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 June 30, 2009
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 1-7657
AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)
New York | 13-4922250 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
World Financial Center, 200 Vesey Street, New York, NY | 10285 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (212) 640-2000
None
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 ¨ 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 issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at July 23, 2009 | |
Common Shares (par value $.20 per share) |
1,189,201,513 shares |
FORM 10-Q
INDEX
Page No. | ||||||
Part I. |
||||||
Item 1. |
||||||
Consolidated Statements of Income Three months ended June 30, 2009 and 2008 |
1 | |||||
Consolidated Statements of Income Six months ended June 30, 2009 and 2008 |
2 | |||||
Consolidated Balance Sheets June 30, 2009 and December 31, 2008 |
3 | |||||
Consolidated Statements of Cash Flows Six months ended June 30, 2009 and 2008 |
4 | |||||
5-37 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
38-79 | ||||
Item 3. |
79-80 | |||||
Item 4. |
80-82 | |||||
Part II. |
||||||
Item 1. |
83-85 | |||||
Item 1A. |
86 | |||||
Item 2. |
87 | |||||
Item 4. |
88 | |||||
Item 6. |
89 | |||||
90 | ||||||
E-1 |
ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF INCOME
(Millions, except per share amounts)
(Unaudited)
Three Months Ended June 30, |
||||||||
2009 | 2008 | |||||||
Revenues |
||||||||
Non-interest revenues |
||||||||
Discount revenue |
$ | 3,305 | $ | 3,991 | ||||
Net card fees |
532 | 542 | ||||||
Travel commissions and fees |
407 | 573 | ||||||
Other commissions and fees |
439 | 590 | ||||||
Securitization (loss) income, net |
(2 | ) | 227 | |||||
Other |
670 | 578 | ||||||
Total non-interest revenues |
5,351 | 6,501 | ||||||
Interest income |
||||||||
Interest and fees on loans |
1,081 | 1,564 | ||||||
Interest and dividends on investment securities |
196 | 217 | ||||||
Deposits with banks and other |
11 | 76 | ||||||
Total interest income |
1,288 | 1,857 | ||||||
Interest expense |
||||||||
Deposits |
105 | 123 | ||||||
Short-term borrowings |
7 | 136 | ||||||
Long-term debt |
431 | 631 | ||||||
Other |
4 | 13 | ||||||
Total interest expense |
547 | 903 | ||||||
Net interest income |
741 | 954 | ||||||
Total revenues net of interest expense |
6,092 | 7,455 | ||||||
Provisions for losses |
||||||||
Charge card |
237 | 241 | ||||||
Cardmember lending |
1,303 | 1,537 | ||||||
Other |
44 | 46 | ||||||
Total provisions for losses |
1,584 | 1,824 | ||||||
Total revenues net of interest expense after provisions for losses |
4,508 | 5,631 | ||||||
Expenses |
||||||||
Marketing, promotion, rewards and cardmember services |
1,512 | 1,924 | ||||||
Salaries and employee benefits |
1,370 | 1,495 | ||||||
Professional services |
599 | 606 | ||||||
Other, net |
609 | 832 | ||||||
Total |
4,090 | 4,857 | ||||||
Pretax income from continuing operations |
418 | 774 | ||||||
Income tax provision |
76 | 114 | ||||||
Income from continuing operations |
342 | 660 | ||||||
Loss from discontinued operations, net of tax |
(5 | ) | (7 | ) | ||||
Net income |
$ | 337 | $ | 653 | ||||
Earnings per Common Share Basic: (Note 12) |
||||||||
Income from continuing operations attributable to common shareholders (a) |
$ | 0.09 | $ | 0.57 | ||||
Loss from discontinued operations |
| (0.01 | ) | |||||
Net income attributable to common shareholders (a) |
$ | 0.09 | $ | 0.56 | ||||
Earnings per Common Share Diluted: (Note 12) |
||||||||
Income from continuing operations attributable to common shareholders (a) |
$ | 0.09 | $ | 0.56 | ||||
Loss from discontinued operations |
| | ||||||
Net income attributable to common shareholders (a) |
$ | 0.09 | $ | 0.56 | ||||
Average common shares outstanding for earnings per common share: |
||||||||
Basic |
1,162 | 1,154 | ||||||
Diluted |
1,165 | 1,163 | ||||||
Cash dividends declared per common share |
$ | 0.18 | $ | 0.18 | ||||
(a) | Represents income from continuing operations or net income, as applicable, less (i) accelerated preferred dividend accretion of $212 million for the quarter ended June 30, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP), (ii) preferred shares dividends and related accretion of $22 million for the quarter ended June 30, 2009 and (iii) earnings allocated to participating share awards of $1 million and $3 million for the quarters ended June 30, 2009 and 2008, respectively. Net income attributable to common shareholders, after consideration of the items described in (i) (iii) above, was $102 million and $650 million for the quarter ended June 30, 2009 and 2008, respectively. |
See Notes to Consolidated Financial Statements.
