Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York   13-4922250

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

World Financial Center, 200 Vesey Street, New York, NY   10285
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (212) 640-2000

None

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 22, 2009

Common Shares (par value $0.20 per share)   1,189,169,358 shares

 


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

        Page No.

Part I.

  Financial Information:  
  Item 1.   Financial Statements  
    Consolidated Statements of Income – Three months ended September 30, 2009 and 2008   1
    Consolidated Statements of Income – Nine months ended September 30, 2009 and 2008   2
    Consolidated Balance Sheets – September 30, 2009 and December 31, 2008   3
    Consolidated Statements of Cash Flows – Nine months ended September 30, 2009 and 2008   4
    Notes to Consolidated Financial Statements   5-38
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   39-76
  Item 3.   Quantitative and Qualitative Disclosures about Market Risk   76-77
  Item 4.   Controls and Procedures   77-80

Part II.

  Other Information:  
  Item 1.   Legal Proceedings   80-81
  Item 1A.   Risk Factors   82-83
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   84
  Item 6.   Exhibits   85
  Signatures   86
 

Exhibit Index

  E-1


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Millions, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
 
     2009     2008  

Revenues

    

Non-interest revenues

    

Discount revenue

   $ 3,373      $ 3,848   

Net card fees

     538        541   

Travel commissions and fees

     383        499   

Other commissions and fees

     448        573   

Securitization income, net

     71        200   

Other

     449        553   
                

Total non-interest revenues

     5,262        6,214   
                

Interest income

    

Interest and fees on loans

     1,059        1,560   

Interest and dividends on investment securities

     229        200   

Deposits with banks and other

     9        74   
                

Total interest income

     1,297        1,834   
                

Interest expense

    

Deposits

     109        109   

Short-term borrowings

     2        114   

Long-term debt and other

     432        661   
                

Total interest expense

     543        884   
                

Net interest income

     754        950   
                

Total revenues net of interest expense

     6,016        7,164   
                

Provisions for losses

    

Charge card

     143        351   

Cardmember lending

     989        958   

Other

     46        50   
                

Total provisions for losses

     1,178        1,359   
                

Total revenues net of interest expense after provisions for losses

     4,838        5,805   

Expenses

    

Marketing, promotion, rewards and cardmember services

     1,619        1,929   

Salaries and employee benefits

     1,261        1,465   

Professional services

     575        608   

Other, net

     465        725   
                

Total

     3,920        4,727   
                

Pretax income from continuing operations

     918        1,078   

Income tax provision

     276        217   
                

Income from continuing operations

     642        861   

Loss from discontinued operations, net of tax

     (2     (46
                

Net income

   $ 640      $ 815   
                

Earnings per Common Share — Basic: (Note 12)

    

Income from continuing operations attributable to common shareholders (a)

   $ 0.54      $ 0.74   

Loss from discontinued operations

     —          (0.04
                

Net income attributable to common shareholders (a)

   $ 0.54      $ 0.70   
                

Earnings per Common Share — Diluted: (Note 12)

    

Income from continuing operations attributable to common shareholders (a)

   $ 0.54      $ 0.74   

Loss from discontinued operations

     (0.01     (0.04
                

Net income attributable to common shareholders (a)

   $ 0.53      $ 0.70   
                

Average common shares outstanding for earnings per common share:

    

Basic

     1,178        1,154   
                

Diluted

     1,181        1,158   
                

Cash dividends declared per common share

   $ 0.18      $ 0.18   
                

 

(a) Represents income from continuing operations or net income, as applicable, less earnings allocated to participating share awards and other items of $8 million and $5 million for the quarters ended September 30, 2009 and 2008, respectively. Net income attributable to common shareholders, after consideration of the items described above, was $632 million and $810 million for the quarters ended September 30, 2009 and 2008, respectively.

See Notes to Consolidated Financial Statements.

 

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AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Millions, except per share amounts)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Revenues

    

Non-interest revenues

    

Discount revenue

   $ 9,744      $ 11,557   

Net card fees

     1,602        1,614   

Travel commissions and fees

     1,155        1,566   

Other commissions and fees

     1,340        1,785   

Securitization income, net

     210        871   

Other

     1,569        1,591   
                

Total non-interest revenues

     15,620        18,984   
                

Interest income

    

Interest and fees on loans

     3,432        4,795   

Interest and dividends on investment securities

     579        603   

Deposits with banks and other

     48        235   
                

Total interest income

     4,059        5,633   
                

Interest expense

    

Deposits

     299        381   

Short-term borrowings

     36        411   

Long-term debt and other

     1,310        1,966   
                

Total interest expense

     1,645        2,758   
                

Net interest income

     2,414        2,875   
                

Total revenues net of interest expense

     18,034        21,859   
                

Provisions for losses

    

Charge card

     716        937   

Cardmember lending

     3,706        3,304   

Other

     143        153   
                

Total provisions for losses

     4,565        4,394   
                

Total revenues net of interest expense after provisions for losses

     13,469        17,465   

Expenses

    

Marketing, promotion, rewards and cardmember services

     4,433        5,609   

Salaries and employee benefits

     3,884        4,430   

Professional services

     1,693        1,764   

Other, net

     1,579        2,349   
                

Total

     11,589        14,152   
                

Pretax income from continuing operations

     1,880        3,313   

Income tax provision

     453        748   
                

Income from continuing operations

     1,427        2,565   

Loss from discontinued operations, net of tax

     (13     (106
                

Net income

   $ 1,414      $ 2,459   
                

Earnings per Common Share — Basic: (Note 12)

    

Income from continuing operations attributable to common shareholders (a)

   $ 0.95      $ 2.21   

Loss from discontinued operations

     (0.01     (0.09
                

Net income attributable to common shareholders (a)

   $ 0.94      $ 2.12   
                

Earnings per Common Share — Diluted: (Note 12)

    

Income from continuing operations attributable to common shareholders (a)

   $ 0.95      $ 2.20   

Loss from discontinued operations

     (0.01     (0.10
                

Net income attributable to common shareholders (a)

   $ 0.94      $ 2.10   
                

Average common shares outstanding for earnings per common share:

    

Basic

     1,164        1,154   
                

Diluted

     1,166        1,161   
                

Cash dividends declared per common share

   $ 0.54      $ 0.54   
                

 

(a) Represents income from continuing operations or net income, as applicable, less (i) accelerated preferred dividend accretion of $212 million for the nine months ended September 30, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP) (ii) preferred shares dividends and related accretion of $94 million for the nine months ended September 30, 2009 and (iii) earnings allocated to participating share awards and other items of $13 million and $14 million for the nine months ended September 30, 2009 and 2008, respectively. Net income attributable to common shareholders, after consideration of the items described in (i) – (iii) above, was $1,095 million and $2,445 million for the nine months ended September 30, 2009 and 2008, respectively.

See Notes to Consolidated Financial Statements.

 

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AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Millions, except share data)

(Unaudited)

 

     September 30,
2009
    December 31,
2008
 

Assets

    

Cash and cash equivalents

    

Cash and cash due from banks

   $ 1,704      $ 1,574   

Interest-bearing deposits in other banks (including federal funds sold and securities purchased under resale agreements: 2009, $151; 2008, $141)

     6,356        6,554   

Short-term investment securities

     10,588        12,419   
                

Total

     18,648        20,547   

Accounts receivable

    

Cardmember receivables, less reserves: 2009, $599; 2008, $810

     31,528        32,178   

Other receivables, less reserves: 2009, $118; 2008, $118

     3,267        4,393   

Loans

    

Cardmember lending, less reserves: 2009, $3,359; 2008, $2,570

     28,116        39,641   

Other, less reserves: 2009, $30; 2008, $39

     511        1,018   

Investment securities

     23,798        12,526   

Premises and equipment – at cost, less accumulated depreciation: 2009, $4,055; 2008, $3,743

     2,759        2,948   

Other assets

     11,818        12,607   

Assets of discontinued operations

     —          216   
                

Total assets

   $ 120,445      $ 126,074   
                

Liabilities and Shareholders’ Equity

    

Liabilities

    

Customers’ deposits

   $ 23,863      $ 15,486   

Travelers Cheques outstanding

     5,746        6,433   

Accounts payable

     8,780        8,428   

Short-term borrowings

     2,202        8,993   

Long-term debt

     52,850        60,041   

Other liabilities

     13,061        14,592   

Liabilities of discontinued operations

     —          260   
                

Total liabilities

     106,502        114,233   
                

Contingencies (see Note 18)

    

Shareholders’ Equity

    

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,189 million shares in 2009 and 1,160 million shares in 2008

     237        232   

Additional paid-in capital

     11,015        10,496   

Retained earnings

     3,247        2,719   

Accumulated other comprehensive loss, net of tax:

    

Net unrealized securities gains (losses), net of tax: 2009, $(332); 2008, $458

     587        (699

Net unrealized derivatives losses, net of tax: 2009, $21; 2008, $44

     (38     (80

Foreign currency translation adjustments, net of tax: 2009, $35; 2008, $64

     (679     (368

Net unrealized pension and other postretirement benefit costs, net of tax: 2009 $212; 2008, $216

     (426     (459
                

Total accumulated other comprehensive loss

     (556     (1,606
                

Total shareholders’ equity

     13,943        11,841   
                

Total liabilities and shareholders’ equity

   $ 120,445      $ 126,074   
                

See Notes to Consolidated Financial Statements

 

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AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Cash Flows from Operating Activities

    

Net income

   $ 1,414      $ 2,459   

Loss from discontinued operations, net of tax

     13        106   
                

Income from continuing operations

     1,427        2,565   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Provisions for losses

     5,234        4,828   

Depreciation and amortization

     777        538   

Deferred taxes, acquisition costs and other

     (1,423     (363

Stock-based compensation

     158        177   

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

    

Other receivables

     1,028        298   

Other assets

     236        (162

Accounts payable and other liabilities

     (925     1,653   

Travelers Cheques outstanding

     (681     (703

Net cash used in operating activities attributable to discontinued operations

     (239     (88
                

Net cash provided by operating activities

     5,592        8,743   
                

Cash Flows from Investing Activities

    

Sale of investments

     2,647        1,919   

Maturity and redemption of investments

     2,741        7,062   

Purchase of investments

     (12,493     (9,591

Net decrease in cardmember loans/receivables

     9,015        679   

Proceeds from cardmember loan securitizations

     2,244        9,619   

Maturities of cardmember loan securitizations

     (4,800     (4,670

Purchase of premises and equipment

     (491     (633

Sale of premises and equipment

     39        15   

Acquisitions, net of cash acquired

     —          (4,617

Net cash provided by investing activities attributable to discontinued operations

     196        2,605   
                

Net cash (used in) provided by investing activities

     (902     2,388   
                

Cash Flows from Financing Activities

    

Net change in customer deposits

     8,545        (3,230

Net decrease in short-term borrowings

     (6,724     (3,574

Issuance of long-term debt

     4,500        13,308   

Principal payments on long-term debt

     (12,439     (10,324

Issuance of American Express Series A preferred shares and warrants

     3,389        —     

Issuance of American Express common shares

     531        180   

Repurchase of American Express Series A preferred shares

     (3,389     —     

Repurchase of American Express stock warrants

     (340     —     

Repurchase of American Express common shares

     —          (219

Common and preferred dividends paid

     (709     (627

Net cash provided by (used in) financing activities attributable to discontinued operations

     40        (6,079
                

Net cash used in financing activities

     (6,596     (10,565

Effect of exchange rate changes on cash

     4        64   
                

Net (decrease) increase in cash and cash equivalents

     (1,902     630   

Cash and cash equivalents at beginning of period includes cash of discontinued operations: 2009, $3; 2008, $6,390

     20,550        15,268   
                

Cash and cash equivalents at end of period includes cash of discontinued operations: 2009, $0; 2008, $342

   $ 18,648      $ 15,898   
                

See Notes to Consolidated Financial Statements.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Company

The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements which are incorporated by reference in the Annual Report on Form 10-K of American Express Company (the Company) for the year ended December 31, 2008 (2008 Form 10-K). Certain reclassifications of prior year amounts have been made to conform to the current presentation. These reclassifications did not have an impact on the Company’s results of operations or cash flows.

