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further discussion of merchant discount and interchange revenue below) to investors in securitizations. These cash flows
are used to pay investors in the transactions a contractual rate of return on their investment, to reimburse investors for
losses of principal resulting from charged-off loans, net of recoveries, and to pay us a contractual fee for servicing the
securitized loans. Any excess cash flows, referred to as excess spread, are paid to us. Both servicing fees and excess
spread are recorded in securitization income. Securitization income also includes the net revaluation of the interest-only
strip receivable and certain other retained interests, reflecting adjustments to the fair values that result from changes in the
level of securitized loans and assumptions used to value the retained interests.
Beginning December 1, 2009, our results of operations will no longer reflect securitization income, but will instead
report interest income, net charge-offs and certain other income associated with all securitized loan receivables and
interest expense associated with debt issued from the trusts to third-party investors in the same line items in our results of
operations as non-securitized credit card loan receivables and corporate debt. Additionally, we will no longer record
initial gains on new securitization activity since securitized credit card loans will no longer receive sale accounting
treatment, nor will there be any gains or losses on the revaluation of the interest-only strip receivable as that asset is not
recognizable in a transaction accounted for as a secured borrowing and, accordingly, will be derecognized on
December 1, 2009. For more information, see “– Accounting Treatment for Off-Balance Sheet Securitizations.”
The table below presents the components of securitization income (dollars in thousands):
For the Years Ended November 30,
2009 vs. 2008
increase
(decrease)
2008 vs. 2007
increase
(decrease)
2009 2008 2007 $ % $ %
Excess spread ................................................................................. $1,570,005 $2,017,146 $1,753,844 $(447,141) (22%) $ 263,302 15%
Servicing fees on securitized loans ..................................................... 492,095 553,398 538,409 (61,303) (11%) 14,989 3%
Net revaluation of retained interests(1) ................................................. (160,087) (119,324) 51,346 (40,763) (34%) (170,670) NM
Other (principally transaction costs).................................................... (22,709) (22,062) (19,976) (647) (3%) (2,086) (10%)
Total securitization income ................................................................ $1,879,304 $2,429,158 $2,323,623 $(549,854) (23%) $ 105,535 5%
(1) Net of issuance discounts, as applicable.
Securitization income is significantly influenced by the level of average securitized loans. Average securitized loans of
$24.6 billion for the year ended November 30, 2009, was significantly lower than the $27.7 billion and $27.0 billion
average levels of securitized loans at November 30, 2008 and 2007, respectively, as a result of the disruption in the
credit card asset-backed securitization markets beginning in the fourth quarter of 2008 and continuing into 2009.
For the year ended November 30, 2009, securitization income decreased $549.9 million, or 23%, as compared to the
year ended November 30, 2008. The decrease is primarily attributable to lower excess spread on securitized loans along
with lower servicing fees earned and a decrease in the net revaluation of retained interests. In 2008, securitization
income increased $105.5 million, or 5%, as compared to 2007 primarily reflecting higher excess spread on securitized
loans offset in part by a decrease in the net revaluation of retained interests. These variances, as well as other factors, are
described in more detail in the tables and discussion below.
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