Citigroup Inc.

ecoveries are added. Securities received in exchange for loan claims indebt restructurings are initially recorded at fair value, with any gain or lossreflected as a recovery or charge-off to the allowance, and are subsequentlyaccounted for as securities available-for-sale.Corporate loansIn the corporate portfolios, the allowance for loan losses includes an assetspecificcomponent and a statistically-based component. The asset-specificcomponent is calculated under ASC 310-10-35, Receivables—SubsequentMeasurement (formerly SFAS 114) on an individual basis for largerbalance,non-homogeneous loans, which are considered impaired. Anasset-specific allowance is established when the discounted cash flows,collateral value (less disposal costs), or observable market price of theimpaired loan is lower than its carrying value. This allowance considers theborrower’s overall financial condition, resources, and payment record, theprospects for support from any financially responsible guarantors (discussedfurther below) and, if appropriate, the realizable value of any collateral.The asset-specific component of the allowance for smaller balance impairedloans is calculated on a pool basis considering historical loss experience.The allowance for the remainder of the loan portfolio is calculated underASC 450, Contingencies (formerly SFAS 5) using a statistical methodology,supplemented by management judgment. The statistical analysis considersthe portfolio’s size, remaining tenor, and credit quality as measured byinternal risk ratings assigned to individual credit facilities, which reflectprobability of default and loss given default. The statistical analysis considershistorical default rates and historical loss severity in the event of default,including historical average levels and historical variability. The result isan estimated range for inherent losses. The best estimate within the range isthen determined by management’s quantitative and qualitative assessmentof current conditions, including general economic conditions, specificindustry and geographic trends, and internal factors including portfolioconcentrations, trends in internal credit quality indicators, and current andpast underwriting standards.For both the asset-specific and the statistically based components of theallowance for loan losses, management may incorporate guarantor support.The financial wherewithal of the guarantor is evaluated, as applicable,based on net worth, cash flow statements and personal or company financialstatements which are updated and reviewed at least annually. Citi seeksperformance on guarantee arrangements in the normal course of business.Seeking performance entails obtaining satisfactory cooperation from theguarantor or borrower to achieve Citi’s strategy in the specific situation. Thisregular cooperation is indicative of pursuit and successful enforcement ofthe guarantee: the exposure is reduced without the expense and burden ofpursuing a legal remedy. Enforcing a guarantee via legal action against theguarantor is not the primary means of resolving a troubled loan situationand rarely occurs. A guarantor’s reputation and willingness to work withCitigroup is evaluated based on the historical experience with the guarantorand the knowledge of the marketplace. In the rare event that the guarantoris unwilling or unable to perform or facilitate borrower cooperation, Citipursues a legal remedy. If Citi does not pursue a legal remedy, it is becauseCiti does not believe that the guarantor has the financial wherewithal toperform regardless of legal action, or because there are legal limitationson simultaneously pursuing guarantors and foreclosure. A guarantor’sreputation does not impact our decision or ability to seek performanceunder guarantee.In cases where a guarantee is a factor in the assessment of loan losses,it is included via adjustment to the loan’s internal risk rating, which inturn is the basis for the adjustment to the statistically based component ofthe allowance for loan losses. To date, it is only in rare circumstances thatan impaired commercial or CRE loan is carried at a value in excess of theappraised value due to a guarantee.When Citi’s monitoring of the loan indicates that the guarantor’swherewithal to pay is uncertain or has deteriorated, there is either nochange in the risk rating, because the guarantor’s credit support was neverinitially factored in, or the risk rating is adjusted to reflect that uncertaintyor deterioration. Accordingly, a guarantor’s ultimate failure to perform ora lack of legal enforcement of the guarantee does not materially impactthe allowance for loan losses, as there is typically no further significantadjustment of the loan’s risk rating at that time. Where Citi is not seekingperformance under the guarantee contract, it provides for loans losses as ifthe loans were non-performing and not guaranteed.Consumer loansFor Consumer loans, each portfolio of smaller-balance, homogeneousloans—including Consumer mortgage, installment, revolving credit, andmost other Consumer loans—is independently evaluated for impairment.The allowance for loan losses attributed to these loans is established via aprocess that estimates the probable losses inherent in the specific portfoliobased upon various analyses. These include migration analysis, in whichhistorical delinquency and credit loss experience is applied to the currentaging of the portfolio, together with analyses that reflect current trendsand conditions.Management also considers overall portfolio indicators, includinghistorical credit losses, delinquent, non-performing, and classified loans,trends in volumes and terms of loans, an evaluation of overall credit quality,the credit process, including lending policies and procedures, and economic,geographical, product and other environmental factors.In addition, valuation allowances are determined for impaired smallerbalancehomogeneous loans whose terms have been modified due to theborrowers’ financial difficulties and where it has been determined that aconcession was granted to the borrower. Such modifications may includeinterest rate reductions, principal forgiveness and/or term extensions. Wherelong-term concessions have been granted, such modifications are accountedfor as troubled debt restructurings (TDRs). The allowance for loan lossesfor TDRs is determined in accordance with ASC 310-10-35 by comparingexpected cash flows of the loans discounted at the loans’ original effectiveinterest rates to the carrying value of the loans. Where short-term concessionshave been granted, the allowance for loan losses is materially consistent withthe requirements of ASC 310-10-35.163