The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial position and the consolidated results of operations for the interim periods have been made. The Company made certain adjustments that represent corrections of errors related to prior periods (see Notes 8 and 13 for additional details). Otherwise, all adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses relating to loans and charge card receivables, Membership Rewards, fair value measurement, and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ.

As discussed in the 2008 Form 10-K, the Company became a bank holding company during the fourth quarter of 2008 under the Bank Holding Company Act of 1956, and the Federal Reserve Board (Federal Reserve) became the Company’s primary federal regulator. As such, the Company is subject to the Federal Reserve’s regulations, policies and minimum capital standards.

Recently Issued Accounting Standards

Effective for interim and annual periods ending after September 15, 2009, the Financial Accounting Standards Board (FASB) Accounting Standards CodificationTM (the Codification) is the single source of authoritative literature of U.S. generally accepted accounting principles (GAAP). The Codification consolidates all authoritative accounting literature into one internet-based research tool, which supercedes all pre-existing accounting and reporting standards, excluding separate rules and other interpretive guidance released by the Securities and Exchange Commission. New accounting guidance is now issued in the form of Accounting Standards Updates, which update the Codification. The Company has adopted the Codification in the period ending September 30, 2009, and as a result has replaced references to standards that were issued prior to the Codification with a description of the applicable accounting guidance.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The FASB recently issued the following accounting standards, which are effective beginning January 1, 2010.

 

   

An amendment to the accounting guidance for transfers of financial assets (originally issued as Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”): The amendment eliminated the concept of a qualifying special purpose entity (QSPE), therefore requiring these entities to be evaluated under the accounting guidance for consolidation of variable interest entities (VIE). Other changes include additional considerations when determining if sale accounting is appropriate, as well as enhanced disclosures requirements. The new standard is to be applied prospectively to transactions completed after the effective date.

 

   

An amendment to the accounting guidance for consolidation of VIEs (originally issued as FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”): The new standard eliminates the scope exception for QSPEs and requires an entity to reconsider its previous consolidation conclusions reached under the VIE consolidation model, including (i) whether an entity is a VIE, (ii) whether the enterprise is the VIE’s primary beneficiary, and (iii) the required financial statement disclosures. The new standard can be applied as of the effective date, with a cumulative-effect adjustment to retained earnings recognized on that date, or retrospectively, with a cumulative-effect adjustment to retained earnings recognized as of the beginning of the first year adjusted.

The Company has determined that it will be required to consolidate the American Express Credit Account Master Trust (the Lending Trust) as a result of implementing these standards, and is currently assessing the impact of such consolidation on its financial position and results of operations. The Company has provided, on a pro forma basis as of September 30, 2009, the impact of consolidating the Lending Trust on its bank regulatory capital ratios within the “Consolidated Capital Resources and Liquidity” section of the Company’s Form 10-Q for the Quarterly Period Ended September 30, 2009. The Company is also assessing the impact of these standards on certain other unconsolidated entities. Refer to Note 7 for further discussion of the Lending Trust.

2. Discontinued Operations

On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB), to Standard Chartered PLC (Standard Chartered), and to sell American Express International Deposit Company (AEIDC) through a put/call agreement to Standard Chartered 18 months after the close of the AEB sale. The sale of AEB was completed on February 29, 2008. In the third quarter of 2008, AEIDC qualified to be reported as a discontinued operation; the sale of AEIDC was completed on September 10, 2009.

For all periods presented, all of the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that were not sold) and AEIDC have been removed from the Corporate & Other segment and are presented separately in discontinued operations in the Company’s Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Accounts Receivable

Accounts receivable at September 30, 2009 and December 31, 2008, consisted of:

 

(Millions)

   2009    2008

U.S. Card Services

   $ 15,930    $ 17,822

International Card Services

     5,627      5,582

Global Commercial Services

     10,364      9,397

Global Network & Merchant Services (a)

     206      187
             

Cardmember receivables, gross (b)

     32,127      32,988

Less: Cardmember reserve for losses

     599      810
             

Cardmember receivables, net

   $ 31,528    $ 32,178
             

Other receivables, gross (c)

   $ 3,385    $ 4,511

Less: Other reserve for losses

     118      118
             

Other receivables, net

   $ 3,267    $ 4,393

 

  (a) Includes receivables primarily related to the Company’s business partners and International Currency Card portfolios.
  (b) Includes approximately $9.8 billion and $9.9 billion of cardmember receivables outside the United States as of September 30, 2009 and December 31, 2008, respectively.
  (c) Other receivables primarily represent amounts due from the Company’s travel customers, third party issuing partners, accrued interest on investments, receivables acquired in connection with the purchase of Corporate Payment Services (CPS), Company cash held in an off-balance sheet securitization trust for daily settlement requirements, and other receivables due to the Company in the ordinary course of business.

The following table presents changes in the cardmember receivable reserve for losses for the nine months ended September 30:

 

(Millions)

   2009     2008  

Balance, January 1

   $ 810      $ 1,149   

Additions:

    

Cardmember receivables provision

     716        937   

Deductions/Other:

    

Cardmember receivables net write-offs (a)

     (937     (883

Cardmember receivables other (b)

     10        (69
                

Balance, September 30

   $ 599      $ 1,134   

 

  (a) Represents write-offs of charge card balances consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries of $254 million and $151 million for the nine months ended September 30, 2009 and 2008, respectively.
  (b) Primarily includes foreign currency translation adjustments. For the three months ended September 30, 2008, this amount also includes waived fees.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Loans

Loans at September 30, 2009 and December 31, 2008 consisted of:

 

(Millions)

   2009    2008

U.S. Card Services

   $ 22,686    $ 32,684

International Card Services

     8,771      9,499

Global Commercial Services

     18      28
             

Cardmember lending, gross

     31,475      42,211

Less: Cardmember lending reserve for losses

     3,359      2,570
             

Cardmember lending, net

   $ 28,116    $ 39,641
             

Other loans, gross (a)

   $ 541    $ 1,057

Less: Other reserve for losses

     30      39
             

Other loans, net

   $ 511    $ 1,018

 

  (a) Other loans primarily represent small business installment loans, a store card portfolio whose billed business is not processed on the Company’s network and small business loans associated with the CPS acquisition. Other loans at December 31, 2008, included a loan to an affiliate in discontinued operations.

The following table presents changes in the cardmember lending reserve for losses for the nine months ended September 30:

 

(Millions)

   2009     2008  

Balance, January 1

   $ 2,570      $ 1,831   

Additions:

    

Cardmember lending provisions (a)

     3,665        3,209   

Cardmember lending other (b)

     41        95   
                

Total provision

     3,706        3,304   
                

Deductions:

    

Cardmember lending net write-offs – principal (c)

     (2,360     (1,941

Cardmember lending net write-offs – interest and fees (c)

     (376     (437

Cardmember lending other (d)

     (181     (117
                

Balance, September 30

   $ 3,359      $ 2,640   

 

  (a) Represents loss provisions for cardmember lending consisting of principal (resulting from authorized transactions), interest, and fee reserves components.
  (b) Primarily represents adjustments to cardmember lending receivables resulting from unauthorized transactions. For the nine months ended September 30, 2008, this amount also includes waived fees.
  (c) Cardmember lending net write-offs – principal for September 30, 2009 and 2008 include recoveries of $253 million and $236 million, respectively. Recoveries of interest and fees were de minimis.
  (d) For September 30, 2009, this amount primarily includes $169 million of reserves that were removed in connection with securitizations during the period, which is offset in the allocated cost of the associated retained subordinated securities. This amount also includes foreign currency translation adjustments. Prior periods primarily included foreign currency translation adjustments.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents changes in the other loans reserve for losses for the nine months ended September 30:

 

(Millions)

   2009     2008  

Balance, January 1

   $ 39      $ 45   

Provisions

     64        29   

Net write-offs and other (a)

     (73     (30
                

Balance, September 30

   $ 30      $ 44   

 

  (a) Net write-offs and other for September 30, 2009 and 2008 include recoveries of $9 million and $8 million, respectively, and foreign currency translation adjustments of $(22) million and $7 million, respectively.

5. Investment Securities

The following is a summary of investment securities, all of which are classified as available-for-sale at September 30, 2009 and December 31, 2008:

 

     September 30, 2009    December 31, 2008

(Millions)

   Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Cost    Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value

State and municipal obligations

   $ 6,280    $ 94    $ (145   $ 6,229    $ 6,628    $ 37    $ (1,034   $ 5,631

U.S. Government treasury obligations

     5,064      22      —          5,086      1,933      48      —          1,981

U.S. Government agency obligations

     6,706      60      —          6,766      3,141      44      —          3,185

Mortgage-backed securities(a)

     161      2      (1     162      73      2      —          75

Retained subordinated securities(b)

     3,172      526      (2     3,696      1,328      —        (584     744

Equity securities(c)

     100      362      —          462      200      344      —          544

Corporate debt securities(d)

     1,280      15      (16     1,279      230      1      (13     218

Foreign government bonds and obligations

     76      2      —          78      84      1      (4     81

Other

     40      —        —          40      67      —        —          67
                                                         

Total

   $ 22,879    $ 1,083    $ (164   $ 23,798    $ 13,684    $ 477    $ (1,635   $ 12,526

 

(a) Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
(b) Consists of investments in retained subordinated securities from the Company’s securitization of cardmember loans.
(c) Represents the Company’s investment in Industrial and Commercial Bank of China (ICBC).
(d) The September 30, 2009 balance includes $1.05 billion of corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the FDIC.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value

The following is a description of the valuation techniques utilized by the Company to measure the fair value of its investment securities, including the three general classifications of such items pursuant to the fair value hierarchy (Level 1, Level 2, and Level 3). These techniques may produce fair values that may not be indicative of a future sale, or reflective of future fair values. The use of different techniques to determine the fair value of these types of investment securities could result in different estimates of fair value at the reporting date.

 

 

Level 1 - When available, quoted market prices are used to determine fair value and the investment securities are classified within Level 1 of the fair value hierarchy. The Company has not classified any investment securities in Level 1 of the fair value hierarchy.

 

 

Level 2 - When quoted prices in an active market are not available, the fair values for the Company’s investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced, but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades, broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. Although the underlying inputs are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.

 

 

Level 3 - In certain circumstances the fair market value for the Company’s investment securities is based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market.

