Citigroup (C)

2Q07 vs. 2Q06

Net Interest Revenue was 2% better than the prior year, as growth in average deposits and loans of 20% and 9%, respectively, was partially offset by a decrease in net interest margins.  Net interest margins declined due to an increase in higher-cost time deposit and e-savings balances, the securitization of higher-margin credit card receivables, and a mix toward lower-yielding mortgage assets.

Non-Interest Revenue increased 3% primarily due to higher loan and deposit volumes, 6% growth in Card purchase sales, and a higher level of securitized Card receivables.  Growth was also driven by higher gains on sale of mortgage loans and net servicing revenues, and the impact of the acquisition of ABN AMRO Mortgage Group in the first quarter of 2007.  Second quarter of 2006 results also included a $132 million pretax gain from the sale of upstate New York branches.

Operating expenses increased primarily due to acquisitions and increased investment spending, including 24 new branch openings during the quarter (15 in CitiFinancial and 9 in Citibank).  Higher volume-related expenses primarily reflected 18% growth in loan originations in Consumer Lending.

Provisions for loan losses and for benefits and claims increased primarily reflecting a change in estimate of loan losses inherent in the U.S. Cards portfolio, portfolio seasoning and delinquencies in second mortgages, and higher loan volumes.  The increase in provision for loan losses also reflected the absence of loan loss reserve releases recorded in the prior year.  The net credit loss ratio increased 12 basis points to 1.26%.

2Q07 vs. 2Q06

Net Interest Revenue increased 18%. Growth was driven by higher average loans, as well as the impact of the acquisitions of Grupo Financiero Uno, Egg, Grupo Cuscatlan, and CrediCard.

Non-Interest Revenue increased 13%, primarily due to higher Card purchase sales, up 31%, and increased investment product sales, up 46%.  By region, the growth was led by Japan—Cards and Retail Banking, Latin America, Asia, and EMEA. The positive impact of foreign currency translation also contributed to increases in revenues.  The 2006 second quarter included a gain on the MasterCard IPO of $55 million.

Excluding the impact of Japan Consumer Finance, revenues increased 24%.

Operating expenses increased, reflecting the integration of the CrediCard portfolio, the acquisitions of Grupo Financiero Uno, Grupo Cuscatlan, and Egg, and an increase in ownership in Nikko.  Expense growth also reflects volume growth across the regions (excluding Japan Consumer Finance), continued investment spending, including 136 branches opened or acquired, higher customer activity, and the impact of foreign currency translation.

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Provisions for loan losses and for benefits and claims increased 54% driven by portfolio growth, increased past due accounts and targeted market expansion in Mexico, the integration of acquisitions, higher net credit losses in Japan Consumer Finance, and the absence of  2006 second quarter loan loss reserve releases.

Net income was also affected by the absence of prior-year Mexico tax benefits of $70 million related to APB 23.

In Citigroup’s 2006 Form 10-K the Company stated that it expected its consumer finance business in Japan to break even in 2007.  However, the situation remains unpredictable; and given the Company’s recent experience with the level of Grey Zone related refund claims, the Company’s best estimate now is that the business will have net losses in 2007. The Company will continue to analyze the profitability prospects for this business thereafter.

Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 44.

2Q07 vs. 2Q06

Revenues, net of interest expense, increased driven by broad-based performance across products and regions.  Equity Markets revenues increased driven by strong growth globally, including cash trading, derivatives products, equity finance and convertibles.  Fixed Income Markets revenue increases were driven by improved results across interest rates and currencies, credit and securitized products, and commodities.  Investment Banking revenue growth was driven by higher equity underwriting and advisory and other fees.  Transaction Services revenues increased reflecting growth in liability balances and assets under custody, higher net interest margins in Cash Management and Securities and Funds Services.

Operating expenses increased due to higher business volumes, compensation costs and growth due to acquisitions.  The growth in the second quarter of 2007 was favorably affected by a $300 million pretax release of litigation reserves.

The provision for credit losses decreased reflecting a stable global corporate credit environment and the absence of a $118 million net increase to loan loss reserves recorded in the prior-year period.

Markets & Banking’s exposure in the subprime secured lending market is divided between secured lending and trading, which together accounted for approximately 2% of the Securities and Banking revenues in full-year 2006.

The Company has been actively managing down its secured lending exposure.  In addition, the Company has been adjusting clients’ collateral and margin requirements during these periods.

Citigroup continues to be an active market-maker in trading activities. As such, the Company hedges risks, using a variety of methods to monitor very carefully the ongoing credit quality of counterparties.  The Company monitors its subprime business daily and has a rigorous process for marking the Company’s positions using fundamental valuation techniques, market references, and liquidity analysis.

