroup Global Investments | ||
Robert Druskin | 56 | President & | ||
Steven J. Freiberg | 48 | Chairman & CEO—Global Consumer Group, North America | ||
John C. Gerspach | 52 | Controller and Chief Accounting Officer | ||
Michael S. Helfer | 60 | General Counsel and Corporate Secretary | ||
Lewis B. Kaden | 63 | Vice Chairman and Chief Administrative Officer | ||
Sallie Krawcheck | 41 | Chief Financial Officer; Head of Strategy | ||
Manuel Medina-Mora | 55 | Chairman & CEO, | ||
Charles Prince | 56 | Chief Executive Officer | ||
William R. Rhodes | 70 | Senior Vice Chairman; Chairman, | ||
Robert E. Rubin | 67 | Chairman of the Executive Committee; Member, Office of the Chairman | ||
Todd S. Thomson | 45 | Chairman & CEO, Global Wealth Management Group | ||
Stephen R. Volk | 69 | Vice Chairman | ||
Sanford I. Weill | 72 | Chairman | ||
Except as described below, eachEach executive officer has been employed in such position or in otherheld executive or management positions withinwith the Company for at least five years.years, except that:
182 This Annual Report on Form 10-K incorporates the requirements of the accounting profession and the Securities and Exchange Commission, including a comprehensive explanation of Form 10-K None of the foregoing incorporation by reference shall include the information referred to in Item 402(a)(8) of Regulation S-K. 183 Sir Winfried Bischoff joined Citigroup in April 2000 upon the merger of J. Henry Schroder & Co. Ltd. with Salomon Smith Barney Holdings Inc. and, from 1995 until that time, he was Chairman of Schroders Plc, the holding company of J. Henry Schroder & Co. Ltd. Mr. Fischer joined Citigroup in 2002 and, prior to that time, was Special Advisor to the Managing Director and First Deputy Managing Director of the International Monetary Fund. and, prior to that time,he was President, Strategic Investments of Nationwide Mutual Insurance Company, and from 20022000 to 2003 andhe was Executive Vice President, Corporate Strategy of Nationwide Mutual Insurance Company and Nationwide Financial Services, Inc. from 20002003. joining Citigroup, Mr. Kaden was a partner at Davis Polk & Wardwell.and until November 2004 servedserving as Chairman and Chief Executive Officer ofSmith Barney until November 2004. Prior to 2002, Ms. Krawcheck was Chairman and Chief Executive Officer of Sanford C. Bernstein & Co., LLC and an Executive Vice President of Bernstein's parent company, Alliance Capital Management, L.P. from 2001. Prior toBefore that, time, Ms. Krawcheck was the Director of Research at Bernstein.20042005 results.Form 10-K Item Number Page Part I 1. Business 2 – 3, 5 – 72, 93 – 94, 138 – 145 2. Properties 140 3. Legal Proceedings 141 – 144 4. Submission of Matters to a Vote of Security Holders Not Applicable Part II 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 64, 132, 147 – 149 6. Selected Financial Data 4 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 – 72 7A. Quantitative and Qualitative Disclosures about Market Risk 44 – 59, 95 – 108, 123 – 129 8. Financial Statements and Supplementary Data 79 – 137 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable 9A. Controls and Procedures 73, 76 9B. Other Information Not Applicable Part III 10. Directors and Executive Officers of the Registrant 145, 147, 150 * 11. Executive Compensation ** 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters *** 13. Certain Relationships and Related Transactions **** 14. Principal Accountant Fees and Services ***** Part IV 15. Exhibits and Financial Statement Schedules 147 Item Number Page
Part I
1. Business 2, 4-93, 212, 172-182 1A. Risk Factors 56 1B. Unresolved Staff Comments Not Applicable 2. Properties 174 3. Legal Proceedings 175-179 4. Submission of Matters to a Vote of Security Holders Not Applicable
Part II
5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 84, 180, 170, 184-185 6. Selected Financial Data 3 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 4-93 7A. Quantitative and Qualitative Disclosures about Market Risk 58-76, 121-138, 152-157 8. Financial Statements and Supplementary Data 103-171 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable 9A. Controls and Procedures 94, 100 9B. Other Information Not Applicable
Part III
10. Directors and Executive Officers of the Registrant 182, 185, 186* 11. Executive Compensation ** 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 181-182*** 13. Certain Relationships and Related Transactions **** 14. Principal Accountant Fees and Services *****
Part IV
15. Exhibits and Financial Statement Schedules 184 19, 2005,18, 2006, to be filed with the SEC (the Proxy Statement), incorporated herein by reference."Executive Compensation""Employment Contracts and Arrangements" in the Proxy Statement, incorporated herein by reference.Meeting,"Meeting" and "Stock Ownership" and "Proposal 3: Approval of Amended and Restated Citigroup Stock Incentive Plan" in the Proxy Statement, incorporated herein by reference.Directors"Directors," "Executive Compensation" and "Executive Compensation""Certain Transactions and Relationships, Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, incorporated herein by reference.