As of September 30, 2009 and December 31, 2008, all of the Company’s investment securities are classified within Level 2 of the fair value hierarchy, except for the retained subordinated securities from the Company’s securitization of cardmember loans, which are classified within Level 3 of the fair value hierarchy. Refer to Note 7 for further details including the valuation methodology used to calculate the fair value of the retained subordinated securities.

The Company has reaffirmed its understanding of the valuation techniques used by its pricing services. No adjustments were deemed necessary to the prices provided by the pricing services as a result of current market conditions. In addition, the Company corroborates the prices provided by its pricing services to test their reasonableness by comparing their prices to valuations from different pricing sources as well as comparing prices to the sale prices received from sold securities.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other-Than-Temporary Impairment

The Company reviews and evaluates investments at least quarterly, and more often as market conditions may require, to identify investments that have indications of other-than-temporary impairment. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several metrics when evaluating securities for other-than-temporary impairment. The key factors considered include the determination of the extent to which the decline in the fair value of the security is due to increased default risk for the specific issuer or market interest rate risk. With respect to increased default risk, the Company assesses the collectibility of principal and interest payments by monitoring issuers’ credit ratings, related changes to those ratings, specific credit events associated with the individual issuers as well as the credit ratings of a financial guarantor, where applicable, and the extent to which amortized cost exceeds fair value and the duration and size of that difference. With respect to market interest rate risk, including benchmark interest rates and credit spreads, the Company assesses whether it has the intent to sell the securities, and whether it is more likely than not that the Company will not be required to sell the securities before recovery of any unrealized losses.

The following table provides information about available-for-sale investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2009 and December 31, 2008:

 

(Millions)

   September 30, 2009     December 31, 2008  
     Less than 12 months     12 months or more     Less than 12 months     12 months or more  

Description of Securities

   Estimated
Fair Value
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Gross
Unrealized
Losses
 

State and municipal obligations

   $ 48    $ (3   $ 2,127    $ (142   $ 2,515    $ (326   $ 2,037    $ (708

Mortgage-backed securities

     70      (1     —        —          —        —          —        —     

Retained subordinated securities

     —        —          73      (2     744      (584     —        —     

Corporate debt securities

     122      (2     70      (14     35      (1     99      (12

Foreign government bonds and obligations

     —        —          —        —          27      (4     —        —     
                                                            

Total

   $ 240    $ (6   $ 2,270    $ (158   $ 3,321    $ (915   $ 2,136    $ (720

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize the gross unrealized losses of temporary impairments by ratio of fair value to amortized cost as of September 30, 2009 and December 31, 2008:

September 30, 2009:

 

(Millions)

   Less than 12 months     12 months or more     Total  

Ratio of Fair Value to

Amortized Cost

   Number of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
    Number of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
    Number of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
 

90%–100%

   39    $ 227    $ (4   243    $ 1,730    $ (69   282    $ 1,957    $ (73

Less than 90%

   5      13      (2   63      540      (89   68      553      (91
                                                            

Total

   44    $ 240    $ (6   306    $ 2,270    $ (158   350    $ 2,510    $ (164

December 31, 2008:

 

(Millions)

   Less than 12 months     12 months or more     Total  

Ratio of Fair Value to

Amortized Cost

   Number of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
    Number of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
    Numbers of
Securities
   Estimated
Fair Value
   Gross
Unrealized
Losses
 

90%–100%

   327    $ 1,289    $ (73   37    $ 111    $ (7   364    $ 1,400    $ (80

Less than 90%

   321      2,032      (842   310      2,025      (713   631      4,057      (1,555
                                                            

Total

   648    $ 3,321    $ (915   347    $ 2,136    $ (720   995    $ 5,457    $ (1,635

At September 30, 2009, the gross unrealized losses on state and municipal securities and all other securities are attributable to a number of reasons such as issuer specific credit spreads and changes in market interest rates. In assessing default risk on these securities, excluding the Company’s retained subordinated securities, the Company has qualitatively considered the key factors identified above and determined that it expects to collect all of the contractual cash flows due on the securities. In assessing default risk on the retained subordinated securities, the Company has also analyzed the projected cash flows of the Lending Trust and expects to collect all of the contractual cash flows due on the securities.

Overall, for the investment securities in gross unrealized loss positions identified above (a) the Company does not intend to sell the securities (b) it is more likely than not that the Company will not be required to sell the securities before recovery of the unrealized losses, and (c) the Company expects that the contractual principal and interest will be received on the securities.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Supplemental Information

Gross realized gains and losses on sales of investment securities, included in other non-interest revenues, follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Millions)

   2009    2008     2009     2008  

Gains

   $ 2    $ 5      $ 225 (a)    $ 9   

Losses

     —        (2     —          (3
                               

Total

   $ 2    $ 3      $ 225      $ 6   

 

(a) Primarily represents the gain from the sale of 50 percent of the Company’s investment in ICBC.

Contractual maturities of investment securities classified as available-for-sale, excluding (i) equity securities and (ii) other securities (primarily mutual funds with no stated maturity), as of September 30, 2009 are as follows:

 

(Millions)

   Cost    Estimated
Fair Value

Due within 1 year

   $ 6,878    $ 6,910

Due after 1 year through 5 years

     9,874      10,412

Due after 5 years through 10 years

     676      724

Due after 10 years

     5,311      5,250
             

Total

   $ 22,739    $ 23,296

The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Fair Values of Financial Instruments

GAAP requires the disclosure of the estimated fair value of financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements for the fair value of financial instruments exclude leases, equity method investments, affiliate investments, pension and benefit obligations, insurance contracts, and all non-financial instruments.

The following table discloses the estimated fair value for the Company’s financial assets and financial liabilities, as of the dates presented:

 

     September 30, 2009    December 31, 2008

(Rounded to nearest billion)

   Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

Financial Assets:

           

Assets for which carrying values equal or approximate fair value

   $ 80    $ 80    $ 73    $ 73

Loans

   $ 29    $ 29    $ 41    $ 41

Financial Liabilities:

           

Liabilities for which carrying values equal or approximate fair value

   $ 46    $ 46    $ 45    $ 44

Long-term debt

   $ 53    $ 54    $ 60    $ 56

The fair values of these financial instruments are estimates based upon market conditions and perceived risks as of September 30, 2009 and December 31, 2008, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be estimated by aggregating the amounts presented. The following methods were used to determine estimated fair values.

Financial Assets for Which Carrying Values Equal or Approximate Fair Value

Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, cardmember receivables, accrued interest, and certain other assets. For these assets, the carrying values approximate fair value because they are short-term in duration or variable rate in nature.

In addition, the following financial assets are carried at fair value:

Investment Securities

Investment securities are recorded at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in accumulated other comprehensive loss. Gains and losses on investment securities classified as available-for-sale are recognized in the Consolidated Statements of Income upon disposition of the securities or when management determines that a decline in value below amortized cost is other-than-temporary. Refer to Note 5 for additional information regarding investment securities, including the valuation methodologies used to estimate fair value.

Derivative Financial Instruments

Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income or Consolidated Balance Sheets (accumulated other comprehensive loss) based upon the nature of the derivative. Refer to Note 15 for additional information regarding derivative financial instruments, including the valuation methodologies used to estimate fair value.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interest-Only Strip

The interest-only strip is recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income. As of September 30, 2009 and December 31, 2008 the interest-only strip had a fair value of nil and $32 million, respectively. Refer to Note 7 for additional information regarding the interest-only strip, including the valuation methodology used to estimate fair value.

Financial Assets Carried at Other Than Fair Value

Loans

Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for the Company’s loans, the principal market is assumed to be the securitization market, and the Company uses the hypothetical securitization price to determine the fair value of the portfolio. The securitization price is estimated from the assumed proceeds of the hypothetical securitization in the current market, adjusted for securitization uncertainties such as market conditions and liquidity.

Financial Liabilities for Which Carrying Values Equal or Approximate Fair Value

Financial liabilities for which carrying values equal or approximate fair values include accrued interest, customer deposits, Travelers Cheques outstanding, short-term borrowings, and certain other liabilities. For these liabilities, the carrying values approximate fair value because they are short-term in duration, variable rate in nature, or have no defined maturity.

Financial Liabilities Carried at Other Than Fair Value

Long-Term Debt

Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using either quoted market prices or discounted cash flows based on the Company’s current borrowing rates for similar types of borrowing.

Guarantees

Refer to Note 16 for discussion of carrying and fair value information regarding guarantees.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. Asset Securitizations

Off-Balance Sheet Securitizations

Servicing Portfolio

The Company periodically securitizes cardmember loans through the American Express Credit Account Master Trust (the Lending Trust). The following table illustrates the activity in the Lending Trust (including the securitized cardmember loans and seller’s interest) for the nine months ended September 30:

 

(Millions)

   2009     2008  

Lending Trust assets, January 1

   $ 41,579      $ 36,194   

Account additions, net

     2,956        10,187   

Cardmember activity, net

     (7,912     (3,456
                

Lending Trust assets, September 30

   $ 36,623      $ 42,925   
                

Securitized cardmember loans, January 1

   $ 28,955      $ 22,670   

Impact of issuances, external

     2,250        9,640   

Impact of issuances, retained

     2,013        1,315   

Impact of maturities

     (4,800     (4,670
                

Securitized cardmember loans, September 30

   $ 28,418      $ 28,955   
                

Seller’s interest, January 1

   $ 12,624      $ 13,524   

Impact of issuances

     (4,263     (10,955

Impact of maturities

     4,800        4,670   

Account additions, net

     2,956        10,187   

Cardmember activity, net

     (7,912     (3,456
                

Seller’s interest, September 30

   $ 8,205      $ 13,970   
                

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 ($35,664 million and $41,756 million at September 30, 2009 and 2008, repectively) transferred to the Lending Trust plus the associated accrued interest receivable ($959 million and $1,169 million at September 30, 2009 and 2008, respectively) 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 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.

In an effort to address the concerns of rating agencies and the recent decline in the trust excess spread due to the performance of the underlying credit card receivables in the Lending Trust and the related American Express Credit Account Secured Note Trusts (the “Note Trusts”), the subsidiaries of the Company that are the transferors to the Lending Trust announced in the second quarter that certain actions affecting outstanding series of securities issued by the Lending Trust and the Note Trusts were completed in order to adjust the credit enhancement structure of substantially all of the outstanding series of securities previously issued by the Lending Trust and the Note Trusts. The actions, which are permitted by the transaction documents governing the Lending Trust and Note Trusts, consist of the

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

issuance of two new series of asset-backed securities, which provided additional credit enhancement to all outstanding series, and the exercise of a discount option with respect to new principal receivables arising in the Lending Trust. In addition to improving the levels of credit enhancement for existing series of securities issued by the Lending Trust and the Note Trusts, the actions increased the yield (or trust excess spread rate) on assets in the Lending Trust. More particularly, the actions taken included the following:

 

  1. Issuance of two new series of investor certificates (collectively, the “Series D Certificates”). The invested amount of investor certificates constituting the Series D Certificates were equal to (i) approximately 4.2 percent of the sum of the aggregate outstanding balances of investor certificates issued by the Lending Trust prior to 2007 (excluding one series of investor certificates matured in July 2009) and their corresponding portion of Series D Certificates and (ii) approximately 6.3 percent of the sum of the aggregate outstanding balances of investor certificates issued by the Lending Trust since 2007 and their corresponding portion of Series D Certificates, which resulted in the aggregate invested amount of the Series D Certificates being equal to approximately $1.5 billion. The Series D Certificates were acquired by the Company’s subsidiaries and affiliates that are the transferors of the Lending Trust in exchange for a portion of the Lending Trust retained interest (i.e., the “sellers’ interest”) owned by such subsidiaries and affiliates. The Series D Certificates provide credit enhancement to the existing series of investor certificates in that they receive payments from the cash flow of the Lending Trust only after payments due to all outstanding series of investor certificates issued by the Lending Trust that are supported by the Series D Certificates have been made to the holders thereof. The Series D Certificates were issued at a market rate of interest.

