American Express 2004 Annual Report Download - page 99

Note 4 SECURITIZED LOANS
The Company periodically securitizes pools of its card-
member loans through the American Express Credit
Account Master Trust (the Lending Trust), which in turn
sells securities collateralized by the transferred card-
member loans to third-party investors. Such securities
represent undivided interests in the transferred card-
member loans. The Company is required to maintain
an undivided interest in the transferred cardmember
loans, which is referred to as seller’s interest and is
reported as loans on the Company’s Consolidated Bal-
ance Sheets. Any billed finance charges related to the
transferred cardmember loans are reported as other
receivables on the Company’s Consolidated Balance
Sheets. The Company retains servicing responsibilities
for the transferred assets and earns a related fee. Pur-
suant to SFAS No. 140, no servicing asset or liability is
recognized at the time of a securitization, as manage-
ment believes that the Company receives adequate
compensation relative to current market servicing fees.
As of December 31, 2004 and 2003, the Lending Trust
held total assets of $24.7 billion and $26.8 billion,
respectively, of which $20.3 billion and $19.4 billion
had been sold.
The Company also retains subordinated interests in the
securitized cardmember loans. Such subordinated
retained interests include one or more investments in
tranches of the securitization and an interest-only strip.
The investments in the tranches of the securitization are
accounted for at fair value as Available-for-Sale invest-
ment securities in accordance with SFAS No. 115 and
are reported in investments on the Company’s Consoli-
dated Balance Sheets. As of December 31, 2004 and
2003, the ending fair value of these subordinated
retained interests was $0.1 billion and $1.8 billion,
respectively, reflecting the sale of $1.4 billion of sub-
ordinated retained interests to third parties during
2004. The interest-only strip is also accounted for at fair
value consistent with a SFAS No. 115 Available-for-Sale
investment but is reported in other assets on the Com-
pany’s Consolidated Balance Sheets. The fair value of
the interest-only strip is the present value of estimated
future excess spread expected to be generated by the
securitized loans over the estimated life of those loans.
Excess spread, which is the net positive cash flow from
interest and fee collections allocated to the investors’
interests after deducting the interest paid on investor
certificates, credit losses, contractual servicing fees and
other expenses, is recognized in securitization income
as it is earned. As of December 31, 2004 and 2003, the
fair value of the interest-only strip was $207 million and
$225 million, respectively.
At the time of a cardmember loan securitization, the
Company typically records a gain on sale, which is cal-
culated as the difference between the proceeds from
the sale and the book basis of the cardmember loans
sold. That book basis on sold cardmember loans is
determined by allocating the carrying amount of the
cardmember loans, net of applicable credit reserves,
between the cardmember loans sold and the interests
retained based on their relative fair values. Such fair
values are based on market prices at date of transfer for
the sold cardmember loans and on the estimated
present value of future cash flows for retained interests.
Gains on sale from securitizations are reported in secu-
ritization income on the Company’s Consolidated
Statements of Income, except for the component
resulting from the release of credit reserves upon sale,
which is reported as a reduction of provision for losses
from cardmember lending. Securitization transaction
costs are offset against the gains on sales at the time of
the transaction.
During 2004, 2003 and 2002, the Company sold $3.9
billion, $3.5 billion and $4.6 billion, respectively, of
cardmember loans, or $3.9 billion, $3.1 billion and
$4.2 billion, respectively, net of the Company’s invest-
ments in subordinated retained interests. Additionally,
during 2004, 2003 and 2002, $3.0 billion, $1.0 billion
and $2.0 billion, respectively, of securities issued to
investors from the Lending Trust matured. The pretax
net gains on sale from securitizations, including the sale
of subordinated retained interests, net of the impact of
maturities, the effect of changes in interest-only strip
valuation factors and a reconciliation adjustment
charge were $26 million, $124 million and $136 million,
respectively, for 2004, 2003 and 2002.
AXP
AR.04
97
Notes to Consolidated Financial Statements