Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

or

  [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

   

13-4922250

 

(State or other jurisdiction of

incorporation or organization)

    (I.R.S. Employer Identification No.)  

World Financial Center, 200 Vesey Street, New York, NY

   

10285

 
(Address of principal executive offices)     (Zip Code)  

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

 
            None  

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X              No             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X              No             

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

 

Large accelerated filer  x

  

Accelerated filer  ¨

Non-accelerated filer  ¨    (Do not check if a smaller reporting company)

  

Smaller reporting company  ¨                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                 No   X        

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

 

Class

     

Outstanding at October 26, 2012

 
Common Shares (par value $.20 per share)       1,119,062,132 shares  


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.    Financial Information      Page No.   
  

Item 1.

  

Financial Statements

  
     

Consolidated Statements of Income – Three Months Ended September 30, 2012 and 2011

     1   
     

Consolidated Statements of Income – Nine Months Ended September 30, 2012 and 2011

     2   
     

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended
September 30, 2012 and 2011

     3   
     

Consolidated Balance Sheets – September 30, 2012 and December 31, 2011

     4   
     

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011

     5   
     

Notes to Consolidated Financial Statements

     6   
  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   
  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     76   
  

Item 4.

  

Controls and Procedures

     76   
Part II.    Other Information   
  

Item 1.

  

Legal Proceedings

     80   
  

Item 1A.

  

Risk Factors

     83   
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     84   
  

Item 6.

  

Exhibits

     85   
  

Signatures

     86   
  

Exhibit Index

     E-1   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

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

       2012     

2011

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 4,425      $             4,218

Net card fees

       633      622

Travel commissions and fees

       465      480

Other commissions and fees

       581      604

Other

       577      534
    

 

 

    

 

Total non-interest revenues

       6,681      6,458
    

 

 

    

 

Interest income

       

Interest on loans

       1,658      1,587

Interest and dividends on investment securities

       60      68

Deposits with banks and other

       21      33
    

 

 

    

 

Total interest income

       1,739      1,688
    

 

 

    

 

Interest expense

       

Deposits

       118      127

Long-term debt and other

       440      448
    

 

 

    

 

Total interest expense

       558      575
    

 

 

    

 

Net interest income

       1,181      1,113
    

 

 

    

 

Total revenues net of interest expense

       7,862      7,571
    

 

 

    

 

Provisions for losses

       

Charge card

       190      174

Cardmember loans

       264      48

Other

       25      27
    

 

 

    

 

Total provisions for losses

       479      249
    

 

 

    

 

Total revenues net of interest expense after provisions for losses        7,383      7,322
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and cardmember services

       2,461      2,511

Salaries and employee benefits

       1,516      1,598

Other, net

       1,536      1,502
    

 

 

    

 

Total

       5,513      5,611
    

 

 

    

 

Pretax income

       1,870      1,711

Income tax provision

       620      476
    

 

 

    

 

Net income

     $ 1,250      $             1,235
    

 

 

    

 

Earnings per Common Share (Note 11):(a)

       

Basic

     $ 1.10      $               1.04

Diluted

     $ 1.09      $               1.03
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,126      1,175

Diluted

       1,132      1,181

Cash dividends declared per common share

     $ 0.20      $               0.18

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $14 million and $15 million for the three months ended September 30, 2012 and 2011, respectively.

See Notes to Consolidated Financial Statements.

 

1


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

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

       2012     

2011

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 13,164      $           12,398

Net card fees

       1,858      1,836

Travel commissions and fees

       1,437      1,457

Other commissions and fees

       1,739      1,717

Other

       1,808      1,546
    

 

 

    

 

Total non-interest revenues

       20,006      18,954
    

 

 

    

 

Interest income

       

Interest on loans

       4,851      4,685

Interest and dividends on investment securities

       193      255

Deposits with banks and other

       73      71
    

 

 

    

 

Total interest income

       5,117      5,011
    

 

 

    

 

Interest expense

       

Deposits

       362      395

Long-term debt and other

       1,320      1,350
    

 

 

    

 

Total interest expense

       1,682      1,745
    

 

 

    

 

Net interest income

       3,435      3,266
    

 

 

    

 

Total revenues net of interest expense

       23,441      22,220
    

 

 

    

 

Provisions for losses

       

Charge card

       531      533

Cardmember loans

       753      104

Other

       68      66
    

 

 

    

 

Total provisions for losses

       1,352      703
    

 

 

    

 

Total revenues net of interest expense after provisions for losses

       22,089      21,517
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and cardmember services

       7,195      7,542

Salaries and employee benefits

       4,687      4,715

Other, net

       4,685      4,052
    

 

 

    

 

Total

       16,567      16,309
    

 

 

    

 

Pretax income from continuing operations

       5,522      5,208

Income tax provision

       1,677      1,501
    

 

 

    

 

Income from continuing operations

       3,845      3,707

Income from discontinued operations, net of tax

             36
    

 

 

    

 

Net income

     $ 3,845      $             3,743
    

 

 

    

 

Earnings per Common Share — Basic (Note 11):

       

Income from continuing operations attributable to common shareholders(a)

     $ 3.33      $               3.09

Income from discontinued operations

             0.03
    

 

 

    

 

Net income attributable to common shareholders(a)

     $ 3.33      $               3.12
    

 

 

    

 

Earnings per Common Share — Diluted (Note 11):

       

Income from continuing operations attributable to common shareholders(a)

     $ 3.31      $               3.08

Income from discontinued operations

             0.03
    

 

 

    

 

Net income attributable to common shareholders(a)

     $ 3.31      $               3.11
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,143      1,184

Diluted

       1,149      1,191

Cash dividends declared per common share

     $ 0.60      $               0.54

 

 

  (a)

Represents income from continuing operations or net income, as applicable, less earnings allocated to participating share awards of $42 million and $44 million for the nine months ended September 30, 2012 and 2011, respectively.

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

                                                                                           

 

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

(Millions)

       2012       2011       2012    

2011

Net income

     $              1,250     $              1,235     $              3,845     $             3,743 

Other comprehensive income (loss):

          

Net unrealized securities gains, net of tax of: 2012, $10 and $24; 2011, $83 and $137

       21       113       52     205 

Net unrealized derivatives (losses) gains, net of tax of: 2012, $1 and $1; 2011, $1 and $4

              (1     1    

Foreign currency translation adjustments, net of tax of: 2012, $(168) and $(155); 2011, $118 and $(54)

       81       (178     (46   (116)

Net unrealized pension and other postretirement benefit gains, net of tax of: 2012, $6 and $19; 2011, $14 and $12

       14       14       34     19 
    

 

 

   

 

 

   

 

 

   

 

Other comprehensive income (loss)

       116       (52     41     114 
    

 

 

   

 

 

   

 

 

   

 

Comprehensive income

     $ 1,366     $ 1,183     $ 3,886     $             3,857 
    

 

 

   

 

 

   

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                             

 

(Millions, except per share data)

      
 
September 30,
2012
  
 
 

December 31, 2011

Assets

      

Cash and cash equivalents

      

Cash and due from banks

     $ 3,817     $            3,514 

Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2012, $68; 2011, $470)

       21,158     20,572 

Short-term investment securities

       168     807 
    

 

 

   

 

Total

       25,143     24,893 

Accounts receivable

      

Cardmember receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2012, $7,070; 2011, $8,027), less reserves: 2012, $409; 2011, $438

       41,910     40,452 

Other receivables, less reserves: 2012, $85; 2011, $102

       3,272     3,657 

Loans

      

Cardmember loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2012, $31,043; 2011, $33,834), less reserves: 2012, $1,459; 2011, $1,874

       60,291     60,747 

Other loans, less reserves: 2012, $18; 2011, $18

       500     419 

Investment securities

       6,060     7,147 

Premises and equipment, less accumulated depreciation: 2012, $5,307; 2011, $4,747

       3,553     3,367 

Other assets (includes restricted cash of consolidated variable interest entities: 2012, $1,297; 2011, $207)

       12,144     12,655 
    

 

 

   

 

Total assets

     $ 152,873     $        153,337 
    

 

 

   

 

Liabilities and Shareholders’ Equity

      

Liabilities

      

Customer deposits

     $ 37,195     $          37,898 

Travelers Cheques outstanding

       4,454     5,123 

Accounts payable

       13,093     10,458 

Short-term borrowings

       4,027     4,337 

Long-term debt (includes debt issued by consolidated variable interest entities: 2012, $15,597; 2011, $20,856)

       56,271     59,570 

Other liabilities

       18,355     17,157 
    

 

 

   

 

Total liabilities

       133,395     134,543 
    

 

 

   

 

Contingencies (Note 13)

      

Shareholders’ Equity

      

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,122 million shares as of September 30, 2012 and 1,164 million shares as of December 31, 2011

       224     232 

Additional paid-in capital

       12,166     12,217 

Retained earnings

       7,923     7,221 

Accumulated other comprehensive (loss) income

      

Net unrealized securities gains, net of tax of: 2012, $192; 2011, $168

       340     288 

Net unrealized derivatives losses, net of tax of: 2012, $ —; 2011, $(1)

            (1)

Foreign currency translation adjustments, net of tax of: 2012, $(614); 2011, $(459)