1
CONSOLIDATED STATEMENTS OF INCOME
(Millions, except per share amounts)
(Unaudited)
Six Months Ended June 30, |
||||||||
2009 | 2008 | |||||||
Revenues |
||||||||
Non-interest revenues |
||||||||
Discount revenue |
$ | 6,371 | $ | 7,709 | ||||
Net card fees |
1,064 | 1,073 | ||||||
Travel commissions and fees |
772 | 1,067 | ||||||
Other commissions and fees |
892 | 1,212 | ||||||
Securitization income, net |
139 | 671 | ||||||
Other |
1,120 | 1,038 | ||||||
Total non-interest revenues |
10,358 | 12,770 | ||||||
Interest income |
||||||||
Interest and fees on loans |
2,373 | 3,235 | ||||||
Interest and dividends on investment securities |
350 | 403 | ||||||
Deposits with banks and other |
39 | 161 | ||||||
Total interest income |
2,762 | 3,799 | ||||||
Interest expense |
||||||||
Deposits |
190 | 272 | ||||||
Short-term borrowings |
34 | 297 | ||||||
Long-term debt |
865 | 1,281 | ||||||
Other |
13 | 24 | ||||||
Total interest expense |
1,102 | 1,874 | ||||||
Net interest income |
1,660 | 1,925 | ||||||
Total revenues net of interest expense |
12,018 | 14,695 | ||||||
Provisions for losses |
||||||||
Charge card |
573 | 586 | ||||||
Cardmember lending |
2,717 | 2,346 | ||||||
Other |
97 | 103 | ||||||
Total provisions for losses |
3,387 | 3,035 | ||||||
Total revenues net of interest expense after provisions for losses |
8,631 | 11,660 | ||||||
Expenses |
||||||||
Marketing, promotion, rewards and cardmember services |
2,814 | 3,680 | ||||||
Salaries and employee benefits |
2,623 | 2,965 | ||||||
Professional services |
1,118 | 1,156 | ||||||
Other, net |
1,114 | 1,624 | ||||||
Total |
7,669 | 9,425 | ||||||
Pretax income from continuing operations |
962 | 2,235 | ||||||
Income tax provision |
177 | 531 | ||||||
Income from continuing operations |
785 | 1,704 | ||||||
Loss from discontinued operations, net of tax |
(11 | ) | (60 | ) | ||||
Net income |
$ | 774 | $ | 1,644 | ||||
Earnings per Common Share Basic: (Note 12) |
||||||||
Income from continuing operations attributable to common shareholders (a) |
$ | 0.41 | $ | 1.47 | ||||
Loss from discontinued operations |
(0.01 | ) | (0.05 | ) | ||||
Net income attributable to common shareholders (a) |
$ | 0.40 | $ | 1.42 | ||||
Earnings per Common Share Diluted: (Note 12) |
||||||||
Income from continuing operations attributable to common shareholders (a) |
$ | 0.41 | $ | 1.46 | ||||
Loss from discontinued operations |
(0.01 | ) | (0.05 | ) | ||||
Net income attributable to common shareholders (a) |
$ | 0.40 | $ | 1.41 | ||||
Average common shares outstanding for earnings per common share: |
||||||||
Basic |
1,159 | 1,153 | ||||||
Diluted |
1,161 | 1,163 | ||||||
Cash dividends declared per common share |
$ | 0.36 | $ | 0.36 | ||||
(a) | Represents income from continuing operations or net income, as applicable, less (i) accelerated preferred dividend accretion of $212 million for the six months ended June 30, 2009, due to the repurchase of $3.39 billion of preferred shares issued as part of the Capital Purchase Program (CPP) (ii) preferred shares dividends and related accretion of $94 million for the six months ended June 30, 2009 and (iii) earnings allocated to participating share awards of $5 million and $9 million for the six months ended June 30, 2009 and 2008, respectively. Net income attributable to common shareholders, after consideration of the items described in (i) (iii) above, was $463 million and $1,635 million for the six months ended June 30, 2009 and 2008, respectively. |
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
(Unaudited)
June 30, 2009 |
December 31, 2008 |
|||||||
Assets |
||||||||
Cash and cash equivalents |
||||||||
Cash and cash due from banks |
$ | 588 | $ | 1,574 | ||||
Interest-bearing deposits in other banks (including federal funds sold and securities purchased under resale agreements: 2009, $126; 2008, $141) |
6,129 | 6,554 | ||||||
Short-term investment securities |
8,898 | 12,419 | ||||||
Total |
15,615 | 20,547 | ||||||
Accounts receivable |
||||||||
Cardmember receivables, less reserves: 2009, $714; 2008, $810 |
30,728 | 32,178 | ||||||
Other receivables, less reserves: 2009, $122; 2008, $118 |
3,913 | 4,393 | ||||||
Loans |
||||||||
Cardmember lending, less reserves: 2009, $3,219; 2008, $2,570 |
29,238 | 39,641 | ||||||
Other, less reserves: 2009, $31; 2008, $39 |
549 | 1,018 | ||||||
Investment securities |
22,319 | 12,526 | ||||||
Premises and equipment at cost, less accumulated depreciation: 2009, $3,952; 2008, $3,743 |
2,763 | 2,948 | ||||||
Other assets |
11,891 | 12,607 | ||||||
Assets of discontinued operations |
19 | 216 | ||||||
Total assets |
$ | 117,035 | $ | 126,074 | ||||
Liabilities and Shareholders Equity |
||||||||
Liabilities |
||||||||
Customers deposits |
$ | 20,128 | $ | 15,486 | ||||
Travelers Cheques outstanding |
5,968 | 6,433 | ||||||
Accounts payable |
8,286 | 8,428 | ||||||
Short-term borrowings |
2,198 | 8,993 | ||||||
Long-term debt |
53,516 | 60,041 | ||||||
Other liabilities |
13,519 | 14,592 | ||||||
Liabilities of discontinued operations |
| 260 | ||||||
Total liabilities |
103,615 | 114,233 | ||||||
Contingencies (see Note 18) |
||||||||
Shareholders Equity |
||||||||
Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,189 million shares in 2009 and 1,160 million shares in 2008 |
239 | 232 | ||||||
Additional paid-in capital |
11,155 | 10,496 | ||||||
Retained earnings |
2,931 | 2,719 | ||||||
Accumulated other comprehensive loss, net of tax: |
||||||||
Net unrealized securities gains (losses), net of tax: 2009, $(7); 2008, $458 |
33 | (699 | ) | |||||
Net unrealized derivatives losses, net of tax: 2009, $27; 2008, $44 |
(49 | ) | (80 | ) | ||||
Foreign currency translation adjustments, net of tax: 2009, $45; 2008, $64 |
(459 | ) | (368 | ) | ||||
Net unrealized pension and other postretirement benefit costs, net of tax: 2009 $216; 2008, $216 |
