Citigroup Inc (C) SEC Annual Report (10-K) for 2012

Citigroup's history dates back to the founding of Citibank in 1812. Citigroup's original corporate predecessor was incorporated in 1988 under the laws of the State of Delaware. Following a series of transactions over a number of years, Citigroup Inc. was formed in 1998 upon the merger of Citicorp and Travelers Group Inc.
Citigroup is a global diversified financial services holding company whose businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. Citi has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions.
Citigroup currently operates, for management reporting purposes, via two primary business segments: Citicorp, consisting of Citi's Global Consumer Banking businesses and Institutional Clients Group ; and Citi Holdings, consisting of Brokerage and Asset Management, Local Consumer Lending and Special Asset Pool . For a further description of the business segments and the products and services they provide, see "Citigroup Segments" below, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements.
Throughout this report, "Citigroup," "Citi" and "the Company" refer to Citigroup Inc. and its consolidated subsidiaries.
Additional information about Citigroup is available on Citi's website at www.citigroup.com . Citigroup's recent annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, as well as other filings with the SEC, are available free of charge through Citi's website by clicking on the "Investors" page and selecting "All SEC Filings." The SEC's website also contains current reports, information statements, and other information regarding Citi at www.sec.gov .
Within this Form 10-K, please refer to the tables of contents on pages 3 and 139 for page references to Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, respectively.

Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's presentation. For information on certain recent such reclassifications, including the transfer of the substantial majority of Citi's retail partner cards businesses (which are now referred to as Citi retail services) from Citi Holdings- Local Consumer Lending to Citicorp- North America Regional Consumer Banking, which was effective January 1, 2012, see Citi's Form 8-K furnished to the SEC on March 26, 2012.
At December 31, 2012, Citi had approximately 259,000 full-time employees compared to approximately 266,000 full-time employees at December 31, 2011.

Please see "Risk Factors" below for a discussion of the most significant risks and uncertainties that could impact Citigroup's businesses, financial condition and results of operations.

EXECUTIVE SUMMARY

Overview

2012-Ongoing Transformation of Citigroup
During 2012, Citigroup continued to build on the significant transformation of the Company that has occurred over the last several years. Despite a challenging operating environment (as discussed below), Citi's 2012 results showed ongoing momentum in most of its core businesses, as Citi continued to simplify its business model and focus resources on its core Citicorp franchise while continuing to wind down Citi Holdings as quickly as practicable in an economically rational manner. Citi made steady progress toward the successful execution of its strategy, which is to:

With these goals in mind, on December 5, 2012, Citi announced a number of repositioning efforts to optimize its footprint, re-size and re-align certain businesses and improve efficiencies, while at the same time maintaining its unique competitive advantages. As a result of these repositioning efforts, in the fourth quarter of 2012, Citi recorded pretax repositioning charges of approximately $1 billion, and expects to incur an additional $100 million of charges in the first half of 2013.

Continued Challenges in 2013
Citi continued to face a challenging operating environment during 2012, many aspects of which it expects will continue into 2013. While showing some signs of improvement, the overall economic environment-both in the U.S. and globally-remains largely uncertain, and spread compression 1 continues to negatively impact the results of operations of several of Citi's businesses, particularly in the U.S. and Asia. Citi also continues to face a significant number of regulatory changes and uncertainties, including the timing and implementation of the final U.S. regulatory capital standards. Further, Citi's legal and related costs remain elevated and likely volatile as it continues to work through "legacy" issues, such as mortgage-related expenses, and operates in a heightened litigious and regulatory environment. Finally, while Citi reduced the size of Citi Holdings by approximately 31% during 2012, the remaining assets within Citi Holdings will continue to have a negative impact on Citi's overall results of operations in 2013, although this negative impact should continue to abate as the wind-down continues. For a more detailed discussion of these and other risks that could impact Citi's businesses, results of operations and financial condition, see "Risk Factors" below. As a result of these continuing challenges, Citi remains highly focused on the areas within its control, including operational efficiency and optimizing its core businesses in order to drive improved returns.

Citigroup
For 2012, Citigroup reported net income of $7.5 billion and diluted earnings per share of $2.44, compared to $11.1 billion and $3.63 per share, respectively, for 2011. 2012 results included several significant items:

a $582 million tax benefit in the third quarter of 2012 related to the resolution of certain tax audit items.