       (728   (682)

Net unrealized pension and other postretirement benefit losses, net of tax of: 2012, $(214); 2011, $(233)

       (447   (481)
    

 

 

   

 

Total accumulated other comprehensive loss

       (835   (876)
    

 

 

   

 

Total shareholders’ equity

       19,478     18,794 
    

 

 

   

 

Total liabilities and shareholders’ equity

     $ 152,873     $        153,337 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                             

 

Nine Months Ended September 30 (Millions)

       2012    

2011

Cash Flows from Operating Activities

      

Net income

     $ 3,845      $            3,743 

Income from discontinuing operations, net of tax

       —        (36)
    

 

 

   

 

Income from continuing operations

       3,845      3,707 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Provisions for losses

       1,352      703 

Depreciation and amortization

       751      733 

Deferred taxes and other

       79      1,045 

Stock-based compensation

       232      227 

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

      

Other receivables

       323      46 

Other assets

       1,112      (234)

Accounts payable and other liabilities

       3,595      732 

Travelers Cheques outstanding

       (675   (585)
    

 

 

   

 

Net cash provided by operating activities

       10,614      6,374 
    

 

 

   

 

Cash Flows from Investing Activities

      

Sale of investments

       427      944 

Maturity and redemption of investments

       1,085      4,714 

Purchase of investments

       (311   (904)

Net increase in cardmember loans/receivables

       (1,877   (1,971)

Purchase of premises and equipment, net of sales: 2012, $3; 2011, $6

       (765   (885)

Acquisitions/dispositions, net of cash acquired/sold

       (456   (610)

Net (increase) decrease in restricted cash

       (1,089   3,658 
    

 

 

   

 

Net cash (used in) provided by investing activities

       (2,986   4,946 
    

 

 

   

 

Cash Flows from Financing Activities

      

Net (decrease) increase in customer deposits

       (316   3,455 

Net (decrease) increase in short-term borrowings

       (346   738 

Issuance of long-term debt

       7,831      9,311 

Principal payments on long-term debt

       (11,417   (14,113)

Issuance of American Express common shares

       393      507 

Repurchase of American Express common shares

       (2,953   (1,950)

Dividends paid

       (675   (646)
    

 

 

   

 

Net cash used in financing activities

       (7,483   (2,698)
    

 

 

   

 

Effect of exchange rate changes on cash

       105      (33)
    

 

 

   

 

Net increase in cash and cash equivalents

       250      8,589 

Cash and cash equivalents at beginning of period

       24,893      16,356 
    

 

 

   

 

Cash and cash equivalents at end of period

     $ 25,143      $          24,945 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company has also focused on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising.

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 for the year ended December 31, 2011.

The interim consolidated financial information in this report has not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period consolidated financial information, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and the disclosures of contingent assets and liabilities. Actual results could be different from these estimates and assumptions.

Beginning the first quarter of 2012, the Company revised the income statement reporting of annual membership card fees on lending products, increasing net card fees and reducing interest on loans. Corresponding amounts presented in prior periods have been reclassified to conform to the current period presentation.

Certain other reclassifications of prior period amounts have been made to conform to the current period presentation. The card fees revision discussed above and these other reclassifications did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

2. Fair Values

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability.

GAAP provides 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

 

6


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  -

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 Company’s 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). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) during the nine months ended September 30, 2012 or during the year ended December 31, 2011, although the disclosed fair value of certain assets that are not carried at fair value, as presented later in this Note, are classified within Level 3.

The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company elects to disclose the fair value measurement at the beginning of the reporting period during which the transfer occurred.

Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy (as described in the preceding paragraphs), as of September 30, 2012 and December 31, 2011:

 

                                                                                               

 

       2012       2011

(Millions)

       Total        Level 1        Level 2        Total        Level 1     

Level 2

Assets:

              

Investment securities:(a)

              

Equity securities

     $ 281     $ 281     $      $ 360     $ 360     $           —

Debt securities and other(b)

       5,779       339       5,440       6,787       340     6,447

Derivatives(a)

       1,089              1,089       1,516            1,516
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total assets

     $ 7,149     $ 620     $ 6,529     $ 8,663     $ 700     $      7,963
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Liabilities:

              

Derivatives(a)

     $ 403     $      $ 403     $ 108     $      $         108
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total liabilities

     $ 403     $      $ 403     $ 108     $      $         108
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Refer to Note 5 for the fair values of investment securities and to Note 8 for the fair values of derivative assets and liabilities, both on a further disaggregated basis.

 

  (b)

The Level 1 amounts represent the Company’s holdings of U.S. Government treasury obligations at September 30, 2012 and December 31, 2011.

Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities Carried at Fair Value

For the financial assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques:

Investment Securities

 

   

When available, quoted prices of identical investment securities 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 of identical investment securities in active markets are not available, the fair values for the Company’s investment securities are obtained primarily from pricing services engaged by the

 

7


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 or recent trades of similar securities. Such investment securities are classified within Level 2 of the fair value hierarchy. 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 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 for reasonableness by comparing the prices from the respective pricing services to valuations obtained from different pricing sources as well as comparing prices to the sale prices received from sold securities at least quarterly. In instances where price discrepancies are identified between different pricing sources, the Company evaluates such discrepancies to ensure that the prices used for its valuation represent the fair value of the underlying investment securities. Refer to Note 5 for additional fair value information.

Derivative Financial Instruments

The fair value of the Company’s derivative financial instruments is estimated by a third-party valuation service that uses proprietary pricing models or by internal pricing models, where the inputs to those models are readily observable from actively quoted markets. The pricing models used are consistently applied and reflect the contractual terms of the derivatives as described below. The Company reaffirms its understanding of the valuation techniques used by the third-party valuation service at least annually. The Company’s derivative instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the Company’s interest rate swaps is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the swap such as the notional amount, fixed coupon rate, floating coupon rate (based on interbank rates consistent with the frequency and currency of the interest cash flows) and tenor, as well as discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated.

The fair value of the Company’s total return contract, which serves as a hedge against the Hong Kong dollar (HKD) change in fair value associated with the Company’s investment in the Industrial and Commercial Bank of China (ICBC), is determined based on a discounted cash flow method using the following significant inputs as of the valuation date: number of shares of the Company’s underlying ICBC investment, the quoted market price of the shares in HKD and the monthly settlement terms of the contract inclusive of price and tenor.

The fair value of foreign exchange forward contracts is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the forward contracts such as the notional amount, maturity dates and contract rate, as well as relevant foreign currency forward curves, and discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated.

Credit valuation adjustments are necessary when the market parameters, such as 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 8 for additional fair value information.

 

8


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Financial Assets and Financial Liabilities Carried at Other Than Fair Value

The following table discloses the estimated fair value for the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of September 30, 2012:

 

                                                                               

 

      
 
Carrying
Value
  
  
    Corresponding Fair Value Amount

(Billions)

         Total        Level 1        Level 2     

Level 3

Financial Assets:

            

Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

     $ 25         $ 25      $ 24         $ 1 (a)    $         —

Other financial assets(b)

     $ 47      $ 47      $      $ 47      $         —

Financial assets carried at other than fair value

            

Loans, net

     $ 61      $ 61 (c)    $      $      $         61

Financial Liabilities:

            

Financial liabilities for which carrying values equal or approximate fair value

     $ 58      $ 58     $      $ 58     $         —

Financial liabilities carried at other than fair value

            

Certificates of deposit(d)

     $ 10      $ 10      $      $ 10      $         —

Long-term debt

     $ 56      $ 60 (c)    $      $ 60      $         —

 

 

  (a)

Reflects time deposits.

 

  (b)

Includes accounts receivables (including fair values of cardmember receivables of $7.0 billion held by consolidated variable interest entities (VIEs) as of September 30, 2012), restricted cash and other miscellaneous assets.

 

  (c)

Includes fair values of loans and long-term debt of $30.7 billion and $15.8 billion, respectively, held by consolidated VIEs as of September 30, 2012.

 

  (d)

Presented as a component of customer deposits on the Consolidated Balance Sheets.

The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of September 30, 2012, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be reliably estimated by aggregating the amounts presented.

Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities Carried at Other Than Fair Value

For the financial assets and liabilities that are not required to be measured at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques to measure fair value:

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, have no defined maturity or have a market-based interest rate.

Financial Assets Carried at Other Than Fair Value

Loans

Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for the Company’s loans the Company uses a discounted cash flow model. Due to the lack of a comparable whole loan sales market for similar credit card receivables and a lack of observable pricing

 

9


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

inputs thereof, the Company uses various inputs derived from an equivalent securitization market to estimate fair value. Such inputs include projected income (inclusive of future interest payments and late fee revenue), estimated pay-down rates, discount rates and relevant credit costs.

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, accounts payable, short-term borrowings and certain other liabilities for which the carrying values approximate fair value because they are short term in duration, have no defined maturity or have a market-based interest rate.

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 future cash flows and the discount rate that reflects the Company’s current rates for similar types of CDs within similar markets.

