Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2010
or
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o |
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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)
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New York
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13-4922250 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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World Financial Center, 200 Vesey Street, New York, NY
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10285 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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 ý No o
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 ý No o
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):
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Large accelerated filer ý
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No ý
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at July 30, 2010 |
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Common Shares (par value $.20 per share)
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1,203,211,865 shares |
AMERICAN EXPRESS COMPANY
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended June 30 (Millions, except per share amounts) |
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2010 |
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2009 |
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Revenues |
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Non-interest revenues |
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Discount revenue |
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$ |
3,734 |
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$ |
3,305 |
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Net card fees |
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520 |
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532 |
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Travel commissions and fees |
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434 |
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407 |
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Other commissions and fees |
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497 |
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439 |
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Securitization income, net |
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(2 |
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Other |
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485 |
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670 |
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Total non-interest revenues |
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5,670 |
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5,351 |
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Interest income |
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Interest and fees on loans |
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1,657 |
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1,081 |
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Interest and dividends on investment securities |
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125 |
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196 |
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Deposits with banks and other |
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16 |
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11 |
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Total interest income |
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1,798 |
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1,288 |
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Interest expense |
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Deposits |
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137 |
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105 |
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Short-term borrowings |
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1 |
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7 |
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Long-term debt and other |
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472 |
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435 |
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Total interest expense |
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610 |
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547 |
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Net interest income |
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1,188 |
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741 |
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Total revenues net of interest expense |
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6,858 |
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6,092 |
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Provisions for losses |
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Charge card |
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96 |
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237 |
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Cardmember loans |
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540 |
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1,303 |
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Other |
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16 |
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44 |
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Total provisions for losses |
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652 |
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1,584 |
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Total revenues net of interest expense after provisions for losses |
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6,206 |
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4,508 |
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Expenses |
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Marketing, promotion, rewards and cardmember services |
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2,122 |
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1,512 |
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Salaries and employee benefits |
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1,315 |
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1,370 |
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Professional services |
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636 |
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599 |
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Other, net |
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538 |
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609 |
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Total |
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4,611 |
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4,090 |
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Pretax income from continuing operations |
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1,595 |
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418 |
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Income tax provision |
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578 |
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76 |
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Income from continuing operations |
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1,017 |
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342 |
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Loss from discontinued operations, net of tax |
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(5 |
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Net income |
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$ |
1,017 |
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$ |
337 |
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Earnings per Common Share Basic: (Note 13) |
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Income from continuing operations attributable to common
shareholders(a) |
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$ |
0.84 |
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$ |
0.09 |
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Loss from discontinued operations, net of tax |
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Net income attributable to common shareholders(a) |
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$ |
0.84 |
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$ |
0.09 |
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Earnings per Common Share Diluted: (Note 13) |
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Income from continuing operations attributable to common
shareholders(a) |
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$ |
0.84 |
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$ |
0.09 |
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Loss from discontinued operations, net of tax |
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Net income attributable to common shareholders(a) |
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$ |
0.84 |
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$ |
0.09 |
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Average common shares outstanding for earnings per common share: |
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Basic |
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1,190 |
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1,162 |
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Diluted |
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1,197 |
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1,165 |
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Cash dividends declared per common share |
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$ |
0.18 |
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$ |
0.18 |
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(a) |
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Represents income from continuing operations or net income, as applicable, less (i)
accelerated preferred dividend accretion of $212 million for the three months ended June 30,
2009 due to a repurchase of $3.39 billion of preferred shares issued as part of the Capital
Purchase Program (CPP), (ii) preferred share dividends and related accretion of $22 million
for the three months ended June 30, 2009, and (iii) earnings allocated to participating share
awards and other items of $13 million and $1 million for the three months ended June
30, 2010 and 2009, respectively. |
See Notes to Consolidated Financial Statements
1
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Six Months Ended June 30 (Millions, except per share amounts) |
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2010 |
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2009 |
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Revenues |
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Non-interest revenues |
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Discount revenue |
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$ |
7,200 |
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$ |
6,371 |
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Net card fees |
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1,041 |
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1,064 |
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Travel commissions and fees |
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820 |
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772 |
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Other commissions and fees |
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997 |
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892 |
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Securitization income, net |
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139 |
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Other |
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911 |
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1,120 |
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Total non-interest revenues |
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10,969 |
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10,358 |
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Interest income |
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Interest and fees on loans |
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3,432 |
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2,373 |
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Interest and dividends on investment securities |
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242 |
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350 |
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Deposits with banks and other |
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29 |
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39 |
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Total interest income |
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3,703 |
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2,762 |
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Interest expense |
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Deposits |
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265 |
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190 |
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Short-term borrowings |
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2 |
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34 |
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Long-term debt and other |
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941 |
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878 |
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Total interest expense |
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1,208 |
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1,102 |
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Net interest income |
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2,495 |
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1,660 |
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Total revenues net of interest expense |
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13,464 |
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12,018 |
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Provisions for losses |
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Charge card |
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323 |
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573 |
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Cardmember loans |
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1,228 |
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2,717 |
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Other |
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44 |
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97 |
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Total provisions for losses |
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1,595 |
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3,387 |
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Total revenues net of interest expense after provisions for losses |
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11,869 |
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8,631 |
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Expenses |
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Marketing, promotion, rewards and cardmember services |
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4,084 |
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2,814 |
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Salaries and employee benefits |
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2,642 |
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2,623 |
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Professional services |
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1,197 |
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1,118 |
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Other, net |
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1,099 |
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1,114 |
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Total |
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9,022 |
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7,669 |
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Pretax income from continuing operations |
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2,847 |
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|
962 |
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Income tax provision |
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945 |
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177 |
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Income from continuing operations |
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1,902 |
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|
785 |
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Loss from discontinued operations, net of tax |
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(11 |
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Net income |
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$ |
1,902 |
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$ |
774 |
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Earnings per Common Share Basic: (Note 13) |
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Income from continuing operations attributable to common shareholders(a) |
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$ |
1.58 |
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$ |
0.41 |
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Loss from discontinued operations, net of tax |
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(0.01 |
) |
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Net income attributable to common shareholders(a) |
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$ |
1.58 |
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$ |
0.40 |
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Earnings per Common Share Diluted: (Note 13) |
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Income from continuing operations attributable to common shareholders(a) |
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$ |
1.57 |
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$ |
0.41 |
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Loss from discontinued operations, net of tax |
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(0.01 |
) |
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Net income attributable to common shareholders(a) |
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$ |
1.57 |
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$ |
0.40 |
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Average common shares outstanding for earnings per common share: |
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Basic |
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1,188 |
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1,159 |
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Diluted |
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1,194 |
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|
1,161 |
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Cash dividends declared per common share |
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$ |
0.36 |
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$ |
0.36 |
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(a) |
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Represents income from continuing operations or net income, as applicable, less (i)
accelerated preferred dividend accretion of $212 million for the six months ended June 30,
2009 due to a repurchase of $3.39 billion of preferred shares issued as part of the Capital
Purchase Program (CPP), (ii) preferred share dividends and related accretion of $94 million
for the six months ended June 30, 2009, and (iii) earnings allocated to participating share
awards and other items of $25 million and $5 million for the six months ended June 30,
2010 and 2009, respectively. |
See Notes to Consolidated Financial Statements
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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December 31, |
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(Millions, except share data) |
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2010 |
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2009 |
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Assets |
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Cash and cash equivalents |
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Cash and cash due from banks |
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$ |
1,850 |
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$ |
1,525 |
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Interest-bearing deposits in other banks (including securities purchased under
resale agreements: 2010, $321; 2009, $212) |
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18,423 |
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11,010 |
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Short-term investment securities |
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414 |
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4,064 |
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Total cash and cash equivalents |
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20,687 |
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16,599 |
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Accounts receivable |
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Cardmember receivables (includes gross receivables of a consolidated variable interest
entity: 2010, $7,582; 2009, $8,314), less reserves: 2010, $440; 2009, $546 |
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34,188 |
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33,197 |
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Other receivables, less reserves: 2010, $184; 2009, $109 |
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2,858 |
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|
5,007 |
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Loans |
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Cardmember loans (includes gross loans of a consolidated variable interest entity: 2010,
$33,510)(a), less reserves: 2010, $4,866; 2009, $3,268 |
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52,406 |
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29,504 |
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Other, less reserves: 2010, $24; 2009, $27 |
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409 |
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|
506 |
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Investment securities |
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17,328 |
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24,337 |
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Premises and equipment at cost, less accumulated depreciation:
2010, $4,387; 2009, $4,130 |
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2,714 |
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|
2,782 |
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Other assets (includes restricted cash of consolidated variable interest entities: 2010, $1,437;
2009, $1,799)(a) |
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13,173 |
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|
13,213 |
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Total assets |
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$ |
143,763 |
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$ |
125,145 |
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Liabilities and Shareholders Equity |
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Liabilities |
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Customer deposits |
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$ |
28,352 |
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$ |
26,289 |
|
Travelers Cheques outstanding |
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|
5,411 |
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|
5,975 |
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Accounts payable |
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|
9,503 |
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|
9,063 |
|
Short-term borrowings |
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|
2,609 |
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|
|
2,344 |
|
Long-term debt (includes debt issued by consolidated variable interest entities: 2010,
$24,655; 2009, $4,970) |
|
|
69,345 |
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|
52,338 |
|
Other liabilities |
|
|
14,030 |
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|
14,730 |
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Total liabilities |
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|
129,250 |
|
|
|
110,739 |
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Contingencies (Note 15) |
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Shareholders Equity |
|
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|
|
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Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,202
million shares in 2010 and 1,192 million shares in 2009 |
|
|
239 |
|
|
|
237 |
|
Additional paid-in capital |
|
|
11,586 |
|
|
|
11,144 |
|
Retained earnings |
|
|
3,724 |
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|
|
3,737 |
|
Accumulated other comprehensive loss, net of tax: |
|
|
|
|
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Net unrealized securities gains, net of tax: 2010, $(103); 2009, $(291) |
|
|
201 |
|
|
|
507 |
|
Net unrealized derivatives losses, net of tax: 2010, $9; 2009, $15 |
|
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(16 |
) |
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(28 |
) |
Foreign currency translation adjustments, net of tax: 2010, $40; 2009, $31 |
|
|
(787 |
) |
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|
(722 |
) |
Net unrealized pension and other postretirement benefit costs, net of tax: 2010 $216;
2009, $244 |
|
|
(434 |
) |
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|
(469 |
) |
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Total accumulated other comprehensive loss |
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(1,036 |
) |
|
|
(712 |
) |
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Total shareholders equity |
|
|
14,513 |
|
|
|
14,406 |
|
|
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Total liabilities and shareholders equity |
|
$ |
143,763 |
|
|
$ |
125,145 |
|
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|
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(a) |
|
The balance as of December 31, 2009 includes an undivided, pro-rata interest in an
unconsolidated variable interest entity (historically referred to as sellers interest)
totaling $8,752, of which $8,033 is included in cardmember loans and $719 is included in
other assets. Refer to Note 7 for additional details. |
See Notes to Consolidated Financial Statements
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 (Millions) |
|
2010 |
|
|
2009 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,902 |
|
|
$ |
774 |
|
Loss from discontinued operations, net of tax |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,902 |
|
|
|
785 |
|
Adjustments to reconcile income from continuing operations to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provisions for losses |
|
|
1,595 |
|
|
|
3,387 |
|
Depreciation and amortization |
|
|
441 |
|
|
|
568 |
|
Deferred taxes, acquisition costs and other |
|
|
699 |
|
|
|
(1,387 |
) |
Stock-based compensation |
|
|
106 |
|
|
|
121 |
|
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
Other receivables |
|
|
202 |
|
|
|
422 |
|
Other assets |
|
|
120 |
|
|
|
683 |
|
Accounts payable and other liabilities |
|
|
(56 |
) |
|
|
(1,351 |
) |
Travelers Cheques outstanding |
|
|
(559 |
) |
|
|
(462 |
) |
Net cash used in operating activities attributable to discontinued operations |
|
|
|
|
|
|
(165 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,450 |
|
|
|
2,601 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Sale of investments |
|
|
1,253 |
|
|
|
1,897 |
|
Maturity and redemption of investments |
|
|
7,025 |
|
|
|
1,371 |
|
Purchase of investments |
|
|
(4,911 |
) |
|
|
(10,023 |
) |
Net decrease in cardmember loans/receivables |
|
|
367 |
|
|
|
8,838 |
|
Proceeds from cardmember loan securitizations |
|
|
|
|
|
|
998 |
|
Maturities of cardmember loan securitizations |
|
|
|
|
|
|
(2,100 |
) |
Purchase of premises and equipment |
|
|
(329 |
) |
|
|
(334 |
) |
Sale of premises and equipment |
|
|
7 |
|
|
|
36 |
|
Acquisitions/Dispositions, net of cash acquired |
|
|
(254 |
) |
|
|
|
|
Net decrease (increase) in restricted cash |
|
|
2,327 |
|
|
|
(56 |
) |
Net cash provided by investing activities attributable to discontinued operations |
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
5,485 |
|
|
|
810 |
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net change in customer deposits |
|
|
2,068 |
|
|
|
4,766 |
|
Net increase (decrease) in short-term borrowings |
|
|
298 |
|
|
|
(6,719 |
) |
Issuance of long-term debt |
|
|
1,444 |
|
|
|
2,980 |
|
Principal payments on long-term debt |
|
|
(9,509 |
) |
|
|
(9,682 |
) |
Issuance of American Express Series A preferred shares and warrants |
|
|
|
|
|
|
3,389 |
|
Issuance of American Express common shares |
|
|
295 |
|
|
|
531 |
|
Repurchase of American Express Series A preferred shares |
|
|
|
|
|
|
(3,389 |
) |
Common and preferred dividends paid |
|
|
(433 |
) |
|
|
(494 |
) |
Net cash used in financing activities attributable to discontinued operations |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(5,837 |
) |
|
|
(8,637 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(10 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
4,088 |
|
|
|
(5,206 |
) |
Cash and cash equivalents at beginning of period includes cash of discontinued operations: 2010, $0; 2009, $3 |
|
|
16,599 |
|
|
|
21,654 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period includes cash of discontinued operations: 2010, $0; 2009, $2 |
|
$ |
20,687 |
|
|
$ |
16,448 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company
American Express is a global service company that provides customers with access to products,
insights and experiences that enrich lives and build business success. The Companys principal
products and services are charge and credit payment card products and travel-related services
offered to consumers and businesses around the world.
The accompanying Consolidated Financial Statements should be read in conjunction with the financial
statements incorporated by reference in the Annual Report on Form 10-K of American Express Company
(the Company) for the year ended December 31, 2009 (2009 Form 10-K).
The interim consolidated 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. 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. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
Accounting estimates are an integral part of the Consolidated Financial Statements. These
estimates are based, in part, on managements 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, reserves for Membership Rewards costs, fair value measurement,
goodwill and income taxes. These accounting estimates reflect the best judgment of management, but
actual results could differ.
Classification of Cash Balances
The Company recently determined that in periods prior to June 30, 2010, the Company misclassified
certain book overdraft balances against cash balances on its Consolidated Balance Sheets. Such
overdraft balances, which arise in the normal course of the Companys business activities, should
have been classified as either accounts payable or other liabilities, depending on the underlying
nature of the account. The Company has evaluated the effects of these misclassifications and
concluded that none of them are material to any of the Companys previously issued quarterly or
annual Consolidated Financial Statements. Nevertheless, the Company has elected to revise in this report and future filings its Consolidated Balance Sheets and Consolidated Statements of Cash Flows to correct
the effects of these misclassifications.
The amounts on prior period Consolidated Balance Sheets that have been revised are summarized
below:
Consolidated Balance Sheets, as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
(Billions) |
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21.1 |
|
|
$ |
22.9 |
|
|
$ |
15.5 |
|
|
$ |
16.6 |
|
|
$ |
20.5 |
|
|
$ |
21.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities |
|
|
22.0 |
|
|
|
23.8 |
|
|
|
22.7 |
|
|
|
23.8 |
|
|
|
23.0 |
|
|
|
24.2 |
|
5
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These balance sheet misclassifications further impacted amounts previously reported in prior
period Consolidated Statements of Cash Flows, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
Six Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2010 |
|
|
September 30, 2009 |
|
|
June 30, 2009 |
|
|
March 31, 2009 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
(Billions) |
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accounts payable
and other liabilities |
|
$ |
(1.0 |
) |
|
$ |
0.2 |
(a) |
|
$ |
(0.9 |
) |
|
$ |
(1.0 |
) |
|
$ |
(1.1 |
) |
|
$ |
(1.4 |
) |
|
$ |
(2.3 |
) |
|
$ |
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities |
|
|
1.1 |
|
|
|
2.3 |
(a) |
|
|
5.0 |
(b) |
|
|
4.9 |
|
|
|
2.9 |
(b) |
|
|
2.6 |
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents |
|
|
5.6 |
|
|
|
6.4 |
|
|
|
(1.9 |
) |
|
|
(2.0 |
) |
|
|
(4.9 |
) |
|
|
(5.2 |
) |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
|
(a) |
|
The As Revised amounts also include a $0.4 billion adjustment to correct certain balances
relating to the foreign currency translation impact on cash flows. This item resulted in a
corresponding $0.4 billion decrease in cash flows in net decrease in cardmember
loans/receivables and net cash provided by investing activities in the Consolidated
Statement of Cash Flows for the three months ended March 31, 2010. This item did not affect
any other previously issued quarterly or annual consolidated financial statements. |
|
(b) |
|
The As Previously Reported amounts for the nine months ended September 30, 2009 and the six
months ended June 30, 2009 include reductions to net cash provided by operating activities of
$0.6 billion and $0.3 billion, respectively, to conform to certain reclassifications beginning
with the December 31, 2009 Consolidated Statement of Cash Flows. These reclassifications
relate to net recoveries of cardmember loans/receivables and changes in restricted cash
balances, both of which are now reflected in cash flows from investing activities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
|
Previously |
|
|
As |
|
(Billions) |
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
Reported |
|
|
Revised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accounts payable
and other liabilities |
|
$ |
|
|
|
$ |
(0.1 |
) |
|
$ |
0.9 |
|
|
$ |
0.5 |
|
|
$ |
1.0 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities |
|
|
6.4 |
|
|
|
6.3 |
|
|
|
8.1 |
|
|
|
7.7 |
|
|
|
8.0 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents |
|
|
(5.0 |
) |
|
|
(5.1 |
) |
|
|
5.3 |
|
|
|
4.9 |
|
|
|
7.0 |
|
|
|
7.5 |
|
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) recently issued the Accounting Standard Update No.
2010-20Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses. This standard amends existing guidance by requiring an entity to
provide a greater level of disaggregated information about the credit quality of its financing
receivables and its allowance for credit losses. In addition, an entity will be required to
disclose credit quality indicators, past due information, and modifications of its financing
receivables. The amendments that require disclosures as of a balance sheet date are effective for
December 31, 2010. The amendments that require disclosures about activity during a period are
effective for periods beginning January 1, 2011. The new
standard is anticipated to require expanded disclosure by the Company due to the requirement for further disaggregation of
currently disclosed information, as well as new disclosure requirements surrounding reserve
activity.
Effective January 1, 2010, the Company adopted Accounting Standards Update (ASU) No. 2009-16,
Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets and ASU No.
2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities (generally referred to herein as new GAAP effective January 1,
2010). These standards eliminate 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 (VIEs). In addition, ASU 2009-17 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 VIEs primary beneficiary and (iii) the
required financial statement disclosures.
Upon adoption of new GAAP effective January 1, 2010, the Company was required to change its
accounting for the American Express Credit Account Master Trust (the Lending Trust), a previously
unconsolidated VIE, which is now consolidated. As a result, beginning January 1, 2010, the
securitized cardmember loans and related debt securities issued to third parties by the Lending
Trust are included on the Companys Consolidated Balance Sheet. The Company continues to
consolidate the American Express Issuance Trust (the Charge Trust). Prior period results have not
been revised for the change in accounting for the Lending Trust. Refer to Note 7 for further
discussion.
7
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 15, 2010, the Company purchased Revolution Money, a provider of secure person-to-person
payment services through an internet based platform, for a cash purchase price of approximately
$305 million. Among the assets acquired was $184 million of goodwill, $119 million of
definite-lived intangible assets, and other miscellaneous net assets totaling $2 million. All
assets and liabilities acquired, including goodwill, are reflected in the Corporate & Other
segment. The acquisition of Revolution Money did not have a significant impact on the Corporate &
Other segments or the Companys results of operations for the six months ended June 30, 2010.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in an orderly transaction between market participants at the measurement
date, and is based on the Companys principal or most advantageous market for the specific asset or
liability.
Generally Accepted Accounting Principles (GAAP) provide for a three-level hierarchy of inputs to
valuation techniques used to measure fair value, defined as follows:
|
|
|
Level 1 Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
|
|
|
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability, including: |
|
- |
|
Quoted prices for similar assets or liabilities in active markets |
|
|
- |
|
Quoted prices for identical or similar assets or liabilities in markets that are not active |
|
|
- |
|
Inputs other than quoted prices that are observable for the asset or liability |
|
|
- |
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means |
|
|
|
Level 3 Inputs that are unobservable and reflect the Companys own assumptions about the
assumptions market participants would use in pricing the asset or liability based on the best
information available in the circumstances (e.g., internally derived assumptions surrounding
the timing and amount of expected cash flows). |
8
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Companys financial assets and financial liabilities measured at
fair value on a recurring basis by GAAPs valuation hierarchy (as described above), as of June 30,
2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
(Millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
469 |
|
|
$ |
469 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
530 |
|
|
$ |
530 |
|
|
$ |
|
|
|
$ |
|
|
Retained subordinated
securities(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,599 |
|
|
|
|
|
|
|
|
|
|
|
3,599 |
|
Debt securities and other |
|
|
16,859 |
|
|
|
|
|
|
|
16,859 |
|
|
|
|
|
|
|
20,208 |
|
|
|
|
|
|
|
20,208 |
|
|
|
|
|
Interest-only strip(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Derivatives(c) |
|
|
1,218 |
|
|
|
|
|
|
|
1,218 |
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
18,546 |
|
|
$ |
469 |
|
|
$ |
18,077 |
|
|
$ |
|
|
|
$ |
25,190 |
|
|
$ |
530 |
|
|
$ |
21,041 |
|
|
$ |
3,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(c) |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
240 |
|
|
$ |
|
|
|
$ |
283 |
|
|
$ |
|
|
|
$ |
283 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
240 |
|
|
$ |
|
|
|
$ |
283 |
|
|
$ |
|
|
|
$ |
283 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Refer to Note 6 for the fair values of investment securities on a further disaggregated
basis. |
|
|
(b) |
|
As a result of new GAAP effective January 1, 2010, the Company no longer presents the
retained subordinated securities and interest-only strip within its Consolidated Financial
Statements in periods subsequent to December 31, 2009. Refer to Note 7 for further details. |
|
|
(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. As of June 30, 2010 and December 31, 2009, $21 million and $33 million,
respectively, of derivative assets and liabilities have been offset and presented net on the
Consolidated Balance Sheets. Refer to Note 9 for the fair values of derivative assets and
liabilities on a further disaggregated basis. |
The table below presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2009, including realized and unrealized gains (losses) included in earnings and accumulated other
comprehensive (loss) income (AOCI):
|
|
|
|
|
|
|
|
|
|
|
2009 (a) |
|
|
Investments-Retained |
|
|
Other Assets- |
|
(Millions) |
|
Subordinated Securities |
|
|
Interest-Only Strip |
|
Beginning fair value, January 1 |
|
$ |
744 |
|
|
$ |
32 |
|
Increases in securitized loans(b) |
|
|
1,760 |
|
|
|
|
|
Unrealized and realized gains (losses) |
|
|
1,095 |
(c) |
|
|
(12 |
)(d) |
|
|
|
|
|
|
|
Ending fair value, December 31 |
|
$ |
3,599 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company did not measure any financial instruments at fair value using significantly
unobservable inputs during the six months ended June 30, 2010. |
|
|
(b) |
|
Represents cost basis of securitized loans. |
|
|
(c) |
|
Included in AOCI, net of taxes. |
|
|
(d) |
|
Included in securitization income, net. |
Valuation Techniques Used in Measuring Fair Value
GAAP requires disclosure of the estimated fair value of all 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.
9
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the financial assets and liabilities measured at fair value on a recurring basis (summarized in
the valuation hierarchy table on the previous page) the Company applies the following valuation
techniques to measure fair value:
Investment Securities (Excluding Retained Subordinated Securities and the Interest-only
Strip)
|
|
|
When available, quoted market prices in active markets are used to determine fair value.
Such investment securities are classified within Level 1 of the fair value hierarchy. |
|
|
|
When quoted prices in an active market are not available, the fair values for the Companys
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 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 and
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. The Company classifies the prices
obtained from the pricing services within Level 2 of the fair value hierarchy because the
underlying inputs are directly observable from active markets or recent trades of similar
securities in inactive markets. However, 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. |
The Company reaffirms its understanding of the valuation techniques used by its pricing services at
least annually. 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. Refer to Note 6 for
additional fair value information.
Retained Subordinated Securities
As of December 31, 2009, the Company determined the fair value of its retained subordinated
securities using discounted cash flow models. The discount rate used was based on an interest rate
curve that was observable in the marketplace plus an unobservable credit spread commensurate with
the risk of these securities and similar financial instruments. The Company classified such
securities in Level 3 of the fair value hierarchy because the applicable credit spreads were not
observable due to the illiquidity in the market with respect to these securities and similar
financial instruments.
Interest-only Strip
As of December 31, 2009, the fair value of the interest-only strip was 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 utilized certain estimates and assumptions to
determine the fair value of the interest-only strip asset, including estimates for finance charge
yield, credit losses, London Interbank Offered Rate (LIBOR) (which determined future certificate
interest costs), monthly payment rate and discount rate. On a quarterly basis, the Company compared
the assumptions it used in calculating the fair value of its interest-only strip to observable
market data when available, and to historical trends. The interest-only strip was classified within
Level 3 of the fair value hierarchy due to the significance of the unobservable inputs used in
valuing this asset.
10
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Financial Instruments
The fair value of the Companys derivative financial instruments, which could be assets or
liabilities on the Consolidated Balance Sheets, is estimated by using either a third-party
valuation service that uses proprietary pricing models, or by using internal pricing models,
neither of which 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. In each case, the valuation models used 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. Refer to Note 9 for additional fair value
information.
