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 March 31, 2009

 

or

 

o        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

 

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

incorporation or organization)

 

 

 

 

 

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  o

 

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

 

 

o  Yes

o  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  o

 

 

 

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

 

Smaller reporting company  o

 

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

 

 

Yes  o

No  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 April 27, 2009

Common Shares (par value $.20 per share)

 

1,167,625,393 shares

 

 

 



Table of Contents

 

AMERICAN EXPRESS COMPANY

 

FORM 10-Q

 

INDEX

 

 

 

Page No.

Part I.

Financial Information:

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Statements of Income — Three months ended March 31, 2009 and 2008

1

 

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2009 and December 31, 2008

2

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2009 and 2008

3

 

 

 

 

 

 

Notes to Consolidated Financial Statements

4 – 31

 

 

 

 

 

Item 2.

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

32 – 66

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

 

 

 

 

 

Item 4.

Controls and Procedures

67 – 69

 

 

 

Part II.

Other Information:

 

 

 

 

 

Item 1.

Legal Proceedings

70 72

 

 

 

 

 

Item 1A.

Risk Factors

73

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

75

 

 

 

 

 

Item 6.

Exhibits

76

 

 

 

 

Signatures

77

 

 

 

 

Exhibit Index

E-1

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Revenues

 

 

 

 

 

Non-interest revenues

 

 

 

 

 

Discount revenue

 

$

3,066

 

$

3,718

 

Net card fees

 

532

 

531

 

Travel commissions and fees

 

365

 

494

 

Other commissions and fees

 

453

 

622

 

Securitization income, net

 

141

 

444

 

Other

 

450

 

460

 

Total non-interest revenues

 

5,007

 

6,269

 

Interest income

 

 

 

 

 

Interest and fees on loans

 

1,292

 

1,671

 

Interest and dividends on investment securities

 

154

 

186

 

Deposits with banks and other

 

28

 

85

 

Total interest income

 

1,474

 

1,942

 

Interest expense

 

 

 

 

 

Deposits

 

85

 

149

 

Short-term borrowings

 

27

 

161

 

Long-term debt

 

434

 

650

 

Other

 

9

 

11

 

Total interest expense

 

555

 

971

 

Net interest income

 

919

 

971

 

Total revenues net of interest expense

 

5,926

 

7,240

 

Provisions for losses

 

 

 

 

 

Charge card

 

336

 

345

 

Cardmember lending

 

1,414

 

809

 

Other

 

53

 

57

 

Total provisions for losses

 

1,803

 

1,211

 

Total revenues net of interest expense after provisions for losses

 

4,123

 

6,029

 

Expenses

 

 

 

 

 

Marketing, promotion, rewards and cardmember services

 

1,302

 

1,756

 

Salaries and employee benefits

 

1,253

 

1,470

 

Professional services

 

519

 

550

 

Other, net

 

505

 

792

 

Total

 

3,579

 

4,568

 

Pretax income from continuing operations

 

544

 

1,461

 

Income tax provision

 

101

 

417

 

Income from continuing operations

 

443

 

1,044

 

Loss from discontinued operations, net of tax

 

(6

)

(53

)

Net income

 

$

437

 

$

991

 

Earnings per Common Share — Basic: (Note 11)

 

 

 

 

 

Income from continuing operations attributable to common shareholders (a)

 

$

0.32

 

$

0.90

 

Loss from discontinued operations

 

(0.01

)

(0.05

)

Net income attributable to common shareholders (a)

 

$

0.31

 

$

0.85

 

Earnings per Common Share — Diluted: (Note 11)

 

 

 

 

 

Income from continuing operations attributable to common shareholders (a)

 

$

0.32

 

$

0.89

 

Loss from discontinued operations

 

(0.01

)

(0.04

)

Net income attributable to common shareholders (a)

 

$

0.31

 

$

0.85

 

Average common shares outstanding for earnings per common share:

 

 

 

 

 

Basic

 

1,156

 

1,153

 

Diluted

 

1,156

 

1,163

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

 


(a) Calculated based on income from continuing operations or net income, as applicable, less (i) preferred shares dividends and related accretion of $72 million for the quarter ended March 31, 2009 and (ii) earnings allocated to participating share awards of $4 million and $6 million for the quarters ended March 31, 2009 and 2008, respectively.

 

See Notes to Consolidated Financial Statements.

 

1



Table of Contents

 

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Millions, except share data)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

Cash and cash due from banks

 

$

122

 

$

1,574

 

Interest-bearing deposits in other banks (including federal funds sold and securities purchased under resale agreements: 2009, $0; 2008, $141)

 

7,128

 

6,554

 

Short-term investment securities

 

13,547

 

12,419

 

Total

 

20,797

 

20,547

 

Accounts receivable

 

 

 

 

 

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

 

29,458

 

32,178

 

Other receivables, less reserves: 2009, $115; 2008, $118

 

2,883

 

4,393

 

Loans

 

 

 

 

 

Cardmember lending, less reserves: 2009, $3,013; 2008, $2,570

 

33,734

 

39,641

 

Other, less reserves: 2009, $41; 2008, $39

 

583

 

1,018

 

Investment securities

 

18,204

 

12,526

 

Premises and equipment — at cost, less accumulated depreciation: 2009, $3,850; 2008, $3,743

 

2,854

 

2,948

 

Other assets

 

12,462

 

12,607

 

Assets of discontinued operations

 

208

 

216

 

Total assets

 

$

121,183

 

$

126,074

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Customers’ deposits

 

$

18,101

 

$

15,486

 

Travelers Cheques outstanding

 

5,917

 

6,433

 

Accounts payable

 

8,070

 

8,428

 

Short-term borrowings

 

2,867

 

8,993

 

Long-term debt

 

57,620

 

60,041

 

Other liabilities

 

12,809

 

14,592

 

Liabilities of discontinued operations

 

19

 

260

 

Total liabilities

 

105,403

 

114,233

 

Contingencies (see Note 17)

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,168 million shares in 2009 and 1,160 million shares in 2008

 

235

 

232

 

Preferred shares, 3.4 million shares issued in 2009 and nil in 2008; liquidation preference $3,389

 

3,168

 

 

Additional paid-in capital

 

10,586

 

10,496

 

Retained earnings

 

3,044

 

2,719

 

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

Net unrealized securities losses, net of tax: 2009, $253; 2008, $458

 