Long-term Debt

Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets adjusted for the impact of fair value hedge accounting on certain fixed-rate notes. The fair value of the Company’s long-term debt is measured using quoted offer prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates currently observed in publicly traded debt markets for debt of similar terms and credit risk. For long-term debt, where there are no rates currently observable in publicly traded debt markets of similar terms and comparable credit risk, the Company uses market interest rates and adjusts those rates for necessary risks, including its own credit risk. In determining an appropriate spread to reflect its credit standing, the Company considers credit default swap spreads, bond yields of other long-term debt offered by the Company, and interest rates currently offered to the Company for similar debt instruments of comparable maturities.

Nonrecurring Fair Value Measurements

The Company did not have any material assets that were measured at fair value for impairment on a nonrecurring basis during the nine months ended September 30, 2012 or during the year ended December 31, 2011.

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Accounts Receivable and Loans

As described below, the Company’s charge and lending payment card products result in the generation of cardmember receivables and cardmember loans, respectively.

Cardmember and Other Receivables

Cardmember receivables, representing amounts due from charge payment card product customers, are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant. Each charge card transaction is authorized based on its likely economics reflecting a cardmember’s most recent credit information and spend patterns. Additionally, global spend limits are established to limit the maximum exposure for the Company.

Charge card customers generally must pay the full amount billed each month.

Cardmember receivable balances are presented on the Consolidated Balance Sheets net of reserves for losses (refer to Note 4), and include principal and any related accrued fees.

Accounts receivable as of September 30, 2012 and December 31, 2011 were as follows:

 

                                             

 

(Millions)

       2012     

2011

U.S. Card Services(a)

     $ 19,522      $           20,645

International Card Services

       7,228      7,222

Global Commercial Services(b)

       15,393      12,829

Global Network & Merchant Services(c)

       176      194
    

 

 

    

 

Cardmember receivables(d)

       42,319      40,890

Less: Reserve for losses

       409      438
    

 

 

    

 

Cardmember receivables, net

     $ 41,910      $           40,452
    

 

 

    

 

Other receivables, net(e)

     $ 3,272      $             3,657
    

 

 

    

 

 

 

  (a)

Includes $6.6 billion and $7.5 billion of gross cardmember receivables available to settle obligations of a consolidated VIE as of September 30, 2012 and December 31, 2011, respectively.

 

  (b)

Includes $0.5 billion of gross cardmember receivables available to settle obligations of a consolidated VIE as of both September 30, 2012 and December 31, 2011. Also includes $0.7 billion and $0.6 billion due from airlines, of which Delta Air Lines (Delta) comprises $0.5 billion and $0.3 billion as of September 30, 2012 and December 31, 2011, respectively.

 

  (c)

Includes receivables primarily related to the Company’s International Currency Card portfolios.

 

  (d)

Includes approximately $13.6 billion and $12.8 billion of cardmember receivables outside the United States as of September 30, 2012 and December 31, 2011, respectively.

 

  (e)

Other receivables primarily represent amounts related to (i) purchased joint venture receivables, (ii) the Company’s travel customers and suppliers, (iii) certain merchants for billed discount revenue and (iv) other receivables due to the Company in the ordinary course of business. As of December 31, 2011, other receivables also included investments that matured on December 31, 2011, but which did not settle until January 3, 2012. Other receivables are presented net of reserves for losses of $85 million and $102 million as of September 30, 2012 and December 31, 2011, respectively.

Cardmember and Other Loans

Cardmember loans, representing amounts due from lending payment card product customers, are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant or when a charge card customer enters into an extended payment arrangement with the Company. The Company’s lending portfolios primarily include revolving loans to cardmembers obtained through either their credit card accounts or the lending-on-charge feature of their charge card accounts. These loans have a range of terms such as credit limits, interest rates, fees and payment structures, which can be revised over time based on new information about cardmembers and in accordance with applicable regulations and the respective product’s terms and conditions. Cardmembers holding revolving loans are typically required to make monthly payments based on pre-established amounts. The amounts that cardmembers choose to revolve are subject to finance charges.

 

11


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cardmember loans are presented on the Consolidated Balance Sheets net of reserves for losses (refer to Note 4), and include principal, accrued interest and fees receivable. The Company’s policy generally is to cease accruing interest on a cardmember loan at the time the account is written off, and establish reserves for interest that the Company believes will not be collected.

Loans as of September 30, 2012 and December 31, 2011 consisted of:

 

                                             

 

(Millions)

       2012     

2011

U.S. Card Services(a)

     $ 52,865      $           53,686

International Card Services

       8,853      8,901

Global Commercial Services

       32      34
    

 

 

    

 

Cardmember loans

       61,750      62,621

Less: Reserve for losses

       1,459      1,874
    

 

 

    

 

Cardmember loans, net

     $ 60,291      $           60,747
    

 

 

    

 

Other loans, net(b)

     $ 500      $                419
    

 

 

    

 

 

 

  (a)

Includes approximately $31.0 billion and $33.8 billion of gross cardmember loans available to settle obligations of a consolidated VIE as of September 30, 2012 and December 31, 2011, respectively.

 

  (b)

Other loans primarily represent a store card loan portfolio whose billed business is not processed on the Company’s network, loans to merchants and small business installment loans. Other loans are presented net of reserves for losses of $18 million as of both September 30, 2012 and December 31, 2011.

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cardmember Loans and Cardmember Receivables Aging

Generally, a cardmember account is considered past due if payment is not received within 30 days after the billing statement date. The following table represents the aging of cardmember loans and receivables as of September 30, 2012 and December 31, 2011:

 

                                                                               

 

2012 (Millions)

       Current       
 
 
 
30-59
Days
Past
Due
  
  
  
  
   
 
 
 
60-89
Days
Past
Due
  
  
  
  
   
 
 
 
90+
Days
Past
Due
  
  
  
  
 

Total

Cardmember Loans:

            

U.S. Card Services

     $ 52,201     $ 210     $ 145     $ 309     $    52,865

International Card Services

       8,714       47       29       63     8,853

Cardmember Receivables:

            

U.S. Card Services

     $ 19,164     $ 130     $ 73     $ 155     $    19,522

International Card Services(a)

       (b     (b     (b     66     7,228

Global Commercial Services(a)

       (b     (b     (b     100     15,393

 

2011 (Millions)

       Current       
 
 
 
30-59
Days
Past
Due
  
  
  
  
   
 
 
 
60-89
Days
Past
Due
  
  
  
  
   
 
 
 
90+
Days
Past
Due
  
  
  
  
 

Total

Cardmember Loans:

            

U.S. Card Services

     $ 52,930     $ 218     $ 165     $ 373     $    53,686

International Card Services

       8,748       52       32       69     8,901

Cardmember Receivables:

            

U.S. Card Services

     $ 20,246     $ 122     $ 81     $ 196     $    20,645

International Card Services(a)

       (b     (b     (b     63     7,222

Global Commercial Services(a)

       (b     (b     (b     109     12,829

 

 

  (a)

For cardmember receivables in International Card Services (ICS) and Global Commercial Services (GCS), delinquency data is tracked based on days past billing status rather than days past due. A cardmember account is considered 90 days past billing if payment has not been received within 90 days of the cardmember’s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing the associated cardmember receivable balance is considered as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes.

 

  (b)

Historically, data for periods prior to 90 days past billing are not available due to financial reporting system constraints. Therefore, it has not been relied upon for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Cardmember Loans and Receivables

The following tables present the key credit quality indicators as of or for the nine months ended September 30:

 

                                                                                                                                               

 

       2012       2011
       Net Write-Off Rate       
 
 
 
30 Days
Past Due
as a % of
Total
  
  
  
  
    Net Write-Off Rate     

30 Days

Past Due

as a % of

Total

 

      
 
Principal
Only
(a)
  
  
   
 
 
Principal,
Interest, &
Fees
(a)
  
  
  
     
 
Principal
Only
(a)
  
  
   
 
 
Principal,
Interest, &
Fees
(a)
  
  
  
 

Cardmember Loans:

              

U.S. Card Services

       2.2%        2.4%        1.3%        3.2%        3.5%      1.5%

International Card Services

       1.9%        2.5%        1.6%        2.9%        3.5%      1.9%

Cardmember Receivables:

              

U.S. Card Services

       2.0%        2.1%        1.8%        1.7%        1.8%      2.0%

 

                                                                                               
       2012       2011

 

      
 
 
 
 
Net Loss
Ratio as
a % of
Charge
Volume
  
  
  
  
  
   
 
 
 
90 Days
Past Billing
as a % of
Receivables
  
  
  
  
   
 
 
 
 
Net Loss
Ratio as
a % of
Charge
Volume
  
  
  
  
  
 

90 Days Past Billing as a % of Receivables

Cardmember Receivables:

          

International Card Services

       0.16%        0.9%        0.15%      0.9%

Global Commercial Services

       0.07%        0.7%        0.06%      0.7%

 

 

  (a)

The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. Because the Company’s practice is to include uncollectible interest and/or fees as part of its total provision for losses, a net write-off rate including principal, interest and/or fees is also presented.

Refer to Note 4 for additional indicators, including external environmental factors, that management considers in its monthly evaluation process for reserves for losses.

Impaired Cardmember 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 Company 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 as troubled debt restructurings (TDRs).

