Citigroup (C)

 Acquisition of Grupo Cuscatlan

In 2007, Citigroup completed the acquisition of the subsidiaries of Grupo Cuscatlan for $1.51 billion ($755 million in cash and 14.2 million shares of Citigroup common stock) from Corporacion UBC Internacional S.A. Grupo Cuscatlan is one of the leading financial groups in Central America, with assets of $5.4 billion, loans of $3.5 billion, and deposits of $3.4 billion. Grupo Cuscatlan has operations in El Salvador, Guatemala, Costa Rica, Honduras and Panama. The results of Grupo Cuscatlan are included from May 11, 2007 forward and are recorded in Latin America Consumer Banking.

 Acquisition of Grupo Cuscatlan

In 2007, Citigroup completed the acquisition of the subsidiaries of Grupo Cuscatlan for $1.51 billion ($755 million in cash and 14.2 million shares of Citigroup common stock) from Corporacion UBC Internacional S.A. Grupo Cuscatlan is one of the leading financial groups in Central America, with assets of $5.4 billion, loans of $3.5 billion, and deposits of $3.4 billion. Grupo Cuscatlan has operations in El Salvador, Guatemala, Costa Rica, Honduras and Panama. The results of Grupo Cuscatlan are included from May 11, 2007 forward and are recorded in Latin America Consumer Banking.

U.S. Cards

        U.S. Cards is one of the largest providers of credit cards in North America, with more than 150 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, Federated, Sears, Dell Computer, Radio Shack, Staples and Zales Corporation.

        Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency and servicing fees.

(1)

See footnote 4 to the table on page 4.

(2)

As a percentage of average managed loans.

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U.S. Cards (Continued)

3Q06 vs. 3Q05

        Net Interest Revenue decreased, reflecting a combination of increased payment rates, higher cost of funds, and the mix of receivable balances. Non-Interest Revenue increased, as the positive impact of 9% growth in purchase sales, increased revenues from previously securitized receivables, which includes excess servicing, and the addition of the Federated portfolio in the 2005 fourth quarter more than offset higher rewards program costs and lower asset sales of $37 million. Included in revenues in the 2005 third quarter were the negative impact of Hurricane Katrina and the effect of the new bankruptcy legislation.

        Operating expenses improved, primarily due to a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns, partially offset by the addition of the Federated portfolio.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses and a loan loss reserve release of $122 million, due to lower bankruptcies and the favorable credit environment.

        Net income also reflected a $39 million tax benefit in the 2006 third quarter resulting from the resolution of the New York Tax Audits.

2006 YTD vs. 2005 YTD

        Net Interest Revenue decreased, reflecting a combination of increased payment rates, higher cost of funds, and the mix of receivable balances. Non-Interest Revenue increased as the positive impact of growth in purchase sales, increased revenues from previously securitized receivables, and the addition of the Federated portfolio more than offset higher rewards program costs. Included in revenues in the 2006 period were asset sales of $105 million, including the 2006 second quarter gain from the MasterCard initial public offering of $59 million. In the 2005 period, revenues included gains from asset sales of $185 million.

        Operating expenses increased, primarily reflecting the addition of the Federated portfolio and the adoption of SFAS 123(R) in the 2006 first quarter; this was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses and a loan loss reserve release of $354 million, due to lower bankruptcies and the favorable credit environment.

        Net Income also reflected an $89 million tax benefit resulting from the resolution of the Federal Tax Audit in the 2006 first quarter, along with a $39 million tax benefit resulting from the resolution of the New York Tax Audits in the 2006 third quarter.

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U.S. Cards

        U.S. Cards is one of the largest providers of credit cards in North America, with more than 140 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 Sears, The Home Depot, Federated, Dell Computer, Radio Shack, Staples and Zales Corporation.

        Revenues are primarily generated from net interest revenue on receivables, interchange fees on purchase sales and other delinquency or services fees.

(1)

See footnote 4 to the table on page 4.

(2)

As a percentage of average managed loans.

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2Q06 vs. 2Q05

        Revenues, net of interest expense, were flat as the positive impact of 12% growth in purchase sales, higher securitization revenues, and the addition of the Federated portfolio in the 2005 fourth quarter were offset by continued net interest margin compression and higher rewards program costs. The net interest margin compression was driven by a combination of increased payment rates, higher cost of funds, and the mix of receivable balances. Included in revenues in the 2006 second quarter was a gain from the MasterCard initial public offering of $59 million. In the 2005 second quarter, revenues included gains from other asset sales of $70 million.

        Operating expenses increased, primarily reflecting the addition of the Federated portfolio; this was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses due to lower bankruptcies, the favorable credit environment, and a loan loss reserve release of $160 million.

2Q06 YTD vs. 2Q05 YTD

        Revenues, net of interest expense, declined as the positive impact of 11% growth in purchase sales and the addition of the Federated portfolio in the 2005 fourth quarter were more than offset by continued net interest margin compression and higher rewards program costs. The net interest margin compression was driven by a combination of increased payment rates, higher cost of funds, and the mix of receivable balances.

        Operating expenses increased, primarily reflecting the addition of the Federated portfolio in the 2005 fourth quarter and the adoption of SFAS 123(R) in the 2006 first quarter; this was partially offset by a decline in advertising and marketing expenses, largely reflecting the timing of advertising campaigns.

        Provision for loan losses and for benefits and claims declined, primarily reflecting a decline in net credit losses due to lower bankruptcies, the favorable credit environment and a loan loss reserve release of $232 million.

        Net Income also reflected an $89 million tax benefit resulting from the resolution of the Federal Tax Audit in the 2006 first quarter.