The following table discloses the estimated fair value for the Companys financial assets and
financial liabilities not carried at fair value, as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(Rounded to nearest billion) |
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets for which
carrying values equal
or approximate fair
value |
|
$ |
60 |
|
|
$ |
60 |
(a) |
|
$ |
58 |
|
|
$ |
58 |
(b) |
Loans, net |
|
$ |
53 |
|
|
$ |
53 |
(a) |
|
$ |
30 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for which
carrying values equal
or approximate fair
value |
|
$ |
37 |
|
|
$ |
37 |
|
|
$ |
34 |
|
|
$ |
34 |
|
Certificates of deposit |
|
$ |
15 |
|
|
$ |
16 |
|
|
$ |
15 |
|
|
$ |
16 |
|
Long-term debt |
|
$ |
69 |
|
|
$ |
72 |
(a) |
|
$ |
52 |
|
|
$ |
54 |
(b) |
|
|
|
|
|
(a) |
|
Includes fair values of cardmember receivables, loans and long-term debt of $7.6 billion,
$31.2 billion and $24.9 billion, respectively, held by consolidated VIEs as of June 30, 2010.
Refer to the Consolidated Balance Sheets for the related carrying values. |
|
|
(b) |
|
Includes fair values of cardmember receivables and long-term debt of $8.3 billion and $5.0
billion, respectively, held by a consolidated VIE as of December 31, 2009. Refer to the
Consolidated Balance Sheets for the related carrying values. |
The fair values of these financial instruments are estimates based upon market conditions and
perceived risks as of June 30, 2010 and December 31, 2009, 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.
Financial Assets Carried at Other than Fair Value
Loans, net
Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In
estimating the fair value for the Companys 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.
11
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Liabilities for Which Carrying Values Equal or Approximate Fair Value
Financial liabilities for which carrying values equal or approximate fair value include accrued
interest, customer deposits (excluding certificates of deposit, which are described further below),
Travelers Cheques outstanding, short-term borrowings and certain other liabilities for which 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
Certificates of Deposit
Certificates of deposit (CDs) are recorded at their historical issuance cost on the Consolidated
Balance Sheets. Fair value is estimated using a discounted cash flow methodology based on the
Companys current borrowing rates for similar types of CDs.
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
Companys current borrowing rates for similar types of borrowings.
Accounts receivable as of June 30, 2010 and December 31, 2009, consisted of:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
U.S. Card Services(a) |
|
$ |
17,307 |
|
|
$ |
17,750 |
|
International Card Services |
|
|
5,596 |
|
|
|
5,944 |
|
Global Commercial Services(b) |
|
|
11,532 |
|
|
|
9,844 |
|
Global Network & Merchant Services(c) |
|
|
193 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Cardmember receivables, gross(d) |
|
|
34,628 |
|
|
|
33,743 |
|
Less: Cardmember reserve for losses |
|
|
440 |
|
|
|
546 |
|
|
|
|
|
|
|
|
Cardmember receivables, net |
|
$ |
34,188 |
|
|
$ |
33,197 |
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables, net(e) |
|
$ |
2,858 |
|
|
$ |
5,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $7.0 billion and $7.8 billion of gross cardmember receivables of a consolidated
VIE as of June 30, 2010 and December 31, 2009, respectively. |
|
|
(b) |
|
Includes $0.6 billion and $0.5 billion of gross cardmember receivables of a consolidated VIE
as of June 30, 2010 and December 31, 2009, respectively. |
|
|
(c) |
|
Includes receivables primarily related to the Companys International Currency Card
portfolios. |
|
|
(d) |
|
Includes approximately $10.5 billion and $10.4 billion of cardmember receivables outside the
United States as of June 30, 2010 and December 31, 2009, respectively. |
|
|
(e) |
|
Other receivables primarily represent amounts due from the Companys travel customers,
third-party issuing partners, accrued interest on investments, and other receivables due to
the Company in the ordinary course of business. As of December 31, 2009, these amounts also
include $1.9 billion of cash held in an unconsolidated VIE required for daily settlement
requirements. Beginning January 1, 2010, this VIE is consolidated by the Company and cash
held by this consolidated VIE is considered restricted cash included in other assets on the
Companys Consolidated Balance Sheets. Refer to Note 7 for additional details. |
12
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in the cardmember receivable reserve for losses for the
six months ended June 30:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
Balance, January 1 |
|
$ |
546 |
|
|
$ |
810 |
|
Additions: |
|
|
|
|
|
|
|
|
Cardmember receivables provisions(a) |
|
|
239 |
|
|
|
539 |
|
Cardmember receivables provisions other(b) |
|
|
84 |
|
|
|
34 |
|
|
|
|
|
|
|
|
Total provision |
|
|
323 |
|
|
|
573 |
|
|
|
|
|
|
|
|
Deductions: |
|
|
|
|
|
|
|
|
Cardmember receivables net write-offs(c)(d) |
|
|
(365 |
) |
|
|
(672 |
) |
Cardmember receivables other(e) |
|
|
(64 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
440 |
|
|
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents loss provisions for cardmember receivables consisting of principal (resulting
from authorized transactions) and fee reserve components. |
|
|
(b) |
|
Primarily represents loss provisions for cardmember receivables resulting from unauthorized
transactions. |
|
|
(c) |
|
Represents write-offs consisting of principal (resulting from authorized transactions) and
fee components, less recoveries of $189 million and $163 million for the six months ended June
30, 2010 and 2009, respectively. For the six months ended June 30, 2009, these amounts also
include net write-offs for cardmember receivables resulting from unauthorized transactions. |
|
|
(d) |
|
Through December 31, 2009, cardmember receivables in the International Card Services (ICS)
and Global Commercial Services (GCS) segments were written off when 360 days past billing or
earlier. During the first quarter of 2010, consistent with applicable bank regulatory
guidance, the Company modified its methodology to write off cardmember receivables in the ICS
and GCS segments when 180 days past due or earlier. Therefore, net write-offs for cardmember
receivables for the first quarter of 2010 included approximately $108 million resulting from
this change in write-off methodology. The impact of this change to the provision for charge
card losses was not material. |
|
|
(e) |
|
For the six months ended June 30, 2010, these amounts include net write-offs of cardmember
receivables resulting from unauthorized transactions. For the six months ended June 30, 2009,
net write-offs of cardmember receivables resulting from unauthorized transactions were
included in cardmember receivables net write-offs. For all periods these amounts include
foreign currency translation adjustments. |
Refer to Note 5 for impaired cardmember receivables as of June 30, 2010 and December 31, 2009.
Loans as of June 30, 2010 and December 31, 2009 consisted of:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
U.S. Card Services(a) |
|
$ |
48,968 |
|
|
$ |
23,507 |
|
International Card Services |
|
|
8,281 |
|
|
|
9,241 |
|
Global Commercial Services |
|
|
23 |
|
|
|
24 |
|
|
|
|
|
|
|
|
Cardmember loans(b) |
|
|
57,272 |
|
|
|
32,772 |
|
Less: Cardmember loans reserve for losses |
|
|
4,866 |
|
|
|
3,268 |
|
|
|
|
|
|
|
|
Cardmember loans, net |
|
$ |
52,406 |
|
|
$ |
29,504 |
|
|
|
|
|
|
|
|
|
|
|
|
Other loans, net(c) |
|
$ |
409 |
|
|
$ |
506 |
|
|
|
|
|
|
(a) |
|
As of June 30, 2010, includes approximately $33.5 billion of gross cardmember loans of a
consolidated VIE. As of December 31, 2009 includes approximately $8.0 billion for an
undivided, pro-rata interest in an unconsolidated VIE (historically referred to as sellers
interest). Refer to Note 7 for additional details. |
|
|
(b) |
|
Cardmember loan balance is net of unamortized net card fees of $123 million and $114 million
as of June 30, 2010 and December 31, 2009, respectively. |
|
|
(c) |
|
Other loans primarily represent small business installment loans, a store card portfolio
whose billed business is not processed on the Companys network and small business loans
associated with the acquisition of Corporate Payment Services (CPS). |
13
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in the cardmember loans reserve for losses for the six
months ended June 30:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
Balance, January 1 |
|
$ |
3,268 |
|
|
$ |
2,570 |
|
Reserves established for consolidation of a variable interest entity |
|
|
2,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted balance, January 1 |
|
|
5,799 |
|
|
|
2,570 |
|
|
|
|
|
|
|
|
Additions: |
|
|
|
|
|
|
|
|
Cardmember loans provisions(a) |
|
|
1,190 |
|
|
|
2,692 |
|
Cardmember loans other(b) |
|
|
38 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total provision |
|
|
1,228 |
|
|
|
2,717 |
|
|
|
|
|
|
|
|
Deductions: |
|
|
|
|
|
|
|
|
Cardmember loans net write-offs principal(c) |
|
|
(1,902 |
) |
|
|
(1,629 |
) |
Cardmember loans net write-offs interest and fees(c) |
|
|
(206 |
) |
|
|
(286 |
) |
Cardmember loans other(d) |
|
|
(53 |
) |
|
|
(153 |
) |
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
4,866 |
|
|
$ |
3,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents loss provisions for cardmember loans consisting of principal (resulting from
authorized transactions), interest and fee reserves components. |
|
|
(b) |
|
Primarily represents loss provisions for cardmember loans resulting from unauthorized
transactions. |
|
|
(c) |
|
Cardmember loans net write-offs principal for the six months ended June 30, 2010 and 2009
include recoveries of $280 million and $174 million, respectively. Recoveries of interest and
fees were de minimis. |
|
|
(d) |
|
These amounts include net write-offs related to unauthorized transactions and foreign
currency translation adjustments. |
Impaired Loans and Receivables
Impaired loans and receivables are defined by GAAP as individual larger balance or homogeneous
pools of smaller balance restructured loans and receivables for which it is probable that the
lender will be unable to collect all amounts due according to the original contractual terms of the
loan and receivable agreement. The Company considers impaired loans and receivables to include: (i)
loans over 90 days past due still accruing interest, (ii) non-accrual loans, and (iii) loans and
receivables modified in a troubled debt restructuring (TDR).
The Company may modify cardmember loans and receivables to minimize losses to the Company while
providing cardmembers with temporary or permanent financial relief. Such modifications may include
reducing the interest rate or delinquency fees on the loans and receivables and/or placing the
cardmember on a fixed payment plan not exceeding 60 months. If the cardmember does not comply with
the modified terms, then the loan or receivable agreement generally reverts back to its original
terms. The performance of loans and receivables modified in a TDR is closely monitored to
understand its impact on the Companys reserve for losses. Though the ultimate success of these
modification programs remains uncertain, the Company believes they
improve the cumulative loss performance of such loans and receivables.
Modification
programs can be long term (more than 12 months) or short-term (12 months or less).
Loans and receivables in short-term modification programs previously were not classified as TDRs.
Beginning June 30, 2010, the Company has classified such cardmember loans and receivables as TDRs
and has correspondingly revised the prior period impaired loan and receivable amounts. Also, for
loans in short-term modification programs where the contractual rate of interest has been
temporarily modified to zero percent (generally not to exceed six months), such loans previously
were not classified as non-accrual loans. Beginning June 30, 2010, the Company has classified such
loans as non-accrual loans and has correspondingly revised the prior period impaired loan and
receivable amounts.
14
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information regarding the Companys impaired loans and receivables as of June 30, 2010 and December
31, 2009 is as follows:
Balances as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans and Receivables |
|
|
and |
|
|
|
|
|
|
Modified in a TDR |
|
|
Receivables |
|
|
|
|
|
|
Short-Term |
|
|
Long-Term |
|
|
Not in |
|
|
|
|
|
|
Modification |
|
|
Modification |
|
|
Modification |
|
|
|
|
(Millions) |
|
Programs |
|
|
Programs |
|
|
Programs |
|
|
Total(e) |
|
Loans over 90 days past due and accruing
interest(a) |
|
$ |
8 |
|
|
$ |
|
|
|
$ |
239 |
|
|
$ |
247 |
|
Non-accrual loans(b) |
|
|
895 |
|
|
|
|
|
|
|
825 |
|
|
|
1,720 |
|
Loans and receivables modified in a
TDR(c) |
|
|
326 |
|
|
|
249 |
|
|
|
|
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of June 30, 2010 |
|
$ |
1,229 |
|
|
$ |
249 |
|
|
$ |
1,064 |
|
|
$ |
2,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses on impaired loans
and receivables |
|
$ |
335 |
(d) |
|
$ |
72 |
(d) |
|
$ |
749 |
|
|
$ |
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans and Receivables |
|
|
and |
|
|
|
|
|
|
Modified in a TDR |
|
|
Receivables |
|
|
|
|
|
|
Short-Term |
|
|
Long-Term |
|
|
Not in |
|
|
|
|
|
|
Modification |
|
|
Modification |
|
|
Modification |
|
|
|
|
(Millions) |
|
Programs |
|
|
Programs |
|
|
Programs |
|
|
Total(e) |
|
Loans over 90 days past due and accruing
interest(a) |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
253 |
|
|
$ |
254 |
|
Non-accrual loans(b) |
|
|
586 |
|
|
|
|
|
|
|
494 |
|
|
|
1,080 |
|
Loans and receivables modified in a
TDR(c) |
|
|
114 |
|
|
|
114 |
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of December 31, 2009 |
|
$ |
701 |
|
|
$ |
114 |
|
|
$ |
747 |
|
|
$ |
1,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses on impaired loans
and receivables |
|
$ |
211 |
(d) |
|
$ |
40 |
(d) |
|
$ |
539 |
|
|
$ |
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Companys policy is generally to accrue interest through the date of charge-off (at 180
days past due). The Company establishes reserves for interest that the Company believes will
not be collected. |
|
(b) |
|
Non-accrual loans not in modification programs include certain cardmember loans placed with
outside collection agencies for which the Company has ceased accruing interest. |
|
(c) |
|
These amounts do not include cardmember loans and receivables modified in a TDR already
disclosed above as (i) loans over 90 days past due and still accruing interest, and (ii)
non-accrual loans. |
|
(d) |
|
Reserves for losses for loans and receivables modified in a TDR are determined by the
difference between cash flows expected to be received from the cardmember discounted at the
original effective interest rate and the recorded investment in the cardmember balance. These
amounts include reserves for losses on loans modified in a TDR that are disclosed above as
loans 90 days past due and still accruing interest and non-accrual loans. |
|
(e) |
|
The increase in impaired loans was due to the adoption of new GAAP effective
January 1, 2010, which resulted in the consolidation of the Lending Trust as discussed further
in Note 1. As a result of these changes, amounts as of June 30, 2010 include impaired loans
and receivables for both the Charge Trust and Lending Trust; correspondingly, amounts as of
December 31, 2009 only include impaired loans and receivables for the Charge Trust and the
sellers interest portion of the Lending Trust. |
15
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Investment securities include debt and equity securities and are classified as available for sale.
The Companys investment securities, principally debt securities, are carried at fair value on the
Consolidated Balance Sheets with unrealized gains (losses) recorded in AOCI, net of income tax
provisions (benefits). Realized gains and losses are recognized in results of operations upon
disposition of the securities using the specific identification method on a trade date basis. Refer
to Note 3 for a description of the Companys methodology for determining the fair value of its
investment securities.
The following is a summary of investment securities as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(Millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
State and municipal
obligations |
|
$ |
6,164 |
|
|
$ |
53 |
|
|
$ |
(186 |
) |
|
$ |
6,031 |
|
|
$ |
6,457 |
|
|
$ |
51 |
|
|
$ |
(258 |
) |
|
$ |
6,250 |
|
U.S. Government agency
obligations |
|
|
6,332 |
|
|
|
31 |
|
|
|
|
|
|
|
6,363 |
|
|
|
6,699 |
|
|
|
47 |
|
|
|
(1 |
) |
|
|
6,745 |
|
U.S. Government treasury
obligations |
|
|
2,700 |
|
|
|
8 |
|
|
|
|
|
|
|
2,708 |
|
|
|
5,556 |
|
|
|
10 |
|
|
|
|
|
|
|
5,566 |
|
Corporate debt
securities(a) |
|
|
1,378 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
1,398 |
|
|
|
1,333 |
|
|
|
14 |
|
|
|
(12 |
) |
|
|
1,335 |
|
Retained subordinated
securities(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,088 |
|
|
|
512 |
|
|
|
(1 |
) |
|
|
3,599 |
|
Mortgage-backed
securities(c) |
|
|
208 |
|
|
|
7 |
|
|
|
|
|
|
|
215 |
|
|
|
179 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
180 |
|
Foreign government
bonds and
obligations |
|
|
99 |
|
|
|
4 |
|
|
|
|
|
|
|
103 |
|
|
|
90 |
|
|
|
2 |
|
|
|
|
|
|
|
92 |
|
Equity securities(d) |
|
|
100 |
|
|
|
369 |
|
|
|
|
|
|
|
469 |
|
|
|
100 |
|
|
|
430 |
|
|
|
|
|
|
|
530 |
|
Other(e) |
|
|
40 |
|
|
|
1 |
|
|
|
|
|
|
|
41 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,021 |
|
|
$ |
494 |
|
|
$ |
(187 |
) |
|
$ |
17,328 |
|
|
$ |
23,542 |
|
|
$ |
1,069 |
|
|
$ |
(274 |
) |
|
$ |
24,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The June 30, 2010 and December 31, 2009 balances include, on a cost basis, $1.2 billion and
$1.1 billion, respectively, of corporate debt obligations issued under the Temporary Liquidity
Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation
(FDIC). |
|
(b) |
|
As a result of the adoption of new GAAP effective January 1, 2010, the Company no longer
presents the retained subordinated securities within its Consolidated Financial Statements in
periods subsequent to December 31, 2009. The December 31, 2009 balance consists of
investments in retained subordinated securities issued by unconsolidated VIEs related to the
Companys cardmember loan securitization programs. Refer to Note 7 for further details. |
|
(c) |
|
Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. |
|
(d) |
|
Principally represents the Companys investment in Industrial and Commercial Bank of China
(ICBC). |
|
(e) |
|
Other is comprised of investments in various mutual funds. |
16
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other-Than-Temporary Impairment
Realized losses are recognized when management determines that a decline in fair value is other
than temporary. Such determination requires judgment regarding the amount and timing of recovery.
The Company reviews and evaluates its investments at least quarterly and more often, as market
conditions may require, to identify investments that have indications of other-than-temporary
impairments. The determination of other-than-temporary impairment is a subjective process,
requiring the use of judgments and assumptions. It is reasonably possible that a change in estimate
will occur in the near term relating to other-than-temporary impairment. Accordingly, the Company
considers several factors when evaluating debt securities for other-than-temporary impairment
including the determination of the extent to which the decline in 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 the Companys investment securities with gross
unrealized losses and the length of time that individual securities have been in a continuous
unrealized loss position as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Less than 12 months |
|
|
12 months or more |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
(Millions) |
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
State and municipal
obligations |
|
$ |
622 |
|
|
$ |
(14 |
) |
|
$ |
1,923 |
|
|
$ |
(172 |
) |
|
$ |
837 |
|
|
$ |
(25 |
) |
|
$ |
2,074 |
|
|
$ |
(233 |
) |
U.S. Government
agency obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Corporate debt
securities |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(1 |
) |
|
|
102 |
|
|
|
(1 |
) |
|
|
38 |
|
|
|
(11 |
) |
Retained subordinated
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
(1 |
) |
Mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
622 |
|
|
$ |
(14 |
) |
|
$ |
1,925 |
|
|
$ |
(173 |
) |
|
$ |
1,308 |
|
|
$ |
(29 |
) |
|
$ |
2,187 |
|
|
$ |
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the gross unrealized losses due to temporary impairments by
ratio of fair value to amortized cost as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions) |
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
Ratio of Fair Value to |
|
Number of |
|
|
Estimated |
|
|
Unrealized |
|
|
Number of |
|
|
Estimated |
|
|
Unrealized |
|
|
Number of |
|
|
Estimated |
|
|
Unrealized |
|
Amortized Cost |
|
Securities |
|
|
Fair Value |
|
|
Losses |
|
|
Securities |
|
|
Fair Value |
|
|
Losses |
|
|
Securities |
|
|
Fair Value |
|
|
Losses |
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90%100% |
|
|
85 |
|
|
$ |
607 |
|
|
$ |
(12 |
) |
|
|
227 |
|
|
$ |
1,290 |
|
|
$ |
(63 |
) |
|
|
312 |
|
|
$ |
1,897 |
|
|
$ |
(75 |
) |
Less than 90% |
|
|
1 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
63 |
|
|
|
635 |
|
|
|
(110 |
) |
|
|
64 |
|
|
|
650 |
|
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of June 30, 2010 |
|
|
86 |
|
|
$ |
622 |
|
|
$ |
(14 |
) |
|
|
290 |
|
|
$ |
1,925 |
|
|
$ |
(173 |
) |
|
|
376 |
|
|
$ |
2,547 |
|
|
$ |
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90%100% |
|
|
155 |
|
|
$ |
1,289 |
|
|
$ |
(25 |
) |
|
|
225 |
|
|
$ |
1,411 |
|
|
$ |
(87 |
) |
|
|
380 |
|
|
$ |
2,700 |
|
|
$ |
(112 |
) |
Less than 90% |
|
|
2 |
|
|
|
19 |
|
|
|
(4 |
) |
|
|
78 |
|
|
|
776 |
|
|
|
(158 |
) |
|
|
80 |
|
|
|
795 |
|
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of
December 31, 2009 |
|
|
157 |
|
|
$ |
1,308 |
|
|
$ |
(29 |
) |
|
|
303 |
|
|
$ |
2,187 |
|
|
$ |
(245 |
) |
|
|
460 |
|
|
$ |
3,495 |
|
|
$ |
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses on state and municipal securities and all other debt securities
can be attributed to a number of reasons such as higher credit spreads generally for state and
municipal securities, higher credit spreads for specific issuers, changes in market benchmark
interest rates or a combination thereof, all as compared to those prevailing when the securities were
acquired.
In assessing default risk on these securities, excluding the Companys 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 in 2009, the Company analyzed the
projected cash flows of the Lending Trust and determined that it expected 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. As
a result, the Company recognized no other-than-temporary impairments during the periods presented.
Supplemental Information
Gross realized gains and losses on the sales of investment securities, included in other
non-interest revenues, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Gains(a) |
|
$ |
1 |
|
|
$ |
222 |
|
|
$ |
2 |
|
|
$ |
223 |
|
Losses |
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(5 |
) |
|
$ |
222 |
|
|
$ |
(4 |
) |
|
$ |
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
2009 gains primarily represent the gain from the sale of 50 percent of the Companys investment in ICBC. |
18
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contractual maturities of investment securities, excluding equity securities and other
securities, as of June 30, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
(Millions) |
|
Cost |
|
|
Fair Value |
|
Due within 1 year: |
|
$ |
8,182 |
|
|
$ |
8,208 |
|
Due after 1 year but within 5 years |
|
|
2,436 |
|
|
|
2,467 |
|
Due after 5 years but within 10 years |
|
|
337 |
|
|
|
349 |
|
Due after 10 years |
|
|
5,926 |
|
|
|
5,794 |
|
|
|
|
|
|
|
|
Total |
|
$ |
16,881 |
|
|
$ |
16,818 |
|
|
|
|
|
|
|
|
The expected payments on state and municipal obligations and mortgage-backed securities may
not coincide with their contractual maturities because the issuers have the right to call or prepay
certain obligations.
Charge Trust and Lending Trust
The Company periodically securitizes cardmember receivables and loans arising from its card
business through the transfer of those assets to securitization trusts. The trusts then issue
securities to third-party investors, collateralized by the transferred assets.
Cardmember receivables are transferred to the American Express Issuance Trust (the Charge Trust),
and cardmember loans are transferred to the American Express Credit Account Master Trust (the
Lending Trust). As of December 31, 2009 and for all prior periods, cardmember receivables
transferred to the Charge Trust did not qualify as accounting sales and, accordingly, the Charge
Trust was consolidated by the Company. As a result, securitized cardmember receivables and the
related debt securities issued to third parties by the Charge Trust were included on the Companys
Consolidated Balance Sheets. The Lending Trust met the criteria of a QSPE for GAAP in effect
through December 31, 2009 and, accordingly, cardmember loans transferred to the Lending Trust
qualified as accounting sales. As a result, when cardmember loans were sold through
securitizations, the Company removed the loans from its Consolidated Balance Sheets and recognized
a gain or loss on sale, recorded certain retained interests in the securitization (i.e., retained
subordinated securities and an interest-only strip asset) and received an undivided pro-rata
interest in the excess loans held in the Lending Trust (historically referred to as sellers
interest).
Upon adoption of new GAAP effective January 1, 2010, the Company continues to consolidate the
Charge Trust. In addition, the Company was required to change its accounting for the Lending Trust,
which is now consolidated. As a result, beginning January 1, 2010, the securitized cardmember loans
and the related debt securities issued to third parties by the Lending Trust are included on the
Companys Consolidated Balance Sheets. Prior period Consolidated Financial Statements have not been
revised for this accounting change.
The Charge Trust and the Lending Trust are consolidated by American Express Travel Related Services
Company, Inc. (TRS), which is a consolidated subsidiary of the Company. The trusts are considered
VIEs as they have insufficient equity at risk to finance their activities, which are to issue
securities that are collateralized by the underlying cardmember receivables and loans.
TRS, in its role as servicer of the Charge Trust and the Lending Trust, has the power to direct the
most significant activity of the trusts, which is the collection of the underlying cardmember
receivables and loans in the trusts. In addition, TRS owns approximately $1.5 billion of
subordinated securities issued by the Lending Trust as of June 30, 2010. These subordinated
securities have the obligation to absorb losses of the Lending Trust and provide the right to
receive benefits from the Lending Trust, both of which are
significant. TRS role as servicer for the Charge Trust does not provide it with a significant
obligation to absorb losses or a significant right to receive benefits. However, TRS position as
the parent company of the entities that transferred the receivables to the Charge Trust makes it
the party most closely related to the Charge Trust. Based on these considerations, TRS was
determined to be the primary beneficiary of both the Charge Trust and the Lending Trust.
19
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The debt securities issued by the Charge Trust and the Lending Trust are non-recourse to the
Company. Securitized cardmember receivables and loans held by the Charge Trust and the Lending
Trust are available only for payment of the debt securities or other obligations issued or arising
in the securitization transactions. The long-term debt of each trust is payable only out of
collections on their respective underlying securitized assets.
There was approximately $10 million and $1.8 billion of restricted cash held by the Charge Trust as
of June 30, 2010 and December 31, 2009, respectively, and approximately $1.4 billion of restricted
cash held by the Lending Trust as of June 30, 2010, included in other assets on the Companys
Consolidated Balance Sheets. Also, as of December 31, 2009, other receivables on the Companys
Consolidated Balance Sheet included $1.9 billion of cash held in the Lending Trust. These amounts
relate to collections of cardmember receivables and loans to be used by the trusts to fund future
expenses, and obligations, including interest paid on investor certificates, credit losses and
upcoming debt maturities.