(430 | ) | (459 | ) | ||||
Total accumulated other comprehensive loss |
(905 | ) | (1,606 | ) | ||||
Total shareholders equity |
13,420 | 11,841 | ||||||
Total liabilities and shareholders equity |
$ | 117,035 | $ | 126,074 | ||||
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
(Unaudited)
Six Months Ended June 30, |
||||||||
2009 | 2008 | |||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 774 | $ | 1,644 | ||||
Loss from discontinued operations, net of tax |
11 | 60 | ||||||
Income from continuing operations |
785 | 1,704 | ||||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |
||||||||
Provisions for losses |
3,725 | 3,315 | ||||||
Depreciation and amortization |
568 | 359 | ||||||
Deferred taxes, acquisition costs and other |
(1,387 | ) | (636 | ) | ||||
Stock-based compensation |
121 | 128 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
||||||||
Other receivables |
422 | 581 | ||||||
Other assets |
627 | 223 | ||||||
Accounts payable and other liabilities |
(1,078 | ) | 2,670 | |||||
Travelers Cheques outstanding |
(462 | ) | (283 | ) | ||||
Net cash used in operating activities attributable to discontinued operations |
(165 | ) | (94 | ) | ||||
Net cash provided by operating activities |
3,156 | 7,967 | ||||||
Cash Flows from Investing Activities |
||||||||
Sale of investments |
1,897 | 1,332 | ||||||
Maturity and redemption of investments |
1,371 | 4,750 | ||||||
Purchase of investments |
(10,023 | ) | (6,668 | ) | ||||
Net decrease (increase) in cardmember loans/receivables |
8,500 | (670 | ) | |||||
Proceeds from cardmember loan securitizations |
998 | 6,551 | ||||||
Maturities of cardmember loan securitizations |
(2,100 | ) | (3,970 | ) | ||||
Purchase of premises and equipment |
(334 | ) | (405 | ) | ||||
Sale of premises and equipment |
36 | 22 | ||||||
Acquisitions, net of cash acquired |
| (4,364 | ) | |||||
Net cash provided by investing activities attributable to discontinued operations |
183 | 2,392 | ||||||
Net cash provided by (used in) investing activities |
528 | (1,030 | ) | |||||
Cash Flows from Financing Activities |
||||||||
Net change in customer deposits |
4,766 | (448 | ) | |||||
Net decrease in short-term borrowings |
(6,719 | ) | (423 | ) | ||||
Issuance of long-term debt |
2,980 | 10,073 | ||||||
Principal payments on long-term debt |
(9,682 | ) | (8,426 | ) | ||||
Issuance of American Express Series A preferred shares and warrants |
3,389 | | ||||||
Issuance of American Express common shares |
531 | 160 | ||||||
Repurchase of American Express Series A preferred shares |
(3,389 | ) | | |||||
Repurchase of American Express common shares |
| (219 | ) | |||||
Common and preferred dividends paid |
(494 | ) | (418 | ) | ||||
Net cash used in financing activities attributable to discontinued operations |
(19 | ) | (2,446 | ) | ||||
Net cash used in financing activities |
(8,637 | ) | (2,147 | ) | ||||
Effect of exchange rate changes on cash |
20 | 33 | ||||||
Net (decrease) increase in cash and cash equivalents |
(4,933 | ) | 4,823 | |||||
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, $2; 2008, $3,716 |
$ | 15,617 | $ | 20,091 | ||||
See Notes to Consolidated Financial Statements.
4
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 Companys 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 managements assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses relating to loans and charge card receivables, Membership Rewards, fair value measurement, and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ.
As discussed in the 2008 Form 10-K, the Company became a bank holding company during the fourth quarter of 2008 under the Bank Holding Company Act of 1956, and the Federal Reserve Board (Federal Reserve) became the Companys primary federal regulator. As such, the Company is subject to the Federal Reserves 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 January 1, 2010. The Company is currently assessing the impact of these standards.
| FASB Statement No. 166, Accounting for Transfers of Financial Assets (SFAS No. 166) amends the derecognition guidance in FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to remove the concept of a qualifying special purpose entity (QSPE) and to eliminate the exception for a QSPE from the consolidation guidance of FASB Interpretation 46, Consolidation of Variable Interest Entities (FIN 46(R)). SFAS No. 166 also requires enhanced disclosures about continuing involvement, retained risks, and the nature and financial effect of restrictions. |
| FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167) amends the consolidation guidance that applies to variable interest entities (VIEs) and requires an entity to reconsider its previous FIN 46(R) conclusions, including (i) whether an entity is a VIE, (ii) whether the enterprise is the VIEs primary beneficiary, and (iii) what type of financial statement disclosures are required. |
5
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 AEBs 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 Companys intention to exercise its AEIDC put option in the third quarter of 2009. On May 14, 2009, in accordance with the terms of the put/call agreement, the Company formally notified Standard Chartered of its 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 (except for certain components of AEB that were not sold) and AEIDC have been removed from the Corporate & Other segment and are presented separately in discontinued operations in the Companys Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.
The decline in the assets of discontinued operations and the liabilities of discontinued operations between December 31, 2008 and June 30, 2009 is primarily attributable to the sale of investment securities by AEIDC and the repayment of intercompany borrowings.
