Citigroup Inc.

Loans included in the U.S. Treasury’s Home Affordable ModificationProgram (HAMP) trial period are not classified as modified under short-termor long-term programs, and the allowance for loan losses for these loansis calculated under ASC 450-20. The allowance calculation for HAMP trialloans uses default rates that assume that the borrower will not successfullycomplete the trial period and receive a permanent modification.Reserve Estimates and PoliciesManagement provides reserves for an estimate of probable losses inherent inthe funded loan portfolio on the balance sheet in the form of an allowancefor loan losses. These reserves are established in accordance with Citigroup’scredit reserve policies, as approved by the Audit Committee of the Board ofDirectors. Citi’s Chief Risk Officer and Chief Financial Officer review theadequacy of the credit loss reserves each quarter with representatives from theRisk Management and Finance staffs for each applicable business area.The above-mentioned representatives covering the business areashaving classifiably managed portfolios, where internal credit-risk ratingsare assigned (primarily ICG, Regional Consumer Banking and LocalConsumer Lending), or modified Consumer loans, where concessions weregranted due to the borrowers’ financial difficulties, present recommendedreserve balances for their funded and unfunded lending portfolios along withsupporting quantitative and qualitative data. The quantitative data include:• Estimated probable losses for non-performing, non-homogeneousexposures within a business line’s classifiably managed portfolioand impaired smaller-balance homogeneous loans whose termshave been modified due to the borrowers’ financial difficulties, andit was determined that a concession was granted to the borrower.Consideration may be given to the following, as appropriate, whendetermining this estimate: (i) the present value of expected future cashflows discounted at the loan’s original effective rate; (ii) the borrower’soverall financial condition, resources and payment record; and (iii) theprospects for support from financially responsible guarantors or therealizable value of any collateral. In the determination of the allowancefor loan losses for TDRs, management considers a combination ofhistorical re-default rates, the current economic environment and thenature of the modification program when forecasting expected cash flows.When impairment is measured based on the present value of expectedfuture cash flows, the entire change in present value is recorded in theProvision for loan losses.• Statistically calculated losses inherent in the classifiably managedportfolio for performing and de minimis non-performing exposures.The calculation is based upon: (i) Citigroup’s internal system of creditriskratings, which are analogous to the risk ratings of the major ratingagencies; and (ii) historical default and loss data, including rating agencyinformation regarding default rates from 1983 to 2009 and internal datadating to the early 1970s on severity of losses in the event of default.• Additional adjustments include: (i) statistically calculated estimates tocover the historical fluctuation of the default rates over the credit cycle,the historical variability of loss severity among defaulted loans, andthe degree to which there are large obligor concentrations in the globalportfolio; and (ii) adjustments made for specifically known items, such ascurrent environmental factors and credit trends.In addition, representatives from each of the Risk Management andFinance staffs that cover business areas that have delinquency-managedportfolios containing smaller-balance homogeneous loans present theirrecommended reserve balances based upon leading credit indicators,including loan delinquencies and changes in portfolio size as well aseconomic trends including housing prices, unemployment and GDP. Thismethodology is applied separately for each individual product within eachdifferent geographic region in which these portfolios exist.This evaluation process is subject to numerous estimates and judgments.The frequency of default, risk ratings, loss recovery rates, the size anddiversity of individual large credits, and the ability of borrowers with foreigncurrency obligations to obtain the foreign currency necessary for orderlydebt servicing, among other things, are all taken into account during thisreview. Changes in these estimates could have a direct impact on the creditcosts in any period and could result in a change in the allowance. Changesto the Allowance for loan losses flow through the Consolidated Statement ofIncome on the line Provision for loan losses.Allowance for Unfunded Lending CommitmentsA similar approach to the allowance for loan losses is used for calculatinga reserve for the expected losses related to unfunded loan commitmentsand standby letters of credit. This reserve is classified on the balancesheet in Other liabilities. Changes to the allowance for unfunded lendingcommitments flow through the Consolidated Statement of Income on theline Provision for unfunded lending commitments.Mortgage Servicing Rights (MSRs)Mortgage servicing rights (MSRs) are recognized as intangible assets whenpurchased or when the Company sells or securitizes loans acquired throughpurchase or origination and retains the right to service the loans.Servicing rights in the U.S. mortgage classes of servicing rightsare accounted for at fair value, with changes in value recorded incurrent earnings.Additional information on the Company’s MSRs can be found in Note 22to the Consolidated Financial Statements.164