CORPORATE INFORMATION
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
The following exhibits are either filed herewith or have been previously filed with the Securities and Exchange Commission and are filed herewith by incorporation by reference:
A more detailed exhibit index has been filed with the SEC. Stockholders may obtain copies of that index, or any of the documents onin that index, by writing to Citigroup Inc., Corporate Governance, 425 Park Avenue, 2nd floor, New York, New York 10043, or on the Internet at http://www.sec.gov.
Financial Statements filed for Citigroup Inc. and Subsidiaries:
United States Securities and Exchange Commission
Washington, DC 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d)15 (d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 20042005
Commission File Number 1-9924
Citigroup Inc.
Incorporated in the State of Delaware
IRS Employer Identification Number: 52-1568099
Address: 399 Park Avenue
New York, New York 10043
Telephone: 212 559 1000
Stockholder Information
Citigroup common stock is listed on the New York Stock Exchange (NYSE) and the Pacific Exchange (PCX) under the ticker symbol "C."
Citigroup Preferred Stock Series F, G, H, and M are also listed on the New York Stock Exchange.
Citigroup Litigation Tracking Warrants are listed on the Nasdaq National Market under the ticker symbol "GSBNZ."
Because our common stock is listed on the NYSE and the PCX, our chief executive officer is required to make, and he has made, an annual certificationcertifications to the NYSE and the PCX stating that he was not aware of any violation by Citigroup of the corporate governance listing standards of the NYSE.NYSE and the PCX, respectively. Our chief executive officer made his annual certificationcertifications to that effect to each of the NYSE and the PCX as of May 7, 2004.16, 2005.
Annual Meeting
The annual meeting will be held at 9:00 a.m. on April 19, 2005,18, 2006, at Carnegie Hall, 154 West 57th Street, New York, NY.New York.
Transfer Agent
Stockholder address changes and inquiries regarding stock transfers, dividend replacement, 1099-DIV reporting, and lost securities for common and preferred stocks should be directed to:
Citibank Stockholder ServicesP. O.P.O. Box 43077
Providence, RI 02940-3077
Telephone No. 816 843 4281781 575 4555
Toll-free No. 888 250 3985
Facsimile No. 201 324 3284
E-mail address: Citibank@shareholders-online.com
Exchange Agent
Holders of Golden State Bancorp, Associates First Capital Corporation, Citicorp or Salomon Inc common stock, Citigroup Inc. Preferred Stock Series J, K, Q, R, S, T, U, or U,V, Salomon Inc Preferred Stock Series ED or D,E, or Travelers Group Preferred Stock Series D should arrange to exchange their certificates by contacting:
Citibank Stockholder ServicesP. O.P.O. Box 43035
Providence, RI 02940-3035
Telephone No. 816 843 4281781 575 4555
Toll-free No. 888 250 3985
Facsimile No. 201 324 3284
E-mail address: Citibank@shareholders-online.com
The 2004 Forms2005 Form 10-K filed with the Securities and Exchange Commission forby the Company, and certain subsidiaries, as well as annual and quarterly reports, are available from Citigroup Document Services toll free at 877 936 2737 (outside the United States at 718 765 6514), by e-mailing a request to docserve@citigroup.com, or by writing to:
Citigroup Document Services
140 58th58th Street, Suite 8G
Brooklyn, NY 11220
Copies of this annual report and other Citigroup financial reports can be viewed or retrieved through the Company's Web site at http://www.citigroup.com by clicking on the "Investor Relations" page and selecting "SEC Filings" or through the SEC's Web site at http://www.sec.gov.