Lending Trust Impact on the Consolidated Balance Sheet
The following table summarizes the major balance sheet impacts, including adjustments associated
with the adoption of new GAAP effective January 1, 2010, for the consolidation of the Lending
Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Adjusted Balance |
|
(Billions) |
|
December 31, 2009 |
|
|
Adjustments |
|
|
January 1, 2010 |
|
Cardmember loans |
|
$ |
32.8 |
|
|
$ |
29.0 |
|
|
$ |
61.8 |
|
Loss reserves (cardmember loans) |
|
|
(3.3 |
) |
|
|
(2.5 |
) |
|
|
(5.8 |
) |
Investment securities |
|
|
24.3 |
|
|
|
(3.6 |
) |
|
|
20.7 |
|
Other receivables |
|
|
5.1 |
|
|
|
(1.9 |
) |
|
|
3.2 |
|
Other assets |
|
|
13.2 |
|
|
|
2.2 |
|
|
|
15.4 |
|
Long-term debt |
|
|
52.3 |
|
|
|
25.0 |
|
|
|
77.3 |
|
Shareholders equity |
|
|
14.4 |
|
|
|
(1.8 |
) |
|
|
12.6 |
|
The primary changes to the Companys Consolidated Balance Sheets were:
|
|
|
An increase to cardmember loans and long-term debt for the (i) cardmember loans
held by the Lending Trust and (ii) debt securities issued by the Lending Trust; |
|
|
|
Establishment of a cardmember reserve for losses for the additional cardmember
loans;
|
|
|
|
The elimination in consolidation of the Companys retained subordinated securities
against the debt securities issued by the Lending Trust; |
|
|
|
A reduction to shareholders equity, primarily for the after-tax effect of
establishing the additional reserve for losses on cardmember loans. |
20
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lending Trust Long-term Debt
As previously discussed, consolidation of the Lending Trust on January 1, 2010 resulted in an
increase to long-term debt on the Companys Consolidated Balance Sheet. The Lending Trusts
long-term debt outstanding, defined as debt with original maturities of one year or greater, as of
June 30, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-End |
|
|
|
Maturity |
|
|
Outstanding |
|
|
Stated Rate |
|
(Millions, except percentages) |
|
Dates |
|
|
Balance |
|
|
on Debt(a) |
|
Fixed Rate Senior Notes |
|
|
2011 |
|
|
$ |
438 |
|
|
|
5.35 |
% |
Fixed Rate Subordinated Notes |
|
|
2011 |
|
|
|
62 |
|
|
|
5.61 |
% |
Floating Rate Senior Notes |
|
|
2010-2018 |
|
|
|
19,502 |
|
|
|
0.95 |
% |
Floating Rate Subordinated Notes |
|
|
2010-2018 |
|
|
|
1,539 |
|
|
|
0.73 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
21,541 |
|
|
|
1.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For floating rate debt issuances, the stated interest rates are based on the floating rates
in effect as of June 30, 2010. These rates may not be indicative of future interest rates. |
Aggregate annual maturities on long-term debt obligations for the Lending Trust (based on
final maturity dates) as of June 30, 2010 were as follows:
|
|
|
|
|
(Millions) |
|
Amount |
|
2010 |
|
$ |
2,250 |
|
2011 |
|
|
5,330 |
|
2012 |
|
|
5,222 |
|
2013 |
|
|
2,904 |
|
2014 |
|
|
2,685 |
|
Thereafter |
|
|
3,150 |
|
|
|
|
|
Total |
|
$ |
21,541 |
|
|
|
|
|
Charge Trust and Lending Trust Triggering Events
Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of
certain events could result in establishment of reserve funds, or in a worst-case scenario, early
amortization of investor certificates. As of June 30, 2010, no triggering events have occurred
resulting in funding of reserve accounts or early amortization.
Securitization Income
As a result of the adoption of new GAAP effective January 1, 2010, the Company no longer recognizes
securitization income, net. The components of securitization income, net for the cardmember loans
and long-term debt are now recorded in other commissions and fees, interest income and interest
expense.
21
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the activity related to securitized loans reported in securitization
income, net, prior to adoption of the new accounting standards:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Excess spread, net(a) |
|
$ |
(139 |
) |
|
$ |
(137 |
) |
Servicing fees |
|
|
140 |
|
|
|
279 |
|
Losses on securitizations(b) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Securitization income, net |
|
$ |
(2 |
) |
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excess spread, net was 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
were recorded in discount revenue in the Companys Consolidated Statements of Income. |
|
(b) |
|
Excludes $82 million and $(48) million of impact from cardmember loan sales and maturities
for the three months ended June 30, 2009, reflected in the provisions for losses for the
period. Excludes $82 million and $(141) million of impact from cardmember loan sales and
maturities for the six months ended June 30, 2009, reflected in the provisions for losses for
the period. |
Retained Interests in Securitized Assets
As of December 31, 2009, the Company retained subordinated interests in the securitized cardmember
loans. These interests included one or more A-rated, BBB-rated and unrated investments in tranches
of the securitization (subordinated securities) of $3.6 billion and an interest-only strip of $20
million. The subordinated securities were accounted for at fair value as available-for-sale
investment securities and were reported in investments on the Companys Consolidated Balance Sheets
with unrealized gains (losses) recorded in AOCI. The interest-only strip was accounted for at fair
value and was reported in other assets on the Companys Consolidated Balance Sheets with changes in
fair value recorded in securitization income, net in the Companys Consolidated Statements of
Income.
As of June 30, 2010 and December 31, 2009, customer deposits were categorized as interest-bearing
or non-interest-bearing deposits as follows:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
U.S.: |
|
|
|
|
|
|
|
|
Interest-bearing |
|
$ |
27,634 |
|
|
$ |
25,579 |
|
Non-interest-bearing |
|
|
13 |
|
|
|
13 |
|
Non-U.S.: |
|
|
|
|
|
|
|
|
Interest-bearing |
|
|
690 |
|
|
|
680 |
|
Non-interest-bearing |
|
|
15 |
|
|
|
17 |
|
|
|
|
|
|
|
|
Total customer deposits |
|
$ |
28,352 |
|
|
$ |
26,289 |
|
|
|
|
|
|
|
|
22
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The customer deposits were aggregated by deposit type offered by the Company as of June 30,
2010 and December 31, 2009 as follows:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
U.S. retail deposits: |
|
|
|
|
|
|
|
|
Cash sweep and savings accounts |
|
$ |
12,753 |
|
|
$ |
10,498 |
|
Certificates of deposit |
|
|
14,881 |
|
|
|
15,081 |
|
Other deposits |
|
|
718 |
|
|
|
710 |
|
|
|
|
|
|
|
|
Total customer deposits |
|
$ |
28,352 |
|
|
$ |
26,289 |
|
|
|
|
|
|
|
|
The scheduled maturities of all certificates of deposit as of June 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions) |
|
U.S. |
|
|
Non-U.S. |
|
|
Total |
|
2010 |
|
$ |
2,868 |
|
|
$ |
402 |
|
|
$ |
3,270 |
|
2011 |
|
|
5,458 |
|
|
|
7 |
|
|
|
5,465 |
|
2012 |
|
|
2,793 |
|
|
|
|
|
|
|
2,793 |
|
2013 |
|
|
2,234 |
|
|
|
|
|
|
|
2,234 |
|
2014 |
|
|
1,016 |
|
|
|
|
|
|
|
1,016 |
|
After 5 years |
|
|
512 |
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,881 |
|
|
$ |
409 |
|
|
$ |
15,290 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 and December 31, 2009, the outstanding amounts of certificates of deposit
in denominations of $100,000 or more were as follows:
|
|
|
|
|
|
|
|
|
(Millions) |
|
2010 |
|
|
2009 |
|
U.S. |
|
$ |
481 |
|
|
$ |
196 |
|
Non-U.S. |
|
|
313 |
|
|
|
293 |
|
|
|
|
|
|
|
|
Total |
|
$ |
794 |
|
|
$ |
489 |
|
|
|
|
|
|
|
|
9. |
|
Derivatives and Hedging Activities |
The Company uses derivative financial instruments (derivatives) to manage exposure to various
market risks. Market risk is the risk to earnings or value resulting from movements in market
prices. The Companys market risk exposure is primarily generated by:
|
|
|
Interest rate risk in its card and insurance and travelers cheque businesses, and its
investment portfolios; and |
|
|
|
Foreign exchange risk in its international operations. |
General principles and the overall framework for managing market risk across the Company are
defined in the Market Risk Policy, which is the responsibility of the Asset-Liability Committee
(ALCO). Market risk limits and escalation triggers in that policy are approved by the ALCO and by
the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally managed by the
Market Risk Committee, which is chaired by the Chief Market Risk Officer of the Company and reports
into the ALCO. Market risk management is also guided by policies covering the use of derivatives,
funding and liquidity and investments. Derivatives derive their value from an underlying variable
or multiple variables, including interest rate, foreign exchange, and equity indices or prices.
These instruments enable end users to increase, reduce or alter exposure to various market risks
and, for that reason, are an integral component of the Companys market risk management. The
Company does not engage in derivatives for trading purposes.
23
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Companys market exposures are in large part by-products of the delivery of its products and
services. Interest rate risk arises through the funding of cardmember receivables and fixed-rate
loans with variable-rate borrowings as well as through the risk to net interest margin from changes
in the relationship between benchmark rates such as Prime and LIBOR.
Interest rate exposure within the Companys charge card and fixed-rate lending products is managed
by varying the proportion of total funding provided by short-term and variable-rate debt and
deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from
time to time to effectively convert fixed-rate debt to variable-rate or to convert variable-rate
debt to fixed rate. The Company may change the mix between variable-rate and fixed-rate funding
based on changes in business volumes and mix, among other factors. The majority of its cardmember
loans, which are linked to a benchmark rate such as Prime that can reprice monthly, are funded with
variable-rate funding, the majority of which is linked to LIBOR.
Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency balance
sheet exposures, translation of foreign subsidiary equity, and foreign currency earnings in
international units. The Companys 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 derivatives such as
foreign exchange forward, and cross-currency swap contracts, which can help lock in the value of
the Companys exposure to specific currencies.
Derivatives may give rise to counterparty credit risk. The Company manages this 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 12 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 Companys Institutional Risk Management
Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with
the Companys ERMC guidelines and procedures and determines the risk mitigation actions, when
necessary. Additionally, to mitigate counterparty credit risk the Company has, in certain limited
instances, entered into master netting agreements and credit support agreements (CSA). As of June
30, 2010 and December 31, 2009, no collateral had been received or posted under the CSAs.
As of June 30, 2010 and December 31, 2009, the counterparty credit risk associated with the
Companys derivatives was not significant. In relation to the Companys credit risk, under the
terms of its derivatives, the Company is not required to either immediately settle any outstanding
liability balances or post collateral upon the occurrence of a specified credit risk-related event.
The Companys derivatives are carried at fair value on the Consolidated Balance Sheets. The
accounting for changes in fair value depends on the instruments intended use and the resulting
hedge designation, if any, as discussed below. Refer to Note 3 for a description of the Companys
methodology for determining the fair value of its derivatives.
24
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the total gross fair value, excluding interest accruals, of
derivative assets and liabilities as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
Other liabilities |
|
|
|
Fair Value |
|
|
Fair Value |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges |
|
$ |
1,039 |
|
|
$ |
632 |
|
|
$ |
|
|
|
$ |
6 |
|
Cash flow hedges |
|
|
|
|
|
|
1 |
|
|
|
25 |
|
|
|
44 |
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges |
|
|
114 |
|
|
|
132 |
|
|
|
98 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
$ |
1,153 |
|
|
$ |
765 |
|
|
$ |
123 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
|
|
|
$ |
11 |
|
|
$ |
8 |
|
|
$ |
5 |
|
Foreign exchange contracts(a) |
|
|
65 |
|
|
|
57 |
|
|
|
105 |
|
|
|
95 |
|
Equity-linked contract(b) |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
65 |
|
|
|
68 |
|
|
|
117 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives(c) |
|
$ |
1,218 |
|
|
$ |
833 |
|
|
$ |
240 |
|
|
$ |
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes foreign currency derivatives embedded in certain operating agreements. |
|
(b) |
|
Represents an equity-linked derivative embedded in one of the Companys investment
securities. |
|
(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. As of June 30, 2010 and December 31, 2009, $21 million and $33 million,
respectively, of derivative assets and liabilities have been offset and presented net on the
Consolidated Balance Sheets. |
|
|
Derivatives that Qualify for Hedge Accounting |
Derivatives executed for hedge accounting purposes are documented and designated as such when the
Company enters into the contracts. In accordance with its risk management policies, the Company
structures its hedges with very similar terms to the hedged items. The Company formally assesses,
at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives
designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged
items. These assessments usually are made through the application of the regression analysis
method. If it is determined that a derivative is not highly effective as a hedge, the Company will
discontinue the application of hedge accounting.
Fair Value Hedges
A fair value hedge involves a derivative designated to hedge the Companys exposure to 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 June 30, 2010 and December 31, 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 and is recorded in earnings as a component of other, net expenses. Hedge
ineffectiveness may be caused by differences between the debts interest coupon and the benchmark
rate, which is in turn primarily due to credit spreads at inception of the hedging relationship
that are 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. If a fair value hedge is de-designated or no longer considered to be
effective, changes in fair value of the derivative continue to be recorded through earnings but the
hedged asset or liability is no longer adjusted for changes in fair value. The existing basis
adjustment of the hedged asset or liability is then amortized or accreted as an adjustment to yield
over the remaining life of that asset or liability.
25
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the impact on the Consolidated Statements of Income associated with
the Companys fixed-rate long-term debt described above for the three and six months ended June 30:
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income |
|
|
|
Derivative contract |
|
|
Hedged item |
|
|
Net hedge |
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
ineffectiveness |
|
(Millions) |
|
Location |
|
2010 |
|
|
2009 |
|
|
Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest rate contracts |
|
Other, net expenses |
|
$ |
289 |
|
|
$ |
(408 |
) |
|
Other, net expenses |
|
$ |
(252 |
) |
|
$ |
347 |
|
|
$ |
37 |
|
|
$ |
(61 |
) |
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income |
|
|
|
Derivative contract |
|
|
Hedged item |
|
|
Net hedge |
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
ineffectiveness |
|
(Millions) |
|
Location |
|
2010 |
|
|
2009 |
|
|
Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest rate contracts |
|
Other, net expenses |
|
$ |
413 |
|
|
$ |
(425 |
) |
|
Other, net expenses |
|
$ |
(367 |
) |
|
$ |
430 |
|
|
$ |
46 |
|
|
$ |
5 |
|
Cash Flow Hedges
A cash flow hedge involves a derivative designated to hedge the Companys 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 derivatives, primarily interest rate swaps. These instruments effectively convert
floating-rate debt to fixed-rate debt for the duration of the swap. As of June 30, 2010 and
December 31, 2009, the Company hedged $0.9 billion and $1.6 billion, respectively, of its floating
debt using interest rate swaps.
For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss on the
derivatives is recorded in AOCI and reclassified into earnings when the hedged cash flows are
recognized in 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 on the derivatives is reported as a
component of other, net expenses. If a cash flow hedge is de-designated or terminated prior to
maturity, the amount previously recorded in AOCI is recognized into earnings over the period that
the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable
that the forecasted transaction will not occur according to the original strategy, any related
amounts previously recorded in AOCI are recognized into earnings immediately.
In the normal course of business, as the hedged cash flows are recognized into earnings, the
Company expects to reclassify $25 million of net pretax losses on derivatives from AOCI into
earnings during the next 12 months.
26
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Companys investments in non-U.S. subsidiaries. The effective portion of the
gain or loss on net investment hedges are recorded in AOCI as part of the cumulative translation
adjustment. Any ineffective portion of the gain or loss on net investment hedges is recognized in
other, net expenses during the period of change.
The following table summarizes the impact of cash flow hedges and net investment hedges on the
Consolidated Financial Statements for the three and six months ended June 30:
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income |
|
|
|
Gains (losses) |
|
|
|
|
|
|
Amount reclassified |
|
|
|
|
|
|
|
|
|
|
recognized in |
|
|
|
|
|
|
from AOCI into |
|
|
|
|
|
|
Net hedge |
|
|
|
AOCI, net of tax |
|
|
|
|
|
|
income |
|
|
|
|
|
|
ineffectiveness |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
|
Cash flow hedges:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
|
|
|
$ |
(5 |
) |
|
Interest expense |
|
|
$ |
(8 |
) |
|
$ |
(31 |
) |
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
3 |
|
Net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
199 |
|
|
$ |
(459 |
) |
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
|
|
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
|
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in income |
|
|
|
Gains (losses) |
|
|
|
|
|
|
Amount reclassified |
|
|
|
|
|
|
|
|
|
|
recognized in |
|
|
|
|
|
|
from AOCI into |
|
|
|
|
|
|
Net hedge |
|
|
|
AOCI, net of tax |
|
|
|
|
|
|
income |
|
|
|
|
|
|
ineffectiveness |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
Cash flow hedges:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
(2 |
) |
|
$ |
(17 |
) |
|
Interest expense |
|
|
$ |
(21 |
) |
|
$ |
(75 |
) |
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
|
|
Net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
335 |
|
|
$ |
(371 |
) |
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
|
|
|
Other, net expenses |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(a) |
|
During the six months ended June 30, 2010 and 2009, there were no forecasted transactions
that were considered no longer probable to occur. |
Derivatives Not Designated as Hedges
The Company has derivatives that act as economic hedges and are not designated for hedge accounting
purposes. 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 derivatives
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.
27
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has certain operating agreements whose payments may be linked to a market rate or
price, primarily foreign currency rates. The payment components of these agreements may meet the
definition of an embedded derivative, which is assessed to determine if it requires separate
accounting and reporting. If so, the embedded derivative is accounted for separately and is
classified as a foreign exchange contract based on its primary risk exposure. In addition, the
Company also holds an investment security containing an embedded equity-linked derivative.
For derivatives that are not designated as hedges, changes in fair value are reported in current
period earnings.
The following table summarizes the impact of derivatives not designated as hedges on the
Consolidated Statements of Income for the three and six months ended June 30:
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income |
|
|
|
|
|
Amount |
|
(Millions) |
|
Location |
|
2010 |
|
|
2009 |
|
Interest rate contracts |
|
Other, net expenses |
|
$ |
(13 |
) |
|
$ |
18 |
|
Foreign exchange contracts(a) |
|
Other non-interest revenues |
|
|
|
|
|
|
|
|
|
|
Interest and dividends on investment securities |
|
|
|
|
|
|
1 |
|
|
|
Interest expense on short-term borrowings |
|
|
2 |
|
|
|
1 |
|
|
|
Interest expense on long-term debt and other |
|
|
23 |
|
|
|
7 |
|
|
|
Other, net expenses |
|
|
(22 |
) |
|
|
54 |
|
Equity-linked contract |
|
Other non-interest revenues |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(11 |
) |
|
$ |
81 |
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income |
|
|
|
|
|
Amount |
|
(Millions) |
|
Location |
|
2010 |
|
|
2009 |
|
Interest rate contracts |
|
Other, net expenses |
|
$ |
(14 |
) |
|
$ |
17 |
|
Foreign exchange contracts(a) |
|
Other non-interest revenues |
|
|
|
|
|
|
(1 |
) |
|
|
Interest and dividends on investment securities |
|
|
1 |
|
|
|
3 |
|
|
|
Interest expense on short-term borrowings |
|
|
4 |
|
|
|
1 |
|
|
|
Interest expense on long-term debt and other |
|
|
42 |
|
|
|
11 |
|
|
|
Other, net expenses |
|
|
(54 |
) |
|
|
53 |
|
Equity-linked contracts |
|
Other non-interest revenues |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(22 |
) |
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For the three and six months ended June 30, 2010, foreign exchange contracts include
embedded foreign currency derivatives. Gains (losses) on these embedded derivatives are
included in other, net expenses. |
28
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 future payments as seen in the table that
follows, to date the Company has not experienced any significant losses related to guarantees. The
Companys initial recognition of guarantees is at fair value, which has been determined in
accordance with GAAP governing fair value measurement. In addition, the Company recognizes a
liability when a loss from an unfavorable outcome is probable and the amount of the loss can be
reasonably estimated.
The following table provides information related to such guarantees as of June 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount of |
|
|
Amount of related |
|
|
|
undiscounted future payments(a) |
|
|
liability(b) |
|
|
|
(Billions) |
|
|
(Millions) |
|
Type of Guarantee |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Card and travel operations(c) |
|
$ |
68 |
|
|
$ |
66 |
|
|
$ |
113 |
|
|
$ |
112 |
|
Other(d) |
|
|
1 |
|
|
|
1 |
|
|
|
100 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69 |
|
|
$ |
67 |
|
|
$ |
213 |
|
|
$ |
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 managements best estimate of maximum exposure based on all eligible claims
as measured against annual billed business volumes. The Company mitigates this risk by
withholding settlement from the merchant or obtaining deposits and other collateral from
merchants considered higher risk due to various factors. The amounts being held by the Company
are not significant when compared to the maximum potential amount of future payments under
this guarantee. |
|
(b) |
|
Included as part of other liabilities on the Companys Consolidated Balance Sheets. |
|
(c) |
|
Includes Credit Card Registry, Return Protection, Account Protection and Merchant Protection,
which the Company offers directly to cardmembers. |
|
(d) |
|
Other primarily includes guarantees related to the Companys business dispositions and real
estate, each of which are individually smaller indemnifications. |
Comprehensive income includes net income and changes in AOCI, which is a balance sheet item in the
Shareholders Equity section of the Companys Consolidated Balance Sheets. AOCI is comprised of
items that have not been recognized in earnings but may be recognized in earnings in the future
when certain events occur. The components of comprehensive income, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
1,017 |
|
|
$ |
337 |
|
|
$ |
1,902 |
|
|
$ |
774 |
|
Other comprehensive income gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized securities gains |
|
|
25 |
|
|
|
400 |
|
|
|
9 |
|
|
|
732 |
|
Net unrealized derivative gains |
|
|
5 |
|
|
|
12 |
|
|
|
12 |
|
|
|
31 |
|
Foreign currency translation adjustments |
|
|
(34 |
) |
|
|
(72 |
) |
|
|
(65 |
) |
|
|
(91 |
) |
Net unrealized pension and other
postretirement benefit costs |
|
|
8 |
|
|
|
8 |
|
|
|
35 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,021 |
|
|
$ |
685 |
|
|
$ |
1,893 |
|
|
$ |
1,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Companys federal tax returns for the years 1997 through 2002. In July 2009,
the IRS completed its field examination of the Companys 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. The Company is currently under examination by the IRS for the years 2005 through 2007.
The Company believes it is reasonably possible that its unrecognized tax benefits could decrease
within the next 12 months by as much as $681 million principally as a result of potential
resolutions 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 $681 million of unrecognized tax benefits,
approximately $304 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 $377 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
over the next 12 months, 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 Companys effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Full Year |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
2009 |
|
Effective tax rate(a) |
|
|
36%(b) (c) |
|
|
|
33%(b) |
|
|
|
25% |
|
|
|
|
(a) |
|
Each of the periods reflects recurring, permanent tax benefits in relation to the level of
pretax income. |
|
(b) |
|
For the three months and six months ended June 30, 2010, the effective tax rate includes
the impact of a $44 million valuation allowance related to deferred tax assets associated with
certain of the Companys non-U.S. travel operations.
|
|
(c) |
|
For the three months ended June 30, 2010, the effective tax rate includes
the impact of an increase of 2010s estimated
annual effective rate during the quarter. |
30
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. |
|
Earnings Per Common Share (EPS) |
The following table presents computations of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1,017 |
|
|
$ |
342 |
|
|
$ |
1,902 |
|
|
$ |
785 |
|
Preferred shares dividends, accretion, and recognition of
remaining unaccreted dividends(a) |
|
|
|
|
|
|
(234 |
) |
|
|
|
|
|
|
(306 |
) |
Earnings allocated to participating share awards and other items |
|
|
(13 |
) |
|
|
(1 |
) |
|
|
(25 |
) |
|
|
(5 |
) |
Loss from discontinued operations, net of tax |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
1,004 |
|
|
$ |
102 |
|
|
$ |
1,877 |
|
|
$ |
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: weighted-average common stock |
|
|
1,190 |
|
|
|
1,162 |
|
|
|
1,188 |
|
|
|
1,159 |
|
Add: weighted-average stock options and warrants(b) |
|
|
7 |
|
|
|
3 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1,197 |
|
|
|
1,165 |
|
|
|
1,194 |
|
|
|
1,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common
shareholders |
|
$ |
0.84 |
|
|
$ |
0.09 |
|
|
$ |
1.58 |
|
|
$ |
0.41 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.84 |
|
|
$ |
0.09 |
|
|
$ |
1.58 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common
shareholders |
|
$ |
0.84 |
|
|
$ |
0.09 |
|
|
$ |
1.57 |
|
|
$ |
0.41 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.84 |
|
|
$ |
0.09 |
|
|
$ |
1.57 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the accelerated preferred dividend accretion of $212 millions for the three and six
months ended June 30, 2009, due to the repurchase of $3.39 billion of preferred shares issued
as part of the Capital Purchase Program (CPP) on June 17, 2009. |
|
|
(b) |
|
For the three and six months ended June 30, 2010, the dilutive effect of unexercised stock
options excluded 35 million and 38 million options, respectively. For the three and six
months ended June 30, 2009, the dilutive effect of unexercised stock options excluded 79
million and 83 million options, respectively, and 24 million warrants for both the three and
six months ended June 30, 2009. Such amounts for all periods were excluded from the
computation of EPS because inclusion of the options and warrants would have been
anti-dilutive. |
Subordinated debentures of $750 million as of June 30, 2010 and December 31, 2009 issued by the
Company would affect the EPS computation only in the unlikely event the Company fails to achieve
specified performance measures related to the Companys tangible common equity and consolidated net
income. In that circumstance the Company would reflect the additional common shares in the EPS
computation.