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Accounts Receivable
Accounts receivable at June 30, 2009 and December 31, 2008, consisted of:
(Millions) |
2009 | 2008 | ||||
U.S. Card Services |
$ | 15,937 | $ | 17,822 | ||
International Card Services |
5,359 | 5,582 | ||||
Global Commercial Services |
9,945 | 9,397 | ||||
Global Network & Merchant Services (a) |
201 | 187 | ||||
Cardmember receivables, gross (b) |
31,442 | 32,988 | ||||
Less: Cardmember reserve for losses |
714 | 810 | ||||
Cardmember receivables, net |
$ | 30,728 | $ | 32,178 | ||
Other receivables, gross (c) |
$ | 4,035 | $ | 4,511 | ||
Less: Other reserve for losses |
122 | 118 | ||||
Other receivables, net |
$ | 3,913 | $ | 4,393 |
(a) | Includes receivables primarily related to the Companys business partners and International Currency Card portfolios. |
(b) | Includes approximately $9.5 billion and $9.9 billion of cardmember receivables outside the United States as of June 30, 2009 and December 31, 2008, respectively. |
(c) | Other receivables primarily represent amounts due from the Companys travel customers, third party issuing partners, accrued interest on investments, receivables acquired in connection with the purchase of Corporate Payment Services (CPS), Company cash held in an off-balance sheet securitization trust for daily settlement requirements, and other receivables due to the Company in the ordinary course of business. |
The following table presents changes in the cardmember receivable reserve for losses for the six months ended June 30:
(Millions) |
2009 | 2008 | ||||||
Balance, January 1 |
$ | 810 | $ | 1,149 | ||||
Additions: |
||||||||
Cardmember receivables provision |
573 | 586 | ||||||
Deductions/Other: |
||||||||
Cardmember receivables net write-offs (a) |
(672 | ) | (550 | ) | ||||
Cardmember receivables other (b) |
3 | (39 | ) | |||||
Balance, June 30 |
$ | 714 | $ | 1,146 |
(a) | Represents write-offs of charge card balances consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries of $163 million and $101 million for the six months ended June 30, 2009 and 2008, respectively. |
(b) | Primarily includes foreign currency translation adjustments. For the three months ended June 30, 2008, this amount also includes waived fees. |
7
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Loans
Loans at June 30, 2009 and December 31, 2008 consisted of:
(Millions) |
2009 | 2008 | ||||
U.S. Card Services |
$ | 23,566 | $ | 32,684 | ||
International Card Services |
8,866 | 9,499 | ||||
Global Commercial Services |
25 | 28 | ||||
Cardmember lending, gross |
32,457 | 42,211 | ||||
Less: Cardmember lending reserve for losses |
3,219 | 2,570 | ||||
Cardmember lending, net |
$ | 29,238 | $ | 39,641 | ||
Other loans, gross (a) |
$ | 580 | $ | 1,057 | ||
Less: Other reserve for losses |
31 | 39 | ||||
Other loans, net |
$ | 549 | $ | 1,018 |
(a) | Other loans primarily represent small business installment loans, a store card portfolio whose billed business is not processed on the Companys network and small business loans associated with the 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 six months ended June 30:
(Millions) |
2009 | 2008 | ||||||
Balance, January 1 |
$ | 2,570 | $ | 1,831 | ||||
Additions: |
||||||||
Cardmember lending provisions (a) |
2,692 | 2,282 | ||||||
Cardmember lending other (b) |
25 | 64 | ||||||
Total provision |
2,717 | 2,346 | ||||||
Deductions: |
||||||||
Cardmember lending net write-offs principal (c) |
(1,629 | ) | (1,244 | ) | ||||
Cardmember lending net write-offs interest and fees (c) |
(286 | ) | (276 | ) | ||||
Cardmember lending other (d) |
(153 | ) | (63 | ) | ||||
Balance, June 30 |
$ | 3,219 | $ | 2,594 |
(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 six months ended June 30, 2008, this amount also includes waived fees. |
(c) | Cardmember lending net write-offs principal for June 30, 2009 and 2008 include recoveries of $174 million and $150 million, respectively. Recoveries of interest and fees were de minimis. |
(d) | For June 30, 2009, this amount primarily includes $144 million of reserves that were removed in connection with securitizations during the period. The offset is in the allocated cost of the associated retained subordinated securities. This amount also includes foreign currency translation adjustments. Prior periods primarily included foreign currency translation adjustments. |
8
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in the other loans reserve for losses for the six months ended June 30:
(Millions) |
2009 | 2008 | ||||||
Balance, January 1 |
$ | 39 | $ | 45 | ||||
Provisions |
36 | 19 | ||||||
Net write-offs and other (a) |
(44 | ) | (17 | ) | ||||
Balance, June 30 |
$ | 31 | $ | 47 |
(a) | Net write-offs for June 30, 2009 and 2008 include recoveries of $4 million and $4 million, respectively. |
5. Investment Securities
The following is a summary of investment securities, all of which are classified as available-for-sale at June 30, 2009 and December 31, 2008:
June 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||
(Millions) |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value | ||||||||||||||||||
State and municipal obligations |
$ | 6,452 | $ | 35 | $ | (533 | ) | $ | 5,954 | $ | 6,628 | $ | 37 | $ | (1,034 | ) | $ | 5,631 | ||||||||
U.S. Government treasury obligations |
4,934 | 23 | | 4,957 | 1,533 | 41 | | 1,574 | ||||||||||||||||||
U.S. Government agency obligations |
6,462 | 53 | | 6,515 | 3,541 | 51 | | 3,592 | ||||||||||||||||||
Mortgage-backed securities(a) |
131 | 2 | (1 | ) | 132 | 73 | 2 | | 75 | |||||||||||||||||
Retained subordinated securities(b) |
2,932 | 235 | (66 | ) | 3,101 | 1,328 | | (584 | ) | 744 | ||||||||||||||||
Equity securities(c) |
100 | 300 | | 400 | 200 | 344 | | 544 | ||||||||||||||||||
Corporate debt securities |
1,186 | 9 | (22 | ) | 1,173 | 230 | 1 | (13 | ) | 218 | ||||||||||||||||
Foreign government bonds and obligations |
61 | 1 | (2 | ) | 60 | 84 | 1 | (4 | ) | 81 | ||||||||||||||||
Other |
27 | | | 27 | 67 | | | 67 | ||||||||||||||||||
Total |
$ | 22,285 | $ | 658 | $ | (624 | ) | $ | 22,319 | $ | 13,684 | $ | 477 | $ | (1,635 | ) | $ | 12,526 |
(a) | Represents the amount of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. |
(b) | Consists of investments in retained subordinated securities from the Companys securitization of cardmember loans. |
(c) | Represents the Companys investment in Industrial and Commercial Bank of China (ICBC). |
9
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. The Company has not classified any investment securities in Level 1 of the fair value hierarchy. |
| When quoted prices in an active market are not available, the fair market values for the Companys investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades, broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. Although the underlying inputs are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. |
As of June 30, 2009 and December 31, 2008, all of the Companys investment securities are classified within Level 2 of the fair value hierarchy, except for the retained subordinated securities from the Companys securitization of cardmember loans, which are classified within Level 3 of the fair value hierarchy. Refer to Note 7 for further details including the valuation methodology used to calculate the fair value of the retained subordinated securities.
The Company has reaffirmed its understanding of the valuation techniques used by its pricing services. No adjustments were deemed necessary to the prices provided by the pricing services as a result of current market conditions. In addition, the Company corroborates the prices provided by its pricing services to test their reasonableness by comparing their prices to valuations from different pricing sources as well as comparing prices to the sale prices received from sold securities.