Excluding CVA/DVA, the impact of minority investments, the repositioning charges in the fourth quarters of 2012 and 2011 and the tax benefit, net income was $11.9 billion, or $3.86 per diluted share, in 2012, an increase of 18% compared to $10.1 billion, or $3.30 per diluted share, reported in 2011, as higher revenues, lower core operating expenses and lower net credit losses were partially offset by higher legal and related costs and a lower net loan loss reserve release. 3

Citi's revenues, net of interest expense, were $70.2 billion in 2012, down 10% versus the prior year. Excluding CVA/DVA and the impact of minority investments, revenues were $77.1 billion, up 1% from 2011, as revenues in Citicorp rose 5%, but were offset by a 40% decline in Citi Holdings revenues compared to the prior year. Net interest revenues of $47.6 billion were 2% lower than the prior year, largely driven by the decline in loan balances in Local Consumer Lending in Citi Holdings as well as spread compression in North America and Asia Regional Consumer Banking (RCB) in Citicorp. Non-interest revenues were $22.6 billion, down 25% from the prior year, driven by CVA/DVA and the loss on MSSB in the third quarter of 2012. Excluding CVA/DVA and the impact of minority investments, non-interest revenues were $29.5 billion, up 6% from the prior year, principally driven by higher revenues in Securities and Banking and higher mortgage revenues in North America RCB , partially offset by lower revenues in the Special Asset Pool within Citi Holdings.

Operating Expenses
Citigroup expenses decreased 1% versus the prior year to $50.5 billion. In 2012, in addition to the previously mentioned repositioning charges, Citi incurred elevated legal and related costs of $2.8 billion compared to $2.2 billion in the prior year. Excluding legal and related costs, repositioning charges for the fourth quarters of 2012 and 2011, and the impact of foreign exchange translation into U.S. dollars for reporting purposes (as used throughout this report, FX translation), which lowered reported expenses by approximately $0.9 billion in 2012 as compared to the prior year, operating expenses declined 1% to $46.6 billion versus $47.3 billion in the prior year.
Citicorp's expenses were $45.3 billion, up 2% from the prior year, as efficiency savings were more than offset by higher legal and related costs and repositioning charges. Citi Holdings expenses were down 19% year-over-year to $5.3 billion, principally due to the continued decline in assets.

Credit Costs
Citi's total provisions for credit losses and for benefits and claims of $11.7 billion declined 8% from the prior year. Net credit losses of $14.6 billion were down 27% from 2011, largely reflecting improvements in North America cards and Local Consumer Lending and the Special Asset Pool within Citi Holdings. Consumer net credit losses declined 22% to $14.4 billion reflecting improvements in North America Citi-branded cards and Citi retail services in Citicorp and Local Consumer Lending within Citi Holdings. Corporate net credit losses decreased 86% year-over-year to $223 million, driven primarily by continued credit improvement in both the Special Asset Pool in Citi Holdings and Securities and Banking in Citicorp.
The net release of allowance for loan losses and unfunded lending commitments was $3.7 billion in 2012, 55% lower than 2011. Of the $3.7 billion net reserve release, $2.1 billion was attributable to Citicorp compared to a $4.9 billion release in the prior year. The decline in the Citicorp reserve release year-over-year mostly reflected a lower reserve release in North America Citi-branded cards and Citi retail services and Securities and Banking . The $1.6 billion net reserve release in Citi Holdings was down from $3.3 billion in the prior year, due primarily to lower releases within the Special Asset Pool , reflecting the decline in assets. Of the $3.7 billion net reserve release, $3.6 billion 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 14.1% and 12.7% as of December 31, 2012, respectively, compared to 13.6% and 11.8% in the prior year. Citi's estimated Tier 1 Common ratio under Basel III was 8.7% at December 31, 2012, up slightly from an estimated 8.6% at September 30, 2012. 4
Citigroup's total allowance for loan losses was $25.5 billion at year end, or 3.9% of total loans, compared to $30.1 billion, or 4.7%, at the end of the prior year. The decline in the total allowance for loan losses reflected the continued wind-down of Citi Holdings and overall continued improvement in the credit quality of Citi's loan portfolios.
The Consumer allowance for loan losses was $22.7 billion, or 5.6% of total Consumer loans, at year end, compared to $27.2 billion, or 6.5% of total loans, at December 31, 2011. Total non-accrual assets increased 3% to $12.0 billion as compared to December 31, 2011. Corporate non-accrual loans declined 28% to $2.3 billion, reflecting continued credit improvement. Consumer non-accrual loans increased $1.4 billion, or 17%, to $9.2 billion versus the prior year. The increase in Consumer non-accrual loans predominantly reflected the Office of the Comptroller of the Currency (OCC) guidance issued in the third quarter of 2012 regarding the treatment of mortgage loans where the borrower has gone through Chapter 7 bankruptcy, which added $1.5 billion to Consumer non-accrual loans (of which approximately $1.3 billion were current).