The Company may modify, through various company sponsored programs, cardmember loans and receivables in instances where the cardmember is experiencing financial difficulty to minimize losses while providing cardmembers with temporary or permanent financial relief. The Company has classified cardmember loans and receivables in these modification programs as TDRs. Such modifications to the loans and receivables may include (i) reducing the interest rate (as low as zero percent, in which case the loan is characterized as non-accrual in the Company’s TDR disclosures), (ii) reducing the outstanding balance (in the event of a settlement), (iii) suspending delinquency fees until the cardmember exits the modification program and (iv) placing the cardmember on a fixed payment plan not to exceed 60 months. Upon entering the modification program, the cardmember’s ability to make future purchases is either cancelled, or in certain cases suspended until the cardmember successfully exits the modification program. In accordance with the modification agreement with the cardmember, loans with modified terms will revert back to the original contractual terms (including contractual interest rate) when the cardmember exits the modification program, either (i) when all payments have been made in accordance with the modification agreement or (ii) the

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

cardmember defaults out of the modification program. In either case, the Company establishes a reserve for cardmember interest charges considered to be uncollectible. The performance of a loan or a receivable modified as a TDR is closely monitored to understand its impact on the Company’s reserve for losses. Though the ultimate success of modification programs remains uncertain, the Company believes the programs improve the cumulative loss performance of such loans and receivables.

Reserves for cardmember loans and receivables modified as TDRs are determined by the difference between the cash flows expected to be received from the cardmember (taking into consideration the probability of subsequent defaults), discounted at the original effective interest rates, and the carrying value of the cardmember loan or receivable balance. The Company determines the original effective interest rate as the interest rate in effect prior to the imposition of any penalty interest rate. All changes in the impairment measurement, including the component due to the passage of time, are included in the provision for losses in the Consolidated Statements of Income.

The following table provides additional information with respect to the Company’s impaired cardmember loans and receivables, which are not significant for ICS and GCS, as of September 30, 2012 and December 31, 2011:

 

                                                                                                                 

 

2012 (Millions)

      
 

 
 
 

Loans over
90 Days

Past Due
& Accruing
Interest
(a)

  
  

  
  
  

   
 
 
Non-
Accrual
Loans
(b)
  
  
  
   
 
 
 
Loans &
Receivables
Modified
as a TDR
(c)
  
  
  
  
   
 
 
 
Total
Impaired
Loans &
Receivables
  
  
  
  
   
 
 
Unpaid
Principal
Balance
(d)
  
  
  
 

Allowance for TDRs(e)

Cardmember Loans:

              

U.S. Card Services

     $ 60     $ 437     $ 666     $ 1,163     $ 1,135     $            150

International Card Services

       62       4       7       73       72     1

Cardmember Receivables:

              

U.S. Card Services

                     119       119       114     80
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 122     $ 441     $ 792     $ 1,355     $ 1,321     $            231
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

2011 (Millions)

      
 
 
 
 
Loans over
90 Days
Past Due
& Accruing
Interest
(a)
  
  
  
  
  
   
 
 
Non-
Accrual
Loans
(b)
  
  
  
   
 
 
 
Loans &
Receivables
Modified
as a TDR
(c)
  
  
  
  
   
 
 
 
Total
Impaired
Loans &
Receivables
  
  
  
  
   
 
 
Unpaid
Principal
Balance
(d)
  
  
  
 

Allowance for TDRs(e)

Cardmember Loans:

              

U.S. Card Services

     $ 64     $ 529     $ 736     $ 1,329     $ 1,268      $            174

International Card Services

       67       6       8       81       80     2

Cardmember Receivables:

              

U.S. Card Services

                     174       174       165     118
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 131     $ 535     $ 918     $ 1,584     $ 1,513     $            294
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The Company’s policy is generally to accrue interest through the date of write-off (at 180 days past due). The Company establishes reserves for interest that the Company believes will not be collected. Excludes loans modified as a TDR.

 

  (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. The Company’s policy is generally not to resume the accrual of interest on these loans. Payments received are applied against the recorded loan balance. Interest income is recognized on a cash basis for any payments received after the loan balance has been paid in full. Excludes loans modified as a TDR.

 

  (c)

Total loans and receivables modified as a TDR includes $333 million and $410 million that are non-accrual and $6 million and $4 million that are past due 90 days and still accruing interest as of September 30, 2012 and December 31, 2011, respectively.

 

  (d)

Unpaid principal balance consists of cardmember charges billed and excludes other amounts charged directly by the Company such as interest and fees.

 

  (e)

Represents the reserve for losses for TDRs, which are evaluated separately for impairment. The Company records a reserve for losses for all impaired loans. Refer to Cardmember Loans Evaluated Separately and Collectively for Impairment in Note 4 for further discussion of the reserve for losses on loans over 90 days past due and accruing interest and non-accrual loans, which are evaluated collectively for impairment.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information with respect to the Company’s interest income recognized and average balances of impaired cardmember loans and receivables, which are not significant for ICS and GCS, during the three and nine months ended September 30:

 

                                                                                           

 

      
 
Three Months Ended
September 30, 2012
  
  
   

 

Nine Months Ended

September 30, 2012

(Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average Balance

Cardmember Loans:

          

U.S. Card Services

     $ 15     $ 1,182     $ 45     $             1,244

International Card Services

       4       73       12     77

Cardmember Receivables:

          

U.S. Card Services

              120            140
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 19     $ 1,375     $ 57     $             1,461
    

 

 

   

 

 

   

 

 

   

 

 

      
 
Three Months Ended
September 30, 2011
  
  
   
 
Nine Months Ended
September 30, 2011

(Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average Balance

Cardmember Loans:

          

U.S. Card Services

     $ 16     $ 1,390     $ 51     $             1,541

International Card Services

       5       92       22     102

Cardmember Receivables:

          

U.S. Card Services

              149            138
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 21     $ 1,631     $ 73     $             1,781
    

 

 

   

 

 

   

 

 

   

 

 

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cardmember Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the cardmember loans and receivables modified as TDRs, which are not significant for ICS, during the three and nine months ended September 30:

 

                                                                                                                                         

 

      

 

Three Months Ended

September 30, 2012

  

  

   

 

Nine Months Ended

September 30, 2012

(Accounts in thousands,

Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 
 
 
Aggregated
Pre-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
   
 
 
 
 
Aggregated
Post-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
   
 
Number of
Accounts
  
  
   
 
 
 
 
Aggregated
Pre-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
 

Aggregated Post- Modification Outstanding Balances(a)

Troubled Debt Restructurings:

              

U.S. Card Services —
Cardmember Loans

       26     $ 193     $ 190       82     $ 600     $                587

U.S. Card Services —
Cardmember Receivables

       9       104       103       28       326     320
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total(b)

       35     $ 297     $ 293       110      $ 926      $                907
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

 

Three Months Ended

September 30, 2011

  

  

   

 

Nine Months Ended

September 30, 2011

(Accounts in thousands,

Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 
 
 
Aggregated
Pre-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
   
 
 
 
 
Aggregated
Post-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
   
 
Number of
Accounts
  
  
   
 
 
 
 
Aggregated
Pre-
Modification
Outstanding
Balances
(a)
  
  
  
  
  
 

Aggregated Post- Modification Outstanding Balances

Troubled Debt Restructurings:

              

U.S. Card Services —
Cardmember Loans

       35     $ 269     $ 259       116      $ 875     $                839

U.S. Card Services —
Cardmember Receivables

       14       108       105       36       292     281
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total(b)

       49     $ 377     $ 364       152     $ 1,167     $             1,120
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Includes principal and accrued interest.

 

  (b)

The difference between the pre- and post-modification outstanding balances is attributable to amounts charged off for cardmember loans and receivables being resolved through the Company’s short-term settlement programs.

As described previously, the Company’s cardmember loans and receivables modification programs may include (i) reducing the interest rate, (ii) reducing the outstanding balance, (iii) suspending delinquency fees and (iv) placing the cardmember on a fixed payment plan not exceeding 60 months. Upon entering the modification program, the cardmember’s ability to make future purchases is either cancelled, or in certain cases suspended until the cardmember successfully exits the modification program.

The Company has evaluated the primary financial effects of the impact of the changes to an account upon modification as follows:

 

   

Interest Rate Reduction: For the three months ended September 30, 2012 and 2011, the average interest rate reduction was 11 percentage points and 12 percentage points, respectively. For both the nine months ended September 30, 2012 and 2011, the average interest rate reduction was 12 percentage points. None of these interest rate reductions had a significant impact on interest on loans in the Consolidated Statements of Income. The Company does not offer interest rate reduction programs for U.S. Card Services (USCS) cardmember receivables as these receivables are non-interest bearing.

 

   

Outstanding Balance Reduction: The table above presents the financial effects to the Company as a result of reducing the outstanding balance for short-term settlement programs. The difference between the pre- and post-modification outstanding balances represents the amount that either has been written-off or will be written-off upon successful completion of the settlement program.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   

Payment Term Extension: For the three and nine months ended September 30, 2012, the average payment term extension was approximately 12 months and 13 months, respectively, for USCS cardmember receivables. For both the three and nine months ended September 30, 2011, the average payment term extension was approximately 15 months for USCS cardmember receivables. For USCS cardmember loans, there have been no payment term extensions.

