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[ 87 ]
notes to consolidated fi nancial statements
american express company
Individually “impaired” loans are defined by GAAP
as larger balance or restructured loans for which it is
probable that the lender will be unable to collect all
amounts due according to the original contractual
terms of the loan agreement. An analysis of impaired
loans follows:
(Millions) 2006 2005
Loans requiring allowance for losses $136 $20
Loans expected to be fully recoverable 104 270
Total impaired loans $240 $ 290
Reserve for losses $72 $15
Average investment during the year $301 $ 121
Interest income recognized while impaired $3$—
Loans amounting to $508 million and $311 million at
December 31, 2006 and 2005, respectively, were past
due 90 days or more and still accruing interest. These
amounts primarily relate to cardmember lending for
which the Company’s policy is to cease accruing for
interest receivable once a related cardmember loan is
more than 180 days past due.
NOTE 5 SECURITIZED LOANS
The Company periodically securitizes cardmember
loans through the American Express Credit Account
Master Trust (the Lending Trust). The following table
illustrates the activity in the Lending Trust (including
the securitized cardmember loans and seller’s interest)
for the years ended December 31:
(Millions) 2006 2005
Lending Trust assets, January 1 $28,854 $24,720
Account additions, net 5,932 3,862
Cardmember activity, net (202) 272
Lending Trust assets, December 31 $34,584 $28,854
Securitized cardmember loans, January 1 $21,175 $20,275
Impact of issuances 3,500 5,400
Impact of maturities (4,505) (4,500)
Securitized cardmember loans,
December 31 $20,170 $21,175
Seller’s interest, January 1 $7,679 $ 4,445
Impact of issuances (3,500) (5,400)
Impact of maturities 4,505 4,500
Account additions, net 5,932 3,862
Cardmember activity, net (202) 272
Seller’s interest, December 31 $14,414 $ 7,679
The Company, through its subsidiaries, is required
to maintain an undivided interest in the transferred
cardmember loans (seller’s interest), which is equal to
the balance of all cardmember loans transferred to the
Lending Trust (Lending Trust assets) less the investors’
portion of those assets (securitized cardmember loans).
Seller’s interest is reported as cardmember loans on the
Company’s Consolidated Balance 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 also
retains subordinated interests in the securitized
cardmember loans. These interests may include one
or more investments in tranches of the securitization
(subordinated securities) and an interest-only strip. The
following table presents retained subordinated interests
for the years ended December 31:
(Millions) 2006 2005
Interest-only strip $ 266 $ 209
Subordinated securities —70
Tota l $ 266 $ 279
The subordinated securities are accounted for at fair
value as Available-for-Sale investment securities and are
reported in investments on the Company’s Consolidated
Balance Sheets as of December 31, 2005. The Company
had no subordinated securities at December 31, 2006.
The interest-only strip is also accounted for at fair value
as an Available-for-Sale investment security, 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 generated by the securitized loans
over the estimated life of those loans.
The following table summarizes the activity related
to securitized loans reported in securitization income,
net for the years ended December 31:
(Millions) 2006 2005 2004
Excess spread, net (a) $1,055 $ 811 $ 671
Servicing fees 407 412 388
Gains on sales from securitizations 27 37 73
Total securitization income $1,489 $1,260 $1,132
(a) Excess spread 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.
At the time of a cardmember loan securitization, the
Company records a gain on sale, which is calculated
as the difference between the proceeds from the sale
and the book basis of the cardmember loans sold. The
book basis is determined by allocating the carrying
amount of the sold 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
the date of transfer for the sold cardmember loans and
on the estimated present value of future cash flows for