Citibank 2010 Annual Report Download - page 166

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Loans included in the U.S. Treasury’s Home Affordable Modification
Program (HAMP) trial period are not classified as modified under short-term
or long-term programs, and the allowance for loan losses for these loans
is calculated under ASC 450-20. The allowance calculation for HAMP trial
loans uses default rates that assume that the borrower will not successfully
complete the trial period and receive a permanent modification.
Reserve Estimates and Policies
Management provides reserves for an estimate of probable losses inherent in
the funded loan portfolio on the balance sheet in the form of an allowance
for loan losses. These reserves are established in accordance with Citigroup’s
credit reserve policies, as approved by the Audit Committee of the Board of
Directors. Citi’s Chief Risk Officer and Chief Financial Officer review the
adequacy of the credit loss reserves each quarter with representatives from the
Risk Management and Finance staffs for each applicable business area.
The above-mentioned representatives covering the business areas
having classifiably managed portfolios, where internal credit-risk ratings
are assigned (primarily ICG, Regional Consumer Banking and Local
Consumer Lending), or modified Consumer loans, where concessions were
granted due to the borrowers’ financial difficulties, present recommended
reserve balances for their funded and unfunded lending portfolios along with
supporting quantitative and qualitative data. The quantitative data include:
Estimated probable losses for non-performing, non-homogeneous •฀
exposures within a business line’s classifiably managed portfolio
and impaired smaller-balance homogeneous loans whose terms
have been modified due to the borrowers’ financial difficulties, and
it was determined that a concession was granted to the borrower.
Consideration may be given to the following, as appropriate, when
determining this estimate: (i) the present value of expected future cash
flows discounted at the loan’s original effective rate; (ii) the borrower’s
overall financial condition, resources and payment record; and (iii) the
prospects for support from financially responsible guarantors or the
realizable value of any collateral. In the determination of the allowance
for loan losses for TDRs, management considers a combination of
historical re-default rates, the current economic environment and the
nature of the modification program when forecasting expected cash flows.
When impairment is measured based on the present value of expected
future cash flows, the entire change in present value is recorded in the
Provision for loan losses.
Statistically calculated losses inherent in the classifiably managed •฀
portfolio for performing and de minimis non-performing exposures.
The calculation is based upon: (i) Citigroup’s internal system of credit-
risk ratings, which are analogous to the risk ratings of the major rating
agencies; and (ii) historical default and loss data, including rating agency
information regarding default rates from 1983 to 2009 and internal data
dating to the early 1970s on severity of losses in the event of default.
Additional adjustments include•฀ : (i) statistically calculated estimates to
cover the historical fluctuation of the default rates over the credit cycle,
the historical variability of loss severity among defaulted loans, and
the degree to which there are large obligor concentrations in the global
portfolio; and (ii) adjustments made for specifically known items, such as
current environmental factors and credit trends.
In addition, representatives from each of the Risk Management and
Finance staffs that cover business areas that have delinquency-managed
portfolios containing smaller-balance homogeneous loans present their
recommended reserve balances based upon leading credit indicators,
including loan delinquencies and changes in portfolio size as well as
economic trends including housing prices, unemployment and GDP. This
methodology is applied separately for each individual product within each
different 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 and
diversity of individual large credits, and the ability of borrowers with foreign
currency obligations to obtain the foreign currency necessary for orderly
debt servicing, among other things, are all taken into account during this
review. Changes in these estimates could have a direct impact on the credit
costs in any period and could result in a change in the allowance. Changes
to the Allowance for loan losses flow through the Consolidated Statement of
Income on the line Provision for loan losses.
Allowance for Unfunded Lending Commitments
A similar approach to the allowance for loan losses is used for calculating
a reserve for the expected losses related to unfunded loan commitments
and standby letters of credit. This reserve is classified on the balance
sheet in Other liabilities. Changes to the allowance for unfunded lending
commitments flow through the Consolidated Statement of Income on the
line Provision for unfunded lending commitments.
Mortgage Servicing Rights (MSRs)
Mortgage servicing rights (MSRs) are recognized as intangible assets when
purchased or when the Company sells or securitizes loans acquired through
purchase or origination and retains the right to service the loans.
Servicing rights in the U.S. mortgage classes of servicing rights
are accounted for at fair value, with changes in value recorded in
current earnings.
Additional information on the Company’s MSRs can be found in Note 22
to the Consolidated Financial Statements.