31
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. |
|
Details of Certain Consolidated Statements of Income Lines |
The following is a detail of other commissions and fees for the three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Foreign currency conversion revenue |
|
$ |
205 |
|
|
$ |
165 |
|
|
$ |
393 |
|
|
$ |
308 |
|
Delinquency fees |
|
|
153 |
|
|
|
131 |
|
|
|
312 |
|
|
|
302 |
|
Service fees |
|
|
80 |
|
|
|
82 |
|
|
|
162 |
|
|
|
161 |
|
Other |
|
|
59 |
|
|
|
61 |
|
|
|
130 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commissions and fees |
|
$ |
497 |
|
|
$ |
439 |
|
|
$ |
997 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a detail of other revenues for the three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Insurance premium revenue |
|
$ |
63 |
|
|
$ |
75 |
|
|
$ |
136 |
|
|
$ |
151 |
|
(Loss) Gain on investment securities |
|
|
(5 |
) |
|
|
222 |
|
|
|
(4 |
) |
|
|
223 |
|
Other |
|
|
427 |
|
|
|
373 |
|
|
|
779 |
|
|
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues |
|
$ |
485 |
|
|
$ |
670 |
|
|
$ |
911 |
|
|
$ |
1,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a detail of marketing, promotion, rewards and cardmember services for the three
and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Marketing and promotion |
|
$ |
802 |
|
|
$ |
352 |
|
|
$ |
1,397 |
|
|
$ |
697 |
|
Cardmember rewards |
|
|
1,198 |
|
|
|
1,029 |
|
|
|
2,416 |
|
|
|
1,875 |
|
Cardmember services |
|
|
122 |
|
|
|
131 |
|
|
|
271 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketing,
promotion, rewards
and cardmember
services |
|
$ |
2,122 |
|
|
$ |
1,512 |
|
|
$ |
4,084 |
|
|
$ |
2,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a detail of other, net expense for the three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Occupancy and equipment |
|
$ |
379 |
|
|
$ |
392 |
|
|
$ |
763 |
|
|
$ |
750 |
|
Communications |
|
|
97 |
|
|
|
106 |
|
|
|
192 |
|
|
|
210 |
|
MasterCard and Visa settlements |
|
|
(213 |
) |
|
|
(213 |
) |
|
|
(426 |
) |
|
|
(426 |
) |
Other |
|
|
275 |
|
|
|
324 |
|
|
|
570 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other, net expense |
|
$ |
538 |
|
|
$ |
609 |
|
|
$ |
1,099 |
|
|
$ |
1,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company and its subsidiaries are involved in a number of legal proceedings concerning matters
arising in connection with the conduct of their respective business activities, and are
periodically subject to governmental examinations (including by regulatory and tax authorities),
information gathering requests, subpoenas, inquiries and investigations (collectively governmental
examinations). As of June 30, 2010, the Company and various of its subsidiaries were named as a
defendant or were otherwise involved in numerous legal proceedings and governmental examinations in
various jurisdictions, both in the United States and internationally. The Company describes
certain of its more significant legal proceedings and governmental examinations under Part II.
Other Information Item 1. Legal Proceedings on
pages 81 84 of this Form 10-Q.
The Company has recorded liabilities for certain of its outstanding legal proceedings and
governmental examinations. A liability is established when it is both (a) probable that a loss
with respect to the legal proceeding has occurred and (b) the amount of the loss can be reasonably
estimated (although there may be an exposure to loss in excess of the liability recorded). The
Company evaluates, on a quarterly basis, developments in legal proceedings and governmental
examinations that could cause an increase or decrease in the amount of the liability that has been
previously established.
The Companys legal proceedings range from cases brought by a single plaintiff to class actions
with hundreds of thousands of putative class members. These legal proceedings, as well as
governmental examinations, involve various lines of business of the Company and a variety of claims
(including, but not limited to, common law tort, contract, antitrust and consumer protection
claims), some of which present novel factual allegations and/or unique legal theories. While some
matters pending against the Company specify the damages claimed by the plaintiff, many seek a
not-yet-quantified amount of damages or are at very early stages of the legal process. Even when
the amount of damages claimed against the Company are stated, the claimed amount may be exaggerated
and/or unsupported. In view of the inherent difficulty of predicting the outcome of legal
proceedings and governmental examinations, for the reasons described above, the
Company at this time cannot reasonably estimate a loss or a range of possible losses in excess of accrued
liabilities, if any, with respect to such matters that would be meaningful to investors or predict
with reasonable accuracy the timing of the ultimate resolution of such matters.
Based on its current knowledge, after taking into consideration its current litigation-related
liabilities, the Company believes it is not a party to, nor are any of its properties the subject
of, any pending legal proceeding or governmental examination that would have a material adverse
effect on the Companys consolidated financial condition or liquidity. However, in light of the
uncertainties involved in such matters, the ultimate outcome of a particular matter could be
material to the Companys operating results for a particular period depending on, among other
factors, the size of the loss or liability imposed and the level of the Companys income for that
period.
16. |
|
Reportable Operating Segments |
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). Corporate functions and auxiliary businesses, including the Companys
publishing business, the Global Prepaid business, as well as other company operations are included
in Corporate & Other.
33
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Beginning in the first quarter of 2010, the Company made changes to the manner in which it
allocates equity capital as well as funding and the related interest expense charged to its
reportable operating segments. The changes reflect the inclusion of additional factors in its
allocation methodologies that the Company believes more accurately reflect the capital
characteristics and funding requirements of its segments. The segment results for quarters prior
to the first quarter of 2010 have been revised for this change. Debt, cash and investment balances
associated with the Companys excess liquidity funding and the related net negative interest spread
continues to be reported in the Corporate & Other segment.
The following table presents certain operating segment information for the three and six
months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Non-interest revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USCS |
|
$ |
2,534 |
|
|
$ |
2,269 |
|
|
$ |
4,851 |
|
|
$ |
4,605 |
|
ICS |
|
|
865 |
|
|
|
838 |
|
|
|
1,747 |
|
|
|
1,625 |
|
GCS |
|
|
1,138 |
|
|
|
1,039 |
|
|
|
2,207 |
|
|
|
2,021 |
|
GNMS |
|
|
1,021 |
|
|
|
872 |
|
|
|
1,970 |
|
|
|
1,679 |
|
Corporate & Other, including adjustments and eliminations(a) |
|
|
112 |
|
|
|
333 |
|
|
|
194 |
|
|
|
428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,670 |
|
|
$ |
5,351 |
|
|
$ |
10,969 |
|
|
$ |
10,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USCS |
|
$ |
1,315 |
|
|
$ |
758 |
|
|
$ |
2,726 |
|
|
$ |
1,686 |
|
ICS |
|
|
342 |
|
|
|
376 |
|
|
|
705 |
|
|
|
741 |
|
GCS |
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
GNMS |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Corporate & Other, including adjustments and eliminations(a) |
|
|
138 |
|
|
|
152 |
|
|
|
267 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,798 |
|
|
$ |
1,288 |
|
|
$ |
3,703 |
|
|
$ |
2,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USCS |
|
$ |
204 |
|
|
$ |
146 |
|
|
$ |
394 |
|
|
$ |
308 |
|
ICS |
|
|
99 |
|
|
|
101 |
|
|
|
205 |
|
|
|
209 |
|
GCS |
|
|
56 |
|
|
|
43 |
|
|
|
104 |
|
|
|
88 |
|
GNMS |
|
|
(46 |
) |
|
|
(44 |
) |
|
|
(93 |
) |
|
|
(94 |
) |
Corporate & Other, including adjustments and eliminations(a) |
|
|
297 |
|
|
|
301 |
|
|
|
598 |
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
610 |
|
|
$ |
547 |
|
|
$ |
1,208 |
|
|
$ |
1,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net of interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USCS |
|
$ |
3,645 |
|
|
$ |
2,881 |
|
|
$ |
7,183 |
|
|
$ |
5,983 |
|
ICS |
|
|
1,108 |
|
|
|
1,113 |
|
|
|
2,247 |
|
|
|
2,157 |
|
GCS |
|
|
1,084 |
|
|
|
998 |
|
|
|
2,106 |
|
|
|
1,936 |
|
GNMS |
|
|
1,068 |
|
|
|
916 |
|
|
|
2,065 |
|
|
|
1,773 |
|
Corporate & Other, including adjustments and eliminations(a) |
|
|
(47 |
) |
|
|
184 |
|
|
|
(137 |
) |
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,858 |
|
|
$ |
6,092 |
|
|
$ |
13,464 |
|
|
$ |
12,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USCS |
|
$ |
522 |
|
|
$ |
(153 |
) |
|
$ |
950 |
|
|
$ |
(160 |
) |
ICS |
|
|
160 |
|
|
|
78 |
|
|
|
311 |
|
|
|
130 |
|
GCS |
|
|
117 |
|
|
|
67 |
|
|
|
209 |
|
|
|
148 |
|
GNMS |
|
|
269 |
|
|
|
239 |
|
|
|
536 |
|
|
|
489 |
|
Corporate & Other, including adjustments and eliminations(a) |
|
|
(51 |
) |
|
|
111 |
|
|
|
(104 |
) |
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,017 |
|
|
$ |
342 |
|
|
$ |
1,902 |
|
|
$ |
785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate & Other includes adjustments and eliminations for intersegment activity. |
34
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
American Express is a global service company that provides customers with access to products,
insights and experiences that enrich lives and build business success. The Companys principal
products and services are charge and credit payment card products and travel-related services
offered to consumers and businesses around the world. The Companys 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 Companys network partners; |
|
|
|
merchant acquisition and processing, point-of-sale, servicing and settlement and marketing
products and services for merchants; and |
|
|
|
fee services, including market and trend analyses and related consulting services, and the
design of customized customer loyalty and rewards programs. |
The Companys 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
direct and third-party sales forces, and direct response advertising.
The Companys products and services generate the following types of revenue for the Company:
|
|
|
Discount revenue, which is the Companys largest revenue source, represents fees charged to
merchants when cardmembers use their cards to purchase goods and services on the Companys
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 conversions and card-related
fees and assessments; |
|
|
|
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 principally represents interest income earned on
outstanding balances, and card fees related to the cardmember loans 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 three financial targets, on average and over time:
|
|
|
Revenues net of interest expense growth of at least 8 percent; |
|
|
|
Earnings per share (EPS) growth of 12 to 15 percent; and |
|
|
|
Return on average equity (ROE) of 33 to 36 percent. |
35
In addition, assuming achievement of such 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
2009, its performance fell short of the targets due to the effects of the continuing global
economic downturn. The Companys share repurchase program was suspended in 2008 and, as a result,
the amount of capital generated that is returned to shareholders has been below the levels achieved
earlier in the decade.
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 debt
investor expectations will likely cause the Company, as well as other financial institutions, to
maintain in future years a higher level of capital than they 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. In addition, the Company recognizes it may need to
maintain higher capital levels to support acquisitions that can augment its business growth. In
combination, these factors have led the Company to revise its on average and over time ROE
financial target to 25 percent or more.
In establishing the revised ROE target, the Company has assumed that it will seek to
maintain a 10 percent Tier 1 Common ratio, although the actual future capital requirements
applicable to the Company are uncertain and will not be known until further guidance is provided in
connection with certain initiatives, such as Basel III and the implementation of regulations under
the recent United States financial reform legislation. International and United States banking
regulators could also increase the capital ratio levels at which banks would be deemed to be well
capitalized. Refer to Capital Strategy below. The revised ROE target also assumes the Company
would need to maintain capital to finance moderate-sized acquisitions, although the actual
magnitude of these transactions cannot be determined at this time. If the Company achieves its EPS
target as well as the revised ROE target, it would seek to return, on average and over time, at least 50 percent of the
capital it generates to shareholders as a dividend or through the repurchase of common stock rather
than the 65 percent level referred to above.
Certain reclassifications of prior year amounts have been made to conform to the current
presentation.
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. Refer to the Forward-Looking
Statements section below.
Bank Holding Company
The Company is a bank holding company under the Bank Holding Company Act of 1956 and the Federal
Reserve Board (Federal Reserve) is the Companys primary federal regulator. As such, the Company is
subject to the Federal Reserves regulations, policies and minimum capital standards.
Current Economic Environment/Outlook
The Companys results for the second quarter of 2010 continued to reflect an improved economic
environment. Year-over-year cardmember spending volumes grew both in the United States and
internationally, and across all of the Companys businesses, due to both higher absolute spending
levels and relatively weak volumes last year amidst the global economic slowdown. Growth in both
the number of transactions and average transaction size contributed to the higher spending.
Double-digit spending growth as compared to last year continued into the third quarter of 2010
through July. Such growth rate was down slightly from June of 2010
reflecting a more challenging year-over-year comparison.
The Company continues to see a sharp divergence between the positive growth rates in customer spending on credit cards and lower borrowing levels, due
in part to changing consumer behavior and the Companys strategic and risk-related actions. The
Company expects the difference in growth rates in credit card spending and loan balances to continue over the near
term. While the offsetting influences of stronger billings growth and lower loan balances
challenge overall revenue growth, improving credit trends and well controlled operating expenses
have provided an ability to invest in the business at significant levels and also generate strong
earnings. Some of these investments are focused on near term metrics, while others are allocated
toward initiatives focused on the medium to long-term success of the Company.
The improving credit trends contributed to the reduction in the second quarter of approximately
$500 million in loss reserves, although reserve coverage ratios remain strong. The Company plans
to maintain its investments in the business at substantial levels to the extent the benefits from
its credit performance continue and intends to dedicate resources to select partnerships and
acquisitions.
36
Net interest yield for the second quarter decreased year-over-year. The lower yield reflects
higher payment rates and lower revolving levels, and the implementation of elements of the recently
passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act), which
were partially offset by the benefit of certain repricing initiatives effective during 2009 and the
first quarter of 2010. The Companys objective is to attain a net interest yield in the US
Consumer business closer to historic levels of approximately 9 percent1, which will be
subject to uncertainties including the requirement under the CARD Act to periodically reevaluate
APR increases.
Despite the improved economic environment and the favorable spending and credit trends discussed
above, the Company recognizes that certain challenges remain. These include high unemployment
levels, uncertainty in customer behavior, volatile consumer confidence and the legislative and
regulatory environment, including the uncertain impact of the CARD Act and the recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection Act. Refer to Certain Legislative,
Regulatory and Other Developments below.
Reengineering Initiatives
In the fourth quarter of 2008 and the second quarter of 2009 the Company undertook major
reengineering initiatives that together were expected to produce cost benefits of approximately
$2.6 billion in 2009 versus the previously anticipated spending levels. These initiatives included
reducing staffing levels and compensation expenses (expected benefit of $875 million in 2009),
reducing certain operating costs (expected benefit of $250 million in 2009) and scaling back
investment spending (expected benefit of $1.5 billion in 2009). The Company recorded restructuring
charges of $404 million ($262 million after-tax) in the fourth quarter of 2008 and $182 million
($118 million after-tax) in the second quarter of 2009, respectively, primarily associated with
severance and other costs related to the expected elimination of a total of approximately 11,000
positions, which accounted for approximately 17 percent of its global workforce as of September 30,
2008.
As the Company has previously indicated, beginning in the third quarter of 2009, benefits related
to better than initially forecasted credit and business trends for 2009, which have continued into
2010, were utilized to increase spending on marketing and other business-building initiatives
during the second half of the year. This has reduced the expected carryover into 2010 of the
reengineering benefits previously discussed in 2009 related to investment spending and position
eliminations, although the employee count decline of 7,500, or 11 percent, since September 30,
2008, primarily due to these initiatives, will continue to provide benefits.
In the second quarter of 2010, income from continuing operations reflects $4 million ($3 million
after-tax) of net reengineering benefit.
Discontinued Operations
For the three and six months ended June 30, 2009, the operating results, assets and liabilities,
and cash flows of 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 Companys
Consolidated Financial Statements.
|
|
|
1 |
|
As discussed on page 41 below, net interest
yield is a non-GAAP measure. The comparable GAAP measure is not determinable
at this time. |
37
American Express Company
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Card billed business:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
119.7 |
|
|
$ |
104.8 |
|
|
$ |
227.7 |
|
|
$ |
202.2 |
|
Outside the United States |
|
|
55.6 |
|
|
|
46.6 |
|
|
|
108.6 |
|
|
|
88.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
175.3 |
|
|
$ |
151.4 |
|
|
$ |
336.3 |
|
|
$ |
290.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cards-in-force (millions)(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
49.0 |
|
|
$ |
49.8 |
|
|
$ |
49.0 |
|
|
$ |
49.8 |
|
Outside the United States |
|
|
39.9 |
|
|
|
38.7 |
|
|
|
39.9 |
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88.9 |
|
|
$ |
88.5 |
|
|
$ |
88.9 |
|
|
$ |
88.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic cards-in-force (millions)(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
38.1 |
|
|
$ |
38.7 |
|
|
$ |
38.1 |
|
|
$ |
38.7 |
|
Outside the United States |
|
|
35.2 |
|
|
|
33.9 |
|
|
|
35.2 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
73.3 |
|
|
$ |
72.6 |
|
|
$ |
73.3 |
|
|
$ |
72.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average discount rate(c) |
|
|
2.56 |
% |
|
|
2.55 |
% |
|
|
2.56 |
% |
|
|
2.55 |
% |
Average basic cardmember spending (dollars)(d) |
|
$ |
3,288 |
|
|
$ |
2,712 |
|
|
$ |
6,299 |
|
|
$ |
5,155 |
|
Average fee per card (dollars)(d) |
|
$ |
37 |
|
|
$ |
35 |
|
|
$ |
37 |
|
|
$ |
35 |
|
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 reflect pricing at merchants accepting general purpose
American Express cards. It represents the percentage of billed business (both proprietary and
Global Network Services) 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 $48 million and $45 million for the three months
ended June 30, 2010 and 2009, respectively, and $99 million and $85 million for the six months
ended June 30, 2010 and 2009, 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
$56 million and $62 million for the three months ended June 30, 2010 and 2009, respectively,
and $107 million and $132 million for the six months ended June 30, 2010 and 2009,
respectively. The Company presents adjusted average fee per card because management believes
this metric presents a useful indicator of card fee pricing across a range of its proprietary
card products. |
38
American Express Company
Selected Statistical Information
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Worldwide cardmember receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
34.6 |
|
|
$ |
31.4 |
|
|
$ |
34.6 |
|
|
$ |
31.4 |
|
Loss reserves (millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
498 |
|
|
$ |
810 |
|
|
$ |
546 |
|
|
$ |
810 |
|
Provisions for losses on authorized transactions(a) |
|
|
55 |
|
|
|
221 |
|
|
|
239 |
|
|
|
539 |
|
Net write-offs(b) |
|
|
(121 |
) |
|
|
(340 |
) |
|
|
(365 |
) |
|
|
(672 |
) |
Other |
|
|
8 |
|
|
|
23 |
|
|
|
20 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
440 |
|
|
$ |
714 |
|
|
$ |
440 |
|
|
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of receivables |
|
|
1.3 |
% |
|
|
2.3 |
% |
|
|
1.3 |
% |
|
|
2.3 |
% |
Net write-off rate USCS |
|
|
1.6 |
% |
|
|
5.2 |
% |
|
|
1.7 |
% |
|
|
5.0 |
% |
30 days past due loans as a % of total USCS |
|
|
1.5 |
% |
|
|
2.6 |
% |
|
|
1.5 |
% |
|
|
2.6 |
% |
Net loss ratio (as a % of charge volume) ICS/GCS(b) (c) |
|
|
0.10 |
% |
|
|
0.27 |
% |
|
|
0.23 |
% |
|
|
N/A |
|
90 days past billing as a % of total ICS/GCS(b) |
|
|
1.0 |
% |
|
|
2.3 |
% |
|
|
1.0 |
% |
|
|
2.3 |
% |
|
|
|
|
|
Worldwide cardmember loans (GAAP basis portfolio):(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
57.3 |
|
|
$ |
32.5 |
|
|
$ |
57.3 |
|
|
$ |
32.5 |
|
30 days past due as a % of total |
|
|
2.8 |
% |
|
|
4.3 |
% |
|
|
2.8 |
% |
|
|
4.3 |
% |
Loss reserves (millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
5,314 |
|
|
$ |
3,013 |
|
|
$ |
3,268 |
|
|
$ |
2,570 |
|
Adoption of new GAAP consolidation
standard(e) |
|
|
N/A |
|
|
|
N/A |
|
|
|
2,531 |
|
|
|
N/A |
|
Provisions for losses on authorized transactions |
|
|
520 |
|
|
|
1,291 |
|
|
|
1,190 |
|
|
|
2,692 |
|
Net write-offs principal |
|
|
(867 |
) |
|
|
(847 |
) |
|
|
(1,902 |
) |
|
|
(1,629 |
) |
Net write-offs interest and fees |
|
|
(92 |
) |
|
|
(131 |
) |
|
|
(206 |
) |
|
|
(286 |
) |
Other |
|
|
(9 |
) |
|
|
(107 |
) |
|
|
(15 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
4,866 |
|
|
$ |
3,219 |
|
|
$ |
4,866 |
|
|
$ |
3,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Reserves principal |
|
$ |
4,743 |
|
|
$ |
3,035 |
|
|
$ |
4,743 |
|
|
$ |
3,035 |
|
Ending Reserves interest and fees |
|
$ |
123 |
|
|
$ |
184 |
|
|
$ |
123 |
|
|
$ |
184 |
|
% of loans |
|
|
8.5 |
% |
|
|
9.9 |
% |
|
|
8.5 |
% |
|
|
9.9 |
% |
% of past due |
|
|
307 |
% |
|
|
230 |
% |
|
|
307 |
% |
|
|
230 |
% |
Average loans |
|
$ |
57.5 |
|
|
$ |
35.2 |
|
|
$ |
58.5 |
|
|
$ |
37.2 |
|
Net write-off rate |
|
|
6.0 |
% |
|
|
9.6 |
% |
|
|
6.5 |
% |
|
|
8.8 |
% |
Net interest income divided by average loans(f) |
|
|
8.3 |
% |
|
|
8.4 |
% |
|
|
8.6 |
% |
|
|
9.0 |
% |
Net interest yield on cardmember loans(g) |
|
|
9.6 |
% |
|
|
9.7 |
% |
|
|
9.9 |
% |
|
|
10.2 |
% |
|
|
|
|
|
Worldwide cardmember loans (Managed basis portfolio):(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
57.3 |
|
|
$ |
62.9 |
|
|
$ |
57.3 |
|
|
$ |
62.9 |
|
30 days past due loans as a % of total |
|
|
2.8 |
% |
|
|
4.3 |
% |
|
|
2.8 |
% |
|
|
4.3 |
% |
Net write-offs principal (millions) |
|
$ |
867 |
|
|
$ |
1,541 |
|
|
$ |
1,902 |
|
|
$ |
2,933 |
|
Average loans |
|
$ |
57.5 |
|
|
$ |
63.9 |
|
|
$ |
58.5 |
|
|
$ |
66.0 |
|
Net write-off rate |
|
|
6.0 |
% |
|
|
9.7 |
% |
|
|
6.5 |
% |
|
|
8.9 |
% |
Net interest yield on cardmember loans(g) |
|
|
9.6 |
% |
|
|
10.1 |
% |
|
|
9.9 |
% |
|
|
10.6 |
% |
|
|
|
(a) |
|
Represents loss provisions for cardmember receivables consisting of principal (resulting
from authorized transactions) and fee reserve components. Adjustments to cardmember
receivables resulting from unauthorized transactions have been reclassified from this line to
Other for all periods presented. |
|
(b) |
|
Effective January 1, 2010, the Company revised the time period in which past due cardmember
receivables in International Card Services and Global Commercial Services are written off when
they are 180 days past due or earlier, consistent with applicable bank regulatory guidance and
the write-off methodology adopted for U.S. Card Services in the fourth quarter of 2008.
Previously, receivables were written off when they were 360 days past billing or earlier.
Therefore, the net write-offs for the first quarter of 2010 included net write-offs of
approximately $60 million for International Card Services and approximately $48 million for
Global Commercial Services resulting from this write-off methodology change, which increased
the net loss ratios and decreased the 90 days past billing metrics for these segments, but did
not have a substantial impact on provisions for losses. |
39
|
|
|
(c) |
|
Beginning with the first quarter of 2010, the Company has revised the net loss ratio to
exclude net write-offs related to unauthorized transactions, consistent with the methodology
for calculation of the net write-off rate for U.S. Card Services. The metrics for prior
periods have not been revised for this change as it was deemed immaterial. |
|
(d) |
|
For periods ended on or prior to December 31, 2009, the Companys cardmember loans and
related debt performance information on a GAAP basis was referred to as the owned basis
presentation. The information presented on a GAAP basis for such periods includes only
non-securitized cardmember loans that were included in the Companys balance sheet. Effective
January 1, 2010, the Companys securitized portfolio of cardmember loans and related debt is
also consolidated on its balance sheet upon the adoption of the new GAAP. Accordingly,
beginning January 1, 2010, the GAAP basis presentation includes both securitized and
non-securitized cardmember loans. Refer to page 63 for a discussion of GAAP basis
information. |
|
(e) |
|
Reflects the new GAAP effective January 1, 2010, which resulted in the consolidation of
the American Express Credit Account Master Trust (the Lending Trust), reflecting $29.0 billion
of additional cardmember loans along with a $2.5 billion loan loss reserve on the Companys
balance sheets. |
|
(f) |
|
This calculation includes elements of total interest income and total interest expense that
are not attributable to the cardmember loan portfolio, and thus is not representative of net
interest yield on cardmember loans. The calculation includes interest income and interest
expense attributable to investment securities and other interest-bearing deposits as well as
to cardmember loans, and interest expense attributable to other activities, including
cardmember receivables. |
|
(g) |
|
See below for calculations of net interest yield on cardmember loans, a non-GAAP measure, and
net interest income divided by average loans, a GAAP measure. Management believes net
interest yield on cardmember loans is useful to investors because it provides a measure of
profitability of the Companys cardmember loan portfolio. |
|
(h) |
|
For periods ended on or prior to December 31, 2009, information presented is based on the
Companys historical non-GAAP, or managed basis presentation. Unlike the GAAP basis
presentation, the information presented on a managed basis in such periods includes both the
securitized and non-securitized cardmember loans. The adoption of new GAAP on January 1, 2010
resulted in accounting for both the Companys securitized and non-securitized cardmember loans
in the Consolidated Financial Statements. As a result, the Companys 2010 GAAP presentations
and managed basis presentations prior to 2010 are generally comparable. Refer to page 63 for
a discussion of managed basis information. |
40
American Express Company
Selected Statistical Information
(continued)
Calculation of net interest yield on cardmember loans(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Calculation based on 2010 and 2009 GAAP
information:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
1,188 |
|
|
$ |
741 |
|
|
$ |
2,495 |
|
|
$ |
1,660 |
|
Average loans (billions) |
|
$ |
57.5 |
|
|
$ |
35.2 |
|
|
$ |
58.5 |
|
|
$ |
37.2 |
|
Adjusted net interest income(c) |
|
$ |
1,379 |
|
|
$ |
855 |
|
|
$ |
2,877 |
|
|
$ |
1,896 |
|
Adjusted average loans (billions)(d) |
|
$ |
57.4 |
|
|
$ |
35.4 |
|
|
$ |
58.4 |
|
|
$ |
37.3 |
|
Net interest income divided by average loans |
|
|
8.3 |
% |
|
|
8.4 |
% |
|
|
8.6 |
% |
|
|
9.0 |
% |
Net interest yield on cardmember loans(e) |
|
|
9.6 |
% |
|
|
9.7 |
% |
|
|
9.9 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation based on 2010 and 2009 managed
information:(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(g) |
|
$ |
1,188 |
|
|
$ |
1,464 |
|
|
$ |
2,495 |
|
|
$ |
3,186 |
|
Average loans (billions) |
|
$ |
57.5 |
|
|
$ |
63.9 |
|
|
$ |
58.5 |
|
|
$ |
66.0 |
|
Adjusted net interest income(c) |
|
$ |
1,379 |
|
|
$ |
1,617 |
|
|
$ |
2,877 |
|
|
$ |
3,475 |
|
Adjusted average loans (billions)(d) |
|
$ |
57.4 |
|
|
$ |
64.0 |
|
|
$ |
58.4 |
|
|
$ |
66.1 |
|
Net interest yield on cardmember loans(e) |
|
|
9.6 |
% |
|
|
10.1 |
% |
|
|
9.9 |
% |
|
|
10.6 |
% |
|
|
|
(a) |
|
Beginning in the first quarter of 2010, the Company changed the manner in which it
allocates interest expense and capital to its reportable operating segments. The change
reflects modifications in allocation methodology that the Company believes to more accurately
reflect the funding and capital characteristics of its segments. The change to interest
allocation impacted the consolidated net interest yield on cardmember loans. Accordingly, the
net interest yields for periods prior to the first quarter of 2010 have been revised for this
change. |
|
(b) |
|
For periods ended on or prior to December 31, 2009, the Companys cardmember loans and
related debt performance information on a GAAP basis was referred to as the owned basis
presentation. The information presented on a GAAP basis for such periods includes only
non-securitized cardmember loans that were included in the Companys balance sheet. Effective
January 1, 2010, the Companys securitized portfolio of cardmember loans and related debt is
also consolidated on its balance sheet upon the adoption of the new GAAP. Accordingly,
beginning January 1, 2010, the GAAP basis presentation includes both securitized and
non-securitized cardmember loans. Refer to page 63 for a discussion of GAAP basis information. |
|
(c) |
|
Represents net interest income allocated to the Companys cardmember loans portfolio on a
GAAP or managed basis, as applicable, in each case excluding the impact of card fees on loans
and balance transfer fees attributable to the Companys cardmember loans. |
|
(d) |
|
Represents average cardmember loans on a GAAP or managed basis, as applicable, in each case
excluding the impact of deferred card fees, net of deferred direct acquisition costs of
cardmember loans. |
|
(e) |
|
Net interest yield on cardmember loans is a non-GAAP financial measure that represents the
net spread earned on cardmember loans. Net interest yield on cardmember loans 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 includes interest that is
deemed uncollectible. For all presentations of net interest yield on cardmember loans,
reserves and net write-offs related to uncollectible interest are recorded through provisions
for losses cardmember loans; therefore, such reserves and net write-offs are not included in
the net interest yield calculation. |
|
(f) |
|
For periods ended on or prior to December 31, 2009, information presented is based on the
Companys historical non-GAAP, or managed basis presentation. Unlike the GAAP basis
presentation, the information presented on a managed basis in such periods includes both the
securitized and non-securitized cardmember loans. The adoption of new GAAP on January 1, 2010
resulted in accounting for both the Companys securitized and non-securitized cardmember loans
in the Consolidated Financial Statements. As a result, the Companys 2010 GAAP presentations
and managed basis presentations prior to 2010 are generally
comparable. Refer to page 63 for
a discussion of managed basis information. |
|
(g) |
|
For periods ended on or prior to December 31, 2009, the information presented includes the
adjustments to the GAAP owned basis presentation for such periods attributable to
securitization activity for interest income and interest expense to arrive at the non-GAAP
managed basis information, which adjustments are set forth under the U.S. Card Services
managed basis presentation on page 63. |
41
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 June 30, 2010 and 2009
The Companys consolidated net income for the three months ended June 30, 2010 increased $680
million or more than 100 percent from the same period a year ago to $1.0 billion, and diluted EPS
increased significantly to $0.84 from $0.09. On a trailing 12-month basis, ROE was 23.5 percent, up
from 13.2 percent a year ago.