(367

)

(699

)

Net unrealized derivatives losses, net of tax: 2009, $34; 2008, $44

 

(61

)

(80

)

Foreign currency translation adjustments, net of tax: 2009, $82; 2008, $64

 

(387

)

(368

)

Net unrealized pension and other postretirement benefit costs, net of tax: 2009 $204; 2008, $216

 

(438

)

(459

)

Total accumulated other comprehensive loss

 

(1,253

)

(1,606

)

Total shareholders’ equity

 

15,780

 

11,841

 

Total liabilities and shareholders’ equity

 

$

121,183

 

$

126,074

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

437

 

$

991

 

Loss from discontinued operations, net of tax

 

6

 

53

 

Income from continuing operations

 

443

 

1,044

 

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

 

 

 

 

 

Provisions for losses

 

1,977

 

1,332

 

Depreciation and amortization

 

192

 

173

 

Deferred taxes, acquisition costs and other

 

(375

)

(188

)

Stock-based compensation

 

53

 

66

 

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

 

 

 

 

 

Other receivables

 

1,466

 

863

 

Other assets

 

250

 

105

 

Accounts payable and other liabilities

 

(2,304

)

1,521

 

Travelers Cheques outstanding

 

(515

)

(346

)

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

 

1

 

(35

)

Net cash provided by operating activities

 

1,188

 

4,535

 

Cash Flows from Investing Activities

 

 

 

 

 

Sale of investments

 

351

 

740

 

Maturity and redemption of investments

 

544

 

3,664

 

Purchase of investments

 

(6,039

)

(4,571

)

Net decrease in cardmember loans/receivables

 

8,315

 

2,919

 

Proceeds from cardmember loan securitizations

 

 

3,721

 

Maturities of cardmember loan securitizations

 

(1,500

)

(2,020

)

Purchase of premises and equipment

 

(88

)

(196

)

Sale of premises and equipment

 

9

 

5

 

Acquisitions, net of cash acquired

 

 

(4,342

)

Net cash provided by investing activities attributable to discontinued operations

 

12

 

2,014

 

Net cash provided by investing activities

 

1,604

 

1,934

 

Cash Flows from Financing Activities

 

 

 

 

 

Net change in customer deposits

 

2,647

 

(1,346

)

Net (decrease) increase in short-term borrowings

 

(6,041

)

1,150

 

Issuance of long-term debt

 

 

3,329

 

Principal payments on long-term debt

 

(2,271

)

(3,377

)

Issuance of American Express Series A preferred shares and warrants

 

3,389

 

 

Issuance of American Express common shares

 

 

92

 

Repurchase of American Express common shares

 

 

(219

)

Common and preferred dividends paid

 

(226

)

(210

)

Net cash used in financing activities attributable to discontinued operations

 

(3

)

(1,748

)

Net cash used in financing activities

 

(2,505

)

(2,329

)

Effect of exchange rate changes on cash

 

(27

)

44

 

Net increase in cash and cash equivalents

 

260

 

4,184

 

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

 

20,550

 

15,268

 

Cash and cash equivalents at end of period includes cash of discontinued operations:
2009, $13; 2008, $4,136

 

$

20,810

 

$

19,452

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation

 

The Company

 

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

 

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

 

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

 

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

 

Recently Issued Accounting Standards

 

The Financial Accounting Standards Board (FASB) recently issued the following accounting standards, which are effective beginning June 30, 2009.  The adoption of the accounting standards listed below will not have a material impact on the Company’s financial position or results of operations.

 

·                  FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1), amends Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28, “Interim Financial Reporting” to require disclosures about fair value of financial instruments in interim financial statements on a prospective basis.

 

·                  FSP No. FAS 115-2/FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS
115-2/FAS 124-2), requires a limited form of retrospective application.  FSP FAS 115-2/FAS 124-2 modifies current impairment guidance for debt securities, changes the requirements for recognizing an other-than-temporary-impairment on debt securities, and modifies the presentation of other-than-temporary-impairment losses in the Statement of Income and Balance Sheet.  In addition, FSP FAS 115-2/FAS 124-2 also requires expanded financial statement disclosures for both debt and equity securities in interim and annual periods.

 

·                  FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4), provides additional guidance in determining whether a market for an asset or a liability within the scope of SFAS No. 157 is inactive, and requires the evaluation of available evidence to determine whether a transaction in an inactive market is not orderly.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.              Discontinued Operations

 

On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB), to Standard Chartered PLC (Standard Chartered).  The sale was completed on February 29, 2008.

 

On September 18, 2007, the Company also entered into an agreement with Standard Chartered to sell American Express International Deposit Company (AEIDC), a subsidiary that issues investment certificates to AEB’s customers, 18 months after the close of the AEB sale through a put/call agreement. In the third quarter of 2008, AEIDC qualified to be reported as a discontinued operation as it is the Company’s intention to exercise its AEIDC put option in the third quarter of 2009.

 

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

 

Results from discontinued operations for the three months ended March 31, 2009 and 2008, were as follows:

 

(Millions)

 

2009

 

2008

 

Revenues net of interest expense

 

$

(6

)

$

71

 

Pretax (loss) income from discontinued operations

 

$

(9

)

$

25

 

Income tax (benefit) provision

 

(3

)

78

 

Loss from discontinued operations, net of tax

 

$

(6

)

$

(53

)

 

At March 31, 2009 and December 31, 2008, the assets and liabilities of the discontinued operations related to AEIDC were as follows:

 

(Millions)

 

2009

 

2008

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

13

 

$

3

 

Investments

 

194

 

213

 

Other assets

 

1

 

 

Total assets

 

208

 

216

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Investment certificates reserve

 

16

 

22

 

Other liabilities

 

3

 

238

 

Total liabilities

 

19

 

260

 

Net assets (deficit)

 

$

189

 

$

(44

)

 

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Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets and Liabilities of Discontinued Operations Measured at Fair Value on a Recurring Basis:

 

The following table presents the AEIDC financial instruments carried at fair value at March 31, 2009 and December 31, 2008, and the respective SFAS No. 157 fair value hierarchy level:

 

 

 

Total Carrying Value included
in Assets of Discontinued
Operations on the Balance
Sheet at:

 

Fair Value

 

(Millions)

 

March 31,
2009

 

December 31,
2008

 