The international RCB revenue growth year-over-year, excluding the impact of FX translation, was driven by 9% revenue growth in Latin America RCB and 2% revenue growth in EMEA RCB . Asia RCB revenues were flat year-over-year, primarily reflecting spread compression in some countries in the region and the impact of regulatory actions in certain countries, particularly Korea. International RCB average deposits grew 2% versus the prior year, average retail loans increased 11%, investment sales grew 12%, average card loans grew 6%, and international card purchase sales grew 10%, all excluding the impact of FX translation.
In Securities and Banking, fixed income markets revenues of $14.0 billion, excluding CVA/DVA, 7 increased 28% from the prior year, reflecting higher revenues in rates and currencies and credit-related and securitized products. Equity markets revenues of $2.4 billion in 2012, excluding CVA/DVA, increased 1% driven by improved derivatives performance as well as the absence in the current year of proprietary trading losses, partially offset by lower cash equity volumes.
Investment banking revenues rose 10% from the prior year to $3.6 billion, principally driven by higher revenues in debt underwriting and advisory activities, partially offset by lower equity underwriting revenues. Lending revenues of $997 million were down 45% from the prior year, reflecting $698 million in losses on hedges related to accrual loans as credit spreads tightened during 2012 (compared to a $519 million gain in the prior year as spreads widened). Excluding the mark-to-market impact of loan hedges related to accrual loans, lending revenues rose 31% year-over-year to $1.7 billion reflecting growth in the Corporate loan portfolio and improved spreads in most regions. Private Bank revenues of $2.3 billion increased 8% from the prior year, excluding CVA/DVA, driven primarily by growth in North America lending and deposits.
In Transaction Services, the increase in revenues year-over-year, excluding the impact of FX translation, was driven by growth in Treasury and Trade Solutions, which was partially offset by a decline in Securities and Fund Services . Excluding the impact of FX translation, Treasury and Trade Solutions revenues were up 8%, driven by growth in trade as end-of-period trade loans grew 23%, partially offset by ongoing spread compression given the low interest rate environment. Securities and Fund Services revenues were down 2%, excluding the impact of FX translation, mostly reflecting lower market volumes as well as spread compression on deposits.
Citicorp end-of-period loans increased 7% year-over-year to $540 billion, with 3% growth in Consumer loans, primarily in Latin America, and 11% growth in Corporate loans.

Citi Holdings 8
Citi Holdings net loss was $6.6 billion compared to a net loss of $4.2 billion in 2011. The increase in the net loss was driven by the $4.7 billion pretax ($2.9 billion after-tax) loss on MSSB described above. In addition, Citi Holdings results included $77 million in repositioning charges in the fourth quarter of 2012, compared to $60 million in the fourth quarter of 2011. Excluding the loss on MSSB, CVA/DVA 9 and the repositioning charges in the fourth quarters of 2012 and 2011, Citi Holdings net loss decreased to $3.7 billion compared to a net loss of $4.2 billion in the prior year, as revenue declines and lower loan loss reserve releases were more than offset by lower operating expenses and lower net credit losses. These improved results in 2012 reflected the continued decline in Citi Holdings assets.
Citi Holdings revenues decreased to $(833) million from $6.3 billion in the prior year. Excluding CVA/DVA and the loss on MSSB, Citi Holdings revenues were $3.7 billion in 2012 compared to $6.2 billion in the prior year. Special Asset Pool revenues, excluding CVA/DVA, were $(657) million in 2012, compared to $473 million in the prior year, largely due to lower non-interest revenue resulting from lower gains on asset sales. Local Consumer Lending revenues of $4.4 billion declined 20% from the prior year primarily due to the 24% decline in average assets. Brokerage and Asset Management revenues, excluding the loss on MSSB, were $(15) million, compared to $282 million in the prior year, mostly reflecting higher funding costs. Net interest revenues declined 30% year-over-year to $2.6 billion, largely driven by continued declining loan balances in Local Consumer Lending . Non-interest revenues, excluding the loss on MSSB and CVA/DVA, were $1.1 billion versus $2.5 billion in the prior year, principally reflecting lower gains on asset sales within the Special Asset Pool .
As noted above, Citi Holdings assets declined 31% year-over-year to $156 billion as of the end of 2012. Also at the end of 2012, Citi Holdings assets comprised approximately 8% of total Citigroup GAAP assets and 15% of risk-weighted assets (as defined under current regulatory guidelines). Local Consumer Lending continued to represent the largest segment within Citi Holdings, with $126 billion of assets as of the end of 2012, of which approximately 73% consisted of mortgages in North America real estate lending.