The following table provides information for the three and nine months ended September 30, 2012 and 2011, with respect to the cardmember loans and receivables modified as TDRs on which there was a default within the previous 12 months. A cardmember will default from a modification program after one and up to three consecutive missed payments, depending on the terms of the modification program. The defaulted ICS cardmember loan modifications were not significant.

 

                                                                                           

 

      
 
Three Months Ended
September 30, 2012
  
  
   
 
Nine Months Ended
September 30, 2012

(Accounts in thousands,

Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 
 
Aggregated
Outstanding
Balances
Upon Default
(a)
  
  
  
  
   
 
Number of
Accounts
  
  
 

Aggregated

Outstanding

Balances

Upon Default(a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

U.S. Card Services —
Cardmember Loans

       4     $ 39       19      $                149

U.S. Card Services —
Cardmember Receivables

       1       8       1      28
    

 

 

   

 

 

   

 

 

   

 

Total

       5     $ 47       20      $                177
    

 

 

   

 

 

   

 

 

   

 

 

      
 
Three Months Ended
September 30, 2011
  
  
   
 
Nine Months Ended
September 30, 2011

(Accounts in thousands,

Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 
 
Aggregated
Outstanding
Balances
Upon Default
(a)
  
  
  
  
   
 
Number of
Accounts
  
  
 

Aggregated

Outstanding

Balances

Upon Default(a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

U.S. Card Services —
Cardmember Loans

       9     $ 65        36     $                271

U.S. Card Services —
Cardmember Receivables

       1       7        5     32
    

 

 

   

 

 

   

 

 

   

 

Total

       10     $ 72        41     $                303
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The outstanding balance includes principal and accrued interest.

 

4. Reserves for Losses

Reserves for losses relating to cardmember loans and receivables represent management’s best estimate of the losses inherent in the Company’s outstanding portfolio of loans and receivables. Management’s evaluation process requires certain estimates and judgments.

Reserves for losses are primarily based upon statistical models that analyze portfolio performance and reflect management’s judgment regarding overall reserve adequacy. The models take into account several factors, including loss migration rates and average losses and recoveries over an appropriate historical period. Management considers whether to adjust the models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as vintage, industry or geographic regions. In addition, management may increase or decrease the reserves for losses on cardmember loans for other external environmental factors, including various indicators related to employment, spend, sentiment, housing and credit, as well as the legal and regulatory environment. Generally, due to the short-term nature of cardmember receivables, the impact of

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

additional external factors on the losses inherent within the cardmember receivables portfolio is not significant. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past due amounts, reserves as a percentage of cardmember receivables or loans and net write-off coverage.

Cardmember loans and receivables balances are written-off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days. Cardmember loans and receivables in bankruptcy or owed by deceased individuals are written off upon notification and recoveries are recognized as they are collected.

Changes in Cardmember Receivables Reserve for Losses

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

 

                                             

 

(Millions)

       2012    

2011

Balance, January 1

     $ 438     $               386 

Additions:

      

Provisions(a)

       434     404 

Other(b)

       97     129 
    

 

 

   

 

Total provision

       531     533 
    

 

 

   

 

Deductions:

      

Net write-offs(c)

       (487   (406)

Other(d)

       (73   (125)
    

 

 

   

 

Balance, September 30

     $ 409     $               388 
    

 

 

   

 

 

 

  (a)

Provisions for principal (resulting from authorized transactions) and fee reserve components.

 

  (b)

Provisions for unauthorized transactions.

 

  (c)

Consists of principal (resulting from authorized transactions) and fee components, less recoveries of $292 million and $255 million for the nine months ended September 30, 2012 and 2011, respectively.

 

  (d)

Includes net write-offs resulting from unauthorized transactions of $(100) million and $(123) million for the nine months ended September 30, 2012 and 2011, respectively; foreign currency translation adjustments of $4 million and nil for the nine months ended September 30, 2012 and 2011, respectively; cardmember bankruptcy reserves of $18 million and nil for the nine months ended September 30, 2012 and 2011, respectively; and other items of $5 million and $(2) million for the nine months ended September 30, 2012 and 2011, respectively. Cardmember bankruptcy reserves were classified as other liabilities in prior periods.

Cardmember Receivables Evaluated Individually and Collectively for Impairment

The following table presents cardmember receivables evaluated individually and collectively for impairment and related reserves as of September 30, 2012 and December 31, 2011:

 

                                             

 

(Millions)

       2012     

2011

Cardmember receivables evaluated individually for impairment(a)

     $ 119      $                174

Related reserves (a)

     $ 80      $                118

 

Cardmember receivables evaluated collectively for impairment

     $ 42,200      $           40,716

Related reserves

     $ 329      $                320

 

 

  (a)

Represents receivables modified in a TDR and related reserves. Refer to the Impaired Loans and Receivables discussion in Note 3 for further information.

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in Cardmember Loans Reserve for Losses

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

 

                                             

 

(Millions)

       2012    

2011

Balance, January 1

     $ 1,874     $            3,646 

Additions:

      

Provisions(a)

       669     23 

Other(b)

       84     81 
    

 

 

   

 

Total provision

       753     104 
    

 

 

   

 

Deductions:

      

Net write-offs:

      

Principal(c)

       (970   (1,375)

Interest and fees(c)

       (121   (159)

Other(d)

       (77   (77)
    

 

 

   

 

Balance, September 30

     $ 1,459     $            2,139 
    

 

 

   

 

 

 

  (a)

Provisions for principal (resulting from authorized transactions), interest and fee reserves components.

 

  (b)

Provisions for unauthorized transactions.

 

  (c)

Consists of principal write-offs (resulting from authorized transactions), less recoveries of $382 million and $444 million for the nine months ended September 30, 2012 and 2011, respectively. Recoveries of interest and fees were de minimis.

 

  (d)

Includes net write-offs for unauthorized transactions of $(84) million and $(76) million for the nine months ended September 30, 2012 and 2011, respectively; foreign currency translation adjustments of $10 million and $(1) million for the nine months ended September 30, 2012 and 2011, respectively; cardmember bankruptcy reserves of $4 million and nil for the nine months ended September 30, 2012 and 2011, respectively; and other items of $(7) million and nil for the nine months ended September 30, 2012 and 2011, respectively. Cardmember bankruptcy reserves were classified as other liabilities in prior periods.

Cardmember Loans Evaluated Individually and Collectively for Impairment

The following table presents cardmember loans evaluated individually and collectively for impairment and related reserves as of September 30, 2012 and December 31, 2011:

 

                                             

 

(Millions)

       2012     

2011

Cardmember loans evaluated individually for impairment(a)

     $ 673      $                744

Related reserves(a)

     $ 151      $                176

 

Cardmember loans evaluated collectively for impairment(b)

     $ 61,077      $           61,877

Related reserves(b)

     $ 1,308      $             1,698

 

 

  (a)

Represents loans modified in a TDR and related reserves. Refer to the Impaired Loans and Receivables discussion in Note 3 for further information.

 

  (b)

Represents current loans and loans less than 90 days past due, loans over 90 days past due and accruing interest, and non-accrual loans and related reserves. The reserves include the results of analytical models that are specific to individual pools of loans and reserves for external environmental factors that apply to loans in geographic markets that are collectively evaluated for impairment and are not specific to any individual pool of loans.

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Investment Securities

Investment securities include debt and equity securities classified as available for sale. The Company’s investment securities, principally debt securities, are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in Accumulated Other Comprehensive Income (AOCI), net of income taxes. 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 2 for a description of the Company’s methodology for determining the fair value of investment securities.

The following is a summary of investment securities as of September 30, 2012 and December 31, 2011:

 

                                                                                                                               

 

       2012       2011

Description of Securities (Millions)

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

Estimated Fair Value

State and municipal obligations

     $ 4,421     $ 199     $ (6   $ 4,614     $ 4,968     $ 103     $ (72   $      4,999

U.S. Government agency obligations

       3                     3       352       2            354

U.S. Government treasury obligations

       330       9              339       330       10            340

Corporate debt securities(a)

       374       7       (1     380       626       9       (3   632

Mortgage-backed securities(b)

       231       17              248       261       17            278

Equity securities(c)

       73       208              281       95       265            360

Foreign government bonds and obligations

       126       15              141       120       10            130

Other(d)

       53       1              54       54                   54
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 5,611     $ 456     $ (7   $ 6,060     $ 6,806     $ 416     $ (75   $      7,147
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The September 30, 2012 and December 31, 2011 balances include, on a cost basis, $300 million and $550 million, respectively, of corporate debt obligations issued under the Temporary Liquidity Guarantee Program that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).

 

  (b)

Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

 

  (c)

Primarily represents the Company’s investment in the Industrial and Commercial Bank of China (ICBC).

 

  (d)

Other comprises investments in various mutual funds.

