American Express 2008 Annual Report Download - page 74

notes to consolidated financial statements
american express company
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evaluation process requires certain estimates and judgments.
Reserves for these losses are primarily based upon models that
analyze specific portfolio statistics and reflect management’s
judgment regarding overall reserve adequacy. The analytic
models take into account several factors, including average
write-off rates for various stages of receivable aging (i.e.,
current, 30 days, 60 days, 90 days) over a 24-month period and
average bankruptcy and recovery rates. Management considers
whether to adjust the analytic models based on other factors,
such as reserves as a percentage of past-due accounts, reserves
as a percentage of cardmember loans and receivables, and net
write-off coverage. Other factors considered include leading
economic and market indicators, such as the unemployment
rate, consumer confidence index, purchasing manager’s index,
bankruptcy filings, concentration of credit risk such as based
on tenure, industry or geographic regions, and the legal and
regulatory environment.
Cardmember receivables balances are written off when
management deems amounts to be uncollectible and is generally
determined by the number of days past due. Receivables in
bankruptcy or owed by deceased individuals are written off upon
notification, while other accounts are written off when 180 days
past due for cardmember receivables within the USCS segment
and when 360 days past due for cardmember receivables within
the ICS and GCS segments. Previously, cardmember receivables
in the USCS segment were written off when 360 days past
due. During 2008, consistent with applicable bank regulatory
guidance, the Company modified its write-off methodology to
write off cardmember receivables in the USCS segment when
180 days past due. Net cardmember receivables write-offs in
2008 included approximately $341 million resulting from this
change in write-off methodology. The impact of this change to
the provision for charge card losses was not material.
Investment Securities
Investment securities include debt and equity securities and are
classified within the available-for-sale category.
Available-for-sale investment securities are carried at fair
value on the Consolidated Balance Sheets with unrealized gains
(losses) recorded in accumulated other comprehensive income
(loss), net of income tax provisions (benefits). Realized gains and
losses on these securities are recognized in results of operations
upon disposition of the securities using the specific identification
method on a trade date basis. In addition, realized losses are
recognized when management determines that a decline in value
is other-than-temporary, which requires judgment regarding
the amount and timing of recovery. Indicators of other-than-
temporary impairment for debt securities include issuer
downgrade, default, or bankruptcy. The Company also considers
the extent to which cost exceeds fair value, the duration and size of
that gap, management’s judgment about the issuer’s current and
prospective financial condition, as well as its intent and ability to
hold the security until recovery of the unrealized losses.
Loans
Cardmember lending
Cardmember loans represent amounts due from lending product
customers. These loans are recorded at the time a cardmember
enters into a point-of-sale transaction with a merchant or
when a charge card customer enters into an extended payment
arrangement. Cardmember loans are presented on the
Consolidated Balance Sheets net of reserves for cardmember
losses, discussed below, and include accrued interest receivable
and fees as of the balance sheet date. The Company’s policy is
to cease accruing for interest receivable on a cardmember loan
at the time when the account is written off.
Reserve for losses — cardmember lending
The Company’s methodology for reserving for losses relating
to cardmember loans is consistent with reserving for losses
relating to cardmember receivables. Cardmember loans (other
than those in bankruptcy or owed by deceased individuals) are
written off when 180 days past due.
Asset Securitizations
The Company periodically securitizes cardmember receivables
and loans by transferring those financial assets to a trust. The
trust then issues securities to third-party investors, and these
securities are collateralized by the transferred assets. The
Company accounts for its transfers of these financial assets in
accordance with SFAS No. 140.
In order for a securitization of financial assets to be
accounted for as a sale, the transferor must surrender control
over those financial assets to the extent that the transferor
receives consideration other than beneficial interests in the
transferred assets.
Cardmember loans are transferred to a QSPE, and such
transactions are structured to meet the sales criteria. Accordingly,
when loans are sold through securitizations, the Company
removes the loans from its Consolidated Balance Sheets and
recognizes a gain or loss on sale and retained interests in the
securitizations.
In contrast, cardmember receivables are transferred
to a variable interest entity, a trust that does not meet the
requirements for treatment as a qualifying sale. Securitizations
of cardmember receivables are accounted for as secured
borrowings.
Premises and Equipment
Premises and Equipment
Premises and equipment, including leasehold improvements,
are carried at cost less accumulated depreciation. Costs incurred
during construction are capitalized and are depreciated once an
asset is placed in service. Depreciation is generally computed
using the straight-line method over the estimated useful lives of
assets, which range from 3 to 8 years for equipment. Premises