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U.S. Cards

        The U.S. Cards business has effectively remained the same; however as referenced above, Mexico results are now reported in International Cards. Further, the U.S. Cards income statement presents all information on a GAAP basis, and therefore no longer reflects adjustments to Total Revenues and Net Credit Losses related to securitization activities. Performance metrics for the entire credit card portfolio, both held and securitized, are included under "Key Indicators—Managed Basis."

U.S. Cards

        The U.S. Cards business has effectively remained the same; however as referenced above, Mexico results are now reported in International Cards. Further, the U.S. Cards income statement presents all information on a GAAP basis, and therefore no longer reflects adjustments to Total Revenues and Net Credit Losses related to securitization activities. Performance metrics for the entire credit card portfolio, both held and securitized, are included under "Key Indicators—Managed Basis."

Cards

(1)

See Footnote (4) to the table on page 6 and discussion of Risk Capital on page 36.

        Cards reported net income of $1.086 billion in the 2005 first quarter, up $106 million or 11% from the 2004 first quarter. North America Cards reported net income of $911 million, up $79 million or 9% over 2004, mainly reflecting lower net credit losses as a result of the improved credit environment and the impact of securitization gains, partially offset by lower net interest revenue due to increased cost of funds and higher payment rates. International Cards net income of $175 million increased $27 million or 18% over 2004, reflecting higher sales and volumes, the impact of the KorAm acquisition, the benefit of foreign currency translation and lower taxes, partially offset by the impact of repositioning costs of $13 million pretax ($9 million after-tax).

        As shown in the following table, average managed loans grew 5% from the 2004 first quarter, reflecting growth of 3% in North America and 23% in International Cards. Growth in North America is primarily the result of increased marketing efforts in the U.S. and growth in Mexico accounts. International Cards growth reflected increases in all regions and also included the benefit of the KorAm acquisition and strengthening currencies.

        Total card sales were $86.4 billion, up 9% from the 2004 first quarter. North America sales were up 6% over the prior-year quarter to $71.7 billion, reflecting higher purchase volumes. International Cards sales grew 30% over the prior-year quarter to $14.7 billion, reflecting broad-based growth led by Asia, which included the KorAm acquisition, and the benefit of strengthening currencies.

        Revenues, net of interest expense, of $4.576 billion in the 2005 first quarter were essentially unchanged from the prior-year quarter, reflecting a decline in North America of $119 million or 3% and an increase in International Cards of $97 million or 13%. The decline in North America was mainly due to the impact of higher cost of funds and increased payment rates resulting from the overall improved economy, partially offset by higher securitization-related gains of $258 million, higher purchase sales and increased loans in Mexico. Citigroup recognizes a gain on sale upon the securitization of credit card receivables. Prior to 2005, this gain was allocated

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between Other Revenue and the Provision for Credit Losses, which reflected the portion of the Allowance for Credit Losses related to the receivables sold. Commencing in 2005, the entire gain on sale upon securitization is recorded in Other Revenue.

        In the 2005 first quarter, Other Revenue includes $258 million of gains, of which $129 million corresponds to the allowance for credit losses for the receivables sold.

        Revenue growth in International Cards reflected the benefit of increased loans and sales in all regions, as well as the benefit of foreign currency translation. Leading the growth was Asia, which included the impact of the KorAm acquisition, and Latin America. Offsetting this increase were declines resulting from the repositioning of our UK Cards and Diners' Club businesses in EMEA.

        Operating expenses of $2.077 billion were $139 million or 7% higher than the prior-year quarter, reflecting the impact of the KorAm acquisition, repositioning actions, foreign currency translation, and higher purchased credit card receivable amortization in North America. Repositioning expenses were $32 million pretax, with $19 million in North America and $13 million internationally.

        The provision for credit losses was $910 million in the 2005 first quarter, compared to $1.228 billion in the prior-year quarter. The decline in the provision for credit losses was mainly in North America and reflected the impact of an improved credit environment and higher levels of securitizations.

        The securitization of credit card receivables is limited to the Citi Cards business within North America. At March 31, 2005, securitized credit card receivables were $87.7 billon, compared to $76.2 billion at March 31, 2004. There was $0.6 billion in credit card receivables held for sale at March 31, 2005, compared to zero at March 31, 2004. 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 in the 2005 first quarter were $2.081 billion, with a related loss ratio of 5.23%, compared to $2.150 billion and 5.33% in the 2004 fourth quarter, and $2.554 billion and 6.69% in the 2004 first quarter. In North America, the 2005 first quarter net credit loss ratio of 5.50% declined from 5.59% in the 2004 fourth quarter and 6.99% in the 2004 first quarter. In International Cards, the 2005 first quarter net credit loss ratio of 3.08% declined from 3.16% in the 2004 fourth quarter and 3.85% in the 2004 first quarter. The decline in these ratios from the prior quarter and prior year was primarily due to the improved credit environment, with the international ratios slightly offset by higher ratios in the UK Cards and Diners Club businesses.

        Loans delinquent 90 days or more on a managed basis were $2.753 billion, or 1.74% of loans, at March 31, 2005, compared to $2.944 billion or 1.78% at December 31, 2004 and $3.152 billion or 2.08% at March 31, 2004. The decline in delinquent loans from the prior quarter and prior year was primarily attributable to improved economic environments across most regions. A summary of delinquency and net credit loss experience related to the on-balance sheet loan portfolio is included in the table on page 41.

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CARDS

(1)

See Footnote (7) to the table on page 4.

        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.

        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.

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        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.