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C > SEC Filings for C > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for CITIGROUP INC


6-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2012 EXECUTIVE SUMMARY

On October 16, 2012, Citi announced that Vikram Pandit had resigned as Chief Executive Officer of Citigroup, effective after the close of business on October 15, 2012. Citi also announced that John Havens had resigned as President and Chief Operating Officer of Citigroup and as Chief Executive Officer of the Institutional Clients Group, effective as of the same time. In connection with the departure of Mr. Pandit, the Citigroup Board of Directors appointed Michael Corbat as Citi's new Chief Executive Officer.

As disclosed in connection with the announcements, these senior management changes are not expected to alter the overall strategy of Citigroup going forward, which is to continue to:


enhance Citi's position as a leading global bank for both institutions and individuals, by building on its unique global network, deep emerging markets expertise, client relationships and product expertise;


position Citi to seize the opportunities provided by current trends (globalization, digitization, urbanization and the rise of the emerging market consumer) for the benefit of clients;


further its commitment to responsible finance and the basics of banking;


strengthen Citi's performance-including gaining market share with clients, making Citi more efficient and productive, and building upon its history of innovation; and


wind down Citi Holdings as soon as practicable, in an economically rational manner.

In addition, on October 29 and 30, 2012, the metropolitan New York City region and New Jersey suffered severe damage from Hurricane Sandy. Citi continues to assess the impact on Citi's facilities and customers in the affected areas and what impact, if any, the storm could have on its results of operations for the fourth quarter of 2012.

THIRD QUARTER 2012 RESULTS

Citigroup

Citigroup reported third quarter of 2012 net income of $468 million, or $0.15 per diluted share. Citi's reported net income declined from $3.8 billion in the third quarter of 2011. Results for the third quarter of 2012 included a pre-tax loss of $4.7 billion ($2.9 billion after-tax) from the previously announced sale of a 14% interest and other-than-temporary impairment of the carrying value of Citi's remaining 35% interest in the Morgan Stanley Smith Barney (MSSB) joint venture recorded in Citi Holdings-Brokerage and Asset Management. (For additional information on the agreement entered into with Morgan Stanley regarding MSSB on September 11, 2012 and the impact of that agreement on third quarter of 2012 results, see Citigroup's Form 8-K filed with the SEC on September 11, 2012 and Note 11 to the Consolidated Financial Statements below.)

In addition, third quarter results included credit valuation adjustment on derivatives (excluding monolines), net of hedges (CVA) and debt valuation adjustment on Citi's fair value option debt (DVA) of pre-tax negative $776 million (negative $485 million after-tax) as Citi's credit spreads tightened during the quarter, compared to pretax positive $1.9 billion (positive $1.2 billion after-tax in the third quarter of 2011. The vast majority of this CVA/DVA was recorded in Securities and Banking. Results for the third quarter of 2012 also included a $582 million tax benefit related to the resolution of certain tax audit items, recorded in the Corporate/Other segment.

Excluding CVA/DVA, the loss on MSSB and the tax items described above, Citi earned $3.3 billion, or $1.06 per diluted share, compared to $0.84 per diluted share in the prior-year period. The year-over-year increase in earnings per share, excluding CVA/DVA, the loss on MSSB and the tax items, primarily reflected higher Citicorp revenues, as well as year-over-year declines in both expenses and credit costs.

Citi's revenues, net of interest expense, were $14.0 billion in the third quarter of 2012, down 33% versus the prior-year period. Excluding CVA/DVA and the loss on MSSB, revenues were $19.4 billion, up 3% from the third quarter of 2011, as revenues in Citicorp rose 5% from the prior-year period while revenues continued to decline in Citi Holdings. Net interest revenues of $11.9 billion were 2% lower than the prior-year period, largely due to continued declining loan balances in Local Consumer Lending in Citi Holdings and ongoing spread compression in GCB and Transaction Services in Citicorp (as used throughout this Form 10-Q, spread compression refers to the reduction in net interest revenue as a percentage of loans or deposits, as applicable, as driven by either lower yields on interest-earning assets or higher costs to fund such assets (or a combination thereof)). Excluding CVA/DVA and the impact of MSSB, non-interest revenues were $7.5 billion, up 11% from the prior-year period, principally driven by higher mortgage revenues in North America RCB and higher revenues in Securities and Banking, partially offset by a lower contribution from MSSB and lower private equity marks in Brokerage and Asset Management within Citi Holdings.