The Companys total revenues net of interest expense and total expenses increased by approximately
13 percent, and provisions for losses decreased by approximately 59 percent, for the three months
ended June 30, 2010. Assuming no changes in foreign currency exchange rates, total revenues net of
interest expense and total expenses increased by approximately 12 percent and provisions for losses
decreased by approximately 59 percent for the three months ended June 30, 20102.
Total Revenues Net of Interest Expense
Consolidated total revenues net of interest expense were $6.9 billion for the three months ended
June 30, 2010, up $766 million or 13 percent from $6.1 billion in the same period a year ago. The
increase in total revenues net of interest expense was driven by the new GAAP effective January 1,
2010, which caused the reporting of write-offs related to securitized loans to move from
securitization income, net in the second quarter of 2009 to provisions for cardmember loan losses
in the second quarter of 2010. In addition, total revenues net of interest expense reflects higher discount revenues, higher other commissions and fees and higher travel commissions and fees. This was partially offset by lower net interest income
in 2010 compared in 2009 to the combined net interest income on the non-securitized loan
portfolio and the net interest income on the securitized loan portfolio (a component of securitization income, net in 2009), reduced other revenues and lower net card fees.
Discount revenue increased $429 million or 13 percent to $3.7 billion as a result of a 16 percent
increase in billed business. The lesser revenue versus billed business growth reflects the
relatively faster growth in billed business related to GNS, where discount revenue is shared with
card issuing partners, as well as a co-brand partnership investment. The average discount rate was
2.56 percent and 2.55 percent for the three months ended June 30, 2010 and 2009, respectively. As
indicated in prior quarters, selective repricing initiatives, changes in the mix of business and
volume-related pricing discounts will likely result in some erosion of the average discount rate
over time.
U.S. billed business and billed business outside the United States were up 14 percent and 19
percent, respectively, primarily due to increases in average spending per proprietary basic card.
Billed business outside the United States was up 16 percent assuming no changes in foreign currency
exchange rates.
|
|
|
2 |
|
These currency rate adjustments assume a
constant exchange rate between periods for purposes of currency translation
into U.S. dollars (i.e., assumes the foreign exchange rates used to determine
results for the current year apply to the corresponding year-earlier period
against which such results are being compared). Management believes this
presentation is helpful to investors by making it easier to compare the
Companys performance from one period to another without the variability caused
by fluctuations in currency exchange rates. |
42
The table below summarizes selected statistics for increases and decreases during the three months
ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Increase |
|
|
|
|
|
|
|
Assuming No |
|
|
|
Percentage |
|
|
Changes in Foreign |
|
|
|
Increase/(Decrease) |
|
|
Exchange Rates |
|
Worldwide:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
16 |
% |
|
|
15 |
% |
Proprietary billed business |
|
|
14 |
|
|
|
14 |
|
GNS billed business(b) |
|
|
27 |
|
|
|
23 |
|
Average spending per proprietary basic card |
|
|
21 |
|
|
|
20 |
|
Basic cards-in-force |
|
|
1 |
|
|
|
|
|
United States:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
14 |
|
|
|
|
|
Average spending per proprietary basic card |
|
|
22 |
|
|
|
|
|
Basic cards-in-force |
|
|
(2 |
) |
|
|
|
|
Proprietary consumer card billed business(c) |
|
|
13 |
|
|
|
|
|
Proprietary small business billed business(c) |
|
|
12 |
|
|
|
|
|
Proprietary Corporate Services billed business(d) |
|
|
21 |
|
|
|
|
|
Outside the United States:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
19 |
|
|
|
16 |
|
Average spending per proprietary basic card |
|
|
20 |
|
|
|
17 |
|
Basic cards-in-force |
|
|
4 |
|
|
|
|
|
Proprietary consumer and small business billed business(e) |
|
|
12 |
|
|
|
9 |
|
Proprietary Corporate Services billed business(d) |
|
|
22 |
|
|
|
22 |
|
|
|
|
(a) |
|
Captions in the table above not designated as proprietary include both proprietary and
Global Network Services data. |
|
(b) |
|
Included in the Global Network & Merchant Services segment. |
|
(c) |
|
Included in the U.S. Card Services segment. |
|
(d) |
|
Included in the Global Commercial Services segment. |
|
(e) |
|
Included in the International Card Services segment. |
Assuming no changes in foreign exchange rates, total billed business outside the United States
increased 23 percent in Asia Pacific, 20 percent in Latin America, 11 percent in Europe and 8
percent in Canada.
Total cards-in-force increased worldwide with an increase of 7 percent in GNS, partially offset by
a decrease of 3 percent in International Card Services (ICS) and GCS and a decrease of 1 percent in
United States Card Services (USCS). As of June 30, 2010, total cards-in-force had decreased
800,000, or 2 percent, in the United States and increased 1.2 million, or 3 percent, outside the
United States, as compared to a year ago.
Travel commissions and fees increased $27 million or 7 percent to $434 million, reflecting a 25
percent increase in worldwide travel sales, partially offset by a lower sales revenue rate.
Other commissions and fees increased $58 million or 13 percent to $497 million, driven primarily by
the new GAAP effective January 1, 2010 where fees related to securitized receivables are now
recognized as other commissions and fees starting in the first quarter of 2010. These fees were
previously reported in securitization income, net. The increase also reflects greater foreign
currency conversion revenues related to higher spending, partially offset by lower delinquency fees
in the non-securitized cardmember loan portfolio.
43
Other revenues decreased $185 million or 28 percent to $485 million, primarily reflecting the $211
million gain in the second quarter of 2009 resulting from the sale of 50 percent of the Companys
equity holdings in Industrial and Commercial Bank of China (ICBC), partially offset by higher GNS
partner-related revenue.
Interest income increased $510 million or 40 percent to $1.8 billion in 2010. Interest and fees on
loans increased $576 million or 53 percent to $1.7 billion, driven by an increase in the average
loan balance resulting from the consolidation of securitized receivables in accordance with the new
GAAP effective January 1, 2010. Interest income related to securitized receivables was reported in
securitization income, net in prior periods, but is now reported in interest and fees on loans.
The increase related to this consolidation was partially offset by lower average non-securitized
cardmember loans, as well as by a lower yield on cardmember loans reflecting higher payment rates,
lower revolving levels, and the implementation of elements of the CARD Act, which were partially
offset by the benefit of certain repricing initiatives effective during 2009 and the first quarter
of 2010. Worldwide cardmember loan balances of $57.3 billion as of June 30, 2010 increased 75
percent from $32.8 billion as of December 31, 2009, due to the adoption of the new GAAP effective
January 1, 2010. On a comparable managed basis, including securitized loans in both periods,
cardmember loan balances of $57.3 billion declined 7.3 percent from $61.8 billion as of December
31, 2009, reflecting higher cardmember payment rates and the growth of products with lower
revolving balances, partially offset by higher cardmember spending levels during the first half of
2010. For further discussion of the managed basis presentation, refer to Cardmember Loan Portfolio
Presentation below.
Interest and dividends on investment securities decreased $71 million or 36 percent to $125
million, primarily reflecting the elimination of interest on retained securities driven by the new
GAAP effective January 1, 2010 and decreased short-term investment levels. Interest on deposits
with banks and others increased $5 million or 45 percent to $16 million, primarily due to the
higher average deposit balances compared to the prior year.
Interest expense increased $63 million or 12 percent to $610 million in 2010. Interest on deposits
increased $32 million or 30 percent to $137 million, as a significant increase in balances was
partially offset by a lower cost of funds. Interest on short-term borrowings decreased $6 million
or 86 percent to $1 million, reflecting lower short-term debt levels due to the strategic shift to
deposit funding. Interest on long-term debt and other increased $37 million or 9 percent to $472
million, reflecting the consolidation of long-term debt associated with securitized loans
previously held off-balance sheet in accordance with the new GAAP effective January 1, 2010.
Interest expense related to this debt was reported in securitization income, net in prior periods,
but is now reported in long-term debt and other interest expense. Excluding this impact, lower
average debt outstanding unrelated to securitized loans was offset by a higher cost of funds.
Provisions for Losses
Consolidated provisions for losses decreased $932 million or 59 percent compared to prior year to
$652 million, primarily driven by lower reserve requirements due to improving credit performance in
both the charge card and cardmember loan portfolios, partially offset by the inclusion of
write-offs related to securitized loans, which were reported in securitization income, net in
periods prior to 2010 and are now reported in provisions for cardmember loan losses.
Charge card provisions decreased $141 million or 59 percent to $96 million, reflecting lower
write-off rates and improving delinquency rates.
Cardmember loans provisions decreased $763 million or 59 percent to $540 million due to improved
credit performance partially offset by an increase related to the inclusion of second quarter 2010
write-offs related to securitized loans as a result of new GAAP effective January 1, 2010.
Other provision for losses decreased $28 million or 64 percent to $16 million, reflecting lower
merchant-related reserves.
44
Expenses
Consolidated expenses were $4.6 billion, up $521 million or 13 percent from $4.1 billion for the
same period in 2009. The increase was a result of increased marketing and promotion expense,
cardmember rewards expense and higher professional services expense, partially offset by lower
salaries and employee benefits expense, cardmember services, communications expense and other, net
expense.
Marketing and promotion expense increased $450 million or more than 100 percent to $802 million,
reflecting the increased investment spending resulting from better credit and business trends
during the second quarter of 2010.
Cardmember rewards expense increased $169 million or 16 percent to $1.2 billion, primarily due to
greater rewards-related spending volumes and higher co-brand expense.
Cardmember services expense decreased $9 million or 7 percent to $122 million, primarily reflecting
a reclassification of certain rewards costs to the cardmember rewards expense line.
Salaries and employee benefits expense decreased $55 million or 4 percent to $1.3 billion, due to
$154 million of net severance costs associated with the Companys reengineering efforts in the
second quarter of 2009. Excluding those charges, salaries and benefits increased 8 percent as
merit increases and higher incentive compensation expense were partially offset by lower employee
levels and related expenses due to the benefits of the Companys reengineering initiatives.
Other, net expense decreased $49 million or 44 percent to $62 million, primarily reflecting a $37
million favorable impact related to hedging the Companys fixed-rate debt in the second quarter of
2010 compared to a $61 million unfavorable impact in the second quarter of 2009.
Income Taxes
The effective tax rate was 36 percent and 18 percent for the three months ended June 30, 2010 and
2009, respectively. Each of the periods reflects the level of pretax income in relation to
recurring permanent tax benefits. The tax rate for the three months ended June 30, 2010 also
includes the impact of a $44 million valuation allowance related to deferred tax assets associated
with certain of the Companys non-U.S. travel operations and an increase of 2010s estimated annual
effective tax rate during the quarter.
Consolidated Results of Operations for the Six Months Ended June 30, 2010 and 2009
The Companys consolidated net income for the six months ended June 30, 2010 increased $1.1 billion
compared to the same period a year ago to $1.9 billion, and diluted EPS increased $1.17 or more
than 100 percent to $1.57. On a trailing 12-month basis, ROE was 23.5 percent, up from 13.2
percent a year ago.
The Companys total revenues net of interest expense and total expenses increased by approximately
12 percent and 18 percent, respectively, and provisions for losses decreased by approximately 53
percent in the six months ended June 30, 2010. Assuming no changes in foreign currency exchange
rates, total revenues net of interest expense and total expenses increased by approximately 10
percent and 15 percent, respectively, and provisions for losses decreased by approximately 54
percent in the six months ended June 30, 20103.
|
|
|
3 |
|
These currency rate adjustments assume
a constant exchange rate between periods for purposes of currency translation
into U.S. dollars (i.e., assumes the foreign exchange rates used to determine
results for the current year apply to the corresponding year-earlier period
against which such results are being compared). Management believes this
presentation is helpful to investors by making it easier to compare the
Companys performance from one period to another without the variability caused
by fluctuations in currency exchange rates. |
45
Total Revenues Net of Interest Expense
Consolidated total revenues net of interest expense were $13.5 billion, up $1.4 billion or 12
percent for the same period a year ago. Total revenues net of interest expense increased due
primarily to higher discount revenues and higher net interest income on the combined securitized
and non-securitized loan portfolio, offset mainly by reduced other revenues and lower net card
fees.
Discount revenue increased $829 million or 13 percent to $7.2 billion as a result of a 16 percent
increase in billed business partially offset by amounts shared with card issuing partners as well
as co-brand partnership investments. The average discount rate was 2.56 percent for the six months
ended June 30, 2010. As previously indicated, changes in the mix of business and volume-related
pricing discounts will likely result in some erosion of the average discount rate over time.
U.S. billed business and billed business outside the United States were up 13 percent and 23
percent, respectively, primarily due to increases in average spending per proprietary basic card.
Billed business outside the United States was up 15 percent assuming no changes in foreign currency
exchange rates.
The table below summarizes selected statistics for increases and decreases during the six months
ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Increase |
|
|
|
|
|
|
|
Assuming No |
|
|
|
Percentage |
|
|
Changes in Foreign |
|
|
|
Increase/(Decrease) |
|
|
Exchange Rates |
|
Worldwide:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
16 |
% |
|
|
13 |
% |
Proprietary billed business |
|
|
14 |
|
|
|
12 |
|
GNS billed business(b) |
|
|
31 |
|
|
|
24 |
|
Average spending per proprietary basic card |
|
|
22 |
|
|
|
20 |
|
Basic cards-in-force |
|
|
1 |
|
|
|
|
|
United States:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
13 |
|
|
|
|
|
Average spending per proprietary basic card |
|
|
22 |
|
|
|
|
|
Basic cards-in-force |
|
|
(2 |
) |
|
|
|
|
Proprietary consumer card billed business(c) |
|
|
12 |
|
|
|
|
|
Proprietary small business billed business(c) |
|
|
9 |
|
|
|
|
|
Proprietary Corporate Services billed business(d) |
|
|
20 |
|
|
|
|
|
Outside the United States:(a) |
|
|
|
|
|
|
|
|
Billed business |
|
|
23 |
|
|
|
15 |
|
Average spending per proprietary basic card |
|
|
25 |
|
|
|
17 |
|
Basic cards-in-force |
|
|
4 |
|
|
|
|
|
Proprietary consumer and small business billed business(e) |
|
|
16 |
|
|
|
7 |
|
Proprietary Corporate Services billed business(d) |
|
|
25 |
|
|
|
19 |
|
|
|
|
(a) |
|
Captions in the table above not designated as proprietary include both proprietary and
Global Network Services data. |
|
(b) |
|
Included in the Global Network & Merchant Services segment. |
|
(c) |
|
Included in the U.S. Card Services segment. |
|
(d) |
|
Included in the Global Commercial Services segment. |
|
(e) |
|
Included in the International Card Services segment. |
Assuming no changes in foreign exchange rates, total billed business outside the United States
increased 22 percent in Asia Pacific, 18 percent in Latin America, 11 percent in Europe and 7
percent in Canada.
46
Total cards-in-force increased worldwide with an increase of 7 percent in GNS, partially offset by
a decrease of 3 percent in ICS and GCS and a decrease of 1 percent in USCS. As of June 30, 2010,
total cards-in-force had decreased 800,000, or 2 percent, in the United States and increased 1.2
million, or 3 percent, outside the United States, as compared to a year ago.
Travel commissions and fees increased $48 million or 6 percent to $820 million, reflecting a 23
percent increase in worldwide travel sales, partially offset by a lower sales revenue rate.
Other commissions and fees increased $105 million or 12 percent to $997 million, primarily driven
by the new GAAP effective January 1, 2010 where fees related to securitized receivables are now
recognized as other commissions and fees starting in the first quarter of 2010. These fees were
previously reported in securitization income, net. The increase also reflects greater foreign
currency conversion revenues related to higher spending, partially offset by lower delinquency fees
in the non-securitized cardmember loan portfolio.
Other revenues decreased $209 million or 19 percent to $911 million, primarily related to a second
quarter of 2009 gain of $211 million on the sale of
50 percent of the Companys investment in ICBC and
migration of the Corporate Payment Services (CPS) portfolio to the American Express network during
the first quarter of 2009, partially offset by higher GNS partner-related revenue.
Interest income increased $941 million or 34 percent to $3.7 billion in 2010. Interest and fees on
loans increased $1.1 billion or 45 percent to $3.4 billion, driven by the new GAAP effective
January 1, 2010. Interest income related to securitized receivables was reported in securitization
income, net in prior periods, but is now reported in interest and fees on loans. The increase
related to this consolidation was partially offset by lower average non-securitized cardmember
loans as well as by a lower yield on cardmember loans as higher payment rates, lower revolving
levels and the implementation of elements of the CARD Act were partially offset by the benefit of
certain repricing initiatives effective during 2009 and the first quarter of 2010. Worldwide
cardmember loan balances of $57.3 billion as of June 30, 2010 increased 75 percent from $32.8
billion as of December 31, 2009, due to the adoption of the new GAAP effective January 1, 2010. On
a comparable managed basis, including securitized loans in both periods, cardmember loan balances
of $57.3 billion declined 7.3 percent from $61.8 billion as of December 31, 2009, reflecting higher
cardmember payment rates and the growth of products with lower revolving balances, partially offset
by higher cardmember spending levels during the first half of 2010. For further discussion of the
managed basis presentation, refer to Cardmember Loan Portfolio Presentation below.
Interest and dividends on investment securities decreased $108 million or 31 percent to $242
million, primarily reflecting lower average short-term investment balances, partially offset by
higher investment yields. Interest on deposits with banks and others decreased $10 million or 26
percent to $29 million, primarily due to the lower other interest income, partially offset by
higher deposit income due to an increase in average interest-bearing deposits.
Interest expense increased $106 million or 10 percent to $1.2 billion in 2010. Interest on
deposits increased $75 million or 39 percent to $265 million, as an increase in average balances
was partially offset by a lower cost of funds. Interest on short-term borrowings decreased $32
million or 94 percent to $2 million, reflecting lower cost of funds and average borrowings.
Interest on long-term debt and other increased $63 million or 7 percent to $941 million, primarily
reflecting the consolidation of long-term debt associated with securitized loans previously held
off-balance sheet in accordance with new GAAP effective January 1, 2010. Interest expense related
to this debt was reported in securitization income, net in prior periods, but is now reported in
long-term debt and other interest expense in 2010. Excluding this impact, interest expense was
flat due to lower average debt outstanding unrelated to securitized loans offset by a higher cost
of funds.
47
Provisions for Losses
Consolidated provisions for losses decreased $1.8 billion or 53 percent over last year to $1.6
billion, due to the benefit of improving credit performance in both the loan and charge card
portfolios.
Charge card provisions decreased $250 million or 44 percent to $323 million, driven by lower
reserve requirements due to improved credit performance.
Cardmember loans provisions decreased $1.5 billion or 55 percent to $1.2 billion, primarily
reflecting lower reserve requirements due to improved credit performance.
Other provision for losses decreased $53 million or 55 percent to $44 million, reflecting lower
merchant-related reserves.
Expenses
Consolidated expenses were $9.0 billion, up $1.4 billion or 18 percent from $7.7 billion for the
same period in 2009. The increase was a result of increased marketing and promotion expense,
cardmember rewards expense, and higher professional services expense, partially offset by lower
communications expense and other, net expense.
Marketing and promotion expense increased $700 million or more than 100 percent to $1.4 billion,
reflecting the increased investment spending resulting from better credit and business trends
during the first six months of 2010.
Cardmember rewards expense increased $541 million or 29 percent to $2.4 billion, reflecting various
redemption option value improvements and a more tenured user base due to recent low acquisition
levels; greater rewards-related spending volumes; and a higher average cost per point due to
redemption mix changes and increased co-brand expenses.
Cardmember services expense increased $29 million or 12 percent to $271 million, primarily
reflecting higher other cardmember services, partially offset by a reclassification of certain rewards costs to the cardmember rewards expense line in
the second quarter of 2010.
Professional services expense increased $79 million or 7 percent to $1.2 billion, primarily driven
by higher technology-related consulting and legal expenses.
Communications expense and other, net expense decreased $18 million or 9 percent and $10 million or
6 percent, respectively. The communications expense decrease was driven by lower postage and
distribution costs as well as lower telephone related costs. Other, net expense decrease was
primarily driven by the favorable accounting impact related to hedging the Companys fixed-rate
debt during the first six months of 2010.
Income Taxes
The effective tax rate was 33 percent and 18 percent for the six months ended June 30, 2010 and
2009, respectively. Each of the periods reflect the level of pretax income in relation to recurring
permanent tax benefits. The tax rate for the six months ended June 30, 2010 also includes the
impact of a $44 million valuation allowance related to deferred tax assets associated with certain
of the Companys non-U.S. travel operations and an increase of 2010s estimated annual effective
tax rate.
48
Consolidated Capital Resources and Liquidity
Capital Strategy
The Companys objective is to retain sufficient levels of capital generated through earnings and
other sources to maintain a solid equity capital base and to provide flexibility to satisfy future
business growth. The Company believes capital allocated to growing businesses with a return on
risk-adjusted equity in excess of its costs will generate shareholder value.
The level and composition of the Companys equity capital are determined in large part by the
Companys internal assessment of its business activities, as well as rating agency and regulatory
capital requirements. They are also influenced by subsidiary capital requirements, the business
environment, and by conditions in the debt capital markets. The Company, as a bank holding company,
is subject to regulatory requirements administered by the U.S. federal banking agencies. The
Federal Reserve has established specific capital adequacy guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items.
The recently-passed Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as a series
of international capital and liquidity standards proposed by the Basel Committee on Banking
Supervision (commonly referred to as Basel III), will in the future change these current
quantitative measures. In general, these changes will involve, for the United States banking
industry as a whole, a reduction in the amount of eligible capital that banks are deemed to hold and
an increase in the amount of capital that their assets, liabilities and certain off-balance sheet
items require. The Company currently reports its capital ratios under
the measurement standards commonly referred to as Basel I. Thus, these changes will generally serve to reduce reported capital ratios
compared to current capital guidelines. The specific guidelines supporting the new legislation have not been finalized but
are generally expected to be issued within the next 18 months. In addition to these measurement
changes, international and United States banking regulators could increase the ratio levels at
which banks would be deemed to be well-capitalized.
The Financial Accounting Standards Board (FASB) amended the accounting for off-balance sheet
securitization activities beginning January 1, 2010, which resulted in the Company consolidating
the assets (primarily cardmember loans) and liabilities (primarily debt certificates) of the
Lending Trust. Both the cardmember loans, net of the impact for any expected credit losses, and the
debt are consolidated by American Express Travel Related Services (TRS), a wholly-owned subsidiary
of the Company. Refer to Note 1 to the Consolidated Financial Statements for further discussion of
the impact of the consolidation of the Lending Trust.
49
The following table presents the regulatory risk-based capital ratios and leverage ratio for the
Company and its significant banking subsidiaries, as well as additional ratios widely utilized in
the market place, as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Well-Capitalized |
|
|
|
|
|
|
Ratio |
|
|
Actual |
|
Risk-Based Capital |
|
|
|
|
|
|
|
|
Tier 1 |
|
|
6.0 |
% |
|
|
|
|
American Express Company |
|
|
|
|
|
|
10.7 |
% |
Centurion Bank |
|
|
|
|
|
|
16.9 |
% |
FSB |
|
|
|
|
|
|
15.5 |
% |
Total |
|
|
10.0 |
% |
|
|
|
|
American Express Company |
|
|
|
|
|
|
12.9 |
% |
Centurion Bank |
|
|
|
|
|
|
18.2 |
% |
FSB |
|
|
|
|
|
|
18.0 |
% |
Tier 1 Leverage |
|
|
5.0 |
% |
|
|
|
|
American Express Company |
|
|
|
|
|
|
8.2 |
% |
Centurion Bank |
|
|
|
|
|
|
18.7 |
% |
FSB |
|
|
|
|
|
|
15.4 |
% |
Tier 1 Common Risk-Based |
|
|
|
|
|
|
|
|
American Express Company |
|
|
|
|
|
|
10.7 |
% |
Common Equity to Risk-Weighted Assets(a) |
|
|
|
|
|
|
|
|
American Express Company |
|
|
|
|
|
|
13.5 |
% |
Tangible Common Equity to Risk-Weighted Assets(a) |
|
|
|
|
|
|
|
|
American Express Company |
|
|
|
|
|
|
10.4 |
% |
|
|
|
(a) |
|
Common equity equals the Companys shareholders equity of $14.5 billion as of June 30,
2010, and tangible common equity equals common shareholders equity, less goodwill and other
intangibles of $3.3 billion. Risk-weighted assets as of June 30, 2010, were $107.6 billion.