Hierarchy
Level

 

Residential mortgage-backed securities

 

 

 

 

 

 

 

Prime(a)

 

$

46

 

$

46

 

2

 

Alt-A(a)

 

141

 

159

 

2

 

Total residential mortgage-backed securities

 

187

 

205

 

 

 

Other asset-backed securities (b)

 

7

 

8

 

3

 

Total investments at fair value

 

$

194

 

$

213

 

 

 

 


(a)          The fair market values were obtained from pricing services engaged by the Company.  The Company receives one price for each security.  The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs.  The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yield, benchmark security prices, credit spreads, prepayment speeds, reported trades, broker-dealer quotes, all with reasonable levels of transparency.  The pricing models used generally do not entail substantial subjectivity because the methodologies employed use inputs observed from active markets or recent trades of similar securities in inactive markets.  The pricing services do not apply any adjustments to the pricing models used, nor does the Company apply any adjustments to prices received from the pricing services.  The Company has reaffirmed its understanding of the valuation techniques used by its pricing services.  No adjustments were deemed necessary to the prices provided by the pricing services as a result of current market conditions.  The use of different techniques (e.g., different pricing models) to determine the fair value of these investments could result in different estimates of fair value at the reporting date.

 

(b)         Represents investments in other asset-backed securities transferred in the second quarter of 2008 from Level 2 into Level 3 of the fair value hierarchy primarily due to the significant inputs to the fair value of these assets being unobservable as a result of limited marketplace activity. The value of these assets was $24 million when they were transferred into Level 3 during the second quarter of 2008.  Throughout the remainder of 2008, the Company had $10 million in net settlements and $6 million in realized losses, reducing the value of these investments to $8 million at December 31, 2008.  During the first quarter of 2009, the Company had $1.3 million in net settlements and $0.4 million in unrealized gains, bringing the value of these securities to $7 million at March 31, 2009.

 

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Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.              Accounts Receivable

 

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

 

(Millions)

 

2009

 

2008

 

U.S. Card Services

 

$

15,551

 

$

17,822

 

International Card Services

 

5,007

 

5,582

 

Global Commercial Services

 

9,561

 

9,397

 

Global Network & Merchant Services (a)

 

149

 

187

 

Cardmember receivables, gross (b)

 

30,268

 

32,988

 

Less: Cardmember reserve for losses

 

810

 

810

 

Cardmember receivables, net

 

$

29,458

 

$

32,178

 

Other receivables, gross (c)

 

$

2,998

 

$

4,511

 

Less: Other reserve for losses

 

115

 

118

 

Other receivables, net

 

$

2,883

 

$

4,393

 

 


(a)          Includes receivables primarily related to the Company’s business partners and International Currency Card portfolios.

 

(b)         Includes approximately $8.9 billion and $9.9 billion of cardmember receivables outside the United States as of March 31, 2009 and December 31, 2008, respectively.

 

(c)          Other receivables primarily represent amounts due from the Company’s travel customers, third party issuing partners, accrued interest on investments, receivables acquired in connection with the purchase of Corporate Payment Services (CPS), and other receivables due to the Company in the ordinary course of business.

 

The following table presents changes in the cardmember receivable reserve for losses for the three months ended March 31:

 

(Millions)

 

2009

 

2008

 

Balance, January 1

 

$

810

 

$

1,149

 

Additions:

 

 

 

 

 

Cardmember receivables provision

 

336

 

345

 

Deductions:

 

 

 

 

 

Cardmember receivables net write-offs (a)

 

(332

)

(257

)

Cardmember receivables other (b)

 

(4

)

(16

)

Balance, March 31

 

$

810

 

$

1,221

 

 


(a)          Represents write-offs of charge card balances consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries of $77 million and $49 million for the three months ended March 31, 2009 and 2008, respectively.

 

(b)         Primarily includes foreign currency translation adjustments. For the three months ended March 31, 2008, this amount also includes waived fees.

 

7



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.              Loans

 

Loans at March 31, 2009 and December 31, 2008 consisted of:

 

(Millions)

 

2009

 

2008

 

U.S. Card Services

 

$

28,228

 

$

32,684

 

International Card Services

 

8,487

 

9,499

 

Global Commercial Services

 

32

 

28

 

Cardmember lending, gross

 

36,747

 

42,211

 

Less: Cardmember lending reserve for losses

 

3,013

 

2,570

 

Cardmember lending, net

 

$

33,734

 

$

39,641

 

Other loans, gross (a)

 

$

624

 

$

1,057

 

Less: Other reserve for losses

 

41

 

39

 

Other loans, net

 

$

583

 

$

1,018

 

 


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

 

The following table presents changes in the cardmember lending reserve for losses for the three months ended March 31:

 

(Millions)

 

2009

 

2008

 

Balance, January 1

 

$

2,570

 

$

1,831

 

Additions:

 

 

 

 

 

Cardmember lending provisions (a)

 

1,401

 

776

 

Cardmember lending other (b)

 

13

 

33

 

Total provision

 

1,414

 

809

 

Deductions:

 

 

 

 

 

Cardmember lending net write-offs - principal (c)

 

(782

)

(566

)

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

 

(155

)

(127

)

Cardmember lending other (d)

 

(34

)

(28

)

Balance, March 31

 

$

3,013

 

$

1,919

 

 


(a) Represents loss provisions for cardmember lending consisting of principal (resulting from authorized transactions), interest, and fee reserves components.

 

(b) Primarily represents adjustments to cardmember lending receivables resulting from unauthorized transactions. For the three months ended March 31, 2008, this amount also includes waived fees.

 

(c) Cardmember lending net write-offs — principal for March 31, 2009 and 2008 include recoveries of $96 million and $71 million, respectively.  Recoveries of interest and fees were de minimis.

 

(d) Primarily includes foreign currency translation adjustments.

 

8



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents changes in the other loans reserve for losses for the three months ended March 31:

 

(Millions)

 

2009

 

2008

 

Balance, January 1

 

$

39

 

$

45

 

Provisions

 

10

 

9

 

Net write-offs and other (a)

 

(8

)

(7

)

Balance, March 31

 

$

41

 

$

47

 

 


(a) Net write-offs for March 31, 2009 and 2008 include recoveries of $2 million and $3 million, respectively.