184
Corporate Governance Materials
The following materials, which have been adopted by the Company, are available free of charge on the Company's Web site at http://www.citigroup.com under the "Corporate Governance" page or by writing to Citigroup Inc., Corporate Governance, 425 Park Avenue, 2nd floor, New York, New York 10043: the Company's (i) corporate governance guidelines, (ii) code of conduct, (iii) code of ethics for financial professionals, and (iv) charters of (a) the audit and risk management committee, (b) the personnel and compensation committee, (c) the public affairs committee, and (d) the nomination and governance committee. The code of ethics for financial professionals applies to the Company's principal executive officer, principal financial officer and principal accounting officer. Amendments and waivers, if
any, to the code of ethics for financial professionals will be disclosed on the Company's Web site.
Securities Registered Pursuant to Section 12(b)12 (b) and (g) of the Exchange Act
A list of Citigroup securities registered pursuant to Section 12(b)12 (b) and (g) of the Securities Exchange Act of 1934 is filed as an exhibit herewith and is available from Citigroup Inc., Corporate Governance, 425 Park Avenue, 2nd floor, New York, New York 10043 or on the Internet at http://www.sec.gov.
As of February 7, 2005,6, 2006, Citigroup had 5,225,357,9844,991,302,195 shares of common stock outstanding.
As of February 7, 2005,6, 2006, Citigroup had approximately 203,395208,325 common stockholders of record. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in "street name" by securities dealers and others for the benefit of individual owners who may vote the shares.
Citigroup is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Citigroup is required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Citigroup (1) has filed all reports required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein nor in Citigroup's 20052006 Proxy Statement incorporated by reference in Part III of this Form 10-K.
Citigroup is ana large accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).
Citigroup is not a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).
The aggregate market value of Citigroup common stock held by non-affiliates of Citigroup on February 7, 20056, 2006 was approximately $245.9$224.5 billion.
Certain information has been incorporated by reference as described herein into Part III of this annual report from Citigroup's 20052006 Proxy Statement.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th23rd day of February, 2005.2006.
Citigroup Inc.
(Registrant)
/s/ Sallie Krawcheck
Sallie Krawcheck
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th23rd day of February, 2005.2006.
Citigroup's Principal Executive Officer and a Director:
/s/ Charles PrinceCharles Prince
Citigroup's Principal Financial Officer:
/s/ Sallie KrawcheckSallie Krawcheck
Citigroup's Principal Accounting Officer:
/s/ William P. HannonWilliam P. HannonJohn C. Gerspach
The Directors of Citigroup listed below executed a power of attorney appointing Sallie Krawcheck their attorney-in-fact, empowering her to sign this report on their behalf.
