American Express 2005 Annual Report Download - page 49

and net write-off rates have historically been broadly
comparable between the Company’s owned and
managed portfolios.
On a GAAP basis, results reflect net securitization
income, which is comprised of the non-credit provision
components of the net gains and charges from securi-
tization activities, the amortization and related impair-
ment charges, if any, of the interest-only strip, excess
spread related to securitized loans, net finance charge
revenue on retained interests in securitized loans, and
servicing income, net of related discounts or fees. Excess
spread, which is the net positive cash flow from interest
and fee collections allocated to the investor’s 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. See Selected Statistical Information below for
data relating to U.S. Card Services’ owned loan portfolio.
During 2005, 2004 and 2003, U.S. Card Services rec-
ognized net gains, including the credit components, of
$21 million ($14 million after-tax), $26 million ($17
million after-tax) and $124 million ($81 million after-
tax), respectively, from net securitization activities. In
2005, the net gains consisted of $181 million of income
from the securitization of $5.4 billion of cardmember
loans, including the impact of the related credit reserves
on the sold loans. This amount was partially offset by
$160 million of charges related to the maturity of $4.5
billion of previously outstanding issuances. In 2004, the
net gains consisted of $230 million of income from the
securitization of $3.9 billion of cardmember loans,
including the impact of the related credit reserves on the
sold loans, and the sale of $1.4 billion of certain retained
interests from previous securitization activities. This
amount was partially offset by $204 million of charges
related to the maturity of $3.0 billion of securitizations
and changes in interest-only strip assumptions.
Management views any net gains from securitizations as
discretionary benefits to be used for card acquisition
expenses, which are reflected in both marketing, pro-
motion, rewards and cardmember services and other
operating expenses. Consequently, the managed basis
presentation for 2005, 2004 and 2003 assumes that
the impact of this net activity was offset by higher
marketing, promotion, rewards and cardmember ser-
vices expenses of $13 million, $16 million and $74 mil-
lion, respectively, and other operating expenses of $8
million, $10 million and $50 million, respectively.
Accordingly, the incremental expenses, as well as the
impact of this net activity, have been eliminated in the
managed basis presentations.
The managed basis presentation for U.S. Card Services
also reflects an increase to interest income recorded to
enable management to evaluate tax exempt investments
on a basis consistent with taxable investment securities.
On a GAAP basis, interest income associated with tax
exempt investments is recorded based on amounts
earned. Accordingly, information presented on a man-
aged basis assumes that tax exempt securities earned
income at rates as if the securities produced taxable
income with a corresponding increase in the provision
for income taxes.
Financial Review
AXP / AR.2005
[47 ]