American Express 2001 Annual Report Download - page 60

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 ❚SECURITIZED LOANS AND RECEIVABLES
The company, through TRS, securitizes U.S. Cardmember loans and, in large part, subsequently transfers the interests in those
assets’ cash flows to third party investors. The company continues to service the accounts and receives a fee for doing so; the fair
value and carrying 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 recognition 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
affiliates, invests in subordinated interests issued by the securitization trust; these are recorded as Investments classified as Avail-
able-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.
During 2001, 2000 and 1999, the company sold $4.3 billion, $4.0 billion and $4.0 billion, respectively, of U.S. Cardmember loans,
or $3.9 billion, $3.6 billion and $3.7 billion net of investments in subordinated interests. During 2001, $1.0 billion of investor cer-
tificates that were previously issued by the securitization trust matured, resulting in $3.3 billion of net additional securitizations
during the year. There were no certificate maturities in 2000. The pretax gains on these securitizations were $155 million, $142 mil-
lion and $154 million, respectively. Cash flows from interest-only strips as well as servicing revenue, which is 2 percent of princi-
pal, are recorded in other revenues. As of December 31, 2001, $13.1 billion of U.S. Cardmember loans had been sold, net of
investments in subordinated interests of $1.2 billion.
The value of retained interests is primarily subject to changes in credit risk, average loan life and interest rates on the transferred
financial assets. Key economic assumptions used in measuring the retained interests resulting from securitizations during 2001
and 2000 were as follows (rates are per annum):
2001 2000
Average loan life (months) 6–8 8–12
Expected credit losses 4.54% – 6.01% 4.46% – 5.12%
Cash flows from retained interests discounted at 3.0% – 12.0% 6.0% – 12.0%
Returns to investors
Variable Contractual spread over Contractual spread over
LIBOR ranging from .09% to 1.05% LIBOR ranging from .09% to .9%
Fixed 5.5% – 7.4% 5.6% – 7.4%
The following table presents quantitative information about delinquencies, net credit losses and components of securitized U.S.
Cardmember loans at December 31:
Total Principal Principal Amount of Loans Net Credit Losses
(Billions) Amount of Loans 30 Days or More Past due During the Year
2001 2000 2001 2000 2001 2000
Cardmember loans managed $ 30.2 $ 28.3 $ 1.1 $ 0.8 $ 1.7 $ 1.1
Less: Securitized loans sold 14.3 11.0
Cardmember loans on balance sheet $ 15.9 $ 17.3