C. Michael Armstrong | Andrew N. Liveris | |
Alain J.P. Belda | Dudley C. Mecum | |
George David | Anne Mulcahy | |
Kenneth T. Derr | Richard D. Parsons | |
John M. Deutch | Judith Rodin | |
Roberto Hernández Ramirez | Robert E. Rubin | |
Ann Dibble Jordan | Franklin A. Thomas | |
Klaus Kleinfeld | Sanford I. Weill | |
/s/ Sallie Krawcheck |
/s/ Sallie KrawcheckSallie Krawcheck185
CITIGROUP BOARD OF DIRECTORS
C. Michael Armstrong | Roberto Hernández Ramirez Chairman Banco Nacional de Mexico | Xerox Corporation | ||||
Alain J.P. Belda Chairman and Chief Executive Officer Alcoa Inc. | Ann Dibble Jordan Consultant | Chairman and Chief Executive Officer | Citigroup Inc. | |||
George David Chairman and Chief Executive Officer United Technologies Corporation | Siemens AG | HONORARY DIRECTOR The Honorable Gerald R. Ford Former President of the United States | ||||
Kenneth T. Derr Chairman, Retired | President, Chief Executive Officer and Chairman-Elect | Judith Rodin President Rockefeller Foundation | ||||
John M. Deutch Institute Professor Massachusetts Institute of Technology | Dudley C. Mecum Managing Director Capricorn Holdings, LLC | Robert E. Rubin Chairman, Executive Committee; Member, Office of the Chairman Citigroup Inc. | ||||
186
Exhibit Number | Description of Exhibit | |
---|---|---|
2.01 | Acquisition Agreement, dated as of January 31, 2005, by and between Citigroup Inc. (the "Company") and MetLife, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 4, 2005 (File No. 1-9924). | |
3.01.1 | Restated Certificate of Incorporation of | |
3.01.2 | Certificate of Designation of 5.321% Cumulative Preferred Stock, Series YY, of the Company, incorporated by reference to Exhibit 4.45 to Amendment No. 1 to the Company's Registration Statement on Form S-3 filed January 22, 1999 (No. 333-68949). | |
3.01.3 | Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated April 18, 2000, incorporated by reference to Exhibit 3.01.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000 (File No. 1-9924). | |
3.01.4 | Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated April 17, 2001, incorporated by reference to Exhibit 3.01.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001 (File No. 1-9924). | |
3.01.5 | Certificate of Designation of 6.767% Cumulative Preferred Stock, Series YYY, of the Company, incorporated by reference to Exhibit 3.01.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-9924) (the "Company's 2001 10-K"). | |
3.02 | By-Laws of the Company, as amended, effective January 19, 2005, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed January 21, 2005 (File No. 1-9924). | |
10.01.1* | Amended and Restated Employment Agreement, dated as of November 16, 2001, between the Company and Sanford I. Weill, incorporated by reference to Exhibit 10.01 to the Company's 2001 10-K. | |
10.01.2*+ | Letter Agreement, dated as of November 16, 2001, between the Company and Sanford I. Weill. | |
10.01.3* | Letter Agreement, dated as of September 16, 2003, between the Company and Sanford I. Weill, incorporated by reference to Exhibit 10.01.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-9924) (the "Company's 2003 10-K"). | |
10.01.4*+ | Letter, dated as of February 17, 2006 from Sanford I. Weill. | |
10.02.1* | Travelers Group Stock Option Plan (as amended and restated as of April 24, 1996), incorporated by reference to Exhibit 10.02.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 1-9924). | |
10.02.2* | Amendment No. 14 to the Travelers Group Stock Option Plan, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 (File No. 1-9924). | |
10.02.3* | Amendment No. 15 to the Travelers Group Stock Option Plan (effective July 23, 1997), incorporated by reference to Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-9924) (the "Company's September 30, 1997 10-Q"). | |
10.02.4* | Amendment No. 16 to the Travelers Group Stock Option Plan, incorporated by reference to Exhibit 10.02.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-9924) (the "Company's 1999 10-K"). | |
10.03.1* | Travelers Group 1996 Stock Incentive Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.03 to the Company's September 30, 1997 10-Q. | |
10.03.2* | Amendment to Travelers Group 1996 Stock Incentive Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.03.2 to the Company's 1999 10-K. | |