Other-Than-Temporary Impairment
The Company reviews and evaluates investments at least quarterly, and more often as market conditions may require, to identify investments that have indications of other-than-temporary impairment. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several metrics when evaluating securities for other-than-temporary impairment. The key factors considered include the determination of the extent to which the decline in the fair value of the security is due to increased default risk for the specific issuer, or market interest rate risk. With respect to increased default risk, the Company assesses the collectibility of principal and interest payments by monitoring issuers credit ratings, related changes to those ratings, specific credit events associated with the individual issuers as well as the credit ratings of financial guarantor, where applicable, and the extent to which amortized cost exceeds fair value and the duration and size of that difference. With respect to market interest rate risk, including benchmark interest rates and credit spreads, the Company assesses whether it has the intent to sell the securities, and whether it is more likely than not that the Company will not be required to sell the securities before recovery of any unrealized losses.
10
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about available-for-sale investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2009 and December 31, 2008:
(Millions) |
June 30, 2009 | December 31, 2008 | ||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Less than 12 months | 12 months or more | |||||||||||||||||||||||||
Description of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||||
State and municipal obligations |
$ | 703 | $ | (25 | ) | $ | 3,533 | $ | (508 | ) | $ | 2,515 | $ | (326 | ) | $ | 2,037 | $ | (708 | ) | ||||||||
Retained subordinated securities |
881 | (55 | ) | 64 | (11 | ) | 744 | (584 | ) | | | |||||||||||||||||
Corporate debt securities |
29 | (2 | ) | 69 | (20 | ) | 35 | (1 | ) | 99 | (12 | ) | ||||||||||||||||
Foreign government bonds and obligations |
4 | | 21 | (2 | ) | 27 | (4 | ) | | | ||||||||||||||||||
Mortgage-backed securities: |
70 | (1 | ) | 6 | | | | | | |||||||||||||||||||
Total |
$ | 1,687 | $ | (83 | ) | $ | 3,693 | $ | (541 | ) | $ | 3,321 | $ | (915 | ) | $ | 2,136 | $ | (720 | ) |
The following tables summarize the gross unrealized losses of temporary impairments by ratio of fair value to amortized cost as of June 30, 2009 and December 31, 2008
June 30, 2009:
(Millions) |
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||
Ratio of Fair Value to Amortized Cost |
Number of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
90%100% |
212 | $ | 1,572 | $ | (67 | ) | 327 | $ | 1,746 | $ | (102 | ) | 539 | $ | 3,318 | $ | (169 | ) | |||||||||
Less than 90% |
17 | 115 | (16 | ) | 253 | 1,947 | (439 | ) | 270 | 2,062 | (455 | ) | |||||||||||||||
Total |
229 | $ | 1,687 | $ | (83 | ) | 580 | $ | 3,693 | $ | (541 | ) | 809 | $ | 5,380 | $ | (624 | ) |
December 31, 2008:
(Millions) |
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||
Ratio of Fair Value to Amortized Cost |
Number of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
Number of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
Numbers of Securities |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
90%100% |
327 | $ | 1,289 | $ | (73 | ) | 37 | $ | 111 | $ | (7 | ) | 364 | $ | 1,400 | $ | (80 | ) | |||||||||
Less than 90% |
321 | 2,032 | (842 | ) | 310 | 2,025 | (713 | ) | 631 | 4,057 | (1,555 | ) | |||||||||||||||
Total |
648 | $ | 3,321 | $ | (915 | ) | 347 | $ | 2,136 | $ | (720 | ) | 995 | $ | 5,457 | $ | (1,635 | ) |
At June 30, 2009, the gross unrealized losses on state and municipal securities and all other securities are attributable to a number of reasons such as increases in issuer specific credit spreads and changes in market interest rates. In assessing default risk on these securities, the Company has qualitatively considered the key factors identified above and determined that it expects to collect all of the contractual cash flows due on the securities. The gross unrealized losses on the retained subordinated securities from the Companys securitization of cardmember loans are attributable to widening of specific credit spreads of the American Express Credit Account Master Trust (Lending Trust). In assessing default risk on these securities, the Company has also analyzed the projected cash flows of the Lending Trust and expects to collect all of the contractual cash flows due on the securities.
11
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Overall, for investment securities in gross unrealized loss positions identified above, the Company does not intend to sell the securities, and it is more likely than not that it will not be required to sell the securities before recovery of the unrealized losses, and expects that the contractual principal and interest will be received on the securities.
Supplemental Information
Gross realized gains and losses on sales of investment securities, included in other non-interest revenue, follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
(Millions) |
2009 | 2008 | 2009 | 2008 | ||||||||||
Gains(a) |
$ | 222 | $ | 1 | $ | 223 | $ | 4 | ||||||
Losses |
| (1 | ) | | (1 | ) | ||||||||
Total |
$ | 222 | $ | | $ | 223 | $ | 3 |
(a) | Primarily represents the gain from the sale of 50 percent of the Companys investment in ICBC. |
Contractual maturities of investment securities classified as available-for-sale, excluding equity securities and other securities (primarily mutual funds with no stated maturity), as of June 30, 2009 are as follows:
(Millions) |
Cost | Estimated Fair Value | ||||
Due within 1 year |
$ | 5,364 | $ | 5,400 | ||
Due after 1 year through 5 years |
9,973 | 10,208 | ||||
Due after 5 years through 10 years |
680 | 650 | ||||
Due after 10 years |
6,140 | 5,632 | ||||
Total |
$ | 22,157 | $ | 21,890 |
The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations.
12
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Fair Values of Financial Instruments
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107), as amended by FASB Staff position No. 107-1 and APB 28-1 Interim Disclosures About Fair Value of Financial Instruments requires the disclosure of the estimated fair value of financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements of SFAS No. 107 exclude leases, equity method investments, affiliate investments, pension and benefit obligations, insurance contracts, and all non-financial instruments.
The following table discloses fair value information for the Companys financial assets and financial liabilities, included in the scope of SFAS No. 107, as amended, as of the dates presented:
(Rounded to nearest billion) |
June 30, 2009 | December 31, 2008 | ||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value | |||||||||
Financial Assets: |
||||||||||||
Assets for which carrying values equal or approximate fair value |
$ | 75 | $ | 75 | $ | 73 | $ | 73 | ||||
Loans |
$ | 30 | $ | 30 | $ | 41 | $ | 41 | ||||
Financial Liabilities: |
||||||||||||
Liabilities for which carrying values equal or approximate fair value |
$ | 42 | $ | 42 | $ | 45 | $ | 44 | ||||
Long-term debt |
$ | 54 | $ | 52 | $ | 60 | $ | 56 |
The fair values of these financial instruments are estimates based upon market conditions and perceived risks as of June 30, 2009 and December 31, 2008, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be estimated by aggregating the amounts presented. The following methods were used to determine estimated fair values.