 

  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 400-600 basis points beginning with the July monthly reporting period.

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:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Millions)    2009     2008     2009     2008  

Excess spread, net (a)

   $ (67   $ 84      $ (204   $ 490   

Servicing fees

     142        141        421        398   

Losses on securitizations (b)

     (4     (25     (7     (17
                                

Securitization income, net

   $ 71      $ 200      $ 210      $ 871   
                                

 

  (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 fees on the securitized accounts, which is recorded in discount revenue in the Company’s Consolidated Statements of Income.
  (b) Excludes $119 million and $(252) million of impact from cardmember loan sales and maturities for the three months ended September 30, 2009, as well as $189 million and $(38) million of impact from cardmember loan sales and maturities for the three months ended September 30, 2008, reflected in the provisions for losses for each respective period. Excludes $201 million and $(393) million of impact from cardmember loan sales and maturities for the nine months ended September 30, 2009, as well as $446 million and $(177) million of impact from cardmember loan sales and maturities for the nine months ended September 30, 2008, reflected in the provisions for losses for each respective period.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 to external investors is reported as a reduction of provisions for losses from cardmember lending. 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 at September 30, 2009 and December 31, 2008:

 

(Millions)

   2009    2008

Subordinated securities (a)

   $ 3,696    $ 744

Interest-only strip (b)

     —        32
             

Total retained interests

   $ 3,696    $ 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.

The Company determines the fair value of its retained subordinated securities using discounted cash flow models. The discount rate used is based on an interest rate curve that is observable in the marketplace plus an unobservable credit spread commensurate with the risk of these securities and similar financial instruments. The Company classifies such securities in Level 3 of the fair value hierarchy because the applicable credit spreads are not observable due to the illiquidity in the market with respect to these securities and similar financial instruments.

The fair value of the interest-only strip is the present value of estimated future positive excess spread expected to be generated by the securitized loans over the estimated remaining life of those loans. Management utilizes certain estimates and assumptions to determine the fair value of the interest-only strip asset, including estimates for finance charge yield, credit losses, LIBOR (which determines future certificate interest costs), monthly payment rate and discount rate. On a quarterly basis, the Company compares the assumptions it uses in calculating the fair value of its interest-only strip to observable market data when available, and to historical trends. The interest-only strip is classified within Level 3 of the fair value hierarchy due to the significance of the unobservable inputs used in valuing this asset.

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the changes in fair value of the Company’s retained subordinated securities and its interest-only strip during the nine months ended September 30, 2009:

 

(Millions)

   Investments–
Retained
Subordinated
Securities
    Other Assets-
Interest-Only
Strip
 

Beginning fair value, January 1, 2009

   $ 744      $ 32   

Increases (Decreases) in securitized loans

     1,844        (17 (b) 

Unrealized gains and realized (losses)

     1,108  (a)      (15 (b) 
                

Ending fair value, September 30, 2009

   $ 3,696      $  —     

 

  (a) Included in accumulated other comprehensive loss net of tax.
  (b) Included in securitization income, net.

Changes in the estimates and assumptions used may have a significant impact on the Company’s valuation of the retained interests. As a result of adverse changes in certain of these assumptions, the fair value of the interest-only asset had been reduced from $32 million at December 31, 2008 to nil at September 30, 2009. The primary drivers of this decline in value are an increase in credit losses and a reduction in the finance charge yield net of certificate interest costs.

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

   3.26% - 20.96   $ (64.1   $ (125.5

LIBOR

   1.26% - 3.37   $ 1.6      $ 3.2   

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 nine months ended September 30, 2009 and 2008:

 

(Millions)

   2009    2008

Proceeds from new securitizations during the period

   $ 2,244    $ 9,619

Proceeds from collections reinvested in revolving cardmember securitizations

   $ 59,715    $ 58,235

Servicing fees received

   $ 421    $ 398

Excess spread received, including issuer rate collections

   $ 1,561    $ 1,872

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents quantitative information about delinquencies, net credit losses, and components of securitized cardmember loans on a trust basis at September 30, 2009 and 2008:

 

(Billions)

   Total Principal
Amount of
Loans
   Amount of
Loans 30 Days or
More Past Due
   Net Credit
Write-offs
During the Year

2009

        

Cardmember loans managed(a)

   $ 59.9    $ 2.4    $ 4.9

Less: Cardmember loans securitized

     28.4      1.1      2.2
                    

Cardmember loans on-balance sheet

   $ 31.5    $ 1.3    $ 2.7
                    

2008

        

Cardmember loans managed(a)

   $ 74.7    $ 2.8    $ 3.6

Less: Cardmember loans securitized

     29.0      1.1      1.2
                    

Cardmember loans on-balance sheet

   $ 45.7    $ 1.7    $ 2.4

 

  (a) Excludes subordinated accrued interest receivable classified in other assets of $764 million and $806 million for the periods ended September 30, 2009 and 2008, respectively.

On-Balance Sheet Securitizations

The Company’s securitizations of cardmember receivables are accounted for as secured borrowings, rather than as qualifying sales, because the receivables are transferred to a non-qualifying special purpose entity, the American Express Issuance Trust (the Charge Trust). The Charge Trust is considered a variable interest entity and is consolidated by American Express Receivables Financing Corporation V, LLC, its primary beneficiary, which is in turn consolidated by the Company.

The cardmember receivables securitized through this entity are not accounted for as sold and continue to be reported as owned assets on the Company’s Consolidated Balance Sheets. The related securities issued to third-party investors are reported as long-term debt on the Company’s Consolidated Balance Sheets.

The following table summarizes the total assets and liabilities held by the Charge Trust at September 30, 2009 and December 31, 2008:

 

(Billions)

   2009    2008

Assets

   $ 7.3    $ 7.8

Liabilities

   $ 5.0    $ 5.0

These receivables are available only for payment of the debt or other obligations issued or arising in the securitization transactions. For these assets, the carrying values approximate fair value because these are short-term in duration. The long-term debt is payable only out of collections on the underlying securitized assets. The fair value of these liabilities was $4.9 billion and $4.4 billion at September 30, 2009 and December 31, 2008, respectively.

Lending Trust and Charge Trust Triggers

Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table below presents key metrics reported by each trust at September 30, 2009:

 

     Lending Trust     Charge Trust  

Excess spread rate, net:

       (a)        (b) 

3-month average – Trigger event

    

Trust trigger for reserve account funding

     <5.00     <4.00

Trust trigger for early amortization

     < 0     < 0

3-month average – Actual rate

    

Floating rate series actual rate

     12.10     29.61

Fixed rate series actual rate

     7.71     26.37

Reserve account funding (millions):

    

Required amount (c)

    

Floating rate series

   $ 0      $ 0   

Fixed rate series

   $ 0      $ 0   

Funded amount

    

Floating rate series

   $ 0      $ 0   

Fixed rate series

   $ 0      $ 0   

Seller’s interest percentage:

    

Required amount

     >7     >15

Actual amount

     23     26

Paydown rate – 3-month average:

    

Required amount

     N/A        >60.0

Actual amount

     N/A        94.3

 

  (a) The excess spread rate, net including issuer rate collections in the Lending Trust is the sum of the net cash flows of the (i) excess spread, net and (ii) issuer rate, as a percentage of the outstanding investors’ certificates. Excess spread, net is the net cash flows from interest and fee collections allocated to the investors’ interests after deducting the interest paid on investors’ certificates, credit losses, contractual servicing fees and other expenses. The deductions may be a greater amount than the collections, resulting in negative spread losses. Excess spread, net is reported by the Company in securitization income, net in the Consolidated Statements of Income. See above for the disclosure of excess spread, net. Issuer rate collections 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 the event the excess spread, net in the Lending Trust becomes negative, and the issuer rate collections are utilized to pay Lending Trust expenses, this would be reflected as an expense in securitization income, net in the Company’s Consolidated Statements of Income and as a reduction of the floating and fixed series excess spread rates.
  (b) The excess spread rate, net in the Charge Trust is the net cash flows from the discounted portion of principal collections allocated to the investors’ interests after deducting the interest paid on investors’ notes, credit losses, contractual servicing fees and other expenses, as a percentage of the outstanding investors’ notes.
  (c) If the three-month average excess spread rate, net including issuer rate collections falls below the trigger level of 5 percent or 4 percent for the Lending Trust and Charge Trust, respectively, the affected Trust is required to fund a cash account in increasing amounts ($3 million to $1.8 billion for the Lending Trust and $11 million to $207 million for the Charge Trust) depending on the severity by which the excess spread rate, net falls below the trigger level.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In the event of an early amortization of the Lending Trust, the lending receivable assets and investor certificates issued by the Lending Trust would revert to the Company’s balance sheet and the investor certificates would be required to be repaid over an approximate four month period, based on the estimated average life of the securitized loans. Although the repayment of the investor certificates is non-recourse to the Company, the Company would need an alternate source of funding for the lending receivables assets that, as a consequence of the early amortization, would revert to the Company’s balance sheet, as well as for lending receivables assets that would be generated in the future from the accounts that are the source of the reverted receivables.

In the event of an early amortization of the Charge Trust, the underlying investor notes issued by the Charge Trust are required to be repaid over an approximate one month period, based on the estimated average life of the securitized receivables.

8. Comprehensive Income

The components of comprehensive income, net of related tax, are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Millions)

   2009     2008     2009     2008  

Net income

   $ 640      $ 815      $ 1,414      $ 2,459   

Other comprehensive income (losses):

        

Net unrealized securities gains (losses)

     554        (423     1,286        (334

Net unrealized derivative gains

     11        47        42        32   

Foreign currency translation adjustments

     (220 )(a)      (43     (311 )(a)      (136

Net unrealized pension and other postretirement benefit costs

     4        4        33        14   
                                

Total

   $ 989      $ 400      $ 2,464      $ 2,035   

 

(a) The three and nine months ended September 30, 2009 include a $135 million and $190 million other comprehensive loss, respectively, representing the correction of an error related to the accounting in prior periods for cumulative translation adjustments associated with a net investment in foreign subsidiaries (see Note 13 for further details).