Operating Expenses

Citigroup expenses decreased 2% versus the prior-year period to $12.2 billion. In the third quarter of 2012, Citi continued to incur elevated legal and related costs ($528 million) and repositioning charges ($95 million) compared to $274 million of legal and related costs and $208 million of repositioning charges in the prior-year period. Excluding these items, as well as the impact of foreign exchange translation into U.S. dollars for reporting purposes (as used throughout this Form 10-Q, FX translation), which lowered reported expenses by approximately $0.3 billion in the third quarter of 2012 as compared to the prior-year period, operating expenses declined slightly to $11.6 billion versus $11.7 billion in the


prior-year period. Citi expects to continue to incur elevated legal and related expenses and repositioning costs in the fourth quarter of 2012.

Citicorp's expenses were $10.3 billion, down 2% from the prior-year period, as efficiency savings more than offset investments and volume-related increases.

Citi Holdings expenses were down 21% year-over-year to $1.2 billion, principally due to the continued decline in assets and thus lower operating expenses.

Credit Costs

Citi's total provisions for credit losses and for benefits and claims of $2.7 billion declined 20% from the prior-year period. Net credit losses of $4.0 billion were down 12% from the third quarter of 2011. Net credit losses in the third quarter of 2012 included approximately $635 million of incremental mortgage charge-offs in Local Consumer Lending within Citi Holdings required by new industry guidance from the Office of the Comptroller of the Currency (OCC) regarding the treatment of mortgage loans where the borrower has gone through Chapter 7 bankruptcy (see Note 1 to the Consolidated Financial Statements). The vast majority of the charge-offs were related to loans which were current. Excluding the charge-offs related to the new OCC guidance, net credit losses would have declined to $3.3 billion or by 26% from the prior-year period.

Consumer net credit losses declined 9% to $3.9 billion, as the continued credit improvement in North America Citi-branded cards and Citi retail services in Citicorp were partially offset by the increase in net credit losses in Local Consumer Lending within Citi Holdings related to the new OCC guidance mentioned above. Corporate net credit losses decreased 57% year-over-year to $117 million, driven primarily by continued credit improvement in the Special Asset Pool in Citi Holdings.

The net release of allowance for loan losses and unfunded lending commitments was $1.5 billion in the third quarter of 2012, 6% higher than the third quarter of 2011. The increase in the net reserve release was due to an approximately $600 million reserve release related to loans impacted by the new OCC guidance described above. Excluding the reserve release related to loans impacted by the new OCC guidance, the net reserve release would have been $909 million, 36% lower than the prior-year period.

Of the $1.5 billion net reserve release, $696 million was attributable to Citicorp compared to an $887 million release in the prior-year period. The decline in the Citicorp reserve release year-over-year mostly reflected a lower reserve release in North America RCB, partially offset by a net reserve release in the Corporate portfolio. The $813 million net reserve release in Citi Holdings was up from $535 million in the prior-year period, due primarily to the release associated with loans impacted by the new OCC guidance mentioned above. $1.3 billion of the $1.5 billion net reserve release related to Consumer, with the remainder in Corporate.

Capital and Loan Loss Reserve Positions

Citigroup's Tier 1 Capital and Tier 1 Common ratios were 13.9% and 12.7% as of September 30, 2012, respectively, compared to 13.5% and 11.7% in the prior-year period. Citi's estimated Tier 1 Common ratio under Basel III was 8.6% at the end of the third quarter of 2012, up from an estimated 7.9% as of the end of the second quarter of 2012. Citi's estimated Basel III Tier 1 Common ratio is a non-GAAP financial measure. For additional information on Citi's estimated Basel III Tier 1 Common Capital and Tier 1 Common ratio, including the calculation of these measures, see "Capital Resources and Liquidity-Capital Resources" below.

Citigroup's total allowance for loan losses was $25.9 billion at quarter end, or 4.0% of total loans, compared to $32.1 billion, or 5.1%, at the end of the prior-year period. The decline in the total allowance for loan losses reflected continued asset sales in Citi Holdings, consistent with Citi's strategy to reduce these assets in an economically rational manner, lower non-accrual loans, and overall continued improvement in the credit quality of the loan portfolios.

The Consumer allowance for loan losses was $23.1 billion, or 5.7% of total Consumer loans, at quarter-end, compared to $28.9 billion, or 6.8% of total loans, at September 30, 2011. Total non-accrual assets declined 5% to $12.7 billion compared to the third quarter of 2011. Corporate non-accrual loans declined 42% to $2.4 billion. Consumer non-accrual loans increased $1.9 billion, or 25%, to $9.8 billion versus the prior-year period, predominantly reflecting the new OCC guidance mentioned above which added $1.5 billion to Consumer non-accrual loans (of which approximately $1.3 billion were current).