Financial Assets for Which Carrying Values Equal or Approximate Fair Value
Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, cardmember receivables, accrued interest, and certain other assets. For these assets, the carrying values approximate fair value because they are short-term in duration or variable rate in nature.
In addition, the following financial assets are carried at fair value:
Investments Securities
Investment securities are recorded at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in accumulated other comprehensive (loss) income. Gains and losses on investment securities classified as available-for-sale are recognized in the Consolidated Statements of Income upon disposition of the securities or when management determines that a decline in value below amortized cost is other-than-temporary. Refer to Note 5 for additional information regarding investment securities, including the valuation methodologies used to calculate fair value.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income or Consolidated Balance Sheets (accumulated other comprehensive (loss) income) based upon the nature of the derivative. Refer to Note 15 for additional information regarding derivative financial instruments, including the valuation methodologies used to calculate fair value.
13
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest-Only Strip
The interest-only strip is recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income. Refer to Note 7 for additional information regarding the interest-only strip, including the valuation methodology used to calculate fair value.
Financial Assets Carried at Other Than Fair Value
Loans
Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for the Companys loans, the principal market is assumed to be the securitization market, and the Company uses the hypothetical securitization price to determine the fair value of the portfolio. The securitization price is determined from the assumed proceeds of the hypothetical securitization in the current market, adjusted for securitization uncertainties such as market conditions and liquidity.
Financial Liabilities for Which Carrying Values Equal or Approximate Fair Value
Financial liabilities for which carrying values equal or approximate fair values include accrued interest, customer deposits, Travelers Cheques outstanding, short-term borrowings, and certain other liabilities. For these liabilities, the carrying values approximate fair value because these are short-term in duration, variable rate in nature, or have no defined maturity.
Financial Liabilities Carried at Other Than Fair Value
Long-Term Debt
Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using either quoted market prices or discounted cash flows based on the Companys current borrowing rates for similar types of borrowing. For variable-rate long-term debt that reprices within one year, fair value approximates carrying value. Refer to Note 16 for discussion of carrying and fair value information regarding guarantees.
14
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Asset Securitizations
Off-Balance Sheet Securitizations
Servicing Portfolio
The Company periodically securitizes cardmember loans through the American Express Credit Account Master Trust (the Lending Trust). The following table illustrates the activity in the Lending Trust (including the securitized cardmember loans and sellers interest) for the six months ended June 30:
(Millions) |
2009 | 2008 | ||||||
Lending Trust assets, January 1 |
$ | 41,579 | $ | 36,194 | ||||
Account additions, net |
| 10,187 | ||||||
Cardmember activity, net |
(6,354 | ) | (2,394 | ) | ||||
Lending Trust assets, June 30 |
$ | 35,225 | $ | 43,987 | ||||
Securitized cardmember loans, January 1 |
$ | 28,955 | $ | 22,670 | ||||
Impact of issuances, external |
1,000 | 6,565 | ||||||
Impact of issuances, retained |
1,748 | 895 | ||||||
Impact of maturities |
(2,100 | ) | (3,970 | ) | ||||
Securitized cardmember loans, June 30 |
$ | 29,603 | $ | 26,160 | ||||
Sellers interest, January 1 |
$ | 12,624 | $ | 13,524 | ||||
Impact of issuances |
(2,748 | ) | (7,460 | ) | ||||
Impact of maturities |
2,100 | 3,970 | ||||||
Account additions, net |
| 10,187 | ||||||
Cardmember activity, net |
(6,354 | ) | (2,394 | ) | ||||
Sellers interest, June 30 |
$ | 5,622 | $ | 17,827 | ||||
The Company, through its subsidiaries, is required to maintain an undivided interest in the transferred cardmember loans (sellers 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). Sellers interest is reported as cardmember lending on the Companys Consolidated Balance Sheets. Any billed finance charges related to the investors portion of securitized cardmember loans are reported as other assets on the Companys Consolidated Balance Sheets.
The Company retains servicing responsibilities for the transferred cardmember loans through its subsidiary, American Express Travel Related Services Company, Inc. (TRS) and earns a related fee. No servicing asset or liability is recognized at the time of a securitization because the Company receives adequate compensation relative to current market servicing fees.
15
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In an effort to address the concerns of the rating agencies and the recent decline in the trust excess spread due to the performance of the underlying credit card receivables in the Lending Trust and the related American Express Credit Account Secured Note Trusts (the Note Trusts), the subsidiaries of the Company that are the transferors of the Lending Trust announced that certain actions affecting outstanding series of securities issued by the Lending Trust and the Note Trusts were completed in order to adjust the credit enhancement structure of substantially all of the outstanding series of securities previously issued by the Lending Trust and the Note Trusts. The actions, which are permitted by the transaction documents governing the Lending Trust and Note Trusts, consist of the issuance of two new series of asset-backed securities, which will provide additional credit enhancement to all outstanding series, and the exercise of a discount option with respect to new principal receivables arising in the Lending Trust. In addition to improving the levels of credit enhancement for existing series of securities issued by the Lending Trust and the Note Trusts, the actions are expected to increase the yield (or trust excess spread rate) on assets in the Lending Trust. More particularly, the actions taken include the following:
1. | Issuance of two new series of investor certificates (collectively, the Series D Certificates). The invested amount of investor certificates constituting the Series D Certificates were equal to (i) approximately 4.2 percent of the sum of the aggregate outstanding balances of investor certificates issued by the Lending Trust prior to 2007 (excluding one series of investor certificates that are scheduled to mature in July 2009) and their corresponding portion of Series D Certificates and (ii) approximately 6.3 percent of the sum of the aggregate outstanding balances of investor certificates issued by the Lending Trust since 2007 and their corresponding portion of Series D Certificates, which resulted in the aggregate invested amount of the Series D Certificates being equal to approximately $1.5 billion. The Series D Certificates were acquired by the Companys subsidiaries and affiliates that are the transferors of the Lending Trust in exchange for a portion of the Lending Trust retained interest (i.e., the sellers interest) owned by such subsidiaries and affiliates. The Series D Certificates will provide credit enhancement to the existing series of investor certificates in that they will receive payments from the cash flow of the Lending Trust only after payments due to all outstanding series of investor certificates issued by the Lending Trust that are supported by the Series D Certificates have been made to the holders thereof. The Series D Certificates were issued at a market rate of interest. |
2. | Designation of a percentage of new principal receivables arising from accounts in the Lending Trust as Discount Option Receivables (as defined in the Lending Trust documentation). As permitted under the terms of the transaction documents governing the Lending Trust, collections on Discount Option Receivables may be applied as finance charge collections, the result of which would be expected to increase the yield on the assets in the Lending Trust. The Company estimates that this action will, over time, increase excess spread in the Lending Trust by approximately 400-600 basis points. |
The Company believes that the actions described above will not have a material impact on the Companys results of operations.