10.04* | Travelers Group Inc. Retirement Benefit Equalization Plan (as amended and restated as of January 2, 1996) (the "Travelers Retirement Plan"), incorporated by reference to Exhibit 10.04 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-9924) (the "Company's 1998 10-K"). | |
10.04.1*+ | Amendment to the Travelers Retirement Plan, included as part of the Action of the Senior Human Resources Officer dated January 3, 2002. | |
10.05* | Citigroup Inc. Amended and Restated Compensation Plan for Non-Employee Directors (as of September 21, 2004), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005 (File No. 1-9924). | |
10.06* | Form of Citigroup Inc. Non-Employee Director Equity Award Agreement (pursuant to the Amended and Restated Compensation Plan for Non-Employee Directors), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 14, 2005 (File No. 1-9924). | |
10.07.1* | Supplemental Retirement Plan of the Company, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-9924). | |
10.07.2* | Amendment to the Company's Supplemental Retirement Plan, incorporated by reference to Exhibit 10.06.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 1-9924). | |
10.08* | Citigroup 1999 Executive Performance Plan (effective January 1, 1999), incorporated by reference to Annex B to the Company's Proxy Statement dated March 8, 1999 (File No. 1-9924). | |
10.09.1* | Travelers Group Capital Accumulation Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.02 to the Company's September 30, 1997 10-Q. | |
10.09.2* | Amendment to the Travelers Group Capital Accumulation Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.08.2 to the Company's 1999 10-K. | |
10.10* | The Travelers Inc. Deferred Compensation and Partnership Participation Plan, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K/A-1 for the fiscal year ended December 31, 1994 (File No. 1-9924). | |
10.11* | The Travelers Insurance Deferred Compensation Plan (formerly The Travelers Corporation TESIP Restoration and Non-Qualified Savings Plan) (as amended through December 10, 1998), incorporated by reference to Exhibit 10.10 to the Company's 1998 10-K. | |
10.12* | The Travelers Corporation Directors' Deferred Compensation Plan (as amended November 7, 1986), incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of The Travelers Corporation for the fiscal year ended December 31, 1986 (File No. 1-5799). | |
10.13 | Citigroup Employee Incentive Plan, amended and restated as of April 17, 2001, incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-9924) (the "Company's 2002 10-K"). | |
10.14 | Citigroup 2000 Stock Purchase Plan (effective May 1, 2000), amended and restated as of February 28, 2003, incorporated by reference to Exhibit 10.14 to the Company's 2002 10-K. | |
10.15.1* | Citicorp 1988 Stock Incentive Plan, incorporated by reference to Exhibit 4 to Citicorp's Registration Statement on Form S-8 filed April 25, 1988 (No. 2-47648). | |
10.15.2* | Amendment to the Citicorp 1988 Stock Incentive Plan, incorporated by reference to Exhibit 10.16.2 to the Company's 1999 10-K. | |
10.16* | 1994 Citicorp Annual Incentive Plan for Selected Executive Officers, incorporated by reference to Exhibit 10 to Citicorp's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994 (File No. 1-5378). | |
10.17.1* | Citicorp 1997 Stock Incentive Plan, incorporated by reference to Citicorp's 1997 Proxy Statement filed February 26, 1997 (File No. 1-5378). | |
10.17.2* | Amendment to the Citicorp 1997 Stock Incentive Plan, incorporated by reference to Exhibit 10.19.2 to the Company's 1999 10-K. | |
10.18.1* | Supplemental Executive Retirement Plan of Citicorp and Affiliates (as amended and restated effective January 1, 1998), incorporated by reference to Exhibit 10.20.1 to the Company's 1999 10-K. | |
10.18.2* | First Amendment to the Supplemental Executive Retirement Plan of Citicorp and Affiliates (as amended and restated effective January 1, 1998), incorporated by reference to Exhibit 10.20.2 to the Company's 1999 10-K. | |
10.19.1* | Supplemental ERISA Compensation Plan of Citibank, N.A. and Affiliates, as amended and restated (the "Citibank Supplemental ERISA Plan"), incorporated by reference to Exhibit 10.(G) to Citicorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-5378). | |
10.19.2* | Amendment to the Citibank Supplemental ERISA | |
10.19.3*+ | Amendment to the Amended Citibank Supplemental ERISA Plan, included as part of, and incorporated by reference to, Exhibit 10.04.1 filed herewith. | |