2012 vs. 2011
Net income increased 18%, mainly driven by higher mortgage revenues and a $2.3 billion decrease in net credit losses, partially offset by a $1.8 billion reduction in loan loss reserve releases.
Revenues increased 5%, driven by a 38% increase in non-interest revenues from higher gains on sale of mortgages, partly offset by a 2% decline in net interest revenues. The higher gains on sale of mortgages were driven by high volumes of mortgage refinancing activity, due largely to the U.S. government's Home Affordable Refinance Program (HARP), as well as higher margins resulting from the shift to retail as compared to third-party origination channels. Assuming the continued low interest rate environment, Citi believes the higher mortgage refinancing volumes could continue into the first half of 2013. Excluding mortgages, revenue from the retail banking business was essentially flat, as volume growth and improved mix in the deposit and lending portfolios was offset by significant spread compression. Citi expects spread compression to continue to negatively impact revenues during 2013.
Cards revenues declined 4%. In Citi-branded cards, both average loans and net interest revenue declined year-over-year, reflecting continued increased payment rates resulting from consumer deleveraging and the impact of the look-back provisions of The Credit Card Accountability Responsibility and Disclosure Act (CARD Act). 10 Citi expects the look-back provisions of the CARD Act will likely have a diminishing impact on the results of operations of its cards businesses during 2013. In Citi retail services, net interest revenues improved slightly but were offset by declining non-interest revenues, driven by improving credit and the resulting impact on contractual partner payments. Citi expects cards revenues could continue to be negatively impacted by higher payment rates for consumers, reflecting ongoing economic uncertainty and deleveraging as well as Citi's shift to higher credit quality borrowers.
As part of its U.S. Citi-branded cards business, Citibank, N.A. issues a co-branded credit card product with American Airlines, the Citi/AAdvantage card. AMR Corporation and certain of its subsidiaries, including American Airlines, Inc., filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in November 2011. On February 14, 2013, AMR Corporation and US Airways Group, Inc. announced that the boards of directors of both companies had approved a merger agreement under which the companies would be combined. For additional information, see "Risk Factors-Business and Operational Risks" below.
Expenses increased 3%, primarily due to increased mortgage origination costs resulting from the higher retail channel mortgage volumes and $100 million of repositioning charges in the fourth quarter of 2012, partially offset by lower expenses in cards. Expenses continued to be impacted by elevated legal and related costs.
Provisions decreased 14%, due to lower net credit losses in the cards portfolio partly offset by continued lower loan loss reserve releases ($2.4 billion in 2012 compared to $4.2 billion in 2011). Assuming no downturn in the U.S. economic environment, Citi believes credit trends have largely stabilized in the cards portfolios.

2011 vs. 2010
Net income increased $3.1 billion, driven by higher loan loss reserve releases and an improvement in net credit losses, partly offset by lower revenues and higher expenses.
Revenues decreased 7% due to a decrease in net interest and non-interest revenues. Net interest revenue decreased 5%, driven primarily by lower cards net interest revenue, which was negatively impacted by the look-back provision of the CARD Act. In addition, net interest revenue for cards was negatively impacted by higher promotional balances and lower total average loans. Non-interest revenue decreased 16%, primarily due to lower gains from the sale of mortgage loans, as margins declined and Citi held more loans on-balance sheet, and declining revenues driven by improving credit and the resulting impact on contractual partner payments in Citi retail services. In addition, the decline in non-interest revenue reflected lower retail banking fee income.
Expenses increased 15%, primarily driven by higher investment spending in the business during the second half of 2011, particularly in cards marketing and technology, and increases in litigation accruals related to the interchange fees litigation (see Note 28 to the Consolidated Financial Statements).
Provisions decreased 66%, primarily due to a loan loss reserve release of $4.2 billion in 2011, compared to a loan loss reserve release of $1.3 billion in 2010, and lower net credit losses in the cards portfolios (cards net credit losses declined $5.0 billion, or 38%, from 2010).