Management believes presenting the ratio of tangible common equity to risk-weighted assets is
a useful measure of evaluating the strength of the Companys capital position. |
The Company seeks to maintain capital levels and ratios in excess of the minimum regulatory
requirements; failure to maintain minimum capital levels could cause the respective regulatory
agencies to take actions that could limit the Companys business operations.
The Companys primary source of equity capital has been through the generation of net income.
Historically, capital generated through net income and other sources such as employee benefit plans
has exceeded the growth in its capital requirements. To the extent capital has exceeded business,
regulatory, and rating agency requirements, the Company has returned excess capital to shareholders
through its regular common dividend and its share repurchase program.
The Company maintains certain flexibility to shift capital across its businesses as appropriate.
For example, the Company may infuse additional capital into subsidiaries to maintain capital at
targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts
can affect the capital profile and liquidity level for American Express Parent Company (Parent
Company).
50
Share Repurchases and Dividends
The Company has a share repurchase program to return excess capital to shareholders. These share
repurchases reduce shares outstanding and offset, in whole or in part, the issuance of new shares
as part of employee compensation plans.
On a cumulative basis, since 1994 the Company has distributed 65 percent of capital generated
through share repurchases and dividends. No shares have been repurchased over the past nine
quarters, as share repurchases were suspended during the first quarter of 2008 in light of the
challenging global economic environment. The Company does not expect to repurchase any of its
shares in the near term; any future repurchases would be subject to consultation with applicable
regulatory authorities.
During the three months ended June 30, 2010, the Company returned $217 million in dividends to
shareholders, which represents approximately 18 percent of total capital generated. During the six
months ended June 30, 2010, the Company returned $433 million in dividends to shareholders, which
represents approximately 20 percent of the total capital generated.
Funding
The Company seeks to maintain broad and well-diversified funding sources to allow it to meet its
maturing obligations, cost-effectively finance current and future asset growth in its global
businesses as well as maintain a strong liquidity profile. The diversity of funding sources by type
of debt instrument, by maturity and by investor base, among other factors, provides additional
insulation from the impact of disruptions in any one type of debt, maturity, or investor. The mix
of the Companys funding in any period will seek to achieve cost-efficiency consistent with both
maintaining diversified sources and achieving its liquidity objectives. The Companys funding
strategy and activities are integrated into its asset-liability management activities.
The Company meets its funding needs through a variety of sources, including debt instruments such
as senior unsecured debentures, asset securitizations and commercial paper, as well as retail
deposits placed with the Companys U.S. banks, and long-term committed bank borrowing facilities in
certain non-U.S. markets.
During the second quarter of 2010, the Company issued $912 million of asset-backed securities as
follows:
|
|
$850 million Class A at one month Libor plus 25 basis points |
|
|
|
$62 million Class B at one month Libor plus 60 basis points |
As of June 30, 2010, the Company had $1.4 billion of commercial paper outstanding and $28.4 billion
of outstanding retail deposits. See Deposit Programs section below for more details.
The Companys funding strategy is to raise funds to meet all financing obligations, including
seasonal and other working capital needs, while maintaining sufficient cash and readily-marketable
securities that are easily convertible to cash, in order to meet all long-term funding maturities
for a 12-month period. The Company has $5.7 billion of unsecured long-term debt, $8.5 billion of
asset securitizations, and $5.4 billion of long-term deposits that will mature by June 30, 2011.
See Liquidity Strategy section for more details.
The Companys equity capital and funding strategies are designed, among other things, to maintain
appropriate and stable unsecured debt ratings from the major credit rating agencies, Moodys
Investor Services (Moodys), Standard & Poors (S&P), Fitch Ratings (Fitch), and Dominion Bond
Rating Services (DBRS). Such ratings support the Companys access to cost effective unsecured
funding as part of its overall financing programs. Ratings for the Companys ABS activities are
evaluated separately.
51
Unsecured Debt Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
|
|
|
|
Short-Term |
|
Senior |
|
|
|
|
|
|
Debt and |
|
Unsecured Debt |
|
|
Credit Agency |
|
Entity Rated |
|
Deposit ratings |
|
ratings |
|
Outlook |
|
|
|
|
|
|
|
|
|
DBRS
|
|
All rated entities
|
|
R-1
(middle)
|
|
A
(high)
|
|
Stable |
Fitch
|
|
All rated entities
|
|
F1
|
|
A+
|
|
Stable(a) |
Moodys
|
|
TRS and rated operating subsidiaries
|
|
Prime-1
|
|
A2
|
|
Stable |
Moodys
|
|
American Express Company
|
|
Prime-2
|
|
A3
|
|
Negative |
S&P
|
|
All rated entities
|
|
A-2
|
|
BBB+
|
|
Stable |
|
|
|
(a) |
|
In April 2010 Fitch revised its ratings outlook from Negative to Stable. |
Downgrades in the Companys unsecured debt or asset securitization programs securities ratings
could result in higher interest expense on the Companys unsecured debt and asset securitizations,
as well as higher fees related to borrowings under its unused lines of credit. In addition to
increased funding costs, declines in credit ratings could reduce the Companys borrowing capacity
in the unsecured debt and asset securitization capital markets. The Company believes the change in
its funding mix, which now includes an increasing proportion of FDIC-insured (as defined below)
U.S. retail deposits, should reduce the impact that credit rating downgrades would have on the
Companys funding capacity and costs.
Deposit Programs
The Company offers deposits within its American Express Centurion Bank and American Express Bank,
FSB subsidiaries (together, the Banks). These funds are currently insured up to $250,000 through
the Federal Deposit Insurance Corporation (FDIC). During the second quarter of 2009, the Company,
through FSB, launched a direct deposit-taking program, Personal Savings from American Express, to
supplement its distribution of deposit products through third-party distribution channels. This
program makes FDIC-insured certificates of deposit (CDs) and high-yield savings account products
available directly to consumers.
During the second quarter of 2010, within U.S. retail deposits the Company focused on continuing to
grow both the number of accounts and the total balances outstanding on savings accounts and CDs that were sourced directly with consumers through
Personal Savings from American Express. These balances grew during the quarter, and financed in
part the maturities in excess of planned issuances of CDs through third-party distribution
channels.
The Company held the following deposits as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
(Billions) |
|
2010 |
|
|
2009 |
|
U.S. retail deposits: |
|
|
|
|
|
|
|
|
Cash sweep and savings accounts |
|
$ |
12.8 |
|
|
$ |
10.5 |
|
Certificates of deposit (a) |
|
|
14.9 |
|
|
|
15.1 |
|
Other deposits |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Total customer deposits |
|
$ |
28.4 |
|
|
$ |
26.3 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes CDs sourced directly with consumers and through third-party distribution channels. |
52
Asset Securitization Programs
The Company periodically securitizes cardmember receivables and loans arising from its card
business, as the securitization market provides the Company with cost-effective funding.
Securitization of cardmember receivables and loans is accomplished through the transfer of those
assets to a trust, which in turn issues certificates or notes (securities) collateralized by the
transferred assets to third-party investors. The proceeds from issuance are distributed to the
Company, through its wholly-owned subsidiaries, as consideration for the transferred assets. Refer
to Note 1 to the Consolidated Financial Statements for a description of the adoption of new GAAP
effective January 1, 2010.
Securitization of cardmember receivables generated under designated consumer charge card, small
business charge card and corporate charge card accounts is accomplished through the transfer of
cardmember receivables to the American Express Issuance Trust (Charge Trust). Securitization of the
Companys cardmember loans generated under designated consumer lending accounts is accomplished
through the transfer of cardmember loans to the American Express Credit Account Master Trust
(Lending Trust). The Company consolidates the Charge Trust and the Lending Trust. Accordingly, the
receivables and loans being securitized are reported as owned assets on the Companys Consolidated
Balance Sheets and the related securities issued to third-party investors are reported as long-term
debt on the Companys Consolidated Balance Sheets.
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. As of June 30, 2010, no
triggering events have occurred that would have resulted in the funding of reserve accounts or
early amortization.
The credit rating agencies are assessing the potential impact of the adoption of new GAAP effective
January 1, 2010 on credit ratings of the securities issued by securitization trusts within the
overall asset-backed securities market. In particular, the agencies are assessing the FDICs safe
harbor rule relating to the FDICs treatment of securitized assets in the event of a sponsoring
financial institutions receivership or conservatorship. Pursuant to the existing safe harbor
rule, the FDIC will not seek to reclaim, recover or recharacterize
any transfer of any financial asset transferred in connection with a
securitization, provided that such transfer meets all conditions for sale accounting in accordance
with GAAP. Because of the adoption of new GAAP effective January 1, 2010, all assets being
securitized are included in the Companys Consolidated Balance Sheets. For this reason, the rating
agencies have indicated that they may ultimately conclude that the safe harbor no longer applies
and, in certain cases, that the highest rating an ABS security could receive would be based on the
sponsoring banks unsecured debt rating, rather than relying on their separate evaluation of the
securitization trust. At present, the FDIC has extended the safe harbor rule to September 30,
2010, and is in the process of revising the safe harbor rule permanently to prevent potential
market disruptions caused by the new GAAP mentioned above. Nonetheless, the ability of the
Companys securitization programs to receive or maintain AAA ratings on ABS securities under the
same terms and conditions as done in the past, or at all, beyond the extended safe harbor September
deadline, is subject to uncertainty. Any action by the rating agencies as described above could
adversely impact the Companys capacity and cost of using ABS as a source of funding for its
business. Refer to Certain Legislative, Regulatory and Other Developments section
below for additional information regarding matters affecting
offerings of asset-backed securities.
Committed Bank Credit Facilities
As of June 30, 2010, the Company maintained committed bank lines of credit totaling $11.9 billion,
of which $3.5 billion was drawn. These draw downs are part of the Companys normal funding
activities. The Companys subsidiary, American Express Credit Corporation (Credco), has an
allocation of $9.8 billion under these facilities and also has access to the Parent Companys
allocation of $1.3 billion for a maximum borrowing capacity of
$11.1 billion. The Company allowed certain credit facilities
totaling approximately $2.0 billion to expire on July 30, 2010.
53
Liquidity Strategy
As noted above, the Company seeks to ensure that it has adequate liquidity in the form of excess
cash and readily-marketable securities that are easily convertible into cash, to satisfy all
maturing long-term funding obligations for a 12-month period, in addition to having access to
significant additional contingent liquidity sources. This objective is managed by regularly
accessing capital through a broad and diverse set of funding programs. The Company maintains a
liquidity plan that enables it to continuously meet its financing obligations even when access to
its primary funding sources become impaired or markets become inaccessible.
As of June 30, 2010, the Companys excess cash and readily-marketable securities available to fund
long-term maturities were as follows:
|
|
|
|
|
(Billions) |
|
|
|
Cash |
|
$ |
21.9 |
(a) |
Readily-marketable securities |
|
|
10.2 |
(b) |
|
|
|
|
Cash and readily-marketable securities |
|
|
32.1 |
|
Less: |
|
|
|
|
Operating cash |
|
|
(4.3) |
(c) |
Short-term obligations outstanding |
|
|
(2.4) |
(d) |
|
|
|
|
Excess cash and readily-marketable securities |
|
$ |
25.4 |
(e) |
|
|
|
|
|
|
|
(a) |
|
Includes cash and cash equivalents of $20.7 billion as well as cash of $1.2 billion held in
other assets on the Consolidated Balance Sheet for certain forthcoming asset-backed
securitization maturities in the third quarter of 2010. |
|
(b) |
|
Consists of certain available-for-sale investment securities (U.S. Treasury and agency
securities and government-guaranteed debt) that are considered highly liquid and either mature
prior to the maturity of borrowings that will occur within the next 12 months, or could be
sold or pledged under sale/repurchase agreements to raise cash. |
|
(c) |
|
Cash on hand for day-to-day operations. |
|
(d) |
|
Consists of commercial paper and U.S. retail CDs with original maturities of three and six
months. |
|
(e) |
|
Amount is not affected by the misclassification of certain book overdraft balances referred
to in Note 1 to the Consolidated Financial Statements. |
The upcoming approximate maturities of the Companys long-term unsecured debt, debt issued in
connection with asset-backed securitizations, and long-term certificates of deposit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding Maturities |
|
(Billions) |
|
Unsecured |
|
|
Asset-Backed |
|
|
Certificates |
|
|
|
|
Quarter Ending: |
|
Debt |
|
|
Securitization |
|
|
of Deposit |
|
|
Total |
|
September 30, 2010 |
|
$ |
1.0 |
|
|
$ |
2.3 |
|
|
$ |
0.2 |
|
|
$ |
3.5 |
|
December 31, 2010 |
|
|
3.4 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
6.5 |
|
March 31, 2011 |
|
|
|
|
|
|
3.2 |
|
|
|
2.0 |
|
|
|
5.2 |
|
June 30, 2011 |
|
|
1.3 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5.7 |
|
|
$ |
8.5 |
|
|
$ |
5.4 |
|
|
$ |
19.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys funding needs for the next 12 months are expected to arise from these maturities as
well as changes in business needs, primarily changes in outstanding cardmember loans and
receivables.
The Company considers various factors in determining the amount of liquidity it maintains, such as
economic and financial market conditions, seasonality in business operations, growth in its
businesses, the cost and availability of alternative liquidity sources, and regulatory and credit
rating agency considerations.
The yield the Company receives on its cash and readily-marketable securities is generally less than
the interest expense on the sources of funding for these balances. Thus, the Company incurs
substantial net interest costs on these amounts. The level of net interest costs will be dependent
on the size of the
Companys cash and readily-marketable securities holdings, as well as the difference between the
cost of funding these amounts and their investment yields.
54
In addition to its cash and readily-marketable securities, the Company continues to maintain a
variety of contingent liquidity resources, such as access to secured borrowing from the Federal
Reserve Bank of San Francisco through the Federal Reserve discount window, and committed bank
credit facilities.
Cash Flows from Operating Activities
The Company generated net cash provided by operating activities in amounts greater than net income
for both the six months ended June 30, 2010 and 2009, primarily due to provisions for losses, which
represent expenses in the Consolidated Statements of Income but do not require cash at the time of
provision. Similarly, depreciation and amortization represent non-cash expenses. In addition, for
the six months ended June 30, 2010, net cash was provided by net income, deferred taxes,
acquisition costs and other and fluctuations in other receivables and other assets, partially offset by fluctuations
in Travelers Cheques outstanding and accounts payable and other liabilities.
For the six months ended June 30, 2009, net cash was provided by net income and fluctuations in
other receivables and other assets, partially offset by deferred taxes, acquisition costs and other
and fluctuations in accounts payable and other liabilities and Travelers Cheques outstanding.
These accounts vary significantly in the normal course of business due to the amount and timing of
various payments.
For the six months ended June 30, 2010, net cash provided by operating activities of $4.5 billion
increased $1.9 billion compared to the same period in 2009. The increase was primarily due to
deferred taxes, acquisition costs and other and fluctuations in accounts payable and other
liabilities, as well as an increase in net income, partially offset by lower provisions for losses
and changes in other receivables and other assets.
Refer to Note 1 to the Consolidated Financial Statements for a discussion of the impact of the
misclassification of cash balances on cash flows from operating activities.
Cash Flows from Investing Activities
The Companys investing activities primarily include funding cardmember loans and receivables and
the Companys available-for-sale investment portfolio.
For the six months ended June 30, 2010, net cash provided by investing activities of $5.5 billion
increased $4.7 billion compared to the same period in 2009. The increase was primarily due to
increased maturity and redemption of investments; lower purchases of investments; maturities of
cardmember loan securitizations in 2009 resulting in an increase in an undivided pro-rata interest
in an unconsolidated VIE (historically referred to as sellers interest); and fluctuations in
restricted cash primarily due to a decrease in restricted cash of a consolidated VIE in 2010, which
was used to pay down long-term debt of the consolidated VIE, partially offset by changes in the net
decrease in cardmember loans and receivables.
Cash Flows from Financing Activities
The Companys financing activities primarily include issuing and repaying debt, taking customer
deposits, paying dividends and repurchasing its common shares.
For the six months ended June 30, 2010, net cash used in financing activities of $5.8 billion
decreased $2.8 billion compared to the same period in 2009. The decrease was primarily due to a
decreased cash outflow for short-term borrowings; a fluctuation in customer deposits; a decrease in
principal payments on long-term debt (which include payments made on long-term debt of a
consolidated VIE of $4.5 billion in 2010) partially offset by decreases in the issuance of
long-term debt and common shares.
55
Certain Legislative, Regulatory and Other Developments
As a participant in the financial services industry, the Company is subject to a wide array of
regulations applicable to its businesses. The Company is a bank holding company and is subject to
the supervision of the Federal Reserve. As such, the Company is subject to the Federal Reserves
regulations and policies, including its regulatory capital requirements. In addition, the extreme
disruptions in the capital markets since mid-2007 and the resulting instability and failure of
numerous financial institutions have led to a number of changes in the financial services industry,
including significant additional regulation and the formation of additional regulatory bodies.
The Companys conversion to a bank holding company in the fourth quarter of 2008 has increased the scope of its regulatory oversight and its compliance program. In addition, although the long-term impact on the Company
of much of the recent and pending legislative and regulatory initiatives remains uncertain, the
Company expects that compliance requirements and expenditures will continue to rise for financial services firms, including the Company, as the legislation
and rules become effective over the course of the next several years.
The CARD Act
In May 2009, the U.S. Congress passed, and the President of the United States signed into law,
legislation, known as the CARD Act, to fundamentally reform credit card billing practices, pricing
and disclosure requirements. This legislation accelerated the effective date and expanded the
scope of amendments to the rules regarding Unfair or Deceptive Acts or Practices (UDAP) and Truth
in Lending Act that restrict certain credit and charge card practices and require expanded
disclosures to consumers, which were adopted in December 2008 by federal bank regulators in the
United States. Together, the legislation and the regulatory amendments, portions of which became
effective commencing August 2009, include, among other matters, rules relating to the imposition by
card issuers of interest rate increases on outstanding balances and the allocation of payments in
respect of outstanding balances with different interest rates. Certain other provisions of the CARD
Act effective in August 2010 require penalty fees to be reasonable and proportional in
relation to the circumstances for which such fees are levied and require issuers to evaluate past
interest rate increases twice per year to determine whether it is appropriate to reduce such
increases.
The Company has made changes to its product terms and practices that are designed to mitigate the
impact on Company revenue of the changes required by the CARD Act and the regulatory amendments.
These changes include instituting
product-specific increases in pricing on purchases and cash advances,
modifying the criteria pursuant to which the penalty rate of
interest is imposed on a cardmember, assessing late fees on certain charge products at an
earlier date than previously assessed and lowering the balance level at which a higher level of late fee is
charged. Although the Company believes that its actions to mitigate the impact of the CARD Act
have, to date, been largely effective (as evidenced in part by the net interest yield for its U.S.
lending portfolio), certain other provisions of the CARD Act are
still subject to some regulatory uncertainty (such as the
requirement to periodically reevaluate APR increases). Accordingly, in the event the actions
undertaken by the Company to date to offset the impact of the new legislation and regulations are
not ultimately effective, they could have a material adverse effect on the Companys results of
operations, including its revenue and net income.
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act)
In July 2010, President Obama signed into law the Reform Act. The Reform Act is comprehensive in
scope and contains a wide array of provisions intending to govern the practices and oversight of
financial institutions and other participants in the financial markets. Among other matters, the
law creates a new independent Consumer Financial Protection Bureau, which will regulate consumer
credit across the U.S. economy. The Bureau will have broad rulemaking and enforcement authority
over providers of credit, savings, payment and other consumer financial products and services.
Under the Reform Act, the Federal Reserve is authorized to regulate interchange fees paid to banks
on debit card transactions to ensure that they are reasonable and proportional to the cost of
processing individual transactions, and to prohibit debit card networks and issuers from requiring
transactions to be processed on
a single payment network. The Reform Act also prohibits credit/debit network rules that would
restrict a merchant from offering discounts to customers in order to encourage them to use a
particular form of payment, as long as such discounts do not discriminate among issuers or
networks, and that would restrict a merchant from setting certain minimum and maximum transaction
amounts for credit cards.
56
The Reform Act has also eliminated an exception to certain types of liabilities applicable to
rating agencies under the securities laws, which has resulted in the agencies declining to give
their consent to disclose ratings in registered offerings. This circumstance is of particular
significance in offerings of asset-backed securities (ABS offerings), which require ratings
disclosure that, subsequent to the Reform Act, can be made only with rating agency consent.
Although the SEC staff has effectively relieved issuers from the ratings disclosure requirement
through January 2011, if the rating agencies do not change their position, the Company will not be
able to issue ABS securities in registered offerings after such time, and may have to rely on
private offerings to raise funding through its ABS program.
The Reform Act also authorizes the Federal Reserve to establish heightened capital, leverage and
liquidity standards, risk management requirements, concentration limits on credit exposures,
mandatory resolution plans (so-called living wills) and stress tests for, among others, large
bank holding companies, such as the Company, that have greater than $50 billion in assets.
In addition, most interest rate and currency swaps will be required
to be exchange-traded which may increase collateral posting requirements for the Company.
Many provisions of the Reform Act require the adoption of rules to implement. In addition, the
Reform Act mandates multiple studies, which could result in additional legislative or regulatory
action. These new rules and studies will be implemented and undertaken over a period of several
years. Accordingly, the ultimate consequences of the Reform Act and its implementing regulations
on the Companys business, results of operations and financial condition are uncertain at this
time.
Other Legislative and Regulatory Initiatives
In addition, other legislative initiatives remain in Congress, including a proposed financial
crisis responsibility fee that would be assessed on large financial institutions at approximately
0.15 percent of total assets (less Tier 1 capital and less FDIC-assessed deposits) for at least the
next ten years for the purpose of recovering projected losses from the Troubled Asset Relief
Program, and other potential assessments.
Governments outside the United States are also considering wide-ranging and comprehensive financial
services industry reform proposals, including various taxes on financial transactions and financial
institutions profits, assets, and compensation. Any such legislative and regulatory changes could
impact the profitability of the Companys business activities, require the Company to change
certain of its business practices and expose it to additional costs (including increased compliance
costs).
The credit and charge card industry also faces continuing scrutiny in connection with the fees
merchants are charged to accept cards. Although investigations into the way bankcard network
members collectively set the interchange (that is, the fee paid by the bankcard merchant acquirer
to the card issuing bank in four party payment networks, like Visa and MasterCard) had largely
been a subject of regulators outside the United States, legislation has been introduced in Congress
designed to give merchants antitrust immunity to negotiate interchange collectively with card
networks and to regulate certain card network practices. Although, unlike the Visa and MasterCard
networks, the American Express network does not collectively set fees, antitrust actions and
government regulation of the bankcard networks pricing could ultimately affect all networks.
In addition to the provisions of the Reform Act regarding merchants ability to offer discounts, a
number of U.S. states are also considering legislation that would prohibit card networks from
imposing conditions, restrictions or penalties on a merchant if the merchant, among other things,
(i) provides a discount to a customer for using one form of payment versus another or one type of
credit or charge card versus another, (ii) imposes a minimum dollar requirement on customers with
respect to the use of credit or charge cards or
(iii) chooses to accept credit and charge cards at some of its locations but not at others. Such
legislation has recently been enacted in Vermont, and is pending enactment in several other states.
57
Also, other countries in which the Company operates have been considering and in some cases
adopting similar legislation and rules that would impose changes on certain practices of card
issuers and bankcard networks, which could have a material adverse effect on the Companys results
of operations.
Our results of operations also could be adversely impacted by various proposals to reform the
taxation of income earned by U.S. companies international business operations and by other
legislative action or inaction, including the potential failure of the U.S. Congress to extend the
active financing exception to Subpart F of the Internal Revenue Code.
In December 2009, the Basel Committee on Banking Supervision of the Bank of International
Settlements (BIS) released a comprehensive list of proposals of new and revised international
capital and liquidity standards for banks. These proposals, if enacted, could have a substantial
impact on the capital structure and liquidity profiles of the banking industry, including those of
the Company. The Committee is evaluating comments it received on the proposals prior to finalizing
the content and timing of implementation of the proposals. During July, the Committee issued several statements that reflected, among other things, tentative decisions it has reached on certain elements of the comprehensive proposals, including timelines for implementation, while re-affirming its goal to issue the proposals in final form before year end.
Refer to Capital Strategy above.
58
BUSINESS SEGMENT RESULTS
Beginning in the first quarter of 2010, the Company made changes to the manner in which it
allocates equity capital as well as funding and the related interest expense charged to its
reportable operating segments. The changes reflect the inclusion of additional factors in its
allocation methodologies that the Company believes more accurately reflect the capital
characteristics and funding requirements of its segments. The segment results for quarters prior
to the first quarter of 2010 have been revised for this change. Debt, cash and investment balances
associated with the Companys excess liquidity funding and the related net negative interest spread
continues to be reported in the Corporate & Other segment. The change to interest allocation also
impacted the consolidated and segment reported net interest yield on cardmember loans.
As discussed more fully below, results are presented on a GAAP basis unless otherwise stated.
