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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
in other assets on the Company’s Consolidated Balance Sheets.
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. Upon
adoption of SFAS No. 155 “Accounting for Certain Hybrid
Financial Instruments – an amendment of FASB Statements
No. 133 and 140” (SFAS No. 155), as of January 1, 2007, the
Company records any changes in the fair value of the interest-
only strip in its securitization income, net. Prior to the adoption
of SFAS No. 155, the Company accounted for the change in
the fair value of the interest-only strip in other comprehensive
(loss) income.
The following table summarizes the activity related to
securitized loans reported in securitization income, net for the
years ended December 31:
(Millions) 2007 2006 2005
Excess spread, net(a) $1,025 $1,055 $ 811
Servicing fees 425 407 412
Gains on sales from
securitizations 57 27 37
Total securitization income $1,507 $1,489 $1,260
(a) Excess spread, net 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. In addition, excess spread, net includes any changes in the
fair value of the interest-only strip.
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 retained interests. Gains on sale
from securitizations are reported in securitization income, net
in the Company’s Consolidated Statements of Income. The
income component resulting from the release of credit reserves
upon sale is reported as a reduction of provision for losses from
cardmember lending.
The Company retains servicing responsibilities for the
transferred cardmember loans through its subsidiary, American
Express Travel Related Services Company, Inc., and earns a
related fee. No servicing asset or liability is recognized at the
time of a securitization because the Company receives adequate
compensation relative to current market servicing fees.
Management utilizes certain estimates and assumptions to
determine the fair value of the retained subordinated interests,
including subordinated securities and the interest-only strip.
These estimates and assumptions are based on projections of
finance charges and fees paid related to the securitized assets,
expected credit losses, average loan life (i.e., monthly payment
rate), the contractual fee to service the transferred assets, and a
discount rate applied to the cash flows from the subordinated
retained interests which is commensurate with the inherent
risk. Changes in the estimates and assumptions used may
have a significant impact in the Company’s valuation. The
key economic assumptions used in measuring the retained
subordinated interest at the time of issuance during 2007 and
2006 were as follows (rates are per annum):
2007 2006
Weighted average
loan life (months) 44
Expected credit losses 2.63% –4.32% 2.60% –3.37%
Residual cash flows
discounted at 12.0% 12.0%
The following table presents quantitative information about
delinquencies, net credit losses, and components of securitized
cardmember loans on a trust basis at December 31:
(Billions)
Total
Principal
Amount of
Loans
Principal
Amount of
Loans 30
Days or
More Past
Due
Net
Credit
Losses
During
the Year
2007
Cardmember loans managed $77.2 $2.4 $2.8
Less: Cardmember loans sold 22.7 0.6 0.8
Cardmember loans on-balance
sheet $54.5 $1.8 $2.0
2006
Cardmember loans managed $63.5 $1.7 $1.9
Less: Cardmember loans sold 20.2 0.5 0.5
Cardmember loans on-balance
sheet $43.3 $1.2 $1.4
86