American Express 2009 Annual Report Download - page 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Changes in the estimates and assumptions used may have
a significant impact on the Company’s valuation of the
retained interests. The key economic assumptions used in
measuring the interest-only strip asset at the time of issuance
as well as at December 31, 2009, and the sensitivity of the fair
value to immediate 10 percent and 20 percent adverse changes
in these assumptions are as follows (rates are per annum):
Interest-Only Strip
At time of issuance As of December 31, 2009
(Millions, except
rates per annum) 2009 2008 Assumptions
Impact on
fair value
of 10%
adverse
change(a)
Finance
charge yield 13.2%-13.5% 13.5%-15.6% 12.4%-13.4% $(77.8)(b)
Expected
credit losses 9.8%-10.9% 4.3%-5.8% 7.6%-8.7% $(50.7)(b)
LIBOR 0.3%-0.9% 2.7%-4.6% 0.2%-0.6% $ (1.7)
Monthly
payment
rate 23.0%-23.1% 23.8%-24.7% 25.5% $ (0.1)
Discount
rate 14.3%-17.2% 11.0%-12.0% 12.4% $ —
(a) The impact on fair value of a 20 percent adverse change is
approximately two times the impact of a 10 percent adverse
change identified above.
(b) The fair value of the interest-only strip is $20 million as of
December 31, 2009. Therefore, a 10 percent adverse change in the
assumption would result in the fair value of the interest-only strip
written down to zero.
The key assumptions and the sensitivity of the current year’s
fair value of the retained subordinated securities to immediate
10 percent and 20 percent adverse changes in these key
assumptions are as follows:
Retained Subordinated Securities
(Millions, except
rates per annum) Assumptions
Impact on fair
value of 10%
adverse change
Impact on fair
value of 20%
adverse change
Discount rate 2.5%-20.7% $(57.2) $(112.0)
LIBOR 1.0%-3.9 % $ 1.5 $ 3.0
This sensitivity analysis does not represent management’s
expectations of adverse changes in these assumptions but is
provided as a hypothetical scenario to assess the sensitivity of
the fair value of the retained subordinated interests to changes
in key inputs. Management cannot extrapolate changes in fair
value based on a 10 percent or 20 percent change in all key
assumptions simultaneously in part because the relationship
of the change in one assumption on the fair value of the
retained interest is calculated independently from any change
in another assumption. Changes in one factor may cause
changes in another, which could magnify or offset the
sensitivities.
Other Disclosures
The table below summarizes cash flows received from the
Lending Trust for the years ended December 31:
(Millions) 2009 2008
Proceeds from new securitizations during
the period(a) $ 2,244 $ 9,619
Proceeds from collections reinvested in
revolving cardmember securitizations $81,654 $78,164
Servicing fees received $ 562 $ 543
Excess spread received, including issuer rate
collections and discounting $ 2,520 $ 2,363
(a) Net of issuance expenses.
The following table presents quantitative information about
delinquencies, net credit losses, and components of
securitized cardmember loans as of December 31:
(Billions)
Total Amount
of
Cardmember
Loans
Amount of
Loans 30
Days or
More Past
Due
Net
Credit
Write-offs
During
the Year
2009
Cardmember loans
managed(a) $61.1 $2.2 $6.2
Less: Cardmember loans
securitized 28.3 1.0 2.8
Cardmember loans
on-balance sheet $32.8 $1.2 $3.4
2008
Cardmember loans
managed $71.2 $3.3 $4.9
Less: Cardmember loans
securitized 29.0 1.4 1.7
Cardmember loans
on-balance sheet $42.2 $1.9 $3.2
(a) Excludes subordinated accrued interest receivable classified in
other assets of $719 million and $807 million as of December 31,
2009 and 2008, respectively. Refer to Note 8.
ON-BALANCE SHEET SECURITIZATIONS
The Company’s securitizations of cardmember receivables are
accounted for as secured borrowings. The Charge Trust is
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