The following table provides information about the Company’s investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2012 and December 31, 2011:

 

                                                                                                                               

 

       2012       2011
       Less than 12 months        12 months or more        Less than 12 months        12 months or more

Description of Securities (Millions)

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

Gross Unrealized Losses

State and municipal obligations

     $      $      $ 126     $ (6   $      $      $ 1,094     $           (72)

Corporate debt securities

                     3       (1     15       (2     2     (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $      $      $ 129     $ (7   $ 15     $ (2   $ 1,096     $           (73)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

21


Table of Contents

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 September 30, 2012 and December 31, 2011:

 

                                                                                                                                               

 

       Less than 12 months        12 months or more        Total

Ratio of Fair Value to Amortized Cost (Dollars in millions)

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

Gross Unrealized Losses

2012:

                    

90%–100%

            $      $        13     $ 126     $ (6     13     $ 126     $             (6)

Less than 90%

                            1       3       (1     1       3     (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of September 30, 2012

            $      $        14     $ 129     $ (7     14     $ 129     $             (7)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

2011:

                    

90%–100%

            $      $        114     $ 884     $ (35     114     $ 884     $           (35)

Less than 90%

       1       15       (2     22       212       (38     23       227     (40)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of December 31, 2011

       1     $ 15     $ (2     136     $ 1,096     $ (73     137     $ 1,111     $           (75)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

The gross unrealized losses are attributed to overall wider credit spreads for state and municipal securities, wider credit spreads for specific issuers, adverse changes in market benchmark interest rates, or a combination thereof, all as compared to those prevailing when the investment securities were acquired.

Overall, for the investment securities in gross unrealized loss positions identified above, (i) the Company does not intend to sell the investment securities, (ii) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses and (iii) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the nine months ended September 30, 2012 or the year ended December 31, 2011.

Supplemental Information

Gross realized gains on sales of investment securities, included in other non-interest revenues for the three and nine months ended September 30, 2012, were $35 million and $85 million, respectively (there were no gross realized gains for the three and nine months ended September 30, 2011). Gross realized losses on sales of investment securities, included in other non-interest revenues for the three and nine months ended September 30, 2012, were nil and $1 million, respectively (there were no gross realized losses for the three and nine months ended September 30, 2011).

Contractual maturities of investment securities, excluding equity securities and other securities, as of September 30, 2012 were as follows:

 

                                             

 

(Millions)

       Cost    

Estimated Fair Value

Due within 1 year

     $ 507     $                509

Due after 1 year but within 5 years

       344     353

Due after 5 years but within 10 years

       166     179

Due after 10 years

       4,468     4,684
    

 

 

   

 

Total

     $ 5,485     $             5,725
    

 

 

   

 

 

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.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Asset Securitizations

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). 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, excluding its consolidated subsidiaries, owns approximately $0.9 billion of subordinated securities issued by the Lending Trust as of September 30, 2012. 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 to the VIE. 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 is the primary beneficiary of both the Charge Trust and the Lending Trust.

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 a de minimis amount and approximately $15 million of restricted cash held by the Charge Trust as of September 30, 2012 and December 31, 2011, respectively, and approximately $1.3 billion and $192 million of restricted cash held by the Lending Trust as of September 30, 2012 and December 31, 2011, respectively, included in other assets on the Company’s Consolidated Balance Sheets. 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.

Charge Trust and Lending Trust Triggering Events

Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each trust could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates. During the nine months ended September 30, 2012 and the year ended December 31, 2011, no such triggering events occurred.

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Customer Deposits

As of September 30, 2012 and December 31, 2011, customer deposits were categorized as interest-bearing or non-interest-bearing deposits as follows:

 

                                             

 

(Millions)

       2012     

2011

U.S.:

       

Interest-bearing

     $ 37,038      $           37,271

Non-interest-bearing

       8      4

Non-U.S.:

       

Interest-bearing

       140      612

Non-interest-bearing

       9      11
    

 

 

    

 

Total customer deposits

     $ 37,195      $           37,898
    

 

 

    

 

 

Customer deposits were aggregated by deposit type offered by the Company as of September 30, 2012 and December 31, 2011 as follows:

 

                                             

 

(Millions)

       2012     

2011

U.S. retail deposits:

       

Savings accounts – Direct

     $ 16,981      $           14,649

Certificates of deposit:

       

Direct

       757      893

Third-party

       9,032      10,781

Sweep accounts – Third-party

       10,268      10,948

Other deposits

       157      627
    

 

 

    

 

Total customer deposits

     $ 37,195      $           37,898
    

 

 

    

 

 

The scheduled maturities of certificates of deposit as of September 30, 2012 were as follows:

 

                                                                    

 

(Millions)

       U.S.        Non-U.S.      

Total

2012

     $ 959     $ 2      $                961

2013

       4,876       1      4,877

2014

       2,608             2,608

2015

       365             365

2016

       618             618

After 5 years

       363             363
    

 

 

   

 

 

    

 

Total

     $ 9,789     $ 3      $             9,792
    

 

 

   

 

 

    

 

 

As of September 30, 2012 and December 31, 2011, certificates of deposit in denominations of $100,000 or more were as follows:

 

                                             

 

(Millions)

       2012     

2011

U.S.

     $ 497      $                580

Non-U.S.

       2      304
    

 

 

    

 

Total

     $ 499      $                884
    

 

 

    

 

 

 

8. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. 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 Company’s market risk management. The Company does not engage in derivatives for trading purposes.

 

24


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Market risk is the risk to earnings or value resulting from movements in market prices. The Company’s market risk exposure is primarily generated by:

 

   

Interest rate risk in its card, insurance and Travelers Cheque businesses, as well as its investment portfolios; and

 

   

Foreign exchange risk in its operations outside the United States and the associated funding of such operations.

The Company centrally monitors market risks using market risk limits and escalation triggers as defined in its Asset/Liability Management Policy.

The Company’s market exposures are in large part byproducts 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 Company’s 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 economically convert fixed-rate debt obligations to variable-rate obligations or to convert variable-rate debt obligations to fixed-rate obligations. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors.

Foreign exchange risk is generated by cardmember cross-currency charges, foreign currency balance sheet exposures, foreign subsidiary equity and foreign currency earnings in entities outside the United States. The Company’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivatives such as foreign exchange forwards and cross-currency swap contracts, which can help mitigate the Company’s exposure to specific currencies.

In addition to the exposures identified above, effective August 1, 2011, the Company entered into a total return contract (TRC) to hedge its exposure to changes in the fair value of its equity investment in ICBC in local currency. Under the terms of the TRC, the Company receives from the TRC counterparty an amount equivalent to any reduction in the fair value of its investment in ICBC in local currency, and in return the Company pays to the TRC counterparty an amount equivalent to any increase in the fair value of its investment in local currency, along with all dividends paid by ICBC, as well as ongoing hedge costs. The TRC matures on August 1, 2014.

Derivatives may give rise to counterparty credit risk, which is the risk that a derivative counterparty will default on, or otherwise be unable to perform pursuant to, an uncollateralized derivative exposure. 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 by the Company and rated as investment grade. Counterparty risk exposures are centrally monitored by the Company. Additionally, in order to mitigate the bilateral counterparty credit risk associated with derivatives, the Company has in certain instances entered into master netting agreements with its derivative counterparties, which provide a right of offset for certain exposures between the parties. To further mitigate bilateral counterparty credit risk, the Company exercises its rights under executed credit support agreements with certain of its derivative counterparties. These agreements require that, in the event the fair value change in the net derivatives position between the two parties exceeds certain dollar thresholds, the party in the net liability position posts collateral to its counterparty.

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, 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. Based on the assessment of credit risk of the Company’s derivative counterparties as of September 30, 2012 and December 31, 2011, the Company does not have derivative positions that warrant credit valuation adjustments.

The Company’s 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 2 for a description of the Company’s methodology for determining the fair value of derivatives.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2012 and December 31, 2011:

 

                                                                                           

 

      
 
Other Assets
Fair Value
  
  
   

 

Other Liabilities

Fair Value

(Millions)

       2012         2011       2012    

2011

Derivatives designated as hedging instruments:

          

Interest rate contracts

          

Fair value hedges

     $ 938     $ 999     $      $                 — 

Cash flow hedges

                         

Total return contract

          

Fair value hedge

              13       23     — 

Foreign exchange contracts

          

Net investment hedges

       26        344       273     54 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives designated as hedging instruments

     $ 964     $ 1,356     $ 296     $                 55 
    

 

 

   

 

 

   

 

 

   

 

Derivatives not designated as hedging instruments:

          

Interest rate contracts

     $      $ 1     $ 1     $                 — 

Foreign exchange contracts, including certain embedded derivatives(a)

       125        159       104     50 

Equity-linked embedded derivative(b)

                     2    
    

 

 

   

 

 

   

 

 

   

 

Total derivatives not designated as hedging instruments

       125        160       107     53 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, gross

     $ 1,089     $ 1,516     $ 403     $               108 
    

 

 

   

 

 

   

 

 

   

 

Cash collateral netting(c)

       (681     (587     (16   — 
    

 

 

   

 

 

   

 

 

   

 

Derivative asset and derivative liability netting(c)

       (18     (14     (18   (14)
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, net

     $ 390      $ 915     $ 369     $                 94 
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Includes foreign currency derivatives embedded in certain operating agreements.

 

  (b)

Represents an equity-linked derivative embedded in one of the Company’s investment securities.

 

  (c)

As permitted under GAAP, balances represent the netting of cash collateral received and posted under credit support agreements, and the netting of derivative assets and derivative liabilities under master netting agreements.

Derivative Financial Instruments 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 terms similar to that of the item being hedged. 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 a 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 Company’s 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.