 

5.              Investment securities

 

Available-for-sale Investments

 

The following is a summary of investment securities classified as available-for-sale at March 31, 2009 and December 31, 2008:

 

 

 

2009

 

2008

 

(Millions)

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

State and municipal obligations

 

$

6,505

 

$

44

 

$

(675

)

$

5,874

 

$

6,552

 

$

37

 

$

(1,034

)

$

5,555

 

U.S. Government and agencies obligations (a)

 

9,689

 

81

 

 

9,770

 

5,074

 

92

 

 

5,166

 

Mortgage-backed securities (b)

 

105

 

3

 

 

108

 

73

 

2

 

 

75

 

Retained subordinated securities (c)

 

1,328

 

 

(450

)

878

 

1,328

 

 

(584

)

744

 

Equity securities (d)

 

200

 

401

 

 

601

 

200

 

344

 

 

544

 

Corporate debt securities

 

725

 

3

 

(33

)

695

 

230

 

1

 

(13

)

218

 

Foreign government bonds and obligations

 

82

 

1

 

(5

)

78

 

84

 

1

 

(4

)

81

 

Other (e)

 

201

 

 

(1

)

200

 

143

 

 

 

143

 

Total

 

$

18,835

 

$

533

 

$

(1,164

)

$

18,204

 

$

13,684

 

$

477

 

$

(1,635

)

$

12,526

 

 


(a)          U.S. Government and agency obligations include U.S. Treasury securities and senior debentures issued by Government Sponsored Enterprises (Fannie Mae and Freddie Mac).  At March 31, 2009 and December 31, 2008, these amounts included $4.8 billion and $3.2 billion, respectively, of securities issued by Fannie Mae and Freddie Mac.

 

(b)         Represents the amount of mortgage-backed securities, all of which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

 

(c)          Consists of investments in retained subordinated securities from the Company’s securitization programs.

 

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

 

(e)          Included in other are short-term money market and state tax exempt securities (estimated fair value totaling $185 million and $127 million at March 31, 2009 and December 31, 2008, respectively) and other securities, primarily mutual funds.

 

The Company reviews and evaluates investments at least quarterly, and more often as market conditions may require, to identify investments that have indications of other-than-temporary impairment. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several metrics when evaluating securities for other-than-temporary impairment, including the extent to which amortized cost exceeds fair value, the duration and size of that difference, and the issuers’ credit rating. For securities in an unrealized loss position, the Company has the ability and the intent to hold the securities for a time sufficient to recover the unrealized losses and expects that contractual principal and interest will be received on these securities.

 

9



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value

 

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

 

·          When available, quoted market prices are used to determine fair value and the investment securities are classified within Level 1 of the fair value hierarchy.

 

·          When quoted prices in an active market are not available, the fair market values for the Company’s investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs.  The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades, broker-dealer quotes, all with reasonable levels of transparency.  The pricing services do not apply any adjustments to the pricing models used, nor does the Company apply any adjustments to prices received from the pricing services.  Although the underlying inputs are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. As of March 31, 2009, all of the Company’s investment securities are classified within Level 2 of the fair value hierarchy, except for the retained subordinated securities from the Company’s securitization programs which are classified within Level 3 of the fair value hierarchy, and are discussed in more detail in Note 6.

 

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

 

10



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.              Asset Securitizations

 

Off-Balance Sheet Securitizations

 

Servicing Portfolio

 

The Company periodically securitizes cardmember loans through the American Express Credit Account Master Trust (the Lending Trust). The following table illustrates the activity in the Lending Trust (including the securitized cardmember loans and seller’s interest) for the three months ended March 31:

 

(Millions)

 

2009

 

2008

 

Lending Trust assets, January 1

 

$

41,579

 

$

36,194

 

Cardmember activity, net

 

(4,542

)

(2,272

)

Lending Trust assets, March 31

 

$

37,037

 

$

33,922

 

Securitized cardmember loans, January 1

 

$

28,955

 

$

22,670

 

Impact of issuances

 

 

4,239

 

Impact of maturities

 

(1,500

)

(2,020

)

Securitized cardmember loans, March 31

 

$

27,455

 

$

24,889

 

Seller’s interest, January 1

 

$

12,624

 

$

13,524

 

Impact of issuances

 

 

(4,239

)

Impact of maturities

 

1,500

 

2,020

 

Cardmember activity, net

 

(4,542

)

(2,272

)

Seller’s interest, March 31

 

$

9,582

 

$

9,033

 

 

The Company, through its subsidiaries, is required to maintain an undivided interest in the transferred cardmember loans (seller’s interest), which is equal to the balance of all cardmember loans transferred to the Lending Trust plus the associated accrued interest receivable (Lending Trust assets) less the investors’ portion of those assets (securitized cardmember loans).  Seller’s interest is reported as cardmember lending on the Company’s Consolidated Balance Sheets.  Any billed finance charges related to the investors’ portion of securitized cardmember loans are reported as other assets on the Company’s Consolidated Balance Sheets.  The seller’s interest is required to be maintained at a minimum level of 7 percent of the outstanding securities in the Lending Trust.  If the seller’s interest was reduced below the 7 percent level, the Company would be required to add additional cardmember loans to the Lending Trust.  As of March 31, 2009, the amount of seller’s interest was approximately 31 percent of the outstanding securities in the Lending Trust.

 

The Company retains servicing responsibilities for the transferred cardmember loans through its subsidiary, American Express Travel Related Services Company, Inc., (TRS) and earns a related fee.  No servicing asset or liability is recognized at the time of a securitization because the Company receives adequate compensation relative to current market servicing fees.

 

11



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Securitization Income

 

The following table summarizes the activity related to securitized loans reported in securitization income, net for the three months ended March 31:

 

(Millions)

 

2009

 

2008

 

Excess spread, net (a)

 

$

2

 

$

310

 

Servicing fees

 

139

 

127

 

Gains on sales from securitizations (b)

 

 

7

 

Securitization income, net

 

$

141

 

$

444

 

 


(a) Excess spread, net is the net cash flow from interest and fee collections allocated to the investors’ interests after deducting the interest paid on investor certificates, credit losses, contractual servicing fees, other expenses, and the changes in the fair value of the interest-only strip.

 

(b) Excludes $(93) million of credit provision impact from maturities for 2009, and $140 million and $(68) million of credit provision impact from cardmember loan sales and maturities for 2008.