16
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Securitization (Loss) Income
The following table summarizes the activity related to securitized loans reported in securitization income, net:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||
Excess spread, net (a) |
(139 | ) | 96 | (137 | ) | 406 | ||||
Servicing fees |
140 | 130 | 279 | 257 | ||||||
(Losses) Gains on sales from securitizations (b) |
(3 | ) | 1 | (3 | ) | 8 | ||||
Securitization (loss) income, net |
(2 | ) | 227 | 139 | 671 | |||||
(a) | Excess spread, net is the net cash flow from interest and fee collections allocated to the investors interests after deducting the interest paid on investor certificates, credit losses, contractual servicing fees, other expenses, and the changes in the fair value of the interest-only strip. This amount excludes issuer rate fees on the securitized accounts, which is recorded in discount revenue in the Companys Consolidated Statements of Income. |
(b) | Excludes $82 million and $(48) million of impact from cardmember loan sales and maturities for the three months ended June 30, 2009, as well as $117 million and $(71) million of impact from cardmember loan sales and maturities for the three months ended June 30, 2008, reflected in the provisions for losses for each respective period. Excludes $82 million and $(141) million of impact from cardmember loan sales and maturities for the six months ended June 30, 2009, as well as $257 million and $(139) million of impact from cardmember loan sales and maturities for the six months ended June 30, 2008, reflected in the provisions for losses for each respective period. |
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 Companys 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, BBB-rated and unrated investments in tranches of the securitization (subordinated securities) and an interest-only strip. The following table presents retained interests at June 30, 2009 and December 31, 2008:
(Millions) |
2009 | 2008 | ||||
Subordinated securities (a) |
$ | 3,101 | $ | 744 | ||
Interest-only strip (b) |
| 32 | ||||
Total retained interests |
$ | 3,101 | $ | 776 |
(a) | The subordinated securities are accounted for at fair value as available-for-sale investment securities and are reported in investments on the Companys 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 Companys Consolidated Balance Sheets with changes in fair value recorded in securitization income, net in the Companys 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.
17
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 Companys retained subordinated securities and its interest-only strip during the six months ended June 30, 2009:
(Millions) |
Investments Retained Subordinated Securities |
Other Assets-Interest-Only Strip |
||||||
Beginning fair value, January 1, 2009 |
$ | 744 | $ | 32 | ||||
Increases in securitized loans |
1,604 | | ||||||
Decreases in securitized loans |
| (17 | ) (b) | |||||
Total realized and unrealized gains (losses) |
753 | (a) | (15 | ) (b) | ||||
Ending fair value, June 30, 2009 |
$ | 3,101 | $ | |
(a) | Included in accumulated other comprehensive (loss) income, net of tax. |
(b) | Included in securitization income, net. |
Changes in the estimates and assumptions used may have a significant impact on the Companys 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 June 30, 2009. The primary drivers of this decline in value are an increase in credit losses and a reduction in the finance charge yield net of certificate interest costs.
The key assumptions and the sensitivity of the current years 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 |
6.9% - 26.8 | % | $ | (80.9 | ) | $ | (157.8 | ) | |||
LIBOR |
1.6% - 3.7 | % | $ | (0.1 | ) | $ | (0.2 | ) |
This sensitivity analysis does not represent managements 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.
18
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Disclosures
The table below summarizes cash flows received from the Lending Trust for the six months ended June 30, 2009 and 2008:
(Millions) |
2009 | 2008 | ||||
Proceeds from new securitizations during the period |
$ | 998 | $ | 6,551 | ||
Proceeds from collections reinvested in revolving cardmember securitizations |
$ | 38,809 | $ | 37,579 | ||
Servicing fees received |
$ | 279 | $ | 257 | ||
Excess spread received, including issuer rate collections |
$ | 788 | $ | 1,274 |
The following table presents quantitative information about delinquencies, net credit losses, and components of securitized cardmember loans on a trust basis at June 30, 2009 and 2008:
(Billions) |
Total Principal Amount of Loans |
Amount of Loans 30 Days or More Past Due |
Net Credit Write-offs During the Year | ||||||
2009 |
|||||||||
Cardmember loans managed(a) |
$ | 62.1 | $ | 2.7 | $ | 3.4 | |||
Less: Cardmember loans securitized |
29.6 | 1.3 | 1.5 | ||||||
Cardmember loans on-balance sheet |
$ | 32.5 | $ | 1.4 | $ | 1.9 | |||
2008 |
|||||||||
Cardmember loans managed(a) |
$ | 75.8 | $ | 2.5 | $ | 2.2 | |||
Less: Cardmember loans securitized |
26.2 | 0.8 | 0.7 | ||||||
Cardmember loans on-balance sheet |
$ | 49.6 | $ | 1.7 | $ | 1.5 | |||
(a) | Excludes subordinated accrued interest receivable classified in other assets of $826 million and $708 million for the periods ended June 30, 2009 and 2008, respectively. |
On-Balance Sheet Securitizations
The Companys 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 Companys Consolidated Balance Sheets. The related securities issued to third-party investors are reported as long-term debt on the Companys Consolidated Balance Sheets.
