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| C > SEC Filings for C > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
SECOND QUARTER OF 2009 MANAGEMENT SUMMARY
Citigroup reported net income of $4.279 billion, $0.49 per diluted share, for the second quarter of 2009. The results included a $6.7 billion after-tax gain on the sale of Smith Barney. The $0.49 earnings per share reflected preferred stock dividends and the quarterly accretion of the Series H preferred stock discount (the preferred stock issued to the U.S. Treasury as part of TARP in October 2008). See "TARP and Other Regulatory Programs" below.
Revenues of $30.0 billion increased 71% from year-ago levels due primarily to the Smith Barney gain on sale and positive revenue marks and gains, relative to the prior-year period, in Citi Holdings, partially offset by the impact of foreign exchange translation and declines in Regional Consumer Banking revenues, primarily in Cards. The difficult economic environment continued to have a negative impact on all businesses.
Net interest revenue declined 8% from the 2008 second quarter, reflecting the Company's smaller balance sheet. Net interest margin in the second quarter of 2009 was 3.24%, up 7 basis points from the second quarter of 2008, reflecting significantly lower cost of funding, largely offset by a decrease in asset yields related to the decrease in the Federal funds rate and the FDIC special assessment of $333 million. Non-interest revenue increased $13.6 billion from a year ago, primarily reflecting the gain on sale of Smith Barney, lower write-downs and gains on exposures in Citi Holdings.
Operating expenses decreased 21% from the previous year, reflecting benefits from Citi's ongoing re-engineering efforts, expense control, and the impact of foreign exchange translation. Headcount of 279,000 was down 84,000 from June 30, 2008 and 30,000 from March 31, 2009.
The Company's equity capital base and trust preferred securities were $176.3 billion at June 30, 2009. Citigroup's stockholders' equity increased by $8.4 billion during the second quarter of 2009 to $152.3 billion, primarily reflecting net income less dividend payouts and an improvement in Accumulated Other Comprehensive Income. The Company distributed $1.55 billion in dividends to its preferred stockholders during the quarter. Citigroup had a Tier 1 Capital ratio of 12.74% at June 30, 2009.
On July 23, 2009 and July 29, 2009, Citigroup closed its exchange offers with the private and public holders, respectively, of preferred stock and trust preferred securities, as applicable ($32.8 billion in aggregate liquidation value). In connection with these exchanges, the U.S. Treasury (UST) also exchanged $25 billion of aggregate liquidation value of its preferred stock, for a total exchange of $57.8 billion. Following an increase in Citigroup's authorized common stock, and the conversion of interim securities to common stock, the UST will own approximately 33.6% of Citigroup's outstanding common stock (not including the exercise of the warrants issued to the UST as part of TARP). See "Events of 2009-Public and Private Exchange Offers" and "TARP and Other Regulatory Programs."
As a result of the closing of the private and public exchange offers, Citigroup will increase its Tier 1 common by approximately $64 billion from the second quarter of 2009 level of $27 billion to approximately $91 billion. In addition, Citigroup's Tangible Common Equity (TCE), which was $40 billion as of June 30, 2009, will increase by approximately $60 billion to approximately $100 billion. (TCE and Tier 1 Common are non-GAAP financial measures. See "Capital Resources and Liquidity" for additional information on these measures, including a reconciliation to the most directly comparable GAAP measures.)
During the second quarter of 2009, the Company recorded a net build of $3.9 billion to its credit reserves. The net build consisted of $1.2 billion in Citicorp ($0.6 billion in Regional Consumer Banking and $0.6 billion in ICG) and $2.7 billion in Citi Holdings (almost all in Local Consumer Lending). The consumer loan delinquency rate was 4.24% at June 30, 2009, compared to 3.93% at March 31, 2009 and 2.30% a year ago. Corporate non-accrual loans were $12.4 billion at June 30, 2009, compared to $11.2 billion at March 31, 2009 and $2.2 billion a year-ago. The increase from prior-year levels is primarily attributable to the transfer of non-accrual loans from the held-for-sale portfolio to the held-for-investment portfolio during the fourth quarter of 2008. The allowance for loan losses totaled $35.9 billion at June 30, 2009, a coverage ratio of 5.60% of total loans.
The Company's effective tax rate was 17.1% in the second quarter of 2009, which includes a tax benefit of $129 million relating to the conclusion of an audit of certain issues in the Company's 2003-2005 U.S. Federal tax audit.
Total deposits were approximately $804.7 billion at June 30, 2009, up 6% from March 31, 2009 and flat with prior-year levels. At June 30, 2009, the Company has increased its structural liquidity (equity, long-term debt and deposits) as a percentage of assets from 68% at March 31, 2009 to approximately 71% at June 30, 2009. Citigroup has continued its deleveraging, reducing total assets from $2,100 billion a year ago to $1,849 billion at June 30, 2009.
In July 2009, Citi appointed three new directors to its board. Additionally, the Company recently announced several senior management appointments, including John Gerspach as Chief Financial Officer, replacing Ned Kelly, who was appointed Vice Chairman of Citigroup, and Eugene McQuade as Chief Executive Officer for Citibank, N.A.
EVENTS IN 2009
Certain significant events have occurred during the fiscal year to date, including events subsequent to June 30, 2009, that had, or could have, an effect on Citigroup's current and future financial condition, results of operations, liquidity and capital resources. Certain of these events are summarized below and discussed in more detail throughout this MD&A.