 

At the time of a cardmember loan securitization, the Company records a gain (loss) on sale, which is calculated as the difference between the proceeds from the sale and the book basis of the cardmember loans sold.  The book basis is determined by allocating the carrying amount of the sold cardmember loans, net of applicable credit reserves, between the cardmember loans sold and the interests retained based on their relative fair values.  Such fair values are based on market prices at the date of transfer for the sold cardmember loans and on the estimated present value of future cash flows for retained interests.  Gains (Losses) on sale from securitizations are reported in securitization income, net in the Company’s Consolidated Statements of Income.  The income component resulting from the release of credit reserves upon sale is reported as a reduction of provisions for losses from cardmember lending.

 

Retained Interests in Securitized Assets and Fair Value Measurement

 

The Company retains subordinated interests in the securitized cardmember loans.  These interests include one or more A-rated and BBB-rated investments in tranches of the securitization (subordinated securities) and an interest-only strip.  The following table presents retained interests at March 31, 2009 and December 31, 2008:

 

(Millions)

 

2009

 

2008

 

Subordinated securities (a)

 

$

878

 

$

744

 

Interest-only strip (b)

 

 

32

 

Total retained interests

 

$

878

 

$

776

 

 


(a) The subordinated securities are accounted for at fair value as available-for-sale investment securities and are reported in investments on the Company’s Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income.

 

(b) The interest-only strip is accounted for at fair value and is reported in other assets on the Company’s Consolidated Balance Sheets with changes in fair value recorded in securitization income, net in the Company’s Consolidated Statements of Income.

 

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

 

12



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

The following table presents the changes in fair value of the Company’s retained subordinated securities and its interest-only strip during the three months ended March 31, 2009:

 

(Millions)

 

Investments—
Retained
Subordinated
Securities

 

Other
Assets-
Interest-
Only Strip

 

Beginning fair value

 

$

744

 

$

32

 

Decreases in securitized loans

 

 

(17

)(b)

Total realized and unrealized gains (losses)

 

134

(a)

(15

)(b)

Ending fair value

 

$

878

 

$

 

 


(a) Included in accumulated other comprehensive (loss) income.

 

(b) Included in securitization income, net.

 

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

 

The key assumptions and the sensitivity of the current year’s fair value of the retained subordinated securities to immediate 10 percent and 20 percent adverse changes in these key assumptions are as follows:

 

Retained Subordinated Securities

 

(Millions, except rates per
annum)

 

Assumptions

 

Impact on fair
value of 10%
adverse change

 

Impact on fair
value of 20%
adverse change

 

Discount rate

 

19.5% - 25.9%

 

$

(44.1

)

$

(84.3

)

LIBOR

 

2.1% - 2.9%

 

$

(6.3

)

$

(12.5

)

 

This sensitivity analysis does not represent management’s expectations of adverse changes in these assumptions but is provided as a hypothetical scenario to assess the sensitivity of the fair value of the retained subordinated interests to changes in key inputs.  Management cannot extrapolate changes in fair value based on a 10 percent or 20 percent change in all key assumptions simultaneously in part because the relationship of the change in one assumption on the fair value of the retained interest is calculated independently from any change in another assumption.  Changes in one factor may cause changes in another, which could magnify or offset the sensitivities.

 

13



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other Disclosures

 

The table below summarizes cash flows received from the Lending Trust at March 31, 2009 and 2008:

 

(Millions)

 

2009

 

2008

 

Proceeds from new securitizations during the period

 

$

 

$

3,721

 

Proceeds from collections reinvested in revolving cardmember securitizations

 

$

19,133

 

$

18,469

 

Servicing fees received

 

$

139

 

$

127

 

Excess spread received, including issuer rate collections

 

$

452

 

$

684

 

 

The following table presents quantitative information about delinquencies, net credit losses, and components of securitized cardmember loans on a trust basis at March 31, 2009 and 2008:

 

(Billions)

 

Total Principal
Amount of
Loans

 

Amount of
Loans 30 Days or
More Past Due

 

Net
Credit
Write-offs
During
the Year

 

2009

 

 

 

 

 

 

 

Cardmember loans managed(a)

 

$

64.2

 

$

3.2

 

$

1.6

 

Less: Cardmember loans securitized

 

27.5

 

1.4

 

0.7

 

Cardmember loans on-balance sheet

 

$

36.7

 

$

1.8

 

$

0.9

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

Cardmember loans managed(a)

 

$

74.3

 

$

2.4

 

$

1.0

 

Less: Cardmember loans securitized

 

24.9

 

0.8

 

0.3

 

Cardmember loans on-balance sheet

 

$

49.4

 

$

1.6

 

$

0.7

 

 


(a)          Excludes subordinated accrued interest receivable classified in other assets of $821 million and $717 million for the periods ended March 31, 2009 and 2008, respectively.

 

14



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On-Balance Sheet Securitizations

 

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

 

The cardmember receivables securitized through this entity are not accounted for as sold and continue to be reported as owned assets on the Company’s Consolidated Balance Sheets.  The related securities issued to third-party investors are reported as long-term debt on the Company’s Consolidated Balance Sheets.  The Company, through its subsidiaries, is required to maintain an undivided, pro rata interest in the transferred cardmember receivables (seller’s interest) at a minimum level of 15 percent of the total receivables in the Charge Trust.  If the seller’s interest was reduced below the 15 percent level, the Company would be required to add additional cardmember receivables to the Charge Trust.  As of March 31, 2009, the amount of seller’s interest was approximately 23 percent of the total receivables in the Charge Trust.

 

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

 

(Billions)

 

2009

 

2008

 

Assets

 

$

7.0

 

$

7.8

 

Liabilities

 

$

5.0

 

$

5.0

 

 

These receivables are available only for payment of the debt or other obligations issued or arising in the securitization transactions.  For these assets, the carrying values approximate fair value because these are short-term in duration.  The long-term debt is payable only out of collections on the underlying securitized assets.  The fair value of these liabilities was $4.7 billion and $4.4 billion at March 31, 2009 and December 31, 2008, respectively.

