American Express 2008 Annual Report Download - page 86

notes to consolidated financial statements
american express company
84
note 6
asset securitizations
off-balance sheet securitizations
Servicing Portfolio
The Company periodically securitizes cardmember loans
through 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) 2008 2007
Lending Trust assets, January 1 $36,194 $34,584
Account additions, net 10,187 —
Cardmember activity, net (4,802)1,610
Lending Trust assets, December 31 $41,579 $36,194
Securitized cardmember loans,
January 1 $ 22,670 $20,170
Impact of issuances 10,955 6,000
Impact of maturities (4,670) (3,500)
Securitized cardmember loans,
December 31 $28,955 $22,670
Seller’s interest, January 1 $13,524 $14,414
Impact of issuances (10,955)(6,000)
Impact of maturities 4,670 3,500
Account additions, net 10,187 —
Cardmember activity, net (4,802)1,610
Seller’s interest, December 31 $12,624 $13,524
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 plus
the associated accrued interest receivable (Lending Trust
assets) less the investors’ portion of those assets (securitized
cardmember loans). Seller’s interest is reported as cardmember
lending on the Company’s Consolidated Balance Sheets.
Any billed finance charges related to the investors’ portion
of securitized cardmember loans are reported as other assets
on the Company’s Consolidated Balance Sheets. The seller’s
interest is required to be maintained at a minimum level of
7 percent of the outstanding securities in the Lending Trust.
If the seller’s interest was reduced below the 7 percent level,
the Company would be required to add additional cardmember
loans to the Lending Trust. As of December 31, 2008, the
amount of seller’s interest was approximately 40 percent of the
outstanding securities in the Lending Trust.
The Company retains servicing responsibilities for the
transferred cardmember loans through its subsidiary, American
Express Travel Related Services Company, Inc., (TRS) 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.
Securitization Income
The following table summarizes the activity related to
securitized loans reported in securitization income, net for the
years ended December 31:
(Millions) 2008 2007 2006
Excess spread, net(a) $ 544 $1,025 $1,055
Servicing fees 543 425 407
(Losses) Gains on sales from
securitizations(b) (17) 57 27
Securitization income, net $1,070 $1,507 $1,489
(a) Excess spread, net is the net 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, other expenses,
and the changes in the fair value of the interest-only strip in 2008 and
2007.
(b) Excludes $446 million and $(177) million of credit provision impact from
cardmember loan sales and maturities for 2008, $144 million and $(84)
million of credit provision impact from cardmember loan sales and maturities
for 2007, as well as $83 million and $(104) million of credit provision impact
from cardmember loan sales and maturities for 2006.
At the time of a cardmember loan securitization, the Company
records a gain (loss) 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 (Losses)
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.
Retained Interests in Securitized Assets and Fair
Value Measurement
The Company retains subordinated interests in the securitized
cardmember loans. These interests include one or more A-rated
and BBB-rated investments in tranches of the securitization
(subordinated securities) and an interest-only strip. The
following table presents retained interests for the years ended
December 31:
(Millions) 2008 2007
Subordinated securities(a) $744 $ 78
Interest-only strip(b) 32 223
Total retained interests $776 $301
(a) 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 with unrealized gains (losses) recorded in
accumulated other comprehensive (loss) income.