2012 vs. 2011
The net loss of $22 million compared to net income of $84 million in 2011 was mainly due to higher operating expenses and lower loan loss reserve releases, partially offset by higher revenues.
Revenues increased 2%, with growth across the major products, including strong growth in Russia. Year-over-year, cards purchase sales increased 12%, investment sales increased 15% and retail loan volume increased 17%. Revenue growth year-over-year was partly offset by the absence of Akbank, Citi's equity investment in Turkey, which was moved to Corporate/Other in the first quarter of 2012. Net interest revenue increased 17%, driven by the absence of Akbank investment funding costs and growth in average deposits of 5%, average retail loans of 16% and average cards loans of 6%, partially offset by spread compression. Interest rate caps on credit cards, particularly in Turkey and Poland, the continued liquidation of a higher yielding non-strategic retail banking portfolio and the continued low interest rate environment were the main contributors to the lower spreads. Citi expects spread compression to continue to negatively impact revenues in this business during 2013. Non-interest revenue decreased 20%, mainly reflecting the absence of Akbank.
Expenses grew 12%, primarily due to the $57 million of fourth quarter of 2012 repositioning charges in Turkey, Romania and Pakistan and the impact of continued investment spending on new internal operating platforms during the year.
Provisions increased $43 million due to lower loan loss reserve releases, partially offset by lower net credit losses across most countries. Net credit losses continued to decline, decreasing 36% due to the ongoing improvement in credit quality and the move toward lower-risk customers. Citi believes that net credit losses in EMEA RCB have largely stabilized and assuming the underlying core portfolio continues to grow in 2013, credit costs could begin to rise.

2011 vs. 2010
Net income decreased 1%, as an improvement in credit costs was offset by higher expenses from increased investment spending and lower revenues.
Revenues decreased 1%, driven by the liquidation of higher yielding non-strategic customer portfolios and a lower contribution from Akbank. Net interest revenue declined 1% due to the decline in the higher yielding non-strategic retail banking portfolio and spread compression in the Citi-branded cards portfolio. Interest rate caps on credit cards, particularly in Turkey and Poland, contributed to the lower spreads in the cards portfolio. Non-interest revenue decreased 2%, mainly reflecting the lower contribution from Akbank. Despite the negative impacts to revenues described above, underlying businesses showed growth, with investment sales up 28% from the prior year and cards purchase sales up 15%.
Expenses increased 7% due to the impact of account acquisition, focused investment spending and higher transactional expenses, partly offset by continued savings initiatives.
Provisions decreased 70%, driven by a reduction in net credit losses. Net credit losses decreased 46%, reflecting the continued credit quality improvement during the year, stricter underwriting criteria and the move to lower-risk products.

2012 vs. 2011
Net income was flat to the prior year as higher revenues were offset by higher credit costs and repositioning charges.
Revenues increased 9%, primarily due to strong revenue growth in Mexico and higher volumes, mostly related to personal loans and credit cards. However, continued regulatory pressure involving foreign exchange controls and related measures in Argentina and Venezuela is expected to negatively impact revenues in the near term. Net interest revenue increased 10% due to increased volumes, partially offset by continued spread compression. Citi expects spread compression to continue to negatively impact revenues in this business during 2013. Non-interest revenue increased 7%, primarily due to increased business volumes in the private pension fund and insurance businesses.
Expenses increased 6%, primarily due to $131 million of repositioning charges in the fourth quarter of 2012, higher volume-driven expenses and increased legal and related costs.
Provisions increased 39%, primarily due to increased loan loss reserve builds driven by underlying business volume growth, primarily in Mexico and Colombia. In addition, net credit losses increased in the retail portfolios, primarily in Mexico, reflecting volume growth. Citi believes that net credit losses in Latin America will likely continue to trend higher as various loan portfolios continue to mature.

2011 vs. 2010
Net income declined 14% as higher revenues were more than offset by higher expenses and higher credit costs.
Revenues increased 7% primarily due to higher volumes. Net interest revenue increased 6% driven by the continued growth in lending and deposit volumes, partially offset by spread compression driven in part by the continued move toward customers with a lower risk profile and stricter underwriting criteria, especially in the Citi-branded cards portfolio. Non-interest revenue increased 8%, primarily driven by an increase in banking fee income from credit card purchase sales.
Expenses increased 10% due to higher volumes and investment spending, including increased marketing and customer acquisition costs as well as new branches, partially offset by continued savings initiatives. The increase in the level of investment spending in the business was largely completed at the end of 2011.
Provisions increased 43%, reflecting lower loan loss reserve releases. Net credit losses declined 13%, driven primarily by improvements in the Mexico cards portfolio due to the move toward customers with a lower-risk profile and stricter underwriting criteria.