 

26


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As of September 30, 2012 and December 31, 2011, the Company hedged $20.0 billion and $17.1 billion, respectively, 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 reflected in earnings as a component of other expenses. Hedge ineffectiveness may be caused by differences between the debt’s interest coupon and the benchmark rate, 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, as 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 resulting from changes in interest rates. The existing basis adjustment of the hedged asset or liability is amortized or accreted as an adjustment to yield over the remaining life of that asset or liability.

Total Return Contract

The Company hedges its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company uses a TRC to transfer this exposure to its derivative counterparty. As of September 30, 2012 and December 31, 2011, the fair value of the equity investment in ICBC was $280 million (474.7 million shares) and $359 million (605.4 million shares), respectively. To the extent the hedge is effective, the gain or loss on the TRC offsets the loss or gain on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item results in hedge ineffectiveness and is recognized in other expenses in the Consolidated Statements of Income.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s hedges of its fixed-rate long-term debt and its investment in ICBC:

 

                                                                                               

 

For the Three Months Ended September 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   

 

Net hedge

ineffectiveness

Derivative

relationship

    

Income Statement

Line Item

       Amount     

Income Statement

Line Item

       Amount     
            2012        2011             2012        2011        2012     

2011

Interest rate contracts

    

Other, net expenses

     $ (28   $ 219     

Other, net expenses

     $ (2   $ (191   $ (30   $      28 

Total return contract

    

Other non-interest revenues

       (19     166     

Other non-interest revenues

       19        (178          (12)

 

 

                                                                                               

 

For the Nine Months Ended September 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   

 

Net hedge

ineffectiveness

Derivative

relationship

    

Income Statement

Line Item

       Amount     

Income Statement

Line Item

       Amount     
            2012        2011             2012        2011        2012     

2011

Interest rate contracts

    

Other, net expenses

     $ (64   $ 202     

Other, net expenses

     $ 25      $ (189   $ (39   $       13 

Total return contract

    

Other non-interest revenues

       2        166     

Other non-interest revenues

       (2     (178          (12)

 

The Company also recognized a net reduction in interest expense on long-term debt of $127 million for both the three months ended September 30, 2012 and 2011, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges. For both the nine months ended September 30, 2012 and 2011, the impact on interest expense was a net reduction in interest expense on long-term debt of $377 million.

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash Flow Hedges

A cash flow hedge involves a derivative designated to hedge the Company’s exposure to variable future cash flows attributable to a particular risk. Such exposures may relate to either 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 derivative instruments economically convert floating-rate debt obligations to fixed-rate obligations for the duration of the instrument. As of September 30, 2012 and December 31, 2011, the Company hedged nil and $305 million, respectively, of its floating-rate debt using interest rate swaps.

For derivatives designated 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 in the same line item in which the hedged instrument or transaction is recognized, primarily in interest expense. Any ineffective portion of the gain or loss on the derivatives is reported as a component of other 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 a de minimis amount of net pretax losses on derivatives from AOCI into earnings during the next 12 months.

Net Investment Hedges

A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S. subsidiaries. The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was $(320) million and $181 million for the three months ended September 30, 2012 and 2011, respectively, and was $(294) million and $(41) million for the nine months ended September 30, 2012 and 2011, respectively. Any ineffective portion of the gain or loss on net investment hedges is recognized in other expenses during the period of change.

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For the three months ended September 30, 2012 and 2011, there were no amounts reclassified from AOCI into earnings and there was no hedge ineffectiveness on cash flow hedges and net investment hedges recorded within the Consolidated Statements of Income.

The following table summarizes the impact of cash flow hedges and net investment hedges on the Consolidated Statements of Income for the nine months ended September 30:

 

                                                                       

 

    

Gains (losses) recognized in income

           
 
 
Amount reclassified
from AOCI into
income
  
  
  
        
 
Net hedge
ineffectiveness

Description (Millions)

    

Income Statement Line Item

       2012        2011     

Income Statement Line Item

       2012     

2011

Cash flow hedges:(a)

                    

Interest rate contracts

     Interest expense      $ (1   $ (13   Other, net expenses      $      $      — 

Net investment hedges:

                    

Foreign exchange contracts

     Other, net expenses      $      $      Other, net expenses      $      $       (3)

 

 

  (a)

During the nine months ended September 30, 2012 and 2011, 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, but are not designated as such 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.

The Company has certain operating agreements containing payments that 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, in which case 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 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.

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated Statements of Income for the three and nine months ended September 30:

 

                                                                    

 

For the Three Months Ended September 30: (Millions)

    

Pretax gains (losses)

            Amount

Description

    

Income Statement Line Item

       2012    

2011

Interest rate contracts

     Other, net expenses      $ (1   $                 — 

Foreign exchange contracts(a)

     Interest and dividends on investment securities                    
     Interest expense on short-term borrowings             — 
     Interest expense on long-term debt and other             33 
     Other, net expenses        (13   (48)

Equity-linked contract

     Other non-interest revenues             (1)
         

 

 

   

 

Total

          $ (14   $                (14)
         

 

 

   

 

 

 

                                                                    

 

For the Nine Months Ended September 30: (Millions)

    

Pretax gains (losses)

            Amount

Description

    

Income Statement Line Item

       2012    

2011

Interest rate contracts

     Other, net expenses      $ (2   $                   2 

Foreign exchange contracts(a)

     Interest and dividends on investment securities                    
     Interest expense on short-term borrowings            
     Interest expense on long-term debt and other             94 
     Other, net expenses        31     (97)

Equity-linked contract

     Other non-interest revenues        2     (1)
         

 

 

   

 

Total

          $ 31     $                   8 
         

 

 

   

 

 

 

  (a)

Foreign exchange contracts include embedded foreign currency derivatives. Gains (losses) on these embedded derivatives are included in other expenses.

 

9. Guarantees

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

In relation to its maximum potential undiscounted future payments as shown in the table that follows, to date the Company has not experienced any significant losses related to guarantees. The Company’s initial recognition of guarantees is at fair value, which has been determined in accordance with GAAP governing fair value measurement. In addition, the Company establishes reserves when a loss is probable and the amount can be reasonably estimated.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information related to such guarantees as of September 30, 2012 and December 31, 2011:

 

                                                                                           

 

      
 
 
 
Maximum potential
undiscounted future
payments
(a)
(Billions)
  
  
  
  
   
 
Related liability(b)
(Millions)

Type of Guarantee

       2012       2011       2012    

2011

Card and travel operations(c)

     $ 45     $ 51     $ 93     $                  96

Other(d)

       1       1       94     98
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 46     $ 52     $ 187     $                194
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Represents the notional amounts that could be lost under the guarantees and indemnifications if there was a total default by the guaranteed parties. The Merchant Protection guarantee is calculated using management’s best estimate of maximum exposure based on all eligible claims as measured against annual billed business volumes. The Company mitigates this risk by withholding settlement from the merchant or obtaining deposits and other guarantees 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 undiscounted future payments.

 

  (b)

Included as part of other liabilities on the Company’s Consolidated Balance Sheets.

 

  (c)

Includes Return Protection, Account Protection and Merchant Protection.

 

  (d)

Primarily includes guarantees related to the Company’s business dispositions and real estate.

 

10. Income Taxes

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2004, however refund claims for those years continue to be reviewed by the IRS. In addition, 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 $918 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 deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $918 million of unrecognized tax benefits, approximately $677 million relates to amounts that if recognized would be recorded to shareholders’ equity and would not impact the effective tax rate. With respect to the remaining $241 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years’ items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

The effective tax rate from continuing operations was 33.2 percent and 30.4 percent for the three and nine months ended September 30, 2012, respectively. The tax rate for the nine months ended September 30, 2012 includes a tax benefit of $146 million, related to the realization of certain foreign tax credits.

The effective tax rate from continuing operations was 27.8 percent and 28.8 percent for the three and nine months ended September 30, 2011, respectively. The tax rate for the three and nine months ended September 30, 2011 includes a $77 million tax benefit related to the realization of certain foreign tax credits. The tax rate for the nine months ended September 30, 2011 also includes the impact of a $102 million tax benefit related to the favorable resolution of certain prior years’ tax items.

 

31


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In addition, the tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

 

11. Earnings Per Common Share (EPS)

The computations of basic and diluted EPS were as follows:

 

                                                                                           

 

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

(Millions, except per share amounts)

       2012       2011       2012    

2011

Numerator:

          

Basic and diluted:

          

Income from continuing operations

     $ 1,250     $ 1,235     $ 3,845     $            3,707 

Earnings allocated to participating share awards(a)

       (14     (15     (42   (44)

Income from discontinued operations, net of tax

                          36 
    

 

 

   

 

 

   

 

 

   

 

Net income attributable to common shareholders

     $ 1,236     $ 1,220     $ 3,803     $            3,699 
    

 

 

   

 

 

   

 

 

   

 

Denominator:(a)

          

Basic: Weighted-average common stock

       1,126       1,175       1,143     1,184 

Add: Weighted-average stock options(b)

       6       6       6    
    

 

 

   

 

 

   

 

 

   

 

Diluted

       1,132       1,181       1,149     1,191 
    

 

 

   

 

 

   

 

 

   

 

Basic EPS:

          

Income from continuing operations attributable to common shareholders

     $ 1.10     $ 1.04     $ 3.33     $              3.09 

Income from discontinued operations

                          0.03 
    

 

 

   

 

 

   

 

 

   

 

Net income attributable to common shareholders

     $ 1.10     $ 1.04     $ 3.33     $              3.12 
    

 

 

   

 

 

   

 

 

   

 

Diluted EPS:

          

Income from continuing operations attributable to common shareholders

     $ 1.09     $ 1.03     $ 3.31     $              3.08 

Income from discontinued operations

                          0.03 
    

 

 

   

 

 

   

 

 

   

 

Net income attributable to common shareholders

     $ 1.09     $ 1.03     $ 3.31     $              3.11 
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The Company’s unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator.