PUBLIC AND PRIVATE EXCHANGE OFFERS
Private Exchange Offers
On July 23, 2009, Citigroup closed its exchange offers with the private holders of $12.5 billion aggregate liquidation value of preferred stock. As previously disclosed, the U.S. Treasury (UST) matched these exchange offers by exchanging $12.5 billion aggregate liquidation value of its preferred stock, for a total closing of $25 billion. The preferred stock held by the private holders and the UST was exchanged for an aggregate of approximately 7,692 shares of interim securities and warrants. The warrants will terminate and the interim securities will automatically convert into Citigroup common stock upon the increase, subject to shareholder approval, in Citigroup's authorized common stock at a ratio of one million shares of common stock for each interim security. Following the authorized share increase, the interim securities issued to the private holders and the UST in this closing will convert into approximately 7.7 billion shares of Citigroup common stock.
The shareholder approval on the proposed increase in Citigroup's authorized common stock is scheduled to occur on September 2, 2009. In addition, see "Public Exchange Offers" below.
Public Exchange Offers
On July 29, 2009, Citigroup closed its exchange offers with certain holders of its publicly-held preferred stock and trust preferred securities. Approximately $20.3 billion in aggregate liquidation value of publicly-held preferred stock and trust preferred securities were validly tendered and not withdrawn in the public exchange offers. This represents 99% of the total liquidation value of securities that Citigroup was offering to exchange.
Upon closing of the public exchange offers, Citi issued approximately 5.8 billion shares of common stock to the public exchange offer participants. In accordance with the instructions given by the participants in the public exchange offers, these shares of common stock are subject to an irrevocable proxy to vote in favor of the proposal to increase Citigroup's authorized common stock, among other matters, which will result in the termination of the warrants and the automatic conversion of the interim securities issued to the UST and the private holders in the private exchange offers into common stock (see "Private Exchange Offers" above).
In addition, as previously disclosed, on July 30, 2009, the UST matched the public exchange offers by exchanging an additional $12.5 billion aggregate liquidation value of its preferred stock, resulting in Citi's issuing approximately 3,846 additional shares of interim securities to the UST and increasing the number of shares of common stock the UST may acquire upon exercise of the warrant issued to it in connection with the private exchange offers closing. The warrant will terminate and these interim securities will convert into approximately 3.8 billion shares of Citigroup common stock following the authorized share increase.
In total, approximately $58 billion in aggregate liquidation value of preferred stock and trust preferred securities were exchanged to common stock and interim securities as a result of the completion of the private and public exchange offers and the associated exchange by the UST. Upon the increase in Citigroup's authorized common stock, and the conversion of the interim securities to common stock, the UST will own approximately 33.6% of Citigroup's outstanding common stock, not including the exercise of the warrants issued to the UST as part of TARP and pursuant to the loss-sharing agreement. See "TARP and Other Regulatory Programs" below.
Capital Impact
As a result of the closing of the private and public exchange offers and the associated exchange by the UST on a proforma basis, Citigroup increased its Tier 1 Common by approximately $64 billion from the second quarter of 2009 level of approximately $27 billion to approximately $91 billion. In addition, Citigroup's tangible common equity (TCE), which was approximately $40 billion as of June 30, 2009, increased by approximately $60 billion to approximately $100 billion on a proforma basis. (TCE and Tier 1 Common are non-GAAP financial measures. See "Capital Resources and Liquidity" below for additional information on these measures, including a reconciliation to the most directly comparable GAAP measures.)
8% Trust Preferred Securities
On July 30, 2009, all remaining preferred stock of Citigroup held by the UST and FDIC (the UST and FDIC are collectively referred to as the "USG") that was not exchanged into Citigroup common stock in connection with the private or public exchange offers was exchanged into newly issued 8% trust preferred securities. An aggregate liquidation amount of approximately $27.1 billion in trust preferred securities was issued to the USG in exchange for an aggregate of $27.059 billion liquidation value of preferred stock.
Accounting Impact
The accounting for the exchange offers will result in the de-recognition of preferred stock and the recognition of the common stock issued at fair value in the Common stock and Additional paid-in capital accounts in equity. The difference between the carrying amount of preferred stock and the fair value of the common stock will be recorded in Retained earnings (impacting net income available to common shareholders and EPS) or Additional paid-in capital accounts in equity, depending on whether the preferred stock was originally non-convertible or convertible.
For USG preferred stock that was converted to 8% trust preferred securities, the newly issued trust preferred securities will be initially recorded at fair value as Long-term debt. The difference between the carrying amount of the preferred stock and the fair value of the trust preferred securities will be
recorded in Retained earnings after adjusting for appropriate deferred tax liability (impacting net income available to common shareholders and EPS). For trust preferred securities exchanged for common stock, the carrying amount currently recorded as long-term debt will be de-recognized and the common stock issued will be recorded at fair value in the Common Stock and the Additional Paid-in Capital accounts in equity. The difference between the carrying amount of the trust preferred securities and the fair value of the common stock will be recorded in the current earnings of the period in which the transaction will occur.
The following table presents the impact of the completion of all stages of the exchange offers to Citigroup's common shares outstanding and to its balance sheet:
(in millions of dollars, except incremental number of Citigroup common
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