 

15



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Lending Trust and Charge Trust Triggers

 

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

 

The following table below presents key metrics reported by each trust at March 31, 2009:

 

 

 

Lending Trust

 

Charge Trust

 

Total trust excess spread rate, net — three months average

 

6.44

%(a)

26.70

%(b)

 

 

 

 

 

 

Floating rate series excess spread rate, net — three months average

 

6.67

%(c)

27.35

%(c)

 

 

 

 

 

 

Fixed rate series excess spread rate, net — three months average

 

3.04

%(c)

24.18

%(c)

 


(a)          Total Trust Excess Spread Rate, net in the Lending Trust is the sum of the net cash flows of the (i) excess spread, net and (ii) issuer rate, as a percentage of the outstanding investors’ certificates.  Excess spread, net is the net cash flows from interest and fee collections allocated to the investors’ interests after deducting the interest paid on investors’ certificates, credit losses, contractual servicing fees and other expenses.  The deductions may be a greater amount than the collections, resulting in negative spread losses.  Excess spread, net is reported by the Company in securitization income, net in the Consolidated Statements of Income.  See above for the disclosure of excess spread, net.  Issuer rate collections are a portion of monthly discount revenue that is earned and collected by the Company on new transactions by cardmembers that have their loans sold into the Lending Trust.  These cash flows are available to pay monthly Lending Trust expense.  The issuer rate is reported in discount revenue in the Company’s Consolidated Statements of Income.

 

(b)         Total Trust Excess Spread Rate, net in the Charge Trust is the net cash flows from the discounted portion of principal collections allocated to the investors’ interests after deducting the interest paid on investors’ notes, credit losses, contractual servicing fees and other expenses, as a percentage of the outstanding investors’ notes.

 

(c)          Rates are calculated based on a 30/360 annualization factor.

 

In the event the excess spread, net in the Lending Trust becomes negative, and the issuer rate collections are utilized to pay Lending Trust expenses, this would be reflected as an expense in securitization income, net in the Company’s Consolidated Statements of Income and as a reduction of the Total Excess Spread Rate, net.

 

In the event the excess spread rate, net for a given fixed or floating rate series is reduced below certain levels for either the Lending Trust or the Charge Trust, certain triggering events occur, including:

 

·                  If the three-month average excess spread rate, net for a given fixed or floating rate series falls below five percent or four percent for the Lending Trust and Charge Trust, respectively, the affected Trust is required to fund a cash reserve account (from cash that would normally revert back to the Company through its subsidiaries) in increasing amounts from $6 million up to a maximum of approximately $1.9 billion for the Lending Trust and from $52 million up to maximum $207 million for the Charge Trust, depending on the fixed or floating rate series Total Trust Excess Spread Rate, net.  During 2009, for certain fixed rate series within the Lending Trust, a cash reserve account was required to be funded in the amount of $39 million, of which a partial funding in the amount of $5.7 million was recorded in other receivables on the Company’s Consolidated Balance Sheets.  The Company has rights to this cash, and it will only be used if this cash is required to help pay off any outstanding principal or interest at maturity or in the event of an early amortization (see below). These fixed rate series, referred to above, will mature in May of 2009 and June of 2011, and it is expected that the cash in the cash reserve account will revert back to the Company upon maturity.

 

16



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·                  If the three-month average excess spread rate, net for a given fixed or floating rate series for either Trust falls below zero percent, an early amortization of the affected Trust will occur.  The applicable cash reserve account (see above) for each Trust is available to the investors if the collections from the securitized loans and receivables are insufficient to pay the principal balance of the investors’ notes and certificates.

 

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

 

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

 

7.     Comprehensive Income

 

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

 

 

 

Three Months Ended
March 31,

 

(Millions)

 

2009

 

2008

 

Net income

 

$

437

 

$

991

 

Other comprehensive income gains (losses):

 

 

 

 

 

Net unrealized securities gains (losses)

 

332

 

(120

)

Net unrealized derivative gains (losses)

 

19

 

(105

)

Foreign currency translation adjustments

 

(19

)

(1

)

Net unrealized pension and other postretirement benefit costs

 

21

 

7

 

Total

 

$

790

 

$

772

 

 

17



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.     Customer Deposits

 

At March 31, 2009 and December 31, 2008, customer deposits were split between interest-bearing and non-interest-bearing deposits as follows:

 

(Millions)

 

2009

 

2008

 

U.S. offices:

 

 

 

 

 

Interest-bearing

 

$

17,246

 

$

14,377

 

Non-interest-bearing

 

23

 

23

 

Non-U.S. offices:

 

 

 

 

 

Interest-bearing

 

820

 

1,072

 

Non-interest-bearing

 

12

 

14

 

Total customer deposits

 

$

18,101

 

$

15,486

 

 

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

 

(Millions)

 

2009

 

2008

 

Retail:

 

 

 

 

 

Cash sweep accounts

 

$

7,497

 

$

7,123

 

CDs

 

9,250

 

6,232

 

Institutional

 

325

 

837

 

Other

 

1,029

 

1,294

 

Total customer deposits

 

$

18,101

 

$

15,486

 

 

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

 

(Millions)

 

2009

 

2008

 

U.S.

 

$

358

 

$

894

 

Non-U.S.

 

18

 

153

 

Total

 

$

376

 

$

1,047

 

 

The scheduled maturities of all time deposits, included in interest-bearing deposits above, at March 31, 2009, are as follows:

 

(Millions)

 

U.S.

 

Non-U.S.

 

Total

 

2009

 

$

4,067

 

$

541

 

$

4,608

 

2010

 

1,929

 

 

1,929

 

2011

 

1,478

 

 

1,478

 

2012

 

708

 

 

708

 

2013

 

986

 

 

986

 

After 5 years

 

445

 

 

445

 

Total

 

$

9,613

 

$

541

 

$

10,154

 

 

18



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.     Income Taxes

 

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

 

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

 

The Company believes it is reasonably possible that unrecognized tax benefits could decrease within the next twelve months by as much as $436 million principally as a result of potential resolutions through settlements of prior years’ tax items with various taxing authorities.  The prior years’ tax items include unrecognized tax benefits relating to the timing of recognition of certain gross income, the deductibility of certain expenses or losses, and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $436 million of unrecognized tax benefits, approximately $350 million are temporary differences that, if recognized, would only impact the effective rate due to net interest assessments and state tax rate differentials. With respect to the remaining amount of $86 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years’ items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

 

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

 

 

 

Three Months Ended
March 31, 2009 (a)

 

Three Months Ended
March 31, 2008 (a)

 

Effective tax rate

 

19

%

29

%

 


(a) Each of the periods reflects recurring, permanent tax benefits. However, the lower tax rate for the first quarter of 2009 reflects the larger impact of the benefits on a decreased level of pretax income.