U.S. Card Services
Selected Income Statement Data
GAAP Basis Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other |
|
$ |
2,534 |
|
|
$ |
2,271 |
|
|
$ |
4,851 |
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization income, net(a) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,315 |
|
|
|
758 |
|
|
|
2,726 |
|
|
|
1,686 |
|
Interest expense |
|
|
204 |
|
|
|
146 |
|
|
|
394 |
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
1,111 |
|
|
|
612 |
|
|
|
2,332 |
|
|
|
1,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense |
|
|
3,645 |
|
|
|
2,881 |
|
|
|
7,183 |
|
|
|
5,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for losses |
|
|
519 |
|
|
|
1,190 |
|
|
|
1,206 |
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense after provisions for
losses |
|
|
3,126 |
|
|
|
1,691 |
|
|
|
5,977 |
|
|
|
3,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services |
|
|
1,386 |
|
|
|
1,021 |
|
|
|
2,687 |
|
|
|
1,910 |
|
Salaries and employee benefits and other operating expenses |
|
|
912 |
|
|
|
926 |
|
|
|
1,785 |
|
|
|
1,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,298 |
|
|
|
1,947 |
|
|
|
4,472 |
|
|
|
3,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income (loss) |
|
|
828 |
|
|
|
(256 |
) |
|
|
1,505 |
|
|
|
(278 |
) |
Income tax provision (benefit) |
|
|
306 |
|
|
|
(103 |
) |
|
|
555 |
|
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
522 |
|
|
$ |
(153 |
) |
|
$ |
950 |
|
|
$ |
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In accordance with the new GAAP effective January 1, 2010, the Company no longer reports
securitization income, net in its income statement. |
59
U.S. Card Services
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Card billed business |
|
$ |
94.6 |
|
|
$ |
84.1 |
|
|
$ |
179.5 |
|
|
$ |
162.1 |
|
Total cards-in-force (millions) |
|
|
39.6 |
|
|
|
40.2 |
|
|
|
39.6 |
|
|
|
40.2 |
|
Basic cards-in-force (millions) |
|
|
29.5 |
|
|
|
29.8 |
|
|
|
29.5 |
|
|
|
29.8 |
|
Average basic cardmember spending (dollars) |
|
$ |
3,212 |
|
|
$ |
2,667 |
|
|
$ |
6,095 |
|
|
$ |
5,058 |
|
U.S. Consumer Travel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel sales (millions) |
|
$ |
840 |
|
|
$ |
696 |
|
|
$ |
1,575 |
|
|
$ |
1,323 |
|
Travel commissions and fees/sales |
|
|
7.9 |
% |
|
|
8.5 |
% |
|
|
7.8 |
% |
|
|
8.3 |
% |
Total segment assets |
|
$ |
82.4 |
|
|
$ |
54.1 |
|
|
$ |
82.4 |
|
|
$ |
54.1 |
|
Segment capital (millions)(a) |
|
$ |
5,997 |
|
|
$ |
5,501 |
|
|
$ |
5,997 |
|
|
$ |
5,501 |
|
Return on average segment capital(b) |
|
|
26.9 |
% |
|
|
4.9 |
% |
|
|
26.9 |
% |
|
|
4.9 |
% |
Return on average tangible segment capital(b) |
|
|
29.2 |
% |
|
|
5.2 |
% |
|
|
29.2 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
17.3 |
|
|
$ |
15.9 |
|
|
$ |
17.3 |
|
|
$ |
15.9 |
|
30 days past due as a % of total |
|
|
1.5 |
% |
|
|
2.6 |
% |
|
|
1.5 |
% |
|
|
2.6 |
% |
Average receivables |
|
$ |
17.1 |
|
|
$ |
15.7 |
|
|
$ |
17.0 |
|
|
$ |
15.9 |
|
Net write-off rate |
|
|
1.6 |
% |
|
|
5.2 |
% |
|
|
1.7 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans (GAAP basis portfolio):(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
49.0 |
|
|
$ |
23.6 |
|
|
$ |
49.0 |
|
|
$ |
23.6 |
|
30 days past due loans as a % of total |
|
|
2.7 |
% |
|
|
4.4 |
% |
|
|
2.7 |
% |
|
|
4.4 |
% |
Average loans |
|
$ |
49.1 |
|
|
$ |
26.5 |
|
|
$ |
49.9 |
|
|
$ |
28.4 |
|
Net write-off rate |
|
|
6.2 |
% |
|
|
10.3 |
% |
|
|
6.7 |
% |
|
|
9.3 |
% |
Net interest income divided by average loans(d) |
|
|
9.1 |
% |
|
|
9.3 |
% |
|
|
9.4 |
% |
|
|
9.8 |
% |
Net interest yield on cardmember loans(e) |
|
|
9.3 |
% |
|
|
8.8 |
% |
|
|
9.7 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans (Managed basis portfolio):(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
49.0 |
|
|
$ |
54.0 |
|
|
$ |
49.0 |
|
|
$ |
54.0 |
|
30 days past due loans as a % of total |
|
|
2.7 |
% |
|
|
4.4 |
% |
|
|
2.7 |
% |
|
|
4.4 |
% |
Average loans |
|
$ |
49.1 |
|
|
$ |
55.1 |
|
|
$ |
49.9 |
|
|
$ |
57.2 |
|
Net write-off rate |
|
|
6.2 |
% |
|
|
10.0 |
% |
|
|
6.7 |
% |
|
|
9.2 |
% |
Net interest yield on cardmember loans(e) |
|
|
9.3 |
% |
|
|
9.7 |
% |
|
|
9.7 |
% |
|
|
10.3 |
% |
|
|
|
(a) |
|
Segment capital represents capital allocated to a segment based upon specific business
operational needs, risk measures, and regulatory capital requirements. |
|
(b) |
|
Return on average segment capital is calculated by dividing the (i) one year period segment
income ($1.5 billion and $223 million for the twelve months ended June 30, 2010 and 2009,
respectively) by the (ii) one year average segment capital ($5.7 billion and $4.6 billion for
the twelve months ended June 30, 2010 and 2009, respectively). Return on average tangible
segment capital is computed in the same manner as return on average segment capital except the
computation of average tangible segment capital excludes average goodwill and other
intangibles of $447 million and $338 million as of June 30, 2010 and 2009, respectively.
Management believes the return on average tangible segment capital is a useful measure of the
profitability of its business. |
|
(c) |
|
For periods ended on or prior to December 31, 2009, the Companys cardmember loans and
related debt performance information on a GAAP basis was referred to as the owned basis
presentation. The information presented on a GAAP basis for such periods includes only
non-securitized cardmember loans that were included in the Companys balance sheet. Effective
January 1, 2010, the Companys securitized portfolio of cardmember loans and related debt is
also consolidated on its balance sheet upon the adoption of the new GAAP. Accordingly,
beginning January 1, 2010, the GAAP basis presentation includes both securitized and
non-securitized cardmember loans. Refer to page 63 for a discussion of GAAP basis information. |
|
(d) |
|
This calculation includes elements of total interest income and total interest expense that
are not attributable to the cardmember loan portfolio, and thus is not representative of net
interest yield on cardmember loans. The calculation includes interest income and interest
expense attributable to investment securities and other interest-bearing deposits as well as
to cardmember loans, and interest expense attributable to other activities, including
cardmember receivables. |
|
(e) |
|
See below for calculations of net interest yield on cardmember loans, a non-GAAP
measure, and net interest income divided by average loans, a GAAP measure. Management
believes net interest yield on cardmember loans is useful to investors because it provides a
measure of profitability of the Companys cardmember loan portfolio. |
|
(f) |
|
For periods ended on or prior to December 31, 2009, information presented is based on the
Companys historical non-GAAP, or managed basis presentation. Unlike the GAAP basis
presentation, the information presented on a managed basis in such periods includes both the
securitized and non-securitized cardmember loans. The adoption of new GAAP on January 1,
2010 resulted in accounting for both the Companys securitized and non-securitized cardmember
loans in the Consolidated Financial Statements. As a result, the Companys 2010 GAAP
presentations and managed basis presentations prior to 2010 are generally comparable. Refer
to page 63 for a discussion of managed basis information. |
60
U.S. Card Services
Selected Statistical Information
(continued)
Calculation of net interest yield on cardmember loans(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions, except percentages or where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Calculation based on 2010 and 2009 GAAP
information:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
1,111 |
|
|
$ |
612 |
|
|
$ |
2,332 |
|
|
$ |
1,378 |
|
Average loans (billions) |
|
$ |
49.1 |
|
|
$ |
26.5 |
|
|
$ |
49.9 |
|
|
$ |
28.4 |
|
Adjusted net interest income(c) |
|
$ |
1,145 |
|
|
$ |
581 |
|
|
$ |
2,391 |
|
|
$ |
1,356 |
|
Adjusted average loans (billions)(d) |
|
$ |
49.2 |
|
|
$ |
26.6 |
|
|
$ |
49.9 |
|
|
$ |
28.5 |
|
Net interest income divided by average loans |
|
|
9.1 |
% |
|
|
9.3 |
% |
|
|
9.4 |
% |
|
|
9.8 |
% |
Net interest yield on cardmember loans(e) |
|
|
9.3 |
% |
|
|
8.8 |
% |
|
|
9.7 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation based on 2010 and 2009 managed
information:(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(g) |
|
$ |
1,111 |
|
|
$ |
1,335 |
|
|
$ |
2,332 |
|
|
$ |
2,904 |
|
Average loans (billions) |
|
$ |
49.1 |
|
|
$ |
55.1 |
|
|
$ |
49.9 |
|
|
$ |
57.2 |
|
Adjusted net interest income(c) |
|
$ |
1,145 |
|
|
$ |
1,343 |
|
|
$ |
2,391 |
|
|
$ |
2,935 |
|
Adjusted average loans (billions)(d) |
|
$ |
49.2 |
|
|
$ |
55.2 |
|
|
$ |
49.9 |
|
|
$ |
57.3 |
|
Net interest yield on cardmember loans(e) |
|
|
9.3 |
% |
|
|
9.7 |
% |
|
|
9.7 |
% |
|
|
10.3 |
% |
|
|
|
(a) |
|
Beginning in the first quarter of 2010, the Company changed the manner in which it allocates
capital and related interest expense to its reportable operating segments to more accurately
reflect the funding and capital characteristics of its segments. The change to interest
allocation impacted the consolidated net interest yield on cardmember loans. Accordingly, the
net interest yields for periods prior to the first quarter of 2010 have been revised for this
change. |
|
(b) |
|
For periods ended on or prior to December 31, 2009, the Companys cardmember loans and
related debt performance information on a GAAP basis was referred to as the owned basis
presentation. The information presented on a GAAP basis for such periods includes only
non-securitized cardmember loans that were included in the Companys balance sheet. Effective
January 1, 2010, the Companys securitized portfolio of cardmember loans and related debt is
also consolidated on its balance sheet upon the adoption of the new GAAP. Accordingly,
beginning January 1, 2010, the GAAP basis presentation includes both securitized and
non-securitized cardmember loans. Refer to page 63 for a discussion of GAAP basis
information. |
|
(c) |
|
Represents net interest income allocated to the Companys cardmember loans portfolio on a
GAAP or managed basis, as applicable, in each case excluding the impact of card fees on loans
and balance transfer fees attributable to the Companys cardmember loans. |
|
(d) |
|
Represents average cardmember loans on a GAAP or managed portfolio basis, as applicable, in
each case excluding the impact of deferred card fees, net of deferred direct acquisition costs
of cardmember loans. |
|
(e) |
|
Net interest yield on cardmember loans is a non-GAAP financial measure that represents the
net spread earned on cardmember loans. Net interest yield on cardmember loans 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 includes interest that is
deemed uncollectible. For all presentations of net interest yield on cardmember loans,
reserves and net write-offs related to uncollectible interest are recorded through provisions
for losses cardmember loans; therefore, such reserves and net write-offs are not included in
the net interest yield calculation. |
|
(f) |
|
For periods ended on or prior to December 31, 2009, information presented is based on the
Companys historical non-GAAP, or managed basis presentation. Unlike the GAAP basis
presentation, the information presented on a managed basis in such periods includes both the
securitized and non-securitized cardmember loans. The adoption of new GAAP on January 1, 2010
resulted in accounting for both the Companys securitized and non-securitized cardmember loans
in the Consolidated Financial Statements. As a result, the Companys 2010 GAAP presentations
and managed basis presentations prior to 2010 are generally comparable. Refer to page 63 for
a discussion of managed basis information. |
|
(g) |
|
For periods ended on or prior to December 31, 2009, the information presented includes the
adjustments to the GAAP owned basis presentation for such periods attributable to
securitization activity for interest income and interest expense to arrive at the non-GAAP
managed basis information, which adjustments are set forth under the U.S. Card Services
managed basis presentation on page 63. |
61
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
The following discussion of U.S. Card Services segment results of operations is presented on a
GAAP basis.
U.S. Card Services reported segment income of $522 million for the three months ended June 30,
2010, a $675 million increase from a loss of $153 million for the same period a year ago. For the
six months ended June 30, 2010, U.S. Card Services reported segment income of $950 million, a $1.1
billion increase from a loss of $160 million for the same period a year ago.
Total revenues net of interest expense increased $764 million or 27 percent to $3.6 billion for the
three months ended June 30, 2010 and $1.2 billion or 20 percent to $7.2 billion for the six months
ended June 30, 2010, driven primarily by the increase in interest income, discount revenue, net card
fees and other offset by the increase in interest expense.
Discount revenue, net card fees and other was $2.5 billion for the three months ended June 30,
2010, an increase of $263 million or 12 percent from $2.3 billion for the same periods a year ago.
The increase is primarily due to a 12 percent increase in billed business. This line also reflects
higher other commissions and fees driven by the new GAAP effective January 1, 2010, which led to
the inclusion of fees formerly recorded in securitization income, net, within discount revenue, net
card fees and other and higher travel revenues, partially offset by lower commissions and fees and
decreased net card fees. Discount revenue, net card fees and other increased $385 million or 9
percent to $4.9 billion for the six months ended June 30, 2010, due to higher discount revenue and
other commissions and fees partially offset by the impact of the new GAAP effective January 1, 2010
and lower net card fees.
Interest income of $1.3 billion and $2.7 billion for the three and six months ended June 30, 2010,
respectively, increased $557 million or 73 percent and $1.0 billion or 62 percent, respectively,
due to the first quarter 2010 consolidation of securitized cardmember loans, partially offset by a
lower average balance of non-securitized cardmember loans and a reduction in loan portfolio yield.
Interest expense of $204 million and $394 million for the three and six months ended June 30, 2010,
respectively, increased $58 million or 40 percent and increased $86 million or 28 percent,
respectively, as compared to a year ago, reflecting higher expense related to the first quarter
2010 consolidation of off-balance sheet debt.
Provisions for losses of $519 million decreased $671 million or 56 percent for the three months
ended June 30, 2010, principally reflecting improving cardmember loan and charge card credit trends
and a lower average balance of non-securitized loans, partially offset by the inclusion of
write-offs on the securitized cardmember loans. Provisions for losses of $1.2 billion decreased
$1.4 billion or 53 percent for the six months ended June 30, 2010, primarily driven by improved
credit performance but partially offset by the effect of the new GAAP, effective January 1, 2010.
Expenses were $2.3 billion, an increase of $351 million
or 18 percent for the three months ended June 30, 2010 due to increased marketing, promotion, rewards and cardmember services
expenses, as salaries and employee benefits and other operating expenses were relatively flat year
over year. Expenses were $4.5 billion, an increase of $784 million or 21 percent, for the six
months ended June 30, 2010 due to increased marketing, promotion, rewards and cardmember services
expenses, as salaries and employee benefits and other operating expenses were relatively flat year
over year.
Marketing, promotion, rewards and cardmember services expenses of $1.4 billion and $2.7 billion for
the three and six months ended June 30, 2010, respectively, increased $365 million or 36 percent
and $777 million or 41 percent, respectively, reflecting increased marketing and promotion expense
and higher rewards costs.
62
Salaries and employee benefits and other operating expenses were $912 million for the three months
ended June 30, 2010, a decrease of $14 million or 2 percent, reflecting higher net charges during
the second quarter of 2009 related to reengineering, a benefit in the second quarter of 2010 versus
a charge in the year ago period related to hedging the Companys fixed-rate debt and higher FDIC
assessments in the second quarter of 2009. Salaries and employee benefits and other operating
expense of $1.8 billion for the six months ended June 30, 2010, remained flat compared to same
period a year ago with higher technology charges offset by a benefit related to hedging the
Companys fixed-rated debt, lower salaries and benefits, and professional services.
The effective tax rate was 37 percent for both the three and six months ended June 30, 2010. The
effective tax rate was (40) percent and (42) percent for the three and six months ended June 30,
2009. The effective rate in the three and six months ended June 30, 2009 reflects the impact of
recurring tax benefits on a pretax loss.
Cardmember Loan Portfolio Presentation
For periods ended on or prior to December 31, 2009, the Companys non-securitized cardmember loan
and related debt performance information on a GAAP basis was referred to as the owned basis
presentation. For such periods, the Company also provided information on a non-GAAP managed
basis. Unlike the GAAP basis presentation, the managed basis presentation in such periods assumed
there had been no off-balance sheet securitizations for the Companys U.S. Card Services segment
(the Company has not securitized its international cardmember loans), resulting in the inclusion of
all securitized and non-securitized cardmember loans and related debt in the Companys performance
information.
Under the GAAP basis presentation prior to securitization for the period ended on or prior to
December 31, 2009, revenues and expenses from cardmember loans and related debt were reflected in
the Companys income statements in other commissions and fees, net interest income and provisions
for losses for cardmember loans. At the time of a securitization transaction, the securitized
cardmember loans were removed from the Companys balance sheet, and the resulting gain on sale was
reflected in securitization income, net, as well as a reduction to the provision for losses (credit
reserves were no longer recorded for the cardmember loans once sold). Over the life of a
securitization transaction, the Company recognized the net cash flow from interest and fee
collections on interests sold to investors (the investors interests) after deducting interest paid
on the investors certificates, credit losses, contractual service fees, other expenses and changes
in the fair value of the interest-only strip (referred to as excess spread). These amounts, in
addition to servicing fees and the non-credit components of the gains/(losses) from securitization
activities were reflected in securitization income, net. The Company also recognized interest
income over the life of the securitization transaction related to the interest it retained (i.e.,
the sellers interest). At the maturity of a securitization transaction, cardmember loans on the
balance sheet increased, and the impact of the incremental required loss reserves was recorded in
provisions for losses.
Under the managed basis presentation for periods ended on or prior to December 31, 2009, revenues
and expenses related to securitized cardmember loans and related debt were reflected in other
commissions and fees (included in discount revenue, net card fees and other), interest income,
interest expense and provisions for losses. In addition, there was no securitization income, net
as this presentation assumed no securitization transactions had occurred.
63
Historically, the Company included USCS information on a managed basis, as that was the manner in
which the Companys management viewed and managed the business. Management believed that a full
picture of trends in the Companys cardmember loans business could only be derived by evaluating
the performance of both securitized and non-securitized cardmember loans, as the presentation of
the entire cardmember loan portfolio was more representative of the economics of the aggregate
cardmember relationships and ongoing business performance and related trends over time. The
managed basis
presentation also provided investors a more comprehensive assessment of the information necessary
for the Company and investors to evaluate the Companys market share.
The adoption of new GAAP on January 1, 2010 resulted in accounting for both the Companys
securitized and non-securitized Cardmember loans in the consolidated financial statements. As a
result, the Companys 2010 GAAP presentations and managed basis presentations prior to 2010 are
generally comparable.
For additional information on the differences between the Companys historical GAAP and managed
basis presentations, see the Companys Financial Review included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2009.
64
The following table sets forth cardmember loan portfolio financial information for the three and
six months ended June 30, 2010. The June 30, 2010 financial information was determined in
accordance with the new GAAP effective January 1, 2010. The June 30, 2009 information includes the
owned (GAAP) basis presentation, together with the adjustments for securitization activity to
arrive at the managed (non-GAAP) basis presentation. For additional information, see Cardmember
Loan Portfolio Presentation above:
U.S. Card Services
Selected Financial Information
Managed Basis Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP) |
|
$ |
2,534 |
|
|
$ |
2,271 |
|
|
$ |
4,851 |
|
|
$ |
4,466 |
|
Securitization adjustments |
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discount revenue, net card fees and other |
|
$ |
2,534 |
|
|
$ |
2,350 |
|
|
$ |
4,851 |
|
|
$ |
4,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP) |
|
$ |
1,315 |
|
|
$ |
758 |
|
|
$ |
2,726 |
|
|
$ |
1,686 |
|
Securitization adjustments |
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
1,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
1,315 |
|
|
$ |
1,529 |
|
|
$ |
2,726 |
|
|
$ |
3,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization income, net:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP) |
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
139 |
|
Securitization adjustments |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitization income, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP) |
|
$ |
204 |
|
|
$ |
146 |
|
|
$ |
394 |
|
|
$ |
308 |
|
Securitization adjustments |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
204 |
|
|
$ |
194 |
|
|
$ |
394 |
|
|
$ |
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported for the period (GAAP) |
|
$ |
519 |
|
|
$ |
1,190 |
|
|
$ |
1,206 |
|
|
$ |
2,573 |
|
Securitization adjustments |
|
|
|
|
|
|
836 |
(b) |
|
|
|
|
|
|
1,472 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provisions for losses |
|
$ |
519 |
|
|
$ |
2,026 |
|
|
$ |
1,206 |
|
|
$ |
4,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In accordance with the new GAAP effective January 1, 2010, the Company no longer reports
securitization income, net in its income statement. |
|
(b) |
|
Includes provisions for losses for off-balance sheet cardmember loans based on the same
methodology as applied to on-balance sheet cardmember loans, except that any quarterly
adjustment to reserve levels for on-balance sheet loans to address external environmental
factors was not applied to adjust the provision expense for the securitized portfolio. |
65
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009 Managed Basis
The following discussion of U.S. Card Services is on a managed basis.
Discount revenue, net card fees and other increased $184 million or 8 percent and $207 million or 4
percent as compared to the same period a year ago to $2.5 billion and $4.9 billion for the three
and six months ended June 30, 2010, respectively, reflecting higher billed business volumes and
increased travel revenues partially offset by lower commissions and fees and decreased net card
fees.
Interest income for the three months ended June 30, 2010 decreased $214 million or 14 percent to
$1.3 billion, due to a decline of 11 percent in the average managed loan portfolio balance and a
lower portfolio yield. The lower yield was driven by higher payment rates, lower revolving levels
and the CARD Act, partially offset by repricing initiatives. Interest income for the six months
ended June 30, 2010, decreased $617 million or 18 percent to $2.7 billion primarily due to 13
percent decline in the average managed loan balances and a lower portfolio yield as compared to a
year ago.
Interest expense increased $10 million or 5 percent as compared to a year ago to $204 million for
the three months ended June 30, 2010 due to higher cost of funds, partially offset by reduced
funding requirements due to a lower average cardmember loan balance. Interest expense decreased $45
million or 10 percent as compared to the same period a year ago to $394 million for the six months
ended June 30, 2010, primarily due to lower average cardmember loan balances.
Provisions for losses decreased $1.5 billion or 74 percent to $519 million for the three months
ended June 30, 2010, principally due to improving cardmember lending and charge card credit
performance and a lower average loan balance. Provisions for losses decreased $2.8 billion or 70
percent to $1.2 billion for the six months ended 2010, principally due to improving cardmember loan
and charge card credit performance and a lower average loan balance.