Citicorp

Citicorp net income decreased 18% from the prior-year period to $4.1 billion. The decrease largely reflected the negative CVA/DVA versus positive CVA/DVA in the prior-year period. CVA/DVA, recorded in Securities and Banking, was a negative $799 million in the third quarter of 2012, compared to positive $1.9 billion in the prior-year period. Excluding CVA/DVA, Citicorp net income increased 20% from the prior-year period to $4.6 billion driven by a 5% increase in revenues, a 2% decline in operating expenses and a 14% decline in provisions for credit losses and for benefits and claims.

Excluding CVA/DVA, Citicorp revenues were $18.4 billion, up 5% versus the third quarter of 2011. GCB revenues of $10.2 billion were up 2% versus the prior-year period. North America RCB revenues grew 6% to $5.4 billion driven by higher mortgage revenues, partially offset by lower cards revenues as consumers continued to deleverage in the face of ongoing macroeconomic uncertainty. For additional information on the results of operations of North America RCB for the third quarter of 2012, see "Global Consumer Banking-North America Regional Consumer Banking" below.

International GCB revenues (consisting of Asia RCB, Latin America RCB and EMEA RCB) declined 2% year-over-year to $4.8 billion. International GCB revenues were


negatively impacted by FX translation as the U.S. dollar generally strengthened in the third quarter of 2012 against local currencies in which Citi generates revenues. Excluding the impact of FX translation, international GCB revenues rose 3% year-over-year, driven by 7% revenue growth in each of Latin America RCB and EMEA RCB, partially offset by a 2% decline in Asia RCB revenues.(1) In Asia RCB, the revenue decline reflected the continued impact of several factors, including spread compression in several countries within the region, lower revenues in Japan and regulatory actions to limit the availability of consumer credit in certain countries, particularly Korea. For additional information on the results of operations of Asia RCB for the third quarter of 2012, see "Global Consumer Banking-Asia Regional Consumer Banking" below.

In North America RCB, average deposits of $154 billion grew 6% year-over-year and average retail loans of $41 billion grew 17%, while average card loans of $108 billion declined 4% and card purchase sales of $58 billion were roughly flat due to the deleveraging related to ongoing macroeconomic uncertainty, as referenced above. Excluding the impact of FX translation, international GCB average deposits grew 4% year-over-year, average retail loans increased 11%, average card loans grew 7% year-over-year and international card purchase sales increased 7%. Growth in these metrics year-over-year reflected continued execution of Citi's strategy to grow its core businesses in Citicorp, particularly in emerging markets such as Latin America.

Securities and Banking revenues were $4.8 billion in the third quarter of 2012, down 29% year-over-year. Excluding the impact of CVA/DVA, Securities and Banking revenues were $5.6 billion, or 15% higher than the prior-year period. Fixed income markets revenues of $3.7 billion in the third quarter of 2012, excluding CVA/DVA,(2) increased 63% from the prior-year period, reflecting significantly higher trading revenues in credit-related and securitized products, as well as a strong performance in rates and currencies, driven by improved market conditions. Equity markets revenues of $510 million in the third quarter of 2012, excluding CVA/DVA, were 76% above the prior-year period driven by improved derivatives performance as well as the absence of proprietary trading losses in the prior-year period, partially offset by lower cash equity volumes.

Investment banking revenues rose 26% from the prior-year period to $926 million, reflecting higher revenues in debt underwriting, equity underwriting and advisory services. Lending revenues of $194 million were down 81% from the prior-year period, reflecting $252 million in losses on hedges related to accrual loans as credit spreads tightened during the third quarter 2012 (compared to a $702 million gain in the prior-year period as spreads widened). Excluding the mark-to-market impact of loan hedges related to accrual loans, lending revenues rose 35% year-over-year to $445 million reflecting higher lending volumes and improved spreads. Private Bank revenues of $590 million increased 8% from the prior-year period, excluding CVA/DVA, driven primarily by growth in North America lending and deposits.

Transaction Services revenues were $2.7 billion, down 2% from the prior-year period, but up 1% excluding the impact of FX translation, as growth in Treasury and Trade Solutions offset a decline in Securities and Fund Services.(3) Excluding the impact of FX translation, Treasury and Trade Solutions revenues were up 4%, reflecting strong growth in average deposits and trade loans, partially offset by ongoing spread compression given the low interest rate environment. Securities and Fund Services revenues were down 8% excluding the impact of FX translation, mostly reflecting lower settlement volumes.

Citicorp end of period loans increased for the seventh consecutive quarter, up 11% year-over-year to $537 billion, with 5% growth in Consumer loans, primarily in Asia and Latin America, and 19% growth in Corporate loans.

