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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
2. Designation of a percentage of new principal receivables
arising from accounts in the Lending Trust as “Discount
Option Receivables” (as defined in the Lending Trust
documentation). As permitted under the terms of the
transaction documents governing the Lending Trust,
collections on Discount Option Receivables may be
applied as finance charge collections, which increased the
yield on the assets in the Lending Trust by approximately
400-650 basis points beginning with the July 2009
monthly reporting period. The designation of Discount
Option Receivables is scheduled to continue through
2010.
The actions described above did not have a material impact
on the Company’s results of operations.
Securitization Income
The following table summarizes the activity related to
securitized loans reported in securitization income, net for the
years ended December 31:
(Millions) 2009 2008 2007
Excess spread, net(a) $(155) $ 544 $1,025
Servicing fees 562 543 425
(Losses) Gains on sales from
securitizations(b) (7) (17) 57
Securitization income, net $ 400 $1,070 $1,507
(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. This amount excludes issuer rate fee
collections, which are a portion of monthly discount revenue that
is earned and collected by the Company on new transactions by
cardmembers that have their loans sold into the Lending Trust.
These cash flows are available to pay monthly Lending Trust
expenses. The issuer rate is reported in discount revenue in the
Company’s Consolidated Statements of Income. In periods when
the excess spread, net in the Lending Trust becomes negative, and
the issuer rate fee collections are utilized to pay Lending Trust
expenses, the Company recognizes an expense in securitization
income, net in the Company’s Consolidated Statements of
Income.
(b) Excludes $201 million and $(393) million of credit provision
impact from cardmember loan sales and maturities for 2009, $446
million and $(177) million of credit provision impact from
cardmember loan sales and maturities for 2008, as well as $144
million and $(84) million of credit provision impact from
cardmember loan sales and maturities for 2007.
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 of cardmember loans is reported as a
reduction of provision for losses from cardmember loans. The
removal of credit reserves in connection with retained
subordinated securities is offset in the allocated cost of the
associated retained subordinated securities.
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, BBB-rated and unrated 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) 2009 2008
Subordinated securities(a) $3,599 $744
Interest-only strip(b) 20 32
Total retained interests $3,619 $776
(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.
(b) The interest-only strip is accounted for at fair value and is
reported in other assets on the Company’s Consolidated Balance
Sheets with changes in fair value recorded in securitization
income, net in the Company’s Consolidated Statements of
Income.
Refer to Note 3 for a description of the Company’s
methodology for determining the fair value of retained
subordinated interests and interest-only strips and related fair
value disclosures.
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