American Express 2001 Annual Report Download - page 40

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FINANCIAL REVIEW
EFFECT OF SECURITIZATIONS
TRS securitizes loans, receivables and, to a limited extent, leases, in the normal course of its business. The above statements of
income and related discussion present TRS results on a managed basis, as if there had been no loan or receivable securitization
transactions. See Note 6 to the Consolidated Financial Statements for further information regarding the company’s securitizations.
As discussed in Consolidated Liquidity and Capital Resources, one of TRS’ primary sources of funding is securitization of Card-
member loans and receivables. TRS securitizes U.S. Cardmember loans and, in large part, transfers the interests in those assets’
cash flows to third party investors. TRS continues to service the accounts and receives a fee for doing so; the fair value and carry-
ing amount of these future servicing fees, net of related costs, are not material. Each new sale of securitized loans results in the
removal of the sold assets from the balance sheet, a reduction in a previously established reserve for credit losses and the recogni-
tion of the present value of the future net cash flows (i.e., finance charge income less interest paid to investors, credit losses and
servicing fees) related to the sold assets. This present value amount represents a retained interest known as an interest-only strip.
For the securitized assets whose interests are not sold, the company retains the rights to all their related cash flows. Those assets,
therefore, are not taken off the balance sheet and are known as seller’s interests. In some instances, the company, through affili-
ates, invests in subordinated interests issued by the securitization trust; these are recorded as Investments classified as Available-
for-Sale.
The gain or loss recorded when loans are securitized is the difference between the proceeds of sale and the book basis of the assets
sold. That book basis is determined by allocating the carrying amount of the assets, net of applicable reserve for losses, between
the assets sold and the retained interests based on their relative fair values. Fair values are based on market prices at date of trans-
fer for assets sold and on the estimated present value of future cash flows for retained interests.
On a GAAP reporting basis, TRS results included securitization gains of $155 million ($101 million after-tax) in 2001, $142 million
($92 million after-tax) in 2000, and $154 million ($100 million after-tax) in 1999. These gains were offset by expenses related to
card acquisition initiatives and, therefore, had no material impact on net income or total expenses in any year. The following tables
reconcile the TRS income statement from a managed basis to a GAAP basis. These tables are not complete statements of income,
as they include only those income statement items that are affected by securitizations.
Year Ended December 31, (Millions) 2001
Managed Basis Securitization Effect GAAP Basis
Net revenues:
Net card fees $ 1,691 $ (16) $ 1,675
Lending net finance charge revenue 3,138 (2,226) 912
Other revenues 3,628 1,499 5,127
Total net revenues 18,102 (743) 17,359
Expenses:
Marketing and promotion 1,145 92 1,237
Provision for losses and claims:
Charge card 1,231 (36) 1,195
Lending 2,243 (925) 1,318
Charge card interest expense 1,476 (33) 1,443
Net discount expense
— 96 96
Other operating expenses 5,379 63 5,442
Total expenses 16,123 (743) 15,380
Pretax income $ 1,979 $ — $ 1,979