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Customer Deposits

At September 30, 2009 and December 31, 2008, customer deposits were categorized as interest-bearing or non-interest-bearing deposits as follows:

 

(Millions)

   2009    2008

U.S.:

     

Interest-bearing

   $ 23,152    $ 14,377

Non-interest-bearing

     15      18

Non-U.S.:

     

Interest-bearing

     673      1,072

Non-interest-bearing

     23      19
             

Total customer deposits

   $ 23,863    $ 15,486

The customer deposits are aggregated by deposit type offered by the Company at September 30, 2009 and December 31, 2008 as follows:

 

(Millions)

   2009    2008

U.S. retail deposits:

     

Cash sweep and savings accounts

   $ 9,583    $ 7,247

Certificates of deposit

     13,569      6,258

Institutional and other deposits

     711      1,981
             

Total customer deposits

   $ 23,863    $ 15,486

At September 30, 2009 and December 31, 2008 time deposits, included in interest-bearing deposits above, in denominations of $100,000 or more were as follows:

 

(Millions)

   2009    2008

U.S.

   $ 85    $ 894

Non-U.S.

     —        153
             

Total

   $ 85    $ 1,047

The scheduled maturities of all time deposits, included in interest-bearing deposits above, at September 30, 2009 are as follows:

 

(Millions)

   U.S.    Non-U.S.    Total

2009

   $ 3,285    $ 171    $ 3,456

2010

     3,120      232      3,352

2011

     3,275      —        3,275

2012

     1,596      —        1,596

2013

     1,360      —        1,360

After 5 years

     933      —        933
                    

Total

   $ 13,569    $ 403    $ 13,972

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10. Income Taxes

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In June 2008, the IRS completed its field examination of the Company’s federal tax returns for the years 1997 through 2002. In July 2009, the IRS completed its field examination of the Company’s federal tax returns for the years 2003 and 2004. However, all of these years continue to remain open as a consequence of certain issues under appeal.

Given the inherent complexities of the business and that the Company is subject to taxation in a substantial number of jurisdictions, the Company routinely assesses the likelihood of additional assessments in each of the taxing jurisdictions and has established a liability for unrecognized tax benefits that management believes to be adequate. Once established, unrecognized tax benefits are adjusted if more accurate information is available, or a change in circumstance or an event occurs necessitating a change to the liability.

The Company believes it is reasonably possible that unrecognized tax benefits could decrease within the next twelve months by as much as $670 million principally as a result of potential resolutions through settlements of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the timing of recognition of certain gross income, the deductibility of certain expenses or losses, and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $670 million of unrecognized tax benefits, approximately $318 million are temporary differences that, if recognized, would only impact the effective rate due to net interest assessments and state tax rate differentials. With respect to the remaining amount of $352 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years’ items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

The following table summarizes the Company’s effective tax rate:

 

     Three Months Ended
September 30, 2009 (a)
    Nine Months Ended
September 30, 2009 (b)
    Full Year 2008 (b)  

Effective tax rate

   30   24   20

 

  (a) Reflects the change in the Company’s estimated annual effective tax rate and tax benefits related to the resolution of certain prior years’ tax items.
  (b) Reflects tax benefits related to the resolution of certain prior years’ tax items.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. Preferred Shares and Warrants

Capital Purchase Program

On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate (5 percent) Cumulative Perpetual Preferred Shares, Series A, and (2) a ten-year warrant (the Warrant) for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share. Upon issuance, $3.16 billion of the proceeds was allocated to the Preferred Shares, and $232 million of the proceeds was allocated to the Warrant based on their relative fair values at the date of issuance.

On June 17, 2009, the Company repurchased the Preferred Shares at their face value of $3.39 billion. As the $3.39 billion cash paid exceeded the $3.18 billion carrying amount of the Preferred Shares, the $212 million excess represented an in-substance Preferred Shares dividend reducing EPS attributable to common shareholders by $0.18 for the nine months ended September 30, 2009, respectively. Refer to Note 12.

On July 29, 2009, the Company repurchased the Warrant for $340 million. The Warrant repurchase resulted in a reduction of cash and adjustment to Retained Earnings and additional paid-in-capital on the Company’s Consolidated Balance Sheet. This repurchase had no impact on the Company’s Consolidated Income Statement and EPS for the three months ended September 30, 2009.

The Treasury Department realized an annualized return of 26 percent from the Company’s overall participation in the CPP.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Earnings Per Common Share (EPS)

Basic EPS is computed using average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of non-participating share awards and other financial instruments that may be converted into common shares. The following table presents computations of basic and diluted EPS:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Millions, except per share amounts)    2009     2008     2009     2008  

Numerator:

        

Basic and diluted:

        

Income from continuing operations

   $ 642      $ 861      $ 1,427      $ 2,565   

Preferred shares dividends, accretion, and recognition of remaining unaccreted dividends (a)

     —          —          (306     —     

Earnings allocated to participating share awards and other items

     (8     (5     (13     (14
                                

Income from continuing operations attributable to common shareholders

     634        856        1,108        2,551   

Loss from discontinued operations

     (2     (46     (13     (106
                                

Net income attributable to common shareholders

   $ 632      $ 810      $ 1,095      $ 2,445   
                                

Denominator:

        

Basic: weighted-average common stock

     1,178        1,154        1,164        1,154   

Add: weighted-average stock options and warrants (b)

     3        4        2        7   
                                

Diluted

     1,181        1,158        1,166        1,161   
                                

Basic Earnings Per Common Share:

        

Income from continuing operations attributable to common shareholders

   $ 0.54      $ 0.74      $ 0.95      $ 2.21   

Loss from discontinued operations

     —          (0.04     (0.01     (0.09
                                

Net income attributable to common shareholders

   $ 0.54      $ 0.70      $ 0.94      $ 2.12   
                                

Diluted Earnings Per Common Share:

        

Income from continuing operations attributable to common shareholders

   $ 0.54      $ 0.74      $ 0.95      $ 2.20   

Loss from discontinued operations

     (0.01     (0.04     (0.01     (0.10
                                

Net income attributable to common shareholders

   $ 0.53      $ 0.70      $ 0.94      $ 2.10   

 

(a) Includes the accelerated preferred dividend accretion of $212 million for the nine months ended September 30, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the CPP.
(b) For the three months ended September 30, 2009 and 2008, unexercised stock options on 71 million and 46 million shares, respectively, and for the nine months ended September 30, 2009 and 2008, unexercised stock options on 79 million and 32 million shares, respectively, were not included in the computation of diluted EPS. These stock options were not included because their respective exercise prices were greater than the average market price of the Company’s common shares.

See Notes 10 and 22 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, for discussion of the Company’s subordinated debentures, including the circumstances under which additional common shares would be reflected in the computation of EPS.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13. Details of Certain Consolidated Statements of Income Lines

As a result of becoming a bank holding company, the Company has made certain additional required disclosures for items representing 1 percent or more of the aggregate of total interest income and total non-interest revenues.

The following is a detail of other commissions and fees for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(Millions)    2009    2008    2009    2008

Delinquency fees

   $ 118    $ 201    $ 420    $ 862

Foreign currency conversion revenue

     184      201      492      615

Service fees and other

     146      171      428      308
                           

Total other commissions and fees

   $ 448    $ 573    $ 1,340    $ 1,785
                           

The following is a detail of other revenues for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(Millions)    2009    2008    2009    2008

Insurance premium revenue

   $ 73    $ 77    $ 225    $ 245

Publishing revenue

     62      89      160      237

Gain on investment securities

     2      3      225      6

Other

     312      384      959      1,103
                           

Total other revenues

   $ 449    $ 553    $ 1,569    $ 1,591
                           

The following is a detail of marketing, promotions, rewards and cardmember services for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(Millions)    2009    2008    2009    2008

Marketing and promotion

   $ 504    $ 649    $ 1,201    $ 1,906

Cardmember rewards

     983      1,132      2,858      3,301

Cardmember services

     132      148      374      402
                           

Total marketing, promotion, rewards and cardmember services

   $ 1,619    $ 1,929    $ 4,433    $ 5,609
                           

The following is a detail of other, net expenses for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Millions)    2009     2008     2009     2008  

Occupancy and equipment

   $ 374      $ 398      $ 1,124      $ 1,185   

Communications

     105        118        315        348   

Other non-income taxes

     99        66        173        178   

MasterCard and Visa settlements

     (214     (214     (640     (357

Foreign exchange (gain) loss

     (160     (10     (152     5   

Other (a)

     261        367        759        990   
                                

Total other, net expense

   $ 465      $ 725      $ 1,579      $ 2,349   
                                

 

  (a) The three and nine months ended September 30, 2009 include (i) a $135 million benefit representing the correction of an error related to the accounting for cumulative translation adjustments associated with a net investment in foreign subsidiaries (the impact of the incorrect accounting was not material to any of the quarterly or annual periods in which it occurred and resulted in a $60 million overstatement of pre-tax income in the second quarter of 2009, a $135 million understatement of pre-tax income in the fourth quarter of 2008 and minimal amounts for all other periods affected dating back to the third quarter of 2007 when the incorrect accounting originated), (ii) a $45 million benefit resulting from the change in fair value of certain forward exchange contracts, and (iii) lower travel and entertainment and other expenses due to the Company’s ongoing reengineering activities. The nine months ended September 30, 2009 also include a $59 million benefit representing the correction of an error related to prior periods from the completion of certain account reconciliations. Based on the items described above, the aggregate impact from the correction of errors in accounting for the nine months ended September 30, 2009 resulted in a $254 million overstatement of pre-tax income.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Reportable Operating Segment Information

The Company is a leading global payments, network, and travel company that is principally engaged in businesses comprising four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and the Global Network & Merchant Services (GNMS). The following table presents certain operating segment information:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Millions)    2009     2008     2009     2008  

Revenues, excluding interest income:

        

USCS

   $ 2,338      $ 2,797      $ 6,955      $ 8,763   

ICS

     866        965        2,461        2,894   

GCS

     1,017        1,291        3,033        3,931   

GNMS

     945        1,015        2,646        2,982   

Corporate & Other, including adjustments and eliminations

     96        146        525        414   
                                

Total

   $ 5,262      $ 6,214      $ 15,620      $ 18,984   
                                

Interest income:

        

USCS

   $ 772      $ 1,190      $ 2,466      $ 3,687   

ICS

     392        523        1,191        1,557   

GCS

     8        43        50        138   

GNMS

     1        2        3        4   

Corporate & Other, including adjustments and eliminations

     124        76        349        247   
                                

Total

   $ 1,297      $ 1,834      $ 4,059      $ 5,633   
                                

Interest expense:

        

USCS

   $ 207      $ 528      $ 639      $ 1,676   

ICS

     110        256        390        768   

GCS

     28        134        139        417   

GNMS

     (17     (54     (60     (171

Corporate & Other, including adjustments and eliminations

     215        20        537        68   
                                

Total

   $ 543      $ 884      $ 1,645      $ 2,758   
                                

Revenues net of interest expense:

        

USCS

   $ 2,903      $ 3,459      $ 8,782      $ 10,774   

ICS

     1,148        1,232        3,262        3,683   

GCS

     997        1,200        2,944        3,652   

GNMS

     963        1,071        2,709        3,157   

Corporate & Other, including adjustments and eliminations

     5        202        337        593   
                                

Total

   $ 6,016      $ 7,164      $ 18,034      $ 21,859   
                                

Income (Loss) from continuing operations:

        

USCS

   $ 109      $ 244      $ (116   $ 788   

ICS

     127        67        230        315   

GCS

     116        134        273        512   

GNMS

     240        258        713        780   

Corporate & Other

     50        158        327        170   
                                

Total

   $ 642      $ 861      $ 1,427      $ 2,565   
                                

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has changed the manner by which it assesses the performance of its reportable operating segments to exclude the impact of its excess liquidity funding levels. Accordingly, beginning in the first quarter of 2009, the debt and cash and investment balances associated with the Company’s excess liquidity funding and the related net negative interest spread are no longer included within the reportable operating segment results (primarily USCS and GCS segments) and are reported in the Corporate & Other segment. The segment results for prior quarters have not been revised for this change. The following table shows the impact of the change in the segment results as follows:

For the three months ended September 30, 2009:

 

(Millions)    USCS    GCS    ICS    Corporate
& Other
    Total

Income (Loss) from continuing operations (a) 

   $ 38.7    $ 12.7    $ 0.3    $ (51.7   $ —  

For the nine months ended September 30, 2009:

 

(Millions)    USCS    GCS    ICS    Corporate
& Other
    Total

Income (Loss) from continuing operations (a) 

   $ 120.7    $ 47.2    $ 0.8    $ (168.7   $ —  

 

  (a) The impact on reportable operating segment debt and asset balances for this change was a decrease to USCS and GCS of $22.9 billion and $5.2 billion, respectively, and an increase to Corporate & Other of $28.1 billion.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15. Derivatives and Hedging Activities

The Company uses derivative financial instruments to manage exposure to various market risks. Market risk is the risk to earnings or value resulting from movements in, for example, interest rates, foreign exchange rates or equity market prices. The Company’s market risk exposures primarily arise through:

 

   

Interest rate risk within its proprietary card-issuing businesses; and

 

   

Foreign exchange risk within its international operations.

