American Express 2005 Annual Report Download - page 79

NOTE 4 Loans
Loans at December 31 consisted of:
(Millions) 2005 2004
Cardmember lending $ 33,104 $ 26,905
International banking:
Consumer and private banking 4,822 4,825
Banks and other institutions 2,268 1,984
Corporate 23 76
Total international banking 7,113 6,885
Other 1,681 1,550
Total loans — gross 41,898 35,340
Less: Loan loss reserves 1,097 1,084
Total $ 40,801 $ 34,256
The following table presents changes in loan loss reserves:
(Millions) 2005 2004
Balance, January 1 $ 1,084 $ 1,121
Provision
(a)
1,381 1,188
Write-offs
(b)
(1,516) (1,319)
Recoveries and other
(c)
148 94
Balance, December 31 $ 1,097 $ 1,084
(a)Provision for the years ended December 31, 2005 and 2004 includes
$1,349 million and $1,130 million, respectively, related to cardmember
lending and $32 million and $58 million, respectively, related to
international banking and other.
(b)Write-offs for the years ended December 31, 2005 and 2004 include
$1,449 million and $1,205 million, respectively, related to cardmember
lending and $67 million and $114 million, respectively, related to
international banking and other.
(c)Recoveries and other for the years ended December 31, 2005 and 2004
include $124 million and $49 million, respectively, related to cardmem-
ber lending and $24 million and $45 million, respectively, related to
international banking and other.
NOTE 5 Securitized Loans
The Company periodically securitizes cardmember
loans through the American Express Credit Account
Master Trust (the Lending Trust), which in turn issues
securities collateralized by the transferred cardmember
loans to third-party investors. Such securities represent
undivided interests in the transferred cardmember
loans. The Company, through its subsidiaries, is
required to maintain an undivided interest in the trans-
ferred cardmember loans, which is referred to as seller’s
interest, and is generally equal to the balance of the loans
in the Lending Trust less the investors’ portion of those
assets. Seller’s interest is reported as loans on the Com-
pany’s Consolidated Balance Sheets. Any billed finance
charges related to the transferred cardmember loans are
reported as other receivables on the Company’s Consoli-
dated Balance Sheets. The Company retains servicing
responsibilities for the transferred cardmember loans,
through its subsidiary, American Express Travel Related
Services Company, Inc. (TRS), and earns a related fee.
Pursuant to SFAS No. 140, no servicing asset or liability
is recognized at the time of a securitization, as
management believes that the Company receives
adequate compensation relative to current market ser-
vicing fees. As of December 31, 2005 and 2004, the
Lending Trust held total assets of $28.9 billion and
$24.7 billion, respectively, of which $21.2 billion and
$20.3 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, 2005 and
2004, the ending fair value of these subordinated
retained interests was $70 million and $108 million,
respectively. The interest-only strip is also accounted for
at fair value consistent with a SFAS No. 115 Available-
for-Sale investment and is reported in other assets. The
fair value of the interest-only strip is the present value
of estimated future excess spread expected to be gener-
ated 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, 2005 and
2004, the fair value of the interest-only strip was $209
million and $207 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 deter-
mined by allocating the carrying amount of the card-
member 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 securitization
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
Notes to Consolidated
Financial Statements
AXP / AR.2005
[77 ]