 

19



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Preferred Shares and Warrants

 

Capital Purchase Program

 

On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, and (2) a ten-year Warrant for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share.  The Series A Preferred Stock has a liquidation preference of $1,000 per share, $1.66 2/3 par value, and pays cumulative quarterly dividends at a rate of 5 percent per year for the first five years and thereafter at a rate of 9 percent per year.  The Warrant, which is generally exercisable upon its issuance, provides for the adjustment of the exercise price and the number of common shares underlying the warrant subject to certain dilutive events.

 

Upon issuance, $3.16 billion was allocated to the Series A Preferred Stock, and $232 million was allocated to the Warrants based on their relative fair values at the date of issuance.  The $3.16 billion initial value of the Series A Preferred Stock will be accreted to the liquidation value of $3.39 billion over five years as a charge to retained earnings.  The amount charged to retained earnings will be deducted from the numerator in calculating basic and diluted earnings per share along with the stated dividends during the related reporting period (see Note 11).

 

The Company may repurchase the Series A Preferred Stock at the liquidation amount plus accrued and unpaid dividends subject to permission granted by the Treasury Department and the Company’s Banking regulator.  The Treasury Department has also established a process for the repurchase of the Warrants in the event that the Series A Preferred Stock is repurchased. Under the CPP requirements, the Company has restrictions on (1) common share dividend payments of not more than $0.18 per share and subject to the timely payment of Series A Preferred Share dividends, (2) common share repurchases other than in connection with benefit plans or in other limited circumstances, and (3) certain executive compensation.

 

20



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.  Earnings Per Common Share (EPS)

 

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

 

 

 

Three Months Ended
March 31,

 

(Millions, except per share amounts)

 

2009

 

2008

 

Numerator:

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

Income from continuing operations

 

$

443

 

$

1,044

 

Preferred shares dividends (a)

 

(61

)

 

Preferred shares accretion

 

(11

)

 

Earnings allocated to participating share awards

 

(4

)

(6

)

Income from continuing operations attributable to common shareholders

 

367

 

1,038

 

Loss from discontinued operations

 

(6

)

(53

)

Net income attributable to common shareholders

 

$

361

 

$

985

 

Denominator:

 

 

 

 

 

Basic: weighted-average common stock

 

1,156

 

1,153

 

Add: weighted-average stock options

 

 

10

 

Diluted

 

1,156

 

1,163

 

 

 

 

 

 

 

Basic Earnings Per Common Share (b):

 

 

 

 

 

Income from continuing operations attributable to common shareholders

 

$

0.32

 

$

0.90

 

Loss from discontinued operations

 

(0.01

)

(0.05

)

Net income attributable to common shareholders

 

$

0.31

 

$

0.85

 

 

 

 

 

 

 

Diluted Earnings Per Common Share (b):

 

 

 

 

 

Income from continuing operations attributable to common shareholders

 

$

0.32

 

$

0.89

 

Loss from discontinued operations

 

(0.01

)

(0.04

)

Net income attributable to common shareholders

 

$

0.31

 

$

0.85

 

 


(a)          Includes dividends paid for the period January 9, 2009 through February 15, 2009 of $17 million, as well as dividends declared, but not yet paid, for the period February 16, 2009 through May 15, 2009 of $44 million. The dividends declared in advance will be paid in the second quarter of 2009.

 

(b)         Basic and diluted EPS for the three months ended March 31, 2008, was reduced by $.01 from amounts previously reported, as a result of the adoption of FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Shared-Based Payment Transactions are Participating Securities” (FSP EITF 03-6-1), which was retroactively applied.

 

For the three months ended March 31, 2009 and 2008, the dilutive effect of unexercised stock options excluded 87 million and 21 million options, respectively, and 24 million warrants for the three months ended March 31, 2009, from the computation of EPS because inclusion of the options and warrants would have been anti-dilutive.  See Notes 10 and 22 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, for discussion of the Company’s subordinated debentures, including the circumstances under which additional common shares would be reflected in the computation of EPS.

 

21



Table of Contents

 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.  Details of Certain Consolidated Statements of Income Lines

 

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

 

The following is a detail of other commissions and fees for the quarters ended March 31:

 

(Millions)

 

2009

 

2008

 

Delinquency fees

 

$

209

 

$

333

 

Foreign currency conversion revenue

 

143

 

193

 

Other

 

101

 

96

 

Total other commissions and fees

 

$

453

 

$

622

 

 

The following is a detail of other revenues for the quarters ended March 31:

 

(Millions)

 

2009

 

2008

 

Insurance premiums

 

$

77

 

$

82

 

Other

 

373

 

378

 

Total other revenues

 

$

450

 

$

460

 

 

The following is a detail of marketing, promotions, rewards and cardmember services for the quarters ended March 31:

 

(Millions)

 

2009

 

2008

 

Marketing and promotion

 

$

345

 

$

594

 

Cardmember rewards

 

846

 

1,040

 

Cardmember services

 

111

 

122

 

Total marketing, promotion, rewards and cardmember services

 

$

1,302

 

$

1,756

 

 

The following is a detail of other, net expenses for the quarters ended March 31:

 

(Millions)

 

2009

 

2008

 

Occupancy and equipment

 

$

358

 

$

375

 

Communications

 

104

 

115

 

MasterCard and Visa settlements

 

(208

)

(70

)

Other

 

251

 

372

 

Total other, net expense

 

$

505

 

$

792

 

 

22



Table of Contents

 

13.  Reportable Operating Segment Information

 

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

 

 

 

Three Months Ended
March 31,

 

(Millions)

 

2009

 

2008

 

Total non-interest revenues:

 

 

 

 

 

USCS

 

$

2,346

 

$

3,023

 

ICS

 

772

 

937

 

GCS

 

981

 

1,235

 

GNMS

 

813

 

942

 

Corporate & Other, including adjustments and eliminations

 

95

 

132

 

Total

 

$

5,007

 

$

6,269

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

USCS

 

$

946

 

$

1,308

 

ICS

 

400

 

510

 

GCS

 

21

 

46

 

GNMS

 

1

 

1

 

Corporate & Other, including adjustments and eliminations

 

106

 

77

 

Total

 

$

1,474

 