General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy approved by the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally managed by the Market Risk Committee, chaired by the Chief Market Risk Officer of the Company. In addition to the Market Risk Committee, market risk exposures for certain regulated entities are monitored and managed by various asset/liability committees, guided by Board-approved policies covering derivative financial instruments, funding and investments.

Derivative financial instruments derive their value from an underlying variable or multiple variables such as interest rate, foreign exchange, and equity indices or prices. These instruments can increase, reduce or otherwise alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk and related asset/liability management strategy and processes. The Company uses derivatives to manage market risk exposures that arise within its business operations, but does not engage in derivative financial instruments for trading purposes.

For the Company’s charge card and fixed-rate lending products, interest rate exposure is managed by shifting the mix of funding toward fixed-rate debt and by using derivative instruments, with an emphasis on interest rate swaps, which effectively fix interest expense for the length of the swap. For the majority of its cardmember loans, which earn a floating-rate of interest, interest rate exposure is managed by shifting the mix of funding toward floating-rate debt by using interest rate swaps to convert the fixed rate funding into floating rate funding for the length of the swap. The Company regularly reviews its strategy and may modify it. In addition, the Company may change the amount hedged and the hedge percentage may change based on changes in business volumes and mix, among other factors.

Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency denominated balance sheet exposures, translation exposure associated with the Company’s net investments in foreign operations, and foreign currency earnings in international units. The Company’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivative financial instruments such as foreign exchange forwards, options, and cross-currency swap contracts, which can help “lock in” the value of the Company’s exposure to specific currencies.

Fair Value Measurements

The fair value of the Company’s derivatives is estimated by using pricing models that do not contain a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those models are readily observable from actively quoted markets. The valuation models used by the Company are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, equity indices or prices, and volatility.

Credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value derivatives are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company manages derivative counterparty credit risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next twelve months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by the Company’s Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with the Company’s ERMC guidelines and procedures and determines the risk mitigation actions, when necessary. Additionally, the Company may, on occasion, enter into master netting agreements.

As of September 30, 2009 and December 31, 2008, the credit and nonperformance risks associated with the Company’s derivative counterparties were not significant.

The following table summarizes the total gross fair value, excluding interest accruals, of derivative product assets and liabilities at September 30, 2009 and December 31, 2008:

 

     Other assets    Other liabilities
     Fair Value (a)    Fair Value (a)

(Millions)

 

Location

   September
2009
   December
2008
   September
2009
   December
2008

Derivatives designated as hedging instruments

           

Interest rate contracts

           

Fair value hedges

   $ 793    $ 1,072    $ —      $ —  

Cash flow hedges

     —        —        59      125

Foreign exchange contracts

           

Net investment hedges

     86      535      224      165
                           

Total derivatives designated as hedging instruments

   $ 879    $ 1,607    $ 283    $ 290
                           

Derivatives not designated as hedging instruments

           

Interest rate contracts

   $ 11    $ 9    $ 7    $ 20

Foreign exchange contracts (b)

     188      166      137      173
                           

Total derivatives not designated as hedging instruments

     199      175      144      193
                           

Total derivatives (c)

   $ 1,078    $ 1,782    $ 427    $ 483

 

  (a) The fair values of the Company’s derivative instruments are classified within Level 2 of the fair value hierarchy.
  (b) As of September 30, 2009, foreign exchange contracts include embedded foreign currency derivatives.
  (c) GAAP permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between the Company and its derivative counterparty. At September 30, 2009 and December 31, 2008, $48 million and $39 million, respectively, of derivative assets and liabilities have been offset and represents the impact of legally enforceable master netting agreements that provide for the net settlement of all contracts in accordance with GAAP.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hedges

A fair value hedge involves a derivative designated to hedge the exposure of future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to convert certain fixed-rate long-term debt to floating rate at the time of issuance. As of September 30, 2009, the Company hedged $15.1 billion of its fixed-rate debt to floating rate debt using interest rate swaps.

To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness. Hedge ineffectiveness may be caused by differences between the debt’s interest coupon and the benchmark rate, which is in turn primarily due to credit spreads at inception of the hedging relationship, which is not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt.

The following tables summarize the impact of fair value hedges associated with the Company’s fixed-rate long-term debt described above on the consolidated financial statements for the three and nine months ended September 30:

For the three months ended September 30:

Statement of Income

 

    

Derivative contract gain(loss)

    

Hedged item gain(loss)

           
(Millions)           Amount
recognized, net
of tax
            Amount
recognized,

net of tax
    Ineffective net gains
(losses), net of tax

Derivative relationship

  

Location

     2009      2008     

Location

     2009     2008     2009     2008

Fair value hedges:

                            

Interest rate contracts

   Other expenses, net      $ 95      $ 48      Other expenses, net      $ (100   $ (43   $ (5   $ 5

For the nine months ended September 30:

Statement of Income

 

    

Derivative contract gain(loss)

    

Hedged item gain(loss)

          
(Millions)           Amount
recognized,

net of tax
            Amount
recognized, net
of tax
   Ineffective net gains
(losses), net of tax

Derivative relationship

  

Location

     2009     2008     

Location

     2009      2008    2009     2008

Fair value hedges:

                           

Interest rate contracts

   Other expenses, net      $ (181   $ (63    Other expenses, net      $ 180      $ 69    $ (1   $ 6

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash Flow Hedges

A cash flow hedge involves a derivative designated to hedge the exposure to variable future cash flows attributable to a particular risk of an existing recognized asset or liability, or a forecasted transaction. The Company hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivative instruments, primarily interest rate swaps. These derivative instruments effectively convert floating rate debt to fixed-rate debt for the duration of the swap. As of September 30, 2009, the Company hedged $2.4 billion of its floating debt using interest rate swaps.

For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives are recorded in accumulated other comprehensive loss and reclassified into earnings when the hedged cash flows are recognized into earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact, primarily in interest expense. Any ineffective portion of the gain or loss, as determined by the accounting requirements, is reported as a component of other expense, net.

In the normal course of business, as the hedged cash flows are recognized into earnings, the Company expects to reclassify $42 million of net pretax losses on derivative instruments from accumulated other comprehensive loss into earnings during the next 12 months.

Currently, the longest period of time over which the Company is hedging its exposure to variability in future cash flows for forecasted transactions is less than one year, and is related to certificates of deposit.

Net Investment Hedges

A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S. subsidiaries. The effective portions of financial instruments that qualify as net investment hedges are recorded in accumulated other comprehensive loss as part of the cumulative translation adjustment. Any ineffective portions of net investment hedges are recognized in other, net expenses during the period of change.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables summarize the impact of cash flow hedges and net investment hedges on the Consolidated Financial Statements for the three and nine months ended September 30:

For the three months ended September 30:

 

    Derivative impact on OCI gain (loss), net of tax    

Derivative ineffectiveness gain (loss), net of tax

(Millions)   Recognized in Other
Comprehensive
Income (OCI)
   

Location Reclassified
into Income

   Amount Reclassified
into Income
   

Location Reclassified

into Income

   Amount

Derivative relationship

  2009     2008          2009     2008          2009    2008

Cash flow hedges:

                  

Interest rate contracts

    $    (3)        $    3      Interest expense    $ (14   $ (44   Other expenses, net    $—      $—  

Net investment hedges:

                  

Foreign exchange contracts

    $(272)        $356      Other expenses, net    $ —        $ —        Other expenses, net    $—      $  2
For the nine months ended September 30:             
    Derivative impact on OCI gain (loss), net of tax    

Derivative ineffectiveness gain (loss), net of tax

(Millions)   Recognized in Other
Comprehensive
Income
   

Location Reclassified
into Income

   Amount Reclassified
into Income
   

Location Reclassified

into Income

   Amount

Derivative relationship

  2009     2008          2009     2008          2009    2008

Cash flow hedges:

                  

Interest rate contracts

  $ (20   $ (82   Interest expense    $ (62   $ (114   Other expenses, net    $—      $—  

Net investment hedges:

                  

Foreign exchange contracts

  $ (643   $ 69      Other expenses, net    $ —        $ —        Other expenses, net    $—      $  2

Derivatives Not Designated as Hedges

The Company has derivatives that act as economic hedges and are not designated for hedge accounting treatment. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options, and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivative instrument effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business.

The Company’s foreign subsidiaries may also enter into operating lease contracts that are denominated in a currency different from the functional or local currency of both parties to the contract. Certain of those contracts may also contain lease payments that are indexed (e.g. to the U.S. Consumer Price Index). The foreign currency and index based payment components of these leases may meet the definition of an embedded derivative. These leases are assessed to determine if the embedded derivative requires separate reporting and accounting, and if so, the embedded derivative is accounted for at fair value.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For derivative financial instruments that are not designated as hedges, changes in fair value are reported in current period earnings.

The following tables summarize the impact of derivatives not designated as hedges on the Consolidated Financial Statements for the three and nine months ended September 30:

For the three months ended September 30:

 

Derivative

relationship

  

Income Statement classification of gain (loss) on

derivatives not designated as hedges

   Amount recognized net of tax  

(Millions)

        2009    2008  

Derivatives not designated as hedges

        

Interest rate contracts

  

Other expenses, net

   $ —      $ (15

Foreign exchange contracts(a)

  

Interest and dividends on investment securities

     1      —     
  

Interest expense on short-term borrowings

     1      (1
  

Interest expense on long-term debt and other

     1      4   
  

Other expenses, net

     36      (90
                  

Total

      $ 39    $ (102

 

(a) For the period ended September 30, 2009, foreign exchange contracts include embedded foreign currency derivatives. Gain (loss) on embedded derivatives is included in Other expenses, net.

