Citibank 2014 Annual Report Download - page 163

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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 are 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
legal limitations on simultaneously pursuing guarantors and foreclosure.
A guarantor’s reputation does not impact Citi’s decision or ability to seek
performance under the 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 in turn
is the basis for the adjustment to the statistically based component of the
Allowance for loan losses. To date, it is only in rare circumstances that an
impaired commercial loan or commercial real estate loan is carried at a
value in excess of the appraised value due to a guarantee.
When Citi’s monitoring of the loan indicates that the guarantor’s
wherewithal to pay is uncertain or has deteriorated, there is either no
change in the risk rating, because the guarantor’s credit support was never
initially factored in, or the risk rating is adjusted to reflect that uncertainty
or deterioration. Accordingly, a guarantor’s ultimate failure to perform or
a lack of legal enforcement of the guarantee does not materially impact
the allowance for loan losses, as there is typically no further significant
adjustment of the loan’s risk rating at that time. Where Citi is not seeking
performance under the guarantee contract, it provides for loan losses as if
the loans were non-performing and not guaranteed.
Reserve Estimates and Policies
Management provides reserves for an estimate of probable losses inherent
in the funded loan portfolio on the Consolidated 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. Applicable business areas include those
having classifiably managed portfolios, where internal credit-risk ratings
are assigned (primarily Institutional Clients Group and Global Consumer
Banking) or modified Consumer loans, where concessions were granted due
to the borrowers’ financial difficulties.
The above-mentioned representatives for these business areas present
recommended reserve balances for their funded and unfunded lending
portfolios along with supporting quantitative and qualitative data
discussed below:
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, where 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