Citi Holdings

Citi Holdings net loss was $3.6 billion in the third quarter of 2012 compared to a $1.2 billion loss reported in the third quarter of 2011. The increase in the net loss year-over-year was driven by the $4.7 billion pre-tax ($2.9 billion after-tax) loss on MSSB mentioned above. Excluding the loss on MSSB and CVA/DVA,(4) Citi Holdings net loss improved to $679 million, from a $1.3 billion loss in the prior-year period, as revenue declines were more than offset by lower operating expenses and lower credit costs, all reflecting the continued decline in Citi Holdings assets, consistent with Citi's strategy. In addition, the net loss in the third quarter of 2012 also reflected a tax benefit of approximately $200 million related to the sale of certain assets in the Special Asset Pool.

Citi Holdings revenues decreased to a negative $3.7 billion from $1.1 billion in the prior-year period. Excluding CVA/DVA and the loss on MSSB, Citi Holdings revenues were $971 million in the third quarter compared to $1.1 billion in the prior-year period. Special Asset Pool revenues, excluding CVA/DVA, were a negative $13 million in the third quarter 2012, compared to a negative $277 million in the prior-year period, largely due to lower funding costs as well as an improvement in asset marks. Local Consumer Lending revenues of $1.1 billion declined 15% from the prior-year period primarily due to the 26% decline in average assets. Brokerage and Asset Management revenues, excluding the loss on MSSB, were $(120) million, compared to $55 million in the prior-year period, reflecting a lower equity contribution from MSSB as well as lower asset marks. Net interest revenues declined 14% year-over-year to $668 million, largely driven by continued declining loan balances in Local Consumer Lending. Non-interest revenues, excluding MSSB


(1)
For the impact of FX translation on the third quarter of 2012 results of operations for each of EMEA RCB, Latin America RCB and Asia RCB, see the table accompanying the discussion of each respective business' results of operations under "Global Consumer Banking" below.

(2)
For the summary of CVA/DVA by business within Securities and Banking for the third quarter of 2012 and comparable periods, see "Citicorp-Institutional Clients Group."

(3)
For the impact of FX translation on the third quarter of 2012 results of operations for Transaction Services, see the table accompanying the discussion under "Institutional Clients Group-Transaction Services" below.

(4)
CVA/DVA in Citi Holdings, recorded in the Special Asset Pool, was a positive $23 million in the third quarter of 2012, compared to a positive $50 million in the prior-year period.


and CVA/DVA, were essentially flat at $303 million versus the prior-year period, reflecting the lower equity contribution from MSSB in Brokerage and Asset Management offset by the improvement in asset marks within the Special Asset Pool.

Citi Holdings assets declined 31% year-over-year to $171 billion as of the end of the third quarter of 2012. At the end of the third quarter of 2012, Citi Holdings assets comprised approximately 9% of total Citigroup GAAP assets and 16% of risk-weighted assets (as defined under current regulatory guidelines). Local Consumer Lending continued to represent the largest segment within Citi Holdings, with $134 billion of assets as of the end of the third quarter, of which approximately 70% consisted of mortgages in North America real estate lending.


RESULTS OF OPERATIONS

SUMMARY OF SELECTED FINANCIAL DATA-Page 1


                                                                                  Citigroup Inc. and Consolidated Subsidiaries

                                                                 Third Quarter         %            Nine Months          %
In millions of dollars, except per-share amounts and ratios     2012       2011      Change       2012       2011      Change
Net interest revenue                                          $ 11,913   $ 12,114         (2 )% $ 35,453   $ 36,364         (3 )%
Non-interest revenue                                             2,038      8,717        (77 )    16,546     24,815        (33 )

Revenues, net of interest expense                             $ 13,951   $ 20,831        (33 )% $ 51,999   $ 61,179        (15 )%
Operating expenses                                              12,220     12,460         (2 )    36,673     37,722         (3 )
Provisions for credit losses and for benefits and claims         2,695      3,351        (20 )     8,520      9,922        (14 )

Income (loss) from continuing operations before income
taxes                                                         $   (964 ) $  5,020         NM    $  6,806   $ 13,535        (50 )%
Income taxes (benefits)                                         (1,488 )    1,278         NM         233      3,430        (93 )

Income from continuing operations                             $    524   $  3,742        (86 )% $  6,573   $ 10,105        (35 )%
Income (loss) from discontinued operations, net of taxes(1)        (31 )        1         NM         (37 )      112         NM

