Citibank 2013 Annual Report Download - page 177

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Corporate loans
Corporate loans represent loans and leases managed by ICG or Citi Holdings.
Corporate loans are identified as impaired and placed on a cash (non-
accrual) basis when it is determined, based on actual experience and a
forward-looking assessment of the collectability of the loan in full, that the
payment of interest or principal is doubtful or when interest or principal is 90
days past due, except when the loan is well collateralized and in the process
of collection. Any interest accrued on impaired Corporate loans and leases
is reversed at 90 days and charged against current earnings, and interest is
thereafter included in earnings only to the extent actually received in cash.
When there is doubt regarding the ultimate collectability of principal, all
cash receipts are thereafter applied to reduce the recorded investment in
the loan.
Impaired Corporate loans and leases are written down to the extent that
principal is deemed to be uncollectable. Impaired collateral-dependent
loans and leases, where repayment is expected to be provided solely by
the sale of the underlying collateral and there are no other available and
reliable sources of repayment, are written down to the lower of cost or
collateral value. Cash-basis loans are returned to an accrual status when
all contractual principal and interest amounts are reasonably assured of
repayment and there is a sustained period of repayment performance in
accordance with the contractual terms.
Loans Held-for-Sale
Corporate and Consumer loans that have been identified for sale are
classified as loans held-for-sale and included in Other assets. The practice
of Citi’s U.S. prime mortgage business has been to sell substantially all of
its conforming loans. As such, U.S. prime mortgage conforming loans are
classified as held-for-sale and the fair value option is elected at origination,
with changes in fair value recorded in Other revenue. With the exception
of these loans for which the fair value option has been elected, held-for-
sale loans are accounted for at the lower of cost or market value, with any
write-downs or subsequent recoveries charged to Other revenue. The related
cash flows are classified in the Consolidated Statement of Cash Flows in the
cash flows from operating activities category on the line Change in loans
held-for-sale.
Allowance for Loan Losses
Allowance for loan losses represents management’s best estimate of probable
losses inherent in the portfolio, including probable losses related to large
individually evaluated impaired loans and troubled debt restructurings.
Attribution of the allowance is made for analytical purposes only, and
the entire allowance is available to absorb probable loan losses inherent
in the overall portfolio. Additions to the allowance are made through the
Provision for loan losses. Loan losses are deducted from the allowance and
subsequent recoveries are added. Assets received in exchange for loan claims
in a restructuring are initially recorded at fair value, with any gain or loss
reflected as a recovery or charge-off to the allowance.
Corporate loans
In the Corporate portfolios, the Allowance for loan losses includes an asset-
specific component and a statistically based component. The asset-specific
component is calculated under ASC 310-10-35, Receivables-Subsequent
Measurement (formerly SFAS 114) on an individual basis for larger-
balance, non-homogeneous loans, which are considered impaired. An asset-
specific allowance is established when the discounted cash flows, collateral
value (less disposal costs), or observable market price of the impaired loan is
lower than its carrying value. This allowance considers the borrower’s overall
financial condition, resources, and payment record, the prospects for support
from any financially responsible guarantors (discussed further below)
and, if appropriate, the realizable value of any collateral. The asset-specific
component of the allowance for smaller balance impaired loans is calculated
on a pool basis considering historical loss experience.
The allowance for the remainder of the loan portfolio is determined under
ASC 450, Contingencies (formerly SFAS 5) using a statistical methodology,
supplemented by management judgment. The statistical analysis considers
the portfolio’s size, remaining tenor, and credit quality as measured by
internal risk ratings assigned to individual credit facilities, which reflect
probability of default and loss given default. The statistical analysis considers
historical default rates and historical loss severity in the event of default,
including historical average levels and historical variability. The result is an
estimated range for inherent losses. The best estimate within the range is
then determined by management’s quantitative and qualitative assessment
of current conditions, including general economic conditions, specific
industry and geographic trends, and internal factors including portfolio
concentrations, trends in internal credit quality indicators, and current and
past underwriting standards.
For both the asset-specific and the statistically based components of the
Allowance 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 financial
statements which are updated and reviewed at least annually. Citi seeks
performance on guarantee arrangements in the normal course of business.
Seeking performance entails obtaining satisfactory cooperation from the
guarantor or borrower in the specific situation. This regular cooperation
is indicative of pursuit and successful enforcement of the guarantee; the
exposure is reduced without the expense and burden of pursuing a legal
remedy. A guarantor’s reputation and willingness to work with Citigroup
is evaluated based on the historical experience with the guarantor and
the knowledge of the marketplace. In the rare event that the guarantor
is unwilling or unable to perform or facilitate borrower cooperation, Citi
pursues a legal remedy; however, enforcing a guarantee via legal action
against the guarantor is not the primary means of resolving a troubled
loan situation and rarely occurs. If Citi does not pursue a legal remedy,
it is because Citi does not believe that the guarantor has the financial
wherewithal to perform regardless of legal action or because there are