 

  (b)

For both the three and nine months ended September 30, 2012, the dilutive effect of unexercised stock options excludes 8 million options from the computation of EPS because inclusion of the options would have been anti-dilutive. For both the three and nine months ended September 30, 2011, the dilutive effect of unexercised stock options excludes 19 million options from the computation of EPS because inclusion of the options would have been anti-dilutive.

For the three and nine months ended September 30, 2012 and 2011, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, which resulted in no impact to EPS. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.

 

32


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Details of Certain Consolidated Statements of Income Line Items

The following is a detail of other commissions and fees:

 

                                                                                   

 

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

(Millions)

     2012       2011       2012    

2011

Foreign currency conversion revenue

   $ 220     $ 225     $ 643     $              651

Delinquency fees

     156       155       476     439

Service fees

     81       89       263     266

Other

     124       135       357     361
  

 

 

   

 

 

   

 

 

   

 

Total other commissions and fees

   $ 581     $ 604     $ 1,739     $           1,717
  

 

 

   

 

 

   

 

 

   

 

 

The following is a detail of other revenues:

 

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

(Millions)

     2012       2011       2012    

2011

Global Network Services partner revenues

   $ 156     $ 157     $ 474     $              459

Net gain on investment securities

     35              84    

Other

     386       377       1,250     1,087
  

 

 

   

 

 

   

 

 

   

 

Total other revenues

   $ 577     $ 534     $ 1,808     $           1,546
  

 

 

   

 

 

   

 

 

   

 

                              

Other revenues include revenues arising from contracts with Global Network Services (GNS) partners including royalties and signing fees, insurance premiums earned from cardmember travel and other insurance programs, Travelers Cheques related revenues, publishing revenues and other miscellaneous revenues and fees.

The following is a detail of marketing, promotion, rewards and cardmember services:

 

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

(Millions)

     2012       2011       2012    

2011

Marketing and promotion

   $ 764     $ 757     $ 2,168     $           2,261

Cardmember rewards

     1,496       1,565       4,425     4,755

Cardmember services

     201       189       602     526
  

 

 

   

 

 

   

 

 

   

 

Total marketing, promotion, rewards and cardmember services

   $ 2,461     $ 2,511     $ 7,195     $           7,542
  

 

 

   

 

 

   

 

 

   

 

                              

Marketing and promotion expense includes advertising costs, which are expensed in the year in which the advertising first takes place. Cardmember rewards expense includes the costs of rewards programs, including Membership Rewards and co-brand arrangements. Cardmember services expense includes protection plans and complimentary services provided to cardmembers.

 

33


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a detail of other, net:

 

                                                                                   

 

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

(Millions)

     2012       2011       2012    

2011

Professional services

   $ 690     $ 690     $ 2,092     $          2,098 

Occupancy and equipment

     453       433       1,337     1,218 

Communications

     93       93       284     280 

MasterCard and Visa settlements, net of legal fees

            (68          (494)

Other

     300       354       972     950 
  

 

 

   

 

 

   

 

 

   

 

Total other, net

   $ 1,536     $ 1,502     $ 4,685     $          4,052 
  

 

 

   

 

 

   

 

 

   

 

 

Other expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations, litigation, internal and regulatory review-related refunds and insurance costs or settlements, investment impairments and certain Loyalty Partner expenses.

 

13. Contingencies

The Company and its subsidiaries are involved in a number of legal proceedings concerning matters arising out of the conduct of their respective business activities and are periodically subject to governmental and regulatory examinations, information gathering requests, subpoenas, inquiries and investigations (collectively, governmental examinations). As of September 30, 2012, 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 and outside the United States. The Company discloses its material legal proceedings and governmental examinations under Item 1. Legal Proceedings, in Part II. Other Information, and under “Legal Proceedings” in its Annual Report on Form 10-K for the year ended December 31, 2011 (collectively, Legal Proceedings).

The Company has recorded liabilities for certain of its outstanding legal proceedings and governmental examinations. A liability is accrued when it is both (a) probable that a loss with respect to the legal proceeding has occurred and (b) the amount of loss can be reasonably estimated. As discussed below, there may be instances in which an exposure to loss exceeds the accrued liability. 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 accrued or a revision to the disclosed estimated range of possible losses, as applicable.

The Company’s 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. As a result, some matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss.

Other matters have progressed sufficiently through discovery and/or development of important factual information and legal issues so that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed or referred to in Legal Proceedings where a loss is reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a range of possible loss,

 

34


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the current estimated range is zero to $510 million in excess of any accrued liability related to those matters. This aggregate range represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimated range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time and actual results may vary significantly from current estimates.

Based on its current knowledge, and taking into consideration its 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 Company’s 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 Company’s operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s earnings for that period.

 

35


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Reportable Operating Segments

The Company is a leading global payments and travel company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICS, GCS and Global Network & Merchant Services (GNMS). Corporate functions and auxiliary businesses, including the Company’s publishing business, the Enterprise Growth Group (including Global Payment Options), as well as other Company operations are included in Corporate & Other.

The following table presents certain operating segment information:

 

                                                                                           

 

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

(Millions)

       2012       2011       2012    

2011

Non-interest revenues:

          

USCS

     $ 2,887     $ 2,752     $ 8,566     $            8,008 

ICS

       1,126       1,156       3,351     3,315 

GCS

       1,218       1,195       3,718     3,631 

GNMS

       1,238       1,188       3,683     3,459 

Corporate & Other, including adjustments and eliminations(a)

       212       167       688     541 
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 6,681     $ 6,458     $ 20,006     $          18,954 
    

 

 

   

 

 

   

 

 

   

 

Interest income:

          

USCS

     $ 1,362     $ 1,287     $ 3,978     $            3,770 

ICS

       289       299       858     913 

GCS

       3       3       8    

GNMS

       7       2       16    

Corporate & Other, including adjustments and eliminations(a)

       78       97       257     317 
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 1,739     $ 1,688     $ 5,117     $            5,011 
    

 

 

   

 

 

   

 

 

   

 

Interest expense:

          

USCS

     $ 194     $ 201     $ 568     $               604 

ICS

       102       108       300     322 

GCS

       65       68       192     196 

GNMS

       (65     (60     (182   (163)

Corporate & Other, including adjustments and eliminations(a)

       262       258       804     786 
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 558     $ 575     $ 1,682     $            1,745 
    

 

 

   

 

 

   

 

 

   

 

Total revenues, net of interest expense:

          

USCS

     $ 4,055     $ 3,838     $ 11,976     $          11,174 

ICS

       1,313       1,347       3,909     3,906 

GCS

       1,156       1,130       3,534     3,442 

GNMS

       1,310       1,250       3,881     3,626 

Corporate & Other, including adjustments and eliminations(a)

       28       6       141     72 
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 7,862     $ 7,571     $ 23,441     $          22,220 
    

 

 

   

 

 

   

 

 

   

 

Income (loss) from continuing operations:

          

USCS

     $ 699     $ 733     $ 2,169     $            1,953 

ICS

       164       221       539     571 

GCS

       183       197       579     558 

GNMS

       360       332       1,089     969 

Corporate & Other, including adjustments and eliminations(a)

       (156     (248     (531   (344)
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 1,250     $ 1,235     $ 3,845     $            3,707 
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Corporate & Other includes adjustments and eliminations for intersegment activity.

 

36


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

Business Introduction

American Express (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company’s range of products and services include:

 

   

charge and credit card products;

 

   

expense management products and services;

 

   

consumer and business travel services;

 

   

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

 

   

network services;

 

   

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

 

   

fee services, including market and trend analyses and related consulting services, fraud prevention services, and the design of customized customer loyalty and rewards programs.

The Company’s products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

The Company competes in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, the Company is facing increasing competition from non-traditional players, such as online networks, telecom providers and software-as-a-service providers, who leverage new technologies and customers’ existing charge and credit card accounts and bank relationships to create payment or other fee-based solutions. In 2009, the Company established the Enterprise Growth Group, which focuses on generating alternative sources of global revenues in areas such as online and mobile payments and fee-based services. In addition to the Enterprise Growth Group, the Company is seeking to transform all of its businesses for the digital marketplace, including increasing the Company’s share of online spend across all products and enhancing customers’ digital experiences.

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

 

   

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

 

   

Net card fees, which represent revenue earned for annual card membership fees;

 

   

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

 

37


Table of Contents
   

Interest on loans, which principally represents interest income earned on outstanding balances.

In addition to funding and operating costs