Citigroup Inc. (Travelers Group Inc.) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, and the nine-month period ended September 30, 1998. The registrant is listed as Travelers Group Inc. (TRV), which changed its name to Citigroup Inc. on October 8, 1998, following a merger with Citicorp. The financial statements presented reflect only the accounts of TRV and its subsidiaries. Due to the pooling of interests accounting method used for the Citicorp merger, these statements do not include Citicorp's results; however, pro forma combined data is provided in the notes. The filing was signed on November 12, 1998.
Key Financial Metrics
| Metric | Q3 1998 | Q3 1997 | 9M 1998 | 9M 1997 |
|---|---|---|---|---|
| Total Revenues | $8,222 million | $9,961 million | $28,686 million | $27,845 million |
| Net Income | $199 million | $1,029 million | $2,433 million | $2,727 million |
| Diluted EPS | $0.15 | $0.85 | $2.02 | $2.25 |
| Total Assets | $358,046 million | N/A | N/A | N/A |
| Total Liabilities | $332,744 million | N/A | N/A | N/A |
| Stockholders' Equity | $22,177 million | N/A | N/A | N/A |
| Cash and Equivalents | $5,737 million | N/A | N/A | N/A |
Debt and Liquidity: Long-term debt totaled $30,412 million. Short-term borrowings were $5,812 million, and investment banking/brokerage borrowings were $16,128 million. The company maintains significant unused credit facilities, including $700 million for TRV and $3.7 billion for Commercial Credit Company (CCC).
Material Changes vs. Prior Period
- Revenue Decline: Q3 1998 revenues decreased 17.5% to $8.222 billion from $9.961 billion in Q3 1997. This was primarily driven by a $2.12 billion swing in "Principal transactions," which moved from a $790 million gain in 1997 to a $1.331 billion loss in 1998.
- Net Income Drop: Q3 1998 net income fell 80.7% to $199 million from $1.029 billion in Q3 1997. The decline is attributed to significant trading losses in Salomon Smith Barney, including $700 million in after-tax losses related to Global Arbitrage and Russian-related credit losses.
- Segment Performance:
- Investment Services: Salomon Smith Barney reported a net loss of $325 million for the quarter, compared to $508 million profit in 1997. Asset management fees, however, grew 26% to a record $563 million.
- Insurance: Property & Casualty earnings were solid despite catastrophe losses of $36.7 million (net of reinsurance) from Hurricane Georges. Life Insurance earnings increased, driven by strong sales in annuities and life products.
- Consumer Finance: Earnings rose to $84 million from $66 million, supported by receivables growth and improved charge-off rates (2.39% vs 2.50%).
- Restructuring Credit: The nine-month 1998 results included a $191 million after-tax credit due to a reduction in the restructuring reserve related to the 1997 Salomon merger, specifically regarding the Seven World Trade Center lease.
Outlook, Risks, and Contingencies
- Citicorp Merger: The merger with Citicorp was consummated on October 8, 1998. Future financial statements will be restated to reflect the combined entity. The company faces a two-year compliance period under the Bank Holding Company Act to address restrictions on insurance underwriting.
- Market Risks: Salomon Smith Barney faces significant market risk, with a Value at Risk (VAR) of $52 million for a one-day interval at 95% confidence. The firm has exposure to hedge funds, including Long-Term Capital Management, though most exposure is collateralized.
- Legal and Environmental: The company maintains reserves for asbestos ($1.02 billion net) and environmental claims ($910 million net). Management states that while additional liabilities may arise, they are not likely to have a material adverse effect on financial condition. However, the ultimate resolution of these claims is uncertain.
- Year 2000 Compliance: The company is implementing changes to computer systems to address the Year 2000 issue, with expected costs between $200 million and $275 million. Contingency plans are being developed for potential third-party failures.
- Accounting Changes: The company adopted FAS No. 127 and FAS No. 130 in 1998. FAS No. 133 (Derivatives) is effective in 2000 and may significantly impact reported earnings and balance sheet presentation.
Investor Verification Checklist
- Pro Forma Data: Verify the pro forma combined financial data for Citigroup (TRV + Citicorp) provided in Note 2, as the reported figures exclude Citicorp entirely.
- Trading Losses: Investigate the specific drivers of the $1.331 billion principal transaction loss in Q3 1998, particularly the exposure to Russian credit and global arbitrage strategies.
- Restructuring Reserve: Confirm the sustainability of the $191 million restructuring credit and the remaining $353 million reserve balance for future facility and severance costs.
- Asbestos/Environmental Reserves: Review the adequacy of the $1.93 billion combined net reserve for asbestos and environmental claims given the uncertainty of future litigation.
- Merger Integration: Assess the timeline and costs associated with the Bank Holding Company Act compliance period following the Citicorp merger.