10.20* | Supplemental ERISA Excess Plan of Citibank, N.A. and Affiliates, as amended and restated, incorporated by reference to Exhibit 10.(H) to Citicorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-5378). | |
10.21.1* | Citicorp Directors' Deferred Compensation Plan, Restated May 1, 1988, incorporated by reference to Exhibit 10.23 to the Company's 1998 10-K. | |
10.21.2* | Amendment to the Citicorp Directors' Deferred Compensation Plan (effective as of December 31, 2001), incorporated by reference to Exhibit 10.22.2 to the Company's 2001 10-K. | |
10.22.1* | Letter Agreement, dated as of October 26, 1999 (the "Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.24 to the Company's 1999 10-K. | |
10.22.2* | Amendment to the Letter Agreement, dated as of February 6, 2002 (the "2002 Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.23.2 to the Company's 2001 10-K. | |
10.22.3* | Amendment to the 2002 Letter Agreement, dated as of February 10, 2003 (the "2003 Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.23.3 to the Company's 2002 10-K. | |
10.22.4* | Amendment to the 2003 Letter Agreement, dated as of March 10, 2004 (the "2004 Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004. | |
10.22.5* | Amendment to the 2004 Letter Agreement, dated as of January 18, 2005 (the "January 2005 Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 24, 2005 (File No. 1-9924). | |
10.22.6* | Amendment to the January 2005 Letter Agreement, dated as of March 14, 2005 (the "March 2005 Letter Agreement"), between the Company and Robert E. Rubin, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 15, 2005 (File No. 1-9924). | |
10.22.7*+ | Amendment to the March 2005 Letter Agreement, dated as of December 19, 2005, between the Company and Robert E. Rubin. | |
10.23* | Letter Agreement, dated October 30, 2002, between the Company and Sallie Krawcheck, incorporated by reference to Exhibit 10.28 to the Company's 2002 10-K. | |
10.24* | Citigroup 1999 Stock Incentive Plan | |
Form of Citigroup Directors' Stock Option Grant Notification, incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-9924). | ||
Lease, dated as of September 25, 2002, between BP 399 Park Avenue LLC (as Landlord) and Citigroup Inc. (as Tenant), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003 (File No. 1-9924). | ||
Primerica Retirement Benefit Equalization Plan, incorporated by reference to Exhibit 10.31 to the Company's 2003 10-K. | ||
Form of Citigroup Equity Award Agreement, incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004 (File No. 1-9924) (the "Company's September 30, 2004 10-Q"). | ||
Form of Citigroup Equity Award Agreement (revised). | ||
10.29* | Form of Reload Option Grant Notification, incorporated by reference to Exhibit 10.03 to the Company's September 30, 2004 10-Q. | |
10.30 | Transaction Agreement, dated as of June 23, 2005, by and between the Company and Legg Mason, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 30, 2005 (File No. 1-9924). | |
10.31 | Global Distribution Agreement, dated as of June 23, 2005, by and between the Company and Legg Mason, Inc., incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 30, 2005 (File No. 1-9924). | |
10.32* | Letter Agreement, dated August 24, 2005, between the Company and Robert B. Willumstad, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed August 26, 2005 (File No. 1-9924). | |
12.01+ | Calculation of Ratio of Income to Fixed Charges. | |
12.02+ | Calculation of Ratio of Income to Fixed Charges Including Preferred Stock Dividends. | |
14.01 | Code of Ethics, incorporated by reference to Exhibit 14.01 to the Company's 2002 10-K. | |
21.01+ | Subsidiaries of the Company. | |
23.01+ | Consent of KPMG LLP, Independent | |
24.01+ | Powers of Attorney. | |
31.01+ | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.02+ | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.01+ | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.01+ | Residual Value Obligation Certificate. | |
99.02+ | List of Securities Registered Pursuant to Section 12(b) and Section 12(g) of the Securities Exchange Act of 1934. |
The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the SEC upon request.
Copies of any of the exhibits referred to above will be furnished at a cost of $0.25 per page (although no charge will be made for the 20042005 Annual Report on Form 10-K) to security holders who make written request therefor to Citigroup Inc., Corporate Governance, 425 Park Avenue, 2nd Floor, New York, New York 10043.