Citigroup Inc.

Interest Rate Risk Associated with Consumer MortgageLending ActivityCitigroup originates and funds mortgage loans. As with all other lendingactivity, this exposes Citigroup to several risks, including credit, liquidity andinterest rate risks. To minimize credit and liquidity risk, Citigroup sells mostof the mortgage loans it originates, but retains the servicing rights. Thesesale transactions create an intangible asset referred to as MSRs, which exposeCiti to interest rate risk. For example, the fair value of MSRs declines withincreased prepayments, and lower interest rates are generally one factor thattends to lead to increased prepayments.In managing this risk, Citigroup hedges a significant portion of the valueof its MSRs. However, since the change in the value of these hedges doesnot perfectly match the change in the value of the MSRs, Citigroup is stillexposed to what is commonly referred to as “basis risk.” Citigroup managesthis risk by reviewing the mix of the various hedges on a daily basis.Citigroup’s MSRs totaled $4.554 billion and $6.530 billion atDecember 31, 2010 and December 31, 2009, respectively. For additionalinformation on Citi’s MSRs, see Notes 18 and 22 to the ConsolidatedFinancial Statements.As part of its mortgage lending activity, Citigroup commonly enters intopurchase commitments to fund residential mortgage loans at specific interestrates within a given period of time, generally up to 60 days after the ratehas been set. If the resulting loans will be classified as loans held-for-sale,Citigroup accounts for the commitments as derivatives. Accordingly, changesin the fair value of these commitments, which are driven by changes inmortgage interest rates, are recognized in current earnings after taking intoconsideration the likelihood that the commitment will be funded.Citigroup hedges its exposure to the change in the value of these commitments.North America CardsOverviewCiti’s North America cards portfolio consists of its Citi-branded and retailpartner cards portfolios reported in Citicorp—Regional ConsumerBanking and Citi Holdings—Local Consumer Lending, respectively. As ofDecember 31, 2010, the Citi-branded portfolio totaled $78 billion, while theretail partner cards portfolio was $46 billion.Beginning as early as 2008, Citi actively pursued loss mitigationmeasures, such as stricter underwriting standards for new accounts andclosing high-risk accounts, in each of its Citi-branded and retail partnercards portfolios. As a result of these efforts, higher risk customers have eitherhad their available lines of credit reduced or their accounts closed. On a netbasis, end-of-period open accounts are down 8% in Citi-branded cards and11% in retail partner cards, each versus prior-year levels.See “Consumer Loan Modification Programs” below for a discussion ofCiti’s modification programs for card loans.Cards Quarterly Trends—Delinquencies and Net Credit LossesThe following charts detail the quarterly trends in delinquencies and netcredit losses for Citigroup’s North America Citi-branded and retail partnercards portfolios. Trends for both Citi-branded and retail partner cardscontinued to reflect the improving credit quality of these portfolios. In Citibrandedcards, delinquencies declined for the fourth consecutive quarter to$1.6 billion, an improvement of 12% from the prior quarter. Net credit lossesdeclined for the third consecutive quarter to $1.7 billion, 11% lower than theprior quarter. In retail partner cards, delinquencies declined for the fourthconsecutive quarter while net credit losses declined for the sixth consecutivequarter. For both portfolios, early-stage delinquencies also continued toshow improvement.99