Net income before attribution of noncontrolling interests     $    493   $  3,743        (87 )% $  6,536   $ 10,217        (36 )%
Net income (loss) attributable to noncontrolling interests          25        (28 )       NM         191        106         80

Citigroup's net income                                        $    468   $  3,771        (88 )% $  6,345   $ 10,111        (37 )%

Less:
Preferred dividends-Basic                                     $      4   $      4          - %  $     17   $     17          - %
Dividends and undistributed earnings allocated to employee
restricted and deferred shares that contain nonforfeitable
rights to dividends, applicable to Basic EPS                        11         70        (84 )       138        164        (16 )

Income allocated to unrestricted common shareholders for
Basic EPS                                                     $    453   $  3,697        (88 )% $  6,190   $  9,930        (38 )%
Add: Interest expense, net of tax, on convertible
securities and adjustment of undistributed earnings
allocated to employee restricted and deferred shares that
contain nonforfeitable rights to dividends, applicable to
diluted EPS                                                          2          6        (67 )        10         12        (17 )

Income allocated to unrestricted common shareholders for
diluted EPS                                                   $    455   $  3,703        (88 )% $  6,200   $  9,942        (38 )%
Earnings per share(2)
Basic
Income from continuing operations                             $   0.17   $   1.27        (87 )% $   2.13   $   3.38        (37 )%
Net income                                                        0.15       1.27        (88 )      2.12       3.41        (38 )

Diluted
Income from continuing operations                             $   0.16   $   1.23        (87 )% $   2.07   $   3.28        (37 )%
Net income                                                        0.15       1.23        (88 )      2.06       3.32        (38 )
Dividends declared per common share                               0.01       0.01          -        0.03       0.02         50

Statement continues on the next page, including notes to the table.


SUMMARY OF SELECTED FINANCIAL DATA-Page 2

                                                                                                  Citigroup Inc. and Consolidated Subsidiaries

                                                                                  Third Quarter            %          Nine Months         %
In millions of dollars, except per-share amounts, ratios and direct staff      2012          2011        Change     2012      2011     Change
At September 30:
Total assets                                                                $ 1,931,346   $ 1,935,992          - %
Total deposits                                                                  944,644       851,281         11
Long-term debt                                                                  271,862       333,824        (19 )
Trust preferred securities (included in long-term debt)                          10,560        16,089        (34 )
Citigroup common stockholders' equity                                           186,465       177,060          5
Total Citigroup stockholders' equity                                            186,777       177,372          5
Direct staff (in thousands)                                                         261           267         (2 )

Ratios
Return on average common stockholders' equity(3)                                   0.99 %        8.44 %               4.61 %    7.82 %
Return on average total stockholders' equity(3)                                    1.00          8.43                 4.61      7.82

Tier 1 Common(4)                                                                  12.73 %       11.71 %
Tier 1 Capital                                                                    13.92         13.45
Total Capital                                                                     17.12         16.89
Leverage(5)                                                                        7.39          7.01

Citigroup common stockholders' equity to assets                                    9.65 %        9.15 %
Total Citigroup stockholders' equity to assets                                     9.67          9.16
Dividend payout ratio(6)                                                           0.07          0.01
Book value per common share(2)                                              $     63.59   $     60.56
Ratio of earnings to fixed charges and preferred stock dividends                  0.81x         1.81x                1.41x     1.71x


(1)
Discontinued operations in 2012 includes definitive agreements executed by Citi to transition a carve-out of its liquid strategies business within Citi Capital Advisors to certain employees responsible for managing those operations. Discontinued operations in 2011 primarily reflect the sale of the Egg Banking PLC credit card business. See Note 2 to the Consolidated Financial Statements.

(2)
All per share amounts and Citigroup shares outstanding for all periods reflect Citigroup's 1-for-10 reverse stock split, which was effective May 6, 2011.

(3)
The return on average common stockholders' equity is calculated using net income less preferred stock dividends divided by average common stockholders' equity. The return on average total Citigroup stockholders' equity is calculated using net income divided by average Citigroup stockholders' equity.

(4)
As currently defined by the U.S. banking regulators, the Tier 1 Common ratio represents Tier 1 Capital less non-common elements, including qualifying perpetual preferred stock, qualifying noncontrolling interests in subsidiaries and qualifying trust preferred securities divided by risk-weighted assets.

(5)
The leverage ratio represents Tier 1 Capital divided by quarterly adjusted average total assets.

(6)
Dividends declared per common share as a percentage of net income per diluted share.


SEGMENT AND BUSINESS-INCOME (LOSS) AND REVENUES

The following tables show the income (loss) and revenues for Citigroup on a segment and business view:

CITIGROUP INCOME

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