66
International Card Services
Selected Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other |
|
$ |
865 |
|
|
$ |
838 |
|
|
$ |
1,747 |
|
|
$ |
1,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
342 |
|
|
|
376 |
|
|
|
705 |
|
|
|
741 |
|
Interest expense |
|
|
99 |
|
|
|
101 |
|
|
|
205 |
|
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
243 |
|
|
|
275 |
|
|
|
500 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense |
|
|
1,108 |
|
|
|
1,113 |
|
|
|
2,247 |
|
|
|
2,157 |
|
Provisions for losses |
|
|
90 |
|
|
|
302 |
|
|
|
248 |
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense after provisions for losses |
|
|
1,018 |
|
|
|
811 |
|
|
|
1,999 |
|
|
|
1,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services |
|
|
376 |
|
|
|
287 |
|
|
|
726 |
|
|
|
545 |
|
Salaries and employee benefits and other operating expenses |
|
|
441 |
|
|
|
453 |
|
|
|
888 |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
817 |
|
|
|
740 |
|
|
|
1,614 |
|
|
|
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income |
|
|
201 |
|
|
|
71 |
|
|
|
385 |
|
|
|
100 |
|
Income tax provision (benefit) |
|
|
41 |
|
|
|
(7 |
) |
|
|
74 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
160 |
|
|
$ |
78 |
|
|
$ |
311 |
|
|
$ |
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
International Card Services
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Card billed business |
|
$ |
25.5 |
|
|
$ |
22.7 |
|
|
$ |
49.9 |
|
|
$ |
43.2 |
|
Total cards-in-force (millions) |
|
|
15.0 |
|
|
|
15.5 |
|
|
|
15.0 |
|
|
|
15.5 |
|
Basic cards-in-force (millions) |
|
|
10.4 |
|
|
|
10.8 |
|
|
|
10.4 |
|
|
|
10.8 |
|
Average basic cardmember spending (dollars) |
|
$ |
2,449 |
|
|
$ |
2,083 |
|
|
$ |
4,789 |
|
|
$ |
3,897 |
|
International Consumer Travel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel sales (millions) |
|
$ |
262 |
|
|
$ |
231 |
|
|
$ |
523 |
|
|
$ |
449 |
|
Travel commissions and fees/sales |
|
|
8.0 |
% |
|
|
8.7 |
% |
|
|
7.6 |
% |
|
|
8.5 |
% |
Total segment assets |
|
$ |
20.0 |
|
|
$ |
19.5 |
|
|
$ |
20.0 |
|
|
$ |
19.5 |
|
Segment capital (millions)(a) |
|
$ |
2,022 |
|
|
$ |
2,215 |
|
|
$ |
2,022 |
|
|
$ |
2,215 |
|
Return on average segment capital(b) |
|
|
23.6 |
% |
|
|
9.8 |
% |
|
|
23.6 |
% |
|
|
9.8 |
% |
Return on average tangible segment capital(b) |
|
|
31.8 |
% |
|
|
13.0 |
% |
|
|
31.8 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
5.6 |
|
|
$ |
5.4 |
|
|
$ |
5.6 |
|
|
$ |
5.4 |
|
90 days past billing as a % of total(c) |
|
|
1.0 |
% |
|
|
3.0 |
% |
|
|
1.0 |
% |
|
|
3.0 |
% |
Net loss ratio (as a % of charge volume)(c)(d) |
|
|
0.15 |
% |
|
|
0.36 |
% |
|
|
0.34 |
% |
|
|
0.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
8.3 |
|
|
$ |
8.9 |
|
|
$ |
8.3 |
|
|
$ |
8.9 |
|
30 days past due loans as a % of total |
|
|
3.0 |
% |
|
|
4.0 |
% |
|
|
3.0 |
% |
|
|
4.0 |
% |
Average loans |
|
$ |
8.3 |
|
|
$ |
8.7 |
|
|
$ |
8.6 |
|
|
$ |
8.8 |
|
Net write-off rate |
|
|
4.9 |
% |
|
|
7.5 |
% |
|
|
5.2 |
% |
|
|
6.9 |
% |
Net interest income divided by average loans(e) |
|
|
11.7 |
% |
|
|
12.7 |
% |
|
|
11.7 |
% |
|
|
12.2 |
% |
Net interest yield on cardmember loans(f) |
|
|
11.4 |
% |
|
|
12.5 |
% |
|
|
11.5 |
% |
|
|
12.3 |
% |
|
|
|
(a) |
|
Segment capital represents capital allocated to a segment based upon specific business
operational needs, risk measures, and regulatory capital requirements. |
|
(b) |
|
Return on average segment capital is calculated by dividing the (i) one year period segment
income ($513 million and $219 million for the twelve months ended June 30, 2010 and 2009,
respectively) by the (ii) one year average segment capital ($2.2 billion and $2.2 billion for
the twelve months ended June 30, 2010 and 2009, respectively). Return on average tangible
segment capital is computed in the same manner as return on average segment capital except the
computation of average tangible segment capital excludes average goodwill and other
intangibles of $561 million and $546 million as of June 30, 2010 and 2009,
respectively. Management believes the return on average tangible segment capital is a useful measure of the
profitability of its business. |
|
(c) |
|
Effective January 1, 2010, the Company revised the time period in which past due cardmember
receivables in International Card Services are written off when they are 180 days past due or
earlier, consistent with applicable bank regulatory guidance and the write-off methodology
adopted for U.S. Card Services in the fourth quarter of 2008. Previously, receivables were
written off when they were 360 days past billing or earlier. Therefore, the net write-offs for
the first quarter of 2010 include net write-offs of approximately $60 million for
International Card Services resulting from this write-off methodology change, which increased
the net loss ratio and decreased the 90 days past billing metric for this segment, but did not
have a substantial impact on provisions for losses. |
|
(d) |
|
Beginning with the first quarter of 2010, the Company has revised the net loss ratio to
exclude write-offs related to unauthorized transactions, consistent with the methodology for
calculation of the net write-off rate for U.S. Card Services. The metrics for prior periods
have not been revised for this change as it was deemed immaterial. |
|
(e) |
|
This calculation includes elements of total interest income and total interest expense that
are not attributable to the cardmember loan portfolio, and thus is not representative of net
interest yield on cardmember loans. The calculation includes interest income and interest
expense attributable to investment securities and other interest-bearing deposits as well as
to cardmember loans, and interest expense attributable to other activities, including
cardmember receivables. |
|
(f) |
|
See below for calculations of net interest yield on cardmember loans, a non-GAAP measure,
and the ratio of net interest income divided by average loans, a GAAP measure. Management
believes net interest yield on cardmember loans is useful to investors because it provides a
measure of profitability of the Companys cardmember loans portfolio. |
68
International Card Services
Selected Statistical Information
(continued)
Calculation of net interest yield on cardmember loans(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions, except for percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net interest income |
|
$ |
243 |
|
|
$ |
275 |
|
|
$ |
500 |
|
|
$ |
532 |
|
Average loans (billions) |
|
$ |
8.3 |
|
|
$ |
8.7 |
|
|
$ |
8.6 |
|
|
$ |
8.8 |
|
Adjusted net interest income(b) |
|
$ |
234 |
|
|
$ |
274 |
|
|
$ |
487 |
|
|
$ |
539 |
|
Adjusted average loans (billions)(c) |
|
$ |
8.2 |
|
|
$ |
8.8 |
|
|
$ |
8.5 |
|
|
$ |
8.8 |
|
Net interest income divided by average loans |
|
|
11.7 |
% |
|
|
12.7 |
% |
|
|
11.7 |
% |
|
|
12.2 |
% |
Net interest yield on cardmember loans(d) |
|
|
11.4 |
% |
|
|
12.5 |
% |
|
|
11.5 |
% |
|
|
12.3 |
% |
|
|
|
(a) |
|
Beginning in the first quarter of 2010, the Company changed the manner in which it allocates
capital and related interest expense to its reportable operating segments to more accurately
reflect the funding and capital characteristics of its segments. The change to interest
allocation impacted the consolidated net interest yield on cardmember loans. Accordingly, the
net interest yields for periods prior to the first quarter of 2010 have been revised for this
change. |
|
(b) |
|
Represents net interest income allocated to the Companys cardmember loans portfolio,
excluding the impact of card fees on loans and balance transfer fees attributable to the
Companys cardmember loans. |
|
(c) |
|
Represents average cardmember loans excluding the impact of deferred card fees, net of
deferred direct acquisition costs of cardmember loans. |
|
(d) |
|
Net interest yield on cardmember loans is a non-GAAP financial measure that represents the
net spread earned on cardmember loans. Net interest yield on cardmember loans 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 includes interest that is
deemed uncollectible. For all net interest yield presentations, reserves and net write-offs
related to uncollectible interest are recorded through provisions for losses cardmember
loans; therefore, such reserves and net write-offs are not included in the net interest yield
calculation. |
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
International Card Services segment income increased more than 100 percent or $82 million to $160
million for the three months ended June 30, 2010, from $78 million for the same period a year ago
as total revenues net of interest expense remained flat, provisions for losses decreased 70 percent
and expenses increased by 10 percent. For the six months ended June 30, 2010, International Card
Services reported segment income of $311 million, a $181 million or more than 100 percent increase
from $130 million for the same period a year ago. Both the revenue and expense comparisons were
influenced by the translation impact of a weaker dollar during the second quarter of 2010.
Total revenues net of interest expense increased $90 million or 4 percent to $2.2 billion for the
six months ended June 30, 2010. The year over year increase is primarily due to increased discount
revenue, other commissions and fees, net card fees and lower interest expense, partially offset by
lower interest income. Total revenues net of interest expense remained flat for the three months
ended June 30, 2010.
Discount revenue, net card fees and other revenues of $865 million and $1.7 billion for three and
six months ended June 30, 2010, respectively, increased $27 million or 3 percent and $122
million or 8 percent, driven primarily by the higher level of card spending, higher other
commissions and fees, increased net card fees and slightly greater travel commissions and
fees, partially offset by lower other revenues. The 12 percent and 16 percent increase in
billed business for the three and six months ended June 30, 2010, respectively, reflects an 18
percent and 23 percent increase in average spending per proprietary basic cards-in-force
partially offset by a 4 percent decrease in basic cards-in-force, when compared to the prior
year.
69
For the three and six months ended June 30, 2010, assuming no changes in foreign currency
exchange rates, billed business increased 9 percent and 7 percent, respectively, and average
spending per proprietary basic
cards-in-force increased 14 percent, respectively. Billed business outside the United States
increased 15 percent in Latin America, 10 percent in Asia Pacific, 7 percent in Canada and 7
percent in Europe for the three months ended June 30, 2010, and 13 percent in Latin America, 8
percent in Asia Pacific, 6 percent in Canada and 6 percent in Europe for the six months ended June
30, 2010.
Interest income of $342 million and $705 million for the three and six months ended June 30, 2010,
respectively, declined $34 million or 9 percent and $36 million or 5 percent as compared to
the same periods a year ago, as a lower yield on cardmember loans and a lower average loan
balance were partially offset by higher lending card fees.
Interest expense decreased $2 million or 2 percent and $4 million or 2 percent for the three and
six months ended June 30, 2010, due to a lower average loan balance, partially offset by a
higher average receivable balance.
Provisions for losses of $90 million and $248 million decreased $212 million or 70 percent and $389
million or 61 percent for the three and six months ended June 30, 2010, respectively, primarily
reflecting improving cardmember loans and charge card credit trends.
Expenses of $817 million and $1.6 billion increased $77 million or 10 percent and $194 million or
14 percent for the three and six months ended June 30, 2010, respectively, due to higher marketing,
promotion, rewards and cardmember services costs.
Marketing, promotion, rewards and cardmember services expenses of $376 million and $726 million for
the three and six months ended June 30, 2010, respectively, increased $89 million or 31 percent and
$181 million or 33 percent as compared to the same periods a year ago, reflecting higher marketing
and promotion expenses and greater rewards costs.
Salaries and employee benefits and other operating expenses decreased $12 million or 3 percent to
$441 million for the three months ended June 30, 2010 reflecting lower salaries and employee benefits,
partially offset by higher professional services expenses. Salaries and employee benefits and other
operating expenses increased $13 million or 1 percent to $888 million for the six months ended June
30, 2010 driven by higher professional services expenses, partially offset by lower salaries and
employee benefits.
The effective tax rate was 20 percent and 19 percent for the three and six months ended June 30,
2010, respectively. The effective tax rate was (10) percent and (30) percent for the three and six
months ended June 30, 2009, respectively. The tax rates in all periods reflect the impact of recurring tax
benefits on varying levels of pretax income. As indicated in previous quarters, this segment
reflects the favorable impact of the Companys consolidated tax benefit related to its ongoing
funding activities outside the United States, which is allocated to International Card Services
under the Companys internal tax allocation process. The availability of this benefit in future
years is largely dependent on a provision of the U.S. Internal Revenue Code that Congress has not
yet acted to extend. Refer to Certain Legislative, Regulatory and Other Developments above for
further discussion of this provision.
70
Global Commercial Services
Selected Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, net card fees and other |
|
$ |
1,138 |
|
|
$ |
1,039 |
|
|
$ |
2,207 |
|
|
$ |
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Interest expense |
|
|
56 |
|
|
|
43 |
|
|
|
104 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
(54 |
) |
|
|
(41 |
) |
|
|
(101 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense |
|
|
1,084 |
|
|
|
998 |
|
|
|
2,106 |
|
|
|
1,936 |
|
Provisions for losses |
|
|
28 |
|
|
|
53 |
|
|
|
106 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense after provisions for losses |
|
|
1,056 |
|
|
|
945 |
|
|
|
2,000 |
|
|
|
1,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, promotion, rewards and cardmember services |
|
|
107 |
|
|
|
74 |
|
|
|
220 |
|
|
|
153 |
|
Salaries and employee benefits and other operating expenses |
|
|
709 |
|
|
|
777 |
|
|
|
1,404 |
|
|
|
1,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
816 |
|
|
|
851 |
|
|
|
1,624 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income |
|
|
240 |
|
|
|
94 |
|
|
|
376 |
|
|
|
216 |
|
Income tax provision |
|
|
123 |
|
|
|
27 |
|
|
|
167 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
117 |
|
|
$ |
67 |
|
|
$ |
209 |
|
|
$ |
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Global Commercial Services
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Card billed business |
|
$ |
32.9 |
|
|
$ |
27.2 |
|
|
$ |
63.7 |
|
|
$ |
52.3 |
|
Total cards-in-force (millions) |
|
|
7.0 |
|
|
|
7.2 |
|
|
|
7.0 |
|
|
|
7.2 |
|
Basic cards-in-force (millions) |
|
|
7.0 |
|
|
|
7.2 |
|
|
|
7.0 |
|
|
|
7.2 |
|
Average basic cardmember spending (dollars) |
|
$ |
4,712 |
|
|
$ |
3,746 |
|
|
$ |
9,110 |
|
|
$ |
7,278 |
|
Global Corporate Travel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel sales |
|
$ |
4.6 |
|
|
$ |
3.6 |
|
|
$ |
8.7 |
|
|
$ |
7.0 |
|
Travel commissions and fees/sales |
|
|
7.6 |
% |
|
|
9.1 |
% |
|
|
7.5 |
% |
|
|
8.8 |
% |
Total segment assets |
|
$ |
23.5 |
|
|
$ |
21.2 |
|
|
$ |
23.5 |
|
|
$ |
21.2 |
|
Segment capital (millions)(a) |
|
$ |
3,509 |
|
|
$ |
3,553 |
|
|
$ |
3,509 |
|
|
$ |
3,553 |
|
Return on average segment capital(b) |
|
|
11.5 |
% |
|
|
7.0 |
% |
|
|
11.5 |
% |
|
|
7.0 |
% |
Return on average tangible segment capital(b) |
|
|
25.0 |
% |
|
|
15.1 |
% |
|
|
25.0 |
% |
|
|
15.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardmember receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
$ |
11.5 |
|
|
$ |
9.9 |
|
|
$ |
11.5 |
|
|
$ |
9.9 |
|
90 days past billing as a % of total(c) |
|
|
1.0 |
% |
|
|
1.9 |
% |
|
|
1.0 |
% |
|
|
1.9 |
% |
Net loss ratio (as a % of charge volume)(c) (d) |
|
|
0.06 |
% |
|
|
0.22 |
% |
|
|
0.17 |
% |
|
|
0.20 |
% |
|
|
|
(a) |
|
Segment capital represents capital allocated to a segment based upon specific business
operational needs, risk measures, and regulatory capital requirements. |
|
(b) |
|
Return on average segment capital is calculated by dividing the (i) one year period
segment income ($411 million and $250 million for the twelve months ended June 30, 2010 and
2009, respectively) by the (ii) one year average segment capital ($3.6 billion and $3.6
billion for the twelve months ended June 30, 2010 and 2009, respectively). Return on
average tangible segment capital is computed in the same manner as return on average
segment capital except the computation of average tangible segment capital excludes average
goodwill and other intangibles of $1.9 billion as of June 30, 2010 and 2009, respectively.
Management believes the return on average tangible segment capital is a useful measure of
the profitability of its business. |
|
(c) |
|
Effective January 1, 2010, the Company revised the time period in which past due
cardmember receivables in Global Commercial Services are written off when they are 180 days
past due or earlier, consistent with applicable bank regulatory guidance and the write-off
methodology adopted for U.S. Card Services in the fourth quarter of 2008. Previously,
receivables were written off when they were 360 days past billing or earlier. Therefore,
the net write-offs for the first quarter of 2010 include net write-offs of approximately
$48 million for Global Commercial Services resulting from this write-off methodology
change, which increased the net loss ratio and decreased the 90 days past billing metric
for this segment, but did not have a substantial impact on provisions for losses. |
|
(d) |
|
Beginning with the first quarter of 2010, the Company has revised the net loss ratio to
exclude net write-offs related to unauthorized transactions, consistent with the
methodology for calculation of the net write-off rate for U.S. Card Services. The metrics
for prior periods have not been revised for this change as it was deemed immaterial. |
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
Global Commercial Services reported segment income of $117 million and $209 million for the
three and six months ended June 30, 2010, an increase of $50 million or 75 percent and $61
million or 41 percent, respectively, compared to the same period a year ago.
Total revenues net of interest expense increased $86 million or 9 percent and $170 million or 9
percent for the three and six months ended June 30, 2010, to $1.1 billion and $2.1 billion,
respectively, due to increased discount revenue, net card fees and other, partially offset by
higher interest expense.
72
Discount revenue, net card fees and other revenues of $1.1 billion for the three months ended
June 30, 2010, increased $99 million or 10 percent due to the increased level of card spending,
greater travel commissions and fees and higher net card fees, other commissions and fees and
other revenues. The 21 percent increase in billed business reflects a 26 percent increase in
average spending per proprietary
basic card, partially offset by a 3 percent decrease in basic cards-in-force. For the six months
ended June 30, 2010, discount revenue, net card fees and other revenues of $2.2 billion
increased $186 million or 9 percent over the same period a year ago, driven primarily by the
increased level of card spending, higher travel commissions and fees and higher net card fees,
partially offset by decreased other revenues and reduced other commissions and fees. The 22
percent increase in billed business reflects a 25 percent increase in average spending per
proprietary basic card, partially offset by a 3 percent decrease in basic cards-in-force.
Interest expense increased $13 million or 30 percent to $56 million for the three months ended
June 30, 2010, driven by increased funding requirements due to a higher average receivable
balance and a higher cost of funds, primarily in the United States. For the six months ended
June 30, 2010 interest expense increased $16 million or 18 percent to $104 million, driven by
increased funding requirements due to a higher average receivable balance, partially offset by
lower cost of funds, primarily in the United States.
Provision for losses decreased $25 million or 47 percent to $28 million for the three months
ended June 30, 2010, driven by improved credit performance within the underlying portfolio,
partially offset by higher receivable levels. For the six months ended June 30, 2010, provision
for losses increased $6 million or 6 percent to $106 million, driven by higher receivable
levels, partially offset by improved credit performance within the underlying portfolio.
Expenses were $816 million for the three months ended June 30, 2010, a decrease of $35 million
or 4 percent, due to a decrease in salaries and employee benefits and other operating expenses,
partially offset by increased marketing, promotion, rewards and cardmember services expenses.
For the six months ended June 30, 2010, expenses were $1.6 billion, reflecting an increase of $4
million, mainly due to increased marketing, promotion, rewards and cardmember services expenses,
partially offset by a decrease in salaries and employee benefits and other operating expenses.
Marketing, promotion, rewards and cardmember services expenses increased $33 million or 45
percent and $67 million or 44 percent to $107 million and $220 million, respectively, for the
three and six months ended June 30, 2010, primarily reflecting higher reward costs and marketing
and promotion expenses.
Salaries and employee benefits and other operating expenses decreased $68 million or 9 percent
and $63 million or 4 percent to $709 million and $1.4 billion, respectively, for the three and
six months ended June 30, 2010, primarily due to net reengineering charges during the second
quarter of 2009 and the accounting benefit related to hedging the Companys fixed-rate debt.
The
effective tax rate was 51 percent and 44 percent for the
three and six months ended June 30, 2010, respectively, and reflects the impact of a $44 million valuation allowance related to
deferred tax assets associated with certain of the Companys non-U.S. travel operations recorded
in the second quarter. The effective tax rate was 29 and 32 percent for the three and six months
ended June 30, 2009.
73
Global Network & Merchant Services
Selected Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount revenue, fees and other |
|
$ |
1,021 |
|
|
$ |
872 |
|
|
$ |
1,970 |
|
|
$ |
1,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Interest expense |
|
|
(46 |
) |
|
|
(44 |
) |
|
|
(93 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
47 |
|
|
|
44 |
|
|
|
95 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense |
|
|
1,068 |
|
|
|
916 |
|
|
|
2,065 |
|
|
|
1,773 |
|
Provisions for losses |
|
|
12 |
|
|
|
33 |
|
|
|
33 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues net of interest expense after provisions for
losses |
|
|
1,056 |
|
|
|
883 |
|
|
|
2,032 |
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and promotion |
|
|
209 |
|
|
|
94 |
|
|
|
375 |
|
|
|
158 |
|
Salaries and employee benefits and other
operating expenses |
|
|
430 |
|
|
|
423 |
|
|
|
825 |
|
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
639 |
|
|
|
517 |
|
|
|
1,200 |
|
|
|
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax segment income |
|
|
417 |
|
|
|
366 |
|
|
|
832 |
|
|
|
752 |
|
Income tax provision |
|
|
148 |
|
|
|
127 |
|
|
|
296 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
269 |
|
|
$ |
239 |
|
|
$ |
536 |
|
|
$ |
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Global Network & Merchant Services
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Billions, except percentages and where indicated) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Global Card billed business(a) |
|
$ |
175.3 |
|
|
$ |
151.4 |
|
|
$ |
336.3 |
|
|
$ |
290.6 |
|
Global Network & Merchant Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
11.9 |
|
|
$ |
10.6 |
|
|
$ |
11.9 |
|
|
$ |
10.6 |
|
Segment capital (millions)(b) |
|
$ |
1,762 |
|
|
$ |
1,488 |
|
|
$ |
1,762 |
|
|
$ |
1,488 |
|
Return on average segment capital(c) |
|
|
65.2 |
% |
|
|
76.7 |
% |
|
|
65.2 |
% |
|
|
76.7 |
% |
Return on average tangible segment capital(c) |
|
|
66.8 |
% |
|
|
78.8 |
% |
|
|
66.8 |
% |
|
|
78.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Network Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card billed business |
|
$ |
21.6 |
|
|
$ |
17.0 |
|
|
$ |
41.7 |
|
|
$ |
31.8 |
|
Total cards-in-force (millions) |
|
|
27.3 |
|
|
|
25.6 |
|
|
|
27.3 |
|
|
|
25.6 |
|
|
|
|
(a) |
|
Global 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. |
|
(b) |
|
Segment capital represents capital allocated to a segment based upon specific business
operational needs, risk measures, and regulatory capital requirements. |
|
(c) |
|
Return on average segment capital is calculated by dividing the (i) one year period
segment income ($984 million and $1.0 billion for the twelve months ended June 30, 2010 and
2009, respectively) by the (ii) one year average segment capital ($1.5 billion and $1.3
billion for the twelve months ended June 30, 2010 and 2009, respectively). Return on
average tangible segment capital is computed in the same manner as return on average
segment capital except the computation of average tangible segment capital excludes average
goodwill and other intangibles of $36 million and $35 million at June 30, 2010 and 2009,
respectively. Management believes the return on average tangible segment capital is a
useful measure of the profitability of its business. |
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
Global Network & Merchant Services reported segment income of $269 million for the three months
ended June 30, 2010, a $30 million or 13 percent increase from $239 million for the same period
a year ago. For the six months ended June 30, 2010, Global Network & Merchant Services reported
segment income of $536 million, a $47 million or 10 percent increase from the same period a year
ago.
Total revenues net of interest expense increased $152 million or 17 percent and $292 million or
16 percent to $1.1 billion and $2.1 billion for the three and six months ended June 30, 2010,
respectively, due to increased discount revenue, fees and other revenues.
Discount revenue, fees and other increased $149 million or 17 percent and $291 million or 17
percent to $1.0 billion and $2.0 billion for the three and six months ended June 30, 2010,
respectively, reflecting an increase in merchant-related revenues, driven by the 16 percent
increase in global card billed business, as well as higher volume driven GNS-related revenues.
Interest expense credit increased $2 million or 5 percent and decreased $1 million or 1 percent
to a credit of $46 million and $93 million for the three and six months ended June 30, 2010,
respectively, due to a higher funding-driven interest credit related to internal transfer
pricing, which recognizes the merchant services accounts payable-related funding benefit.
Provisions for losses decreased $21 million or 64 percent and $35 million or 51 percent to $12
million and $33 million for the three and six months ended June 30, 2010, respectively,
primarily due to lower merchant-related debit balances.
75
Expenses were $639 million and $1.2 billion for the three and six months ended June 30, 2010,
respectively, an increase of $122 million or 24 percent and $247 million or 26 percent,
respectively, due to increased marketing and promotion and salaries and employee benefits and
other operating expenses.
Marketing and promotion expenses increased $115 million or more than 100 percent and $217
million or more than 100 percent for the three and six months ended June 30, 2010, respectively,
reflecting higher brand, network and merchant-related marketing investments.
Salaries and employee benefits and other operating expenses increased $7 million or 2 percent
and $30 million or 4 percent for the three and six months ended June 30, 2010, respectively,
reflecting higher professional services and technology-related expenses, offset by lower
salaries and employee benefits expense.
The effective tax rate was 35 percent and 36 percent for the three and six months ended June 30,
2010, respectively. The effective tax rate was 35 percent for both the three and six months
ended June 30, 2009, respectively.
Corporate & Other
Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009
Corporate & Other reported net expense of $51 million and $104 million for the three and six
months ended June 30, 2010, respectively. Segment income for the three and six months ended
June 30, 2009 was $111 million and $178 million, respectively. The net expense for the three
months ended June 30, 2010 reflected higher incentive compensation and benefit expense compared
to prior year, partially offset by $93 million and $43 million of after-tax income related to
the MasterCard and Visa litigation settlements, respectively, and $2 million of after-tax
benefit related to the Companys reengineering efforts. The income for the three months ended
June 30, 2009, reflected $135 million of after-tax income related to the ICBC sale, $93 million
and $43 million of after-tax income related to the MasterCard and Visa litigation settlements,
respectively, and a $35 million of after-tax expense related to the Companys reengineering
initiatives.
The net expense for the six months ended June 30, 2010 reflected higher incentive compensation
and benefit expense compared to prior year, partially offset by $186 million and $86 million of
after-tax income related to the MasterCard and Visa litigation settlements, respectively, and $3
million of after-tax benefit related to the Companys reengineering efforts. The income for the
six months ended June 30, 2009 included $186 million and $86 million of after-tax income
reflected the MasterCard and Visa litigation settlements, respectively.
OTHER REPORTING MATTERS
Accounting Developments
See Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial
Statements.
76
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk to earnings or value resulting from movements in market prices. The
Companys market risk consists primarily of interest rate risk in the proprietary card-issuing
and Travelers Cheque businesses and foreign exchange risk in international operations. As
described in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 (see
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk), the detrimental effect on the Companys pretax
earnings of:
|
|
|
a hypothetical 100 basis point increase in interest rates would be approximately
$117 million; |
|
|
|
a hypothetical 10 percent strengthening of the U.S. dollar related to anticipated
overseas operating results for the next 12 months would be approximately $112 million. |
These sensitivities are based on the 2009 year-end positions, and assume that all relevant
maturities and types of interest rates and foreign exchange rates that affect the Companys
results would increase instantaneously and simultaneously and to the same degree. There were no
material changes in these market risks since December 31, 2009.
77
ITEM 4. CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures are
effective. There have not been any changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
Cautionary Note Regarding Forward-looking Statements
This report includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking
statements, which address the Companys expected business and financial performance, among other
matters, contain words such as believe, expect, anticipate, optimistic, intend, plan,
aim, will, may, should, could, would, likely, and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. The Company undertakes no obligation to update or revise any
forward-looking statements. Factors that could cause actual results to differ materially from
these forward-looking statements include, but are not limited to, the following: the inability of
the Company to achieve its revised on average, over time return on equity financial target of 25%
or more, which will depend in part on the Companys earnings growth, the risks of which are
described herein, and future capital levels of the Company, which are still uncertain and subject
to the issuance of regulatory guidelines under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Reform Act), the Basel III regulatory initiative and possible changing
interpretations by bank regulators as to the capital ratio levels at which banks would be deemed to
be well-capitalized, as well as the number and size of acquisitions that may be consummated by
the Company; the Companys failure, over time, to return to shareholders at least 50 percent
of capital generated, which will depend on its ability to grow its business and meet its on
average, over time target for earnings per share growth of 12 percent to 15 percent, the risks of
which are described herein, and its on average, over time target return on equity of 25 percent or
more, the risks of which are described above;
the Companys net interest yield on U.S. cardmember loans not trending over time to
historical levels as expected, which will be influenced by, among other things, the effects of The
Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) and
regulations adopted pursuant thereto, including the regulations requiring the Company to
periodically reevaluate APR increases, interest rates, changes in consumer behavior that affect
loan balances, such as paydown rates, the Companys cardmember acquisition strategy, product mix,
credit actions, including line size and other adjustments to credit availability, and pricing
changes; the Companys growth rate of its loan portfolio might not remain lower than the growth
rate of billed business generated on the Companys card products in the near term, which will
depend in part on paydown rates and spending volumes on the Companys credit card products, which
are in turn dependent on, among other things, consumer confidence, unemployment, interest rates and
general economic conditions; changes in laws or government regulations, including, in the United
States, the impact of the Reform Act, which is subject to further extensive rulemaking, the
implications of which are not fully known at this time; the impact of the provisions of the Reform
Act permitting merchants to discount or provide in-kind incentives for the use of one form of
payment versus another, which will depend in part on merchants inclination to implement and invest
in differentiated pricing and consumers behavior in choosing among different value propositions
offered through various payment products; the difference between the Companys discount rate to
merchants and the discount rate for debit transactions to be established by the Federal Reserve,
which could put increased downward pressure on the Companys discount rate; the Companys ability
to exceed for 2010 its on-average, over-time e