For the nine months ended September 30:

 

Derivative

relationship

  

Income Statement classification of gain (loss) on

derivatives not designated as hedges

   Amount recognized net of tax  

(Millions)

        2009    2008  

Derivatives not designated as hedges

        

Interest rate contracts

  

Other expenses, net

   $ 11    $ (10

Foreign exchange contracts(a)

  

Interest and dividends on investment securities

     2      —     
  

Interest expense on short-term borrowings

     2      (2
  

Interest expense on long-term debt and other

     8      13   
  

Other expenses, net

     57      (75
                  

Total

      $ 80    $ (74

 

(a) For the period ended September 30, 2009, foreign exchange contracts include embedded foreign currency derivatives. Gain (loss) on embedded derivatives is included in Other expenses, net.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Guarantees

The Company provides cardmember protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business which are within the scope of GAAP governing the accounting for guarantees.

In relation to its maximum amount of undiscounted payments as seen below, to date the Company has not experienced any significant losses related to guarantees. The Company’s initial recognition of guarantees is at fair market value, which has been determined in accordance with GAAP governing fair value measurement.

The following table provides information related to such guarantees at September 30, 2009 and December 31, 2008:

 

    Maximum amount of undiscounted future
payments(a)
(Billions)
  Amount of related liability(b)
(Millions)

Type of Guarantee

  September 30, 2009   December 31, 2008   September 30, 2009   December 31, 2008

Card and travel operations (c)

  $ 65   $ 69   $ 100   $ 99

Other (d)

    1     1     81     93
                       

Total

  $ 66   $ 70   $ 181   $ 192

 

  (a) Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The Merchant Protection guarantee is calculated using management’s best estimate of maximum exposure based on all eligible claims as measured against annual billed business volumes.
  (b) Included as part of other liabilities on the Company’s Consolidated Balance Sheets.
  (c) Includes Credit Card Registry, Return Protection, Account Protection and Merchant Protection, which the Company offers directly to cardmembers. The Company generally has no collateral or other recourse provisions related to these guarantees.
  (d) Other primarily includes guarantees related to the Company’s business dispositions, real estate and various tax items.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

17. Restructuring Charges

During the three and nine months ended September 30, 2009, the Company recorded $6 million and $183 million of new restructuring charges, net of adjustments of previously accrued amounts due to revisions of prior estimates. The restructuring activities in the quarter related principally to downsizing and reorganizing certain operations in network services, prepaid services, and staff groups. Year-to-date activity primarily relates to charges the Company took in the second quarter to further reduce its operating costs.

Restructuring charges and any subsequent adjustments related to severance obligations are included in salaries and employee benefits in the Company’s Consolidated Statements of Income, while charges pertaining to other exit costs are included in occupancy and equipment, professional services, and other net expenses.

The following table summarizes the Company’s restructuring reserves activity for the three and nine months ended September 30, 2009:

For the three months ended September 30, 2009:

 

(Millions)

   Severance(a)     Other (b)     Total  

Liability balance at June 30, 2009

   $ 367      $ 54      $ 421   

Restructuring charges, net of $7 in adjustments (c)

     4        2        6   

Payments

     (73     (6     (79

Other non-cash (d)

     7        1        8   
                        

Liability balance at September 30, 2009 (e)

   $ 305      $ 51      $ 356   

For the nine months ended September 30, 2009:

 

(Millions)

   Severance(a)     Other (b)     Total  

Liability balance at December 31, 2008

   $ 365      $ 62      $ 427   

Restructuring charges, net of $30 in adjustments (c)

     159        24        183   

Payments

     (232     (36     (268

Other non-cash (d)

     13        1        14   
                        

Liability balance at September 30, 2009 (e)

   $ 305      $ 51      $ 356   

 

  (a) Accounted for in accordance with the GAAP governing the accounting for nonretirement postemployment benefits and for costs associated with exit or disposal activities.
  (b) Other primarily includes facility exit and contract termination costs.
  (c) Net adjustments of $7 million during the three months ended September 30, 2009 ($2 million in USCS, $1 million in ICS, $4 million in GCS, $(1) million in GNMS, and $1 million in Corporate & Other) and $30 million during the nine months ended September 30, 2009 ($2 million in USCS, $13 million in ICS, $3 million in GCS, $2 million in GNMS, and $10 million in Corporate & Other) primarily related to higher employee redeployments to other positions within the Company.
  (d) Consists primarily of foreign exchange impacts.
  (e) The majority of cash payments related to the remaining restructuring liabilities are expected to be completed in 2010, with the exception of certain smaller amounts related to contractual long-term severance arrangements which are expected to be completed in 2012, and certain lease obligations which will continue until their expiration in 2022.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the Company’s restructuring charges, net of adjustments by reportable segment for the three and nine months ended September 30, 2009, and the cumulative amounts relating to the restructuring programs that were in progress during 2009 and initiated at various dates between 2006 and 2009.

 

     2009 Total Restructuring Charges
net of Adjustments
   Cumulative Restructuring
Expense Incurred to Date On In-
Progress Restructuring Programs
 

(Millions)

   Q1-Q2    Q3     Total    Severance    Other    Total  

USCS

   $ 18    $ (2   $ 16    $ 68    $ 6    $ 74   

ICS

     20      (1     19      97      4      101   

GCS

     79      (4     75      209      25      234   

GNMS

     13      1        14      50      2      52   

Corporate & Other

     47      12        59      163      60      223 (a) 
                                            

Total

   $ 177    $ 6      $ 183    $ 587    $ 97    $ 684 (b) 
                                            

 

  (a) The Corporate & Other segment includes certain 2009 and 2008 severance and other charges of $34 million and $133 million, respectively, related to Company-wide support functions which were not allocated to the Company’s operating segments, as these were corporate initiatives and are consistent with how such charges were reported internally.
  (b) As of September 30, 2009, the total expenses to be incurred for previously approved restructuring activities that were in progress are not expected to be materially different than the cumulative expenses incurred to date for these programs.

18. Contingencies

The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.

19. Subsequent Events

The Company has performed an evaluation of subsequent events through October 30, 2009, which is the date the financial statements were issued.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

American Express Company (the Company), a bank holding company, is a leading global payments and travel company. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company’s range of products and services include:

 

 

charge and credit card products;

 

 

expense management products and services;

 

 

consumer and business travel services;

 

 

stored value products such as Travelers Cheques and other prepaid products;

 

 

network services for the Company’s network partners; and

 

 

merchant acquisition and merchant processing, point-of-sale, servicing and settlement and marketing products and services for merchants.

The Company’s products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising.

The Company’s products and services generate the following types of revenue for the Company:

 

 

Discount revenue, which is the Company’s largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Company’s network;

 

 

Net card fees, which represent revenue earned for annual charge card memberships;

 

 

Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions;

 

 

Other commissions and fees, which are earned on foreign exchange conversion fees and card-related fees and assessments;

 

 

Securitization income, net, which is the net earnings related to cardmember loans financed through securitization activities;

 

 

Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services’ (GNS) partners including royalties and signing fees, publishing revenues, and other miscellaneous revenue and fees; and

 

 

Interest and fees on loans, which represents interest income earned on outstanding balances, card fees and balance transfer fees related to the cardmember lending portfolio.

In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses.

Historically, the Company has sought to achieve a number of financial targets, on average and over time:

 

 

Total revenues net of interest expense growth of at least 8 percent;

 

 

Earnings per share growth of 12 to 15 percent;

 

 

Return on average equity (ROE) of 33 to 36 percent.

 

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In addition, assuming achievement of these financial targets, the Company has sought to return at least 65 percent of the capital it generates to shareholders as a dividend or through the repurchase of common stock.

The Company met or exceeded these targets for most of the past decade. However, during 2008 and the first nine months of 2009, its performance fell short of the targets due to the effects of the continuing global economic downturn. As long as these difficult conditions persist, it is unlikely that the Company will achieve its financial targets, on average and over time. The Company’s share repurchase program was suspended in 2008 and, as a result, the amount of capital generated that is returned to shareholders has been and will likely continue to be below the levels achieved earlier in the decade.

When economic conditions improve, the Company believes it will be positioned, over the long term, to generate revenue and earnings growth in line with its historical target levels. However, evolving market, regulatory and rating agency expectations will likely cause the Company, as well as other financial institutions, to maintain in future years a higher level of capital than they would have historically maintained. These higher capital requirements would in turn lead, all other things being equal, to lower future ROE than the Company has historically targeted. While the Company is not establishing a new target at this time, it currently believes that it will ultimately be positioned to deliver a ROE in excess of 20 percent over time. As the capital requirements for financial institutions become clearer, management will have greater visibility into this area. At that time, the Company will provide updated long-term ROE and capital distribution targets.

Certain reclassifications of prior year amounts have been made to conform to the current presentation. These reclassifications did not have an impact on the Company’s results of operations or cash flows.

Certain of the statements in this Form 10-Q report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See the “Forward-Looking Statements” section below.

Current Economic Environment/Outlook

While year-over-year cardmember spending volume comparisons remained negative during the third quarter, monthly comparisons have recently improved as spending levels have stabilized. This pattern was fairly consistent across all of the Company’s businesses. In addition, the number of cardmember transactions on the Company’s network was relatively flat year-over-year. If third quarter spending volumes continue through the fourth quarter, which is subject to various uncertainties such as consumer confidence and the strength of the economy, among other factors, the Company would expect further narrowing of the decline in growth metrics given easier year-over-year comparisons.

Credit trends continued to show overall improvement. Charge card losses have moderated in the United States and worldwide past-due trends have improved. As expected, lending write-offs declined substantially in the quarter, although remain at historically high levels. Despite the decline, the Company increased reserves in light of the uncertainty surrounding the timing of an ultimate improvement in unemployment and other economic trends. While there is still reason to be cautious about the impact of high unemployment levels, the Company expects to see sequential improvement in the loan loss provision during the fourth quarter. As a result, the Company anticipates that it will make a greater level of incremental investments in the fourth quarter compared to the third quarter. Assuming current delinquency trends continue and bankruptcies do not increase significantly, the Company expects managed lending write-off rates in the United States for the fourth quarter to be less than the write-off rate in the third quarter1.

 

1

The “managed basis” presentation includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the “owned basis” (GAAP) information and the “managed basis” information is attributable to the effects of securitized activities. The Company is not presenting estimates of owned net write-off rates comparable to the managed data above because the owned write-off rates are not determinable at this time. For further discussion of the Company’s owned and managed basis presentation, refer to the information set forth under U.S. Card Services in the section captioned “Differences Between GAAP and Managed Presentations”.

 

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Reengineering Initiatives

In response to recent adverse economic conditions and to better position the Company’s cost structure for an anticipated slower economic growth environment over the medium term after the recession, the Company took various actions in the latter part of 2008 and in the second quarter of 2009 to reduce its cost structure that resulted in recording pretax reengineering charges of $449 million ($291 million after-tax) and $200 million ($130 million after-tax; before consideration of adjustments in the second quarter to amounts accrued in prior quarters), respectively. The Company estimates that all of the severance and employee-related costs and a significant majority of the other costs will result in future cash expenditures. The Company’s operating expense trends in the third quarter continued to reflect the cost reductions resulting from these reengineering programs.