Leveraged lending accounted for approximately 5% of Securities and Banking revenues in the second quarter of 2006.  As of June 30, 2007, there were four committed transactions which required re-pricing.  For those transactions, the Company recorded losses on its commitments, which were recorded in commissions and fees revenue during the second quarter of 2007.  The Company has made commitments to finance other similar transactions which will likely require an adjustment to price and terms.

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The Company believes that when these transactions are re-priced, these transactions will be sold to investors.  In a small subset of these transactions, the Company has extended equity bridge commitments to top-tier clients in connection with the Company’s leveraged financing activities.

Certain of the statements above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  See “Forward-Looking Statements” on page 44.

2Q07 vs. 2Q06

Revenues, net of interest expense, of $3.197 billion in the second quarter of 2007 increased $705 million, or 28%, from the prior-year period, primarily reflecting the acquisition of Nikko; an increase in fee-based and recurring net interest revenue, reflecting the continued advisory-based strategy; an increase in international revenues, driven by strong Capital Markets activity in Asia; and strong domestic syndicate sales. Total assets under fee-based management were $509 billion as of June 30, 2007, up $146 billion, or 40%, from the prior-year period. Total client assets, including assets under fee-based management, of $1,788 billion in the second quarter of 2007 increased $467 billion, or 35%, compared to the prior-year quarter, reflecting organic growth and the acquisition of Nikko and Quilter client assets, as well as the transfer of CIS assets from U.S. Consumer on June 30, 2007.  Global Wealth Management had 15,595 financial advisors/bankers as of June 30, 2007, compared with 13,671 as of June 30, 2006, driven by the Nikko and Quilter acquisitions, the CIS transfer, and hiring in the Private Bank. Annualized revenue per FA/banker of $878,000 increased 21% from the prior-year quarter.

Operating expenses of $2.455 billion in the second quarter of 2007 increased $494 million from the prior-year

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quarter. The expense increase in 2007 was mainly driven by the Nikko and Quilter acquisitions as well as higher variable compensation associated with increased business volumes.

The provision for loan losses increased $4 million, or 50%.  The provision of $12 million in the current quarter was driven by portfolio growth.

Net Income in the 2007 second quarter included a $65 million APB 23 benefit in Private Bank.

2Q07 vs. 2Q06

Revenues, net of interest expense, of $1.032 billion in the second quarter of 2007 increased $448 million or 77%.

Total proprietary revenues, net of interest expense, for the second quarter of 2007 of $910 million, were composed of revenues from private equity of $711 million, hedge funds of $119 million and other investment activity of $80 million. Private equity revenue increased $195 million from the 2006 second quarter, primarily driven by higher realized and unrealized gains. Hedge fund revenue improved by $162 million, largely due to a higher investment performance. Other investment activities revenue increased $66 million from the 2006 second quarter, largely due to realized and unrealized real estate gains and the mark-to-market value on Citigroup’s investments.  Client revenues increased $25 million, reflecting increased management fees from a 55% growth in average client capital under management.

Operating expenses in the second quarter of 2007 of $215 million increased $16 million from the second quarter of 2006, primarily due to increased performance-driven compensation and higher employee-related expenses.

Minority interest, net of taxes, in the second quarter of 2007 of $64 million increased $61 million from the second quarter of 2006, primarily due to higher private equity gains related to underlying investments held by consolidated majority-owned legal entities.  The impact of minority interest is reflected in fees, dividends, and interest, and net realized

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and net change in unrealized gains consistent with proceeds received by minority interests.

Proprietary capital under management of $11.8 billion increased $506 million from the second quarter 2006, as increases in private equity and hedge funds were partially offset by the sale of MetLife shares in July 2006.

Client capital under management of $47.4 billion in the 2007 second quarter increased $16.8 billion from the 2006 second quarter, due to inflows from institutional and high-net-worth clients.

On July 2, 2007, the Company completed the acquisition of Old Lane Partners, L.P. and Old Lane Partners, GP, LLC (Old Lane).  Old Lane is the manager of a global, multi-strategy hedge fund and a private equity fund with total assets under management and private equity commitments of approximately $4.5 billion.  Old Lane will operate as part of AI.  Old Lane’s Vikram Pandit became the Chief Executive Officer of AI.

2Q07 vs. 2Q06

Revenues, net of interest expense, increased, primarily due to improved treasury results, partially offset by higher intersegment eliminations.  Lower overall rates, partially offset by higher funding balances, drove the improvement in treasury revenues.

Restructuring expense.  See Note 7 on page 57 for details on the 2007 restructuring charge.

Other operating expenses increased, primarily due to increased staffing, technology and other unallocated expenses, partially offset by higher intersegment eliminations.

Income tax benefits increased due to the higher pretax loss in the current year.