$

1,942

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

USCS

 

$

218

 

$

609

 

ICS

 

149

 

252

 

GCS

 

58

 

137

 

GNMS

 

(22

)

(60

)

Corporate & Other, including adjustments and eliminations

 

152

 

33

 

Total

 

$

555

 

$

971

 

 

 

 

 

 

 

Total revenues net of interest expense:

 

 

 

 

 

USCS

 

$

3,074

 

$

3,722

 

ICS

 

1,023

 

1,195

 

GCS

 

944

 

1,144

 

GNMS

 

836

 

1,003

 

Corporate & Other, including adjustments and eliminations

 

49

 

176

 

Total

 

$

5,926

 

$

7,240

 

 

 

 

 

 

 

Income (Loss) from continuing operations:

 

 

 

 

 

USCS

 

$

(25

)

$

523

 

ICS

 

39

 

133

 

GCS

 

86

 

151

 

GNMS

 

237

 

223

 

Corporate & Other

 

106

 

14

 

Total

 

$

443

 

$

1,044

 

 

23



Table of Contents

 

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

 

(Millions)

 

USCS

 

GCS

 

ICS

 

Corporate
& Other

 

Total

 

Income (Loss) from continuing operations (a)

 

$

27.1

 

$

14.9

 

$

0.2

 

$

(42.2

)

$

 

 


(a)          The impact on reportable operating segment debt and asset balances for this change was a decrease to USCS and GCS of $18.4 billion and $10.2 billion, respectively, and an increase to Corporate & Other of $28.6 billion.

 

14.  Derivatives and Hedging Activities

 

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

 

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

·              Foreign exchange risk within its international operations.

 

General principles and the overall framework for managing market risk across the Company are defined in the Market Risk Policy approved by the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally managed by the Market Risk Committee, chaired by the Chief Market Risk Officer of the Company. Within each business, market risk exposures are monitored and managed by various asset/liability committees, guided by Board-approved policies covering derivative financial instruments, funding and investments. The Company does not engage in derivative financial instruments for trading purposes.

 

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

 

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

 

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

 

24



Table of Contents

 

Fair Value Measurements

 

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

 

Credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value derivatives is 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.

 

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

 

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

 

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

 

Location

 

Other assets

 

Other liabilities

 

 

 

Fair Value (a)

 

Fair Value (a)

 

(Millions)

 

March
2009

 

December
2008

 

March
2009

 

December
2008

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

Fair value hedges

 

$

1,055

 

$

1,072

 

$

 

$

 

Cash flow hedges

 

 

 

98

 

125

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

Net investment hedges

 

99

 

535

 

233

 

165

 

Total derivatives designated as hedging instruments

 

$

1,154

 

$

1,607

 

$

331

 

$

290

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

7

 

$

9

 

$

14

 

$

20

 

Foreign exchange contracts

 

152

 

166

 

138

 

173

 

Total derivatives not designated as hedging instruments

 

159

 

175

 

152

 

193

 

Total derivatives (b)

 

$

1,313

 

$

1,782

 

$

483

 

$

483

 

 


(a)                     The fair values of the Company’s derivative instruments are classified within Level 2 of the fair value hierarchy.

 

(b)                    Financial Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts” (FIN 39), permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between the Company and its derivative counterparty.  At March 31, 2009 and December 31, 2008, $39 million of derivative assets and liabilities have been offset and represents the impact of legally enforceable master netting agreements that provide for the net settlement of all contracts in accordance with FIN 39.

 

25



Table of Contents

 

Fair Value Hedges

 

A fair value hedge is a derivative designated to hedge the exposure of future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to convert certain fixed-rate long-term debt to floating rate at the time of issuance. As of March 31, 2009, the Company hedged $12.4 billion of its fixed-rate debt to float rate debt using interest rate swaps.

 

To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness. Hedge ineffectiveness may be caused by differences between the debt’s interest coupon and the benchmark rate, which is in turn primarily due to credit spreads at inception of the hedging relationship, which is not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swaps without causing an off-setting impact in the value of the hedged debt. The ineffective net gains (losses), net of tax on fair value hedges amounted to approximately $43 million and nil for the quarter ended March 31, 2009 and 2008, respectively.

 

The following tables summarize the impact of fair value hedges on the consolidated financial statements for the quarters ended March 31:

 

 

 

Statement of Income

 

 

 

Derivative contract gain (loss)

 

Hedged item gain (loss)

 

(Millions)

 

 

 

Amount
recognized,
net of tax

 

 

 

Amount
recognized,
net of tax

 

Derivative relationship

 

Location

 

2009

 

2008

 

Location

 

2009

 

2008

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other expenses, net

 

$

(11

)

$

82

 

Other expenses, net

 

$

54

 

$

(82

)

 

Cash Flow Hedges

 

A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows attributable to a particular risk of an existing recognized asset or liability, or a forecasted transaction. The Company hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivative instruments, primarily interest rate swaps. These derivative instruments effectively convert floating rate debt to a fixed rate debt for the duration of the swap. As of March 31, 2009, the Company hedged $3.8 billion of its floating rate debt to fixed rate debt using interest rate swaps.

 

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

 

In the normal course of business, as the hedged cash flows are recognized into earnings, the Company expects to reclassify $67 million of net pretax losses on derivative instruments from accumulated other comprehensive (loss) income to earnings during the next 12 months.

 

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

 

26



Table of Contents

 

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 designates foreign currency derivatives, primarily forward agreements, as hedges of net investments in certain foreign operations.  These derivatives reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S. subsidiaries.

 

For derivative financial instruments that qualify as net investment hedges, the effective portions of the change in fair value of the derivatives are recorded in accumulated other comprehensive (loss) income as part of the cumulative translation adjustment. Any ineffective portions of net investment hedges are recognized in other, net expense during the period of change.

 

The following table summarizes the impact of cash flow hedges and net investment hedges on the consolidated financial statements for the quarters ended March 31:

 

 

 

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

 

Derivative ineffectiveness gain (loss), net of tax

 

(Millions)

 

Recognized in
other
comprehensive
income

 

Location
reclassified into

 

Amount
reclassified
into Income

 

 

 

Amount

 

Derivative relationship

 

2009

 

2008

 

Income

 

2009

 

2008

 

Location

 

2009

 

2008

 

 

 

 

 

 

 </