Cumulatively through these reengineering initiatives, the Company expects to eliminate approximately 11,000 positions, which accounted for approximately 17 percent of the global workforce at the end of the third quarter of 2008. The Company initially estimated that these initiatives would result in combined savings of approximately $2.6 billion over the course of 2009, including approximately $1.5 billion of reduced investment spending; however, the better than expected credit trends discussed earlier will likely lead to increased investment spending, thereby reducing the $1.5 billion of savings included within the Company’s total reengineering targets. Based on its progress to date, the Company is on track to realize additional operating expense benefits this year.

Discontinued Operations

For the appropriate periods, the operating results, assets and liabilities, and cash flows of American Express Bank Ltd. (AEB), which was sold to Standard Chartered PLC (Standard Chartered) in 2008, and American Express International Deposit Company (AEIDC), which was sold to Standard Chartered in the third quarter of 2009, have been removed from the Corporate & Other segment and reported separately within the discontinued operations captions on the Company’s Consolidated Financial Statements and notes related thereto.

Refer to Note 2 to the Consolidated Financial Statements for further discussion of the Company’s discontinued operations.

 

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American Express Company

Selected Statistical Information

(Billions, except percentages and where indicated)

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Card billed business (a):

        

United States

   $ 106.5      $ 120.3      $ 308.7      $ 358.4   

Outside the United States

     50.1        55.2        138.5        164.4   
                                

Total

   $ 156.6      $ 175.5      $ 447.2      $ 522.8   
                                

Total cards-in-force (millions) (b):

        

United States

     49.4        54.3        49.4        54.3   

Outside the United States

     39.0        37.8        39.0        37.8   
                                

Total

     88.4        92.1        88.4        92.1   
                                

Basic cards-in-force (millions) (b):

        

United States

     38.6        42.3        38.6        42.3   

Outside the United States

     34.3        32.8        34.3        32.8   
                                

Total

     72.9        75.1        72.9        75.1   
                                

Average discount rate (c)

     2.54     2.56     2.55     2.56

Average basic cardmember spending (dollars) (d)

   $ 2,898      $ 3,049      $ 8,029      $ 9,233   

Average fee per card (dollars) (d)

   $ 37      $ 34      $ 37      $ 34   

Average fee per card adjusted (dollars)(d)

   $ 41      $ 39      $ 41      $ 39   

 

(a) Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards. Card billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled.
(b) Total cards-in-force represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements.
(c) This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and GNS) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance.
(d) Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs, plus card fees included in interest and fees on loans (including related amortization of deferred direct acquisition costs), divided by average worldwide proprietary cards-in-force. The card fees related to cardmember loans included in interest and fees on loans were $47 million and $35 million for the quarters ended September 30, 2009 and 2008, respectively. The card fees related to cardmember loans included in interest and fees on loans were $132 million and $105 million for the nine months ended September 30, 2009 and 2008, respectively. The adjusted average fee per card is computed in the same manner, but excludes amortization of deferred direct acquisition costs (a portion of which is charge card related and included in net card fees and a portion of which is lending related and included in interest and fees on loans). The amount of amortization excluded was $57 million and $84 million for the quarters ended September 30, 2009 and 2008, respectively. The amount of amortization excluded was $189 million and $243 million for the nine months ended September 30, 2009 and 2008, respectively. The Company presents adjusted average fee per card because management believes that this metric presents a useful indicator of card fee pricing across a range of its proprietary card products.

 

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Selected Statistical Information (continued)

 

(Billions, except percentages and where indicated)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Worldwide cardmember receivables:

        

Total receivables

   $ 32.1      $ 37.6      $ 32.1      $ 37.6   

Loss reserves (millions):

        

Beginning balance

   $ 714      $ 1,146      $ 810      $ 1,149   

Provision

     143        351        716        937   

Net write-offs

     (265     (333     (937     (883

Other

     7        (30     10        (69
                                

Ending balance

   $ 599      $ 1,134      $ 599      $ 1,134   
                                

% of receivables

     1.9     3.0     1.9     3.0

Net write-off rate – USCS

     3.2     3.4     4.4     3.7

30 days past due as a % of total – USCS

     2.2     3.3     2.2     3.3

Net loss ratio as a % of charge volume – ICS

     0.37     0.25     0.36     0.23

90 days past due as a % of total – ICS

     2.5     2.7     2.5     2.7

Net loss ratio as a % of total – GCS

     0.23     0.15     0.21     0.12

90 days past due as a % of total – GCS

     1.5     1.8     1.5     1.8

Worldwide cardmember lending – owned basis (a):

        

Total loans

   $ 31.5      $ 45.7      $ 31.5      $ 45.7   

30 days past due loans as a % of total

     4.0     3.7     4.0     3.7

Loss reserves (millions):

        

Beginning balance

   $ 3,219      $ 2,594      $ 2,570      $ 1,831   

Provision

     973        927        3,665        3,209   

Net write-offs – principal

     (731     (697     (2,360     (1,941

Net write-offs – interest and fees

     (90     (161     (376     (437

Other (b)

     (12     (23     (140     (22
                                

Ending balance

   $ 3,359      $ 2,640      $ 3,359      $ 2,640   
                                

Ending Reserves – principal

   $ 3,246      $ 2,426      $ 3,246      $ 2,426   

Ending Reserves – interest and fees

   $ 113      $ 214      $ 113      $ 214   

% of loans

     10.7     5.8     10.7     5.8

% of past due

     264     154     264     154

Average loans

   $ 32.3      $ 47.7      $ 35.7      $ 49.3   

Net write-off rate

     9.1     5.8     8.8     5.2

Net interest yield on cardmember loans (c)

     9.7     8.9     9.8     8.8

Worldwide cardmember lending – managed basis (d):

        

Total loans

   $ 60.7      $ 75.5      $ 60.7      $ 75.5   

30 days past due loans as a % of total

     4.0     3.8     4.0     3.8

Net write-offs-principal (millions)

   $ 1,327      $ 1,090      $ (4,260   $ 2,884   

Average loans

   $ 61.8      $ 76.1      $ 64.6      $ 75.9   

Net write-off rate

     8.6     5.7     8.8     5.1

Net interest yield on cardmember loans (c)

     10.0     9.2     10.3     9.2

 

(a) “Owned,” a GAAP basis measurement, reflects only cardmember loans included on the Company’s Consolidated Balance Sheets.
(b) For the quarter and nine months ended September 30, 2009, other primarily includes $25 million and $169 million of reserves that were removed in connection with securitizations during the period, respectively. The offset is in the allocated cost of the associated retained subordinated securities. This amount also includes foreign currency translation adjustments. The prior period primarily includes foreign currency translation adjustments.

 

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(c) See below for calculations of net interest yield on cardmember loans. The Company believes net interest yield on cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Company’s cardmember lending portfolio. The Company believes net interest yield cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Company’s cardmember lending portfolio. Owned net interest yield for the nine months ended September 30, 2009, has been revised for a correction in the calculation methodology.
(d) Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the “owned basis” (GAAP) information and “managed basis” information is attributable to the effects of securitization activities. Refer to the information set forth under U.S. Card Services Selected Financial Information for further discussion of the managed basis presentation.

Selected Statistical Information (continued)

Calculation of net interest yield on cardmember loans

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Millions)

   2009     2008     2009     2008  

Owned Basis:

        

Net interest income

   $ 754      $ 950      $ 2,414      $ 2,875   

Average loans (billions)

   $ 32.3      $ 47.7      $ 35.7      $ 49.3   

Adjusted net interest income (a)

   $ 797      $ 1,068      $ 2,628      $ 3,248   

Adjusted average loans (billions) (b)

   $ 32.4      $ 47.8      $ 35.8      $ 49.4   

Net interest yield on cardmember loans (c)

     9.7     8.9     9.8     8.8

Managed Basis (d):

        

Net interest income (e)

   $ 1,410      $ 1,637      $ 4,596      $ 4,885   

Average loans (billions)

   $ 61.8      $ 76.1      $ 64.6      $ 75.9   

Adjusted net interest income (f)

   $ 1,554      $ 1,756      $ 4,966      $ 5,259   

Adjusted average loans (billions) (g)

   $ 62.0      $ 76.2      $ 64.8      $ 76.0   

Net interest yield on cardmember loans (c)

     10.0     9.2     10.3     9.2

 

(a) Represents net interest income allocable to the Company’s owned cardmember lending portfolio, which excludes the impact of card fees on loans and balance transfer fees attributable to the Company’s owned cardmember lending portfolio.
(b) Represents average owned loans excluding the impact of deferred card fees net of deferred direct acquisition costs for owned cardmember loans.
(c) Net interest yield on cardmember loans represents the net spread earned on cardmember loans. Net interest yield on cardmember loans (both on an owned and managed basis) is computed by dividing adjusted net interest income by adjusted average loans, computed on an annualized basis. The calculation of net interest yield on cardmember loans (both on an owned and managed basis) includes interest and fees that are deemed uncollectible. For the owned basis presentation, reserves and net write-offs related to uncollectible interest and fees are recorded through provisions for losses - cardmember lending, and for the managed basis presentation, reserves and net write-offs related to uncollectible interest and fees are included as a reduction to securitization income, net; therefore, such reserves and net write-offs are not included in the net interest yield calculation. The Company believes net interest yield cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Company’s cardmember lending portfolio. Owned net interest yield for the nine months ended September 30, 2009, has been revised for a correction in the calculation methodology.
(d) Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. Refer to the information set forth under U.S. Card Services Selected Financial Information for further discussion of the managed basis presentation.
(e) Includes the GAAP to managed basis securitization adjustments to interest income and interest expense as set forth under U.S. Card Services Selected Financial Information managed basis presentation.
(f) Represents net interest income allocable to the Company’s managed cardmember lending portfolio, which excludes the impact of card fees on managed loans and balance transfer fees attributable to the Company’s managed cardmember lending portfolio.
(g) Represents average managed loans excluding the impact of deferred card fees net of deferred direct acquisition costs for managed cardmember loans.

 

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The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.

Consolidated Results of Operations for the Three Months Ended September 30, 2009 and 2008

The Company’s consolidated income from continuing operations for the three months ended September 30, 2009, decreased $219 million or 25 percent to $642 million as compared to the same period a year ago, and diluted earnings per share (EPS) from continuing operations declined $0.20 or 27 percent to $0.54.

The Company’s consolidated net income for the three months ended September 30, 2009 decreased $175 million or 21 percent from the year ago period to $640 million, and diluted EPS decreased $0.17 or 24 percent to $0.53. Net income included a loss from discontinued operations of $2 million as compared to a $46 million loss from discontinued operations a year ago. For the twelve months ended, ROE was 11.7 percent, down from 27.8 percent a year ago.

The Company’s revenues, expenses, and provisions for losses are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes reduced the growth rates of revenues net of interest expense, total expenses, and provisions for losses by 2 percent, for the three months ended September 30, 2009.

Results from continuing operations for the three months ended September 30, 2009 included:

 

 

A $180 million ($113 million after-tax) benefit related to the accounting for a net investment in the Company’s consolidated foreign subsidiaries. See also Business Segment Results – Corporate & Other below for further discussion.

Results from continuing operations for the three months ended September 30, 2008 included:

 

 

A $100 million ($62 million after-tax) charge to the fair market value of the Company’s interest-only strip.

Total Revenues Net of Interest Expense

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