19
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the total assets and liabilities held by the Charge Trust at June 30, 2009 and December 31, 2008:
(Billions) |
2009 | 2008 | ||||
Assets |
$ | 7.4 | $ | 7.8 | ||
Liabilities |
$ | 5.0 | $ | 5.0 |
These receivables are available only for payment of the debt or other obligations issued or arising in the securitization transactions. For these assets, the carrying values approximate fair value because these are short-term in duration. The long-term debt is payable only out of collections on the underlying securitized assets. The fair value of these liabilities was $4.9 billion and $4.4 billion at June 30, 2009 and December 31, 2008, respectively.
Lending Trust and Charge Trust Triggers
Under the respective terms of the Lending Trust and the Charge Trust agreements, the occurrence of certain events could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor certificates.
The following table below presents key metrics reported by each trust at June 30, 2009:
Lending Trust | Charge Trust | |||||
Excess spread rate, net: |
(a) | (b) | ||||
3-month average Trigger event |
||||||
Trust trigger for reserve account funding |
£ 5.00 | % | £ 4.00 | % | ||
Trust trigger for early amortization |
£ 0 | % | £ 0 | % | ||
3-month average Actual rate |
||||||
Floating rate series actual rate |
5.37 | % | 28.50 | % | ||
Fixed rate series actual rate |
1.25 | % | 25.33 | % | ||
Reserve account funding (millions) |
||||||
Required amount (c) |
||||||
Floating rate series |
$ 0 | $ 0 | ||||
Fixed rate series |
$ 35 | $ 0 | ||||
Funded amount |
||||||
Floating rate series |
$ 0 | $ 0 | ||||
Fixed rate series |
$ 5 | (d) | $ 0 | |||
Sellers interest percentage: |
||||||
Required amount |
³ 7 | % | ³ 15 | % | ||
Actual amount |
14 | % | 28 | % | ||
Paydown rate 3-month average: |
||||||
Required amount |
N/A | ³ 60.0 | % | |||
Actual amount |
N/A | 92.6 | % |
(a) | The excess spread rate, net including issuer rate collections in the Lending Trust is the sum of the net cash flows of the (i) excess spread, net and (ii) issuer rate, as a percentage of the outstanding investors certificates. Excess spread, net is the net cash flows from interest and fee collections allocated to the investors interests after deducting the interest paid on investors certificates, credit losses, contractual servicing fees and other expenses. The deductions may be a greater amount than the collections, resulting in negative spread losses. Excess spread, net is reported by the Company in securitization income, net in the Consolidated Statements of Income. See above for the disclosure of excess spread, net. Issuer rate collections are a portion of monthly discount revenue that is earned and collected by the Company on new transactions by cardmembers that have their loans sold into the Lending Trust. These cash flows are available to pay monthly Lending Trust expenses. The issuer rate is reported in discount revenue in the Companys Consolidated Statements of Income. In the event the excess spread, net in the Lending Trust becomes negative, and the issuer rate collections are utilized to pay Lending Trust expenses, this would be reflected as an expense in securitization income, net in the Companys Consolidated Statements of Income and as a reduction of the floating and fixed series excess spread rates. |
20
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) | The excess spread rate, net in the Charge Trust is the net cash flows from the discounted portion of principal collections allocated to the investors interests after deducting the interest paid on investors notes, credit losses, contractual servicing fees and other expenses, as a percentage of the outstanding investors notes. |
(c) | If the three-month average excess spread rate, net including issuer rate collections falls below the trigger level of 5 percent or 4 percent for the Lending Trust and Charge Trust, respectively, the affected Trust is required to fund a cash account in increasing amounts ($3 million to $1.9 billion for the Lending Trust and $11 million to $207 million for the Charge Trust) depending on the severity by which the excess spread rate, net falls below the trigger level. |
(d) | This amount is recorded in other receivables on the Companys 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). |
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 Companys 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 Companys balance sheet, as well as for lending receivables assets that would be generated in the future from the accounts that are the source of the reverted receivables.
In the event of an early amortization of the Charge Trust, the underlying investor notes issued by the Charge Trust are required to be repaid over an approximate one month period, based on the estimated average life of the securitized receivables.
8. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Millions) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Net income |
$ | 337 | $ | 653 | $ | 774 | $ | 1,644 | ||||||||
Other comprehensive income (losses): |
||||||||||||||||
Net unrealized securities gains |
400 | 209 | 732 | 89 | ||||||||||||
Net unrealized derivative gains (losses) |
12 | 90 | 31 | (15 | ) | |||||||||||
Foreign currency translation adjustments |
(72 | ) | (92 | ) | (91 | ) | (93 | ) | ||||||||
Net unrealized pension and other postretirement benefit costs |
8 | 3 | 29 | 10 | ||||||||||||
Total |
$ | 685 | $ | 863 | $ | 1,475 | $ | 1,635 |
21
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Customer Deposits
At June 30, 2009 and December 31, 2008, customer deposits were categorized as interest-bearing or non-interest-bearing deposits as follows:
(Millions) |
2009 | 2008 | ||||
U.S.: |
||||||
Interest-bearing |
$ | 19,305 | $ | 14,377 | ||
Non-interest-bearing |
12 | 16 | ||||
Non-U.S.: |
||||||
Interest-bearing |
785 | 1,072 | ||||
Non-interest-bearing |
26 | 21 | ||||
Total customer deposits |
$ | 20,128 | $ | 15,486 |
The customer deposits are aggregated by deposit type offered by the Company at June 30, 2009 and December 31, 2008, as follows:
(Millions) |
2009 | 2008 | ||||
Retail: |
||||||
Cash sweep accounts |
$ | 7,120 | $ | 7,123 | ||
CDs and other retail deposits |
11,985 | 6,375 | ||||
Institutional |
200 | 837 | ||||
Other |
823 | 1,151 | ||||
Total customer deposits |
$ | 20,128 | $ | 15,486 |
At June 30, 2009 and December 31, 2008 time deposits, included in interest-bearing deposits above, in denominations of $100,000 or more were as follows:
(Millions) |
2009 | 2008 | ||||
U.S. |
$ | 253 | $ | 894 | ||
Non-U.S. |
6 | 153 | ||||
Total |
$ | 259 | $ | 1,047 |
The scheduled maturities of all time deposits, included in interest-bearing deposits above, at June 30, 2009, are as follows:
(Millions) |
U.S. | Non-U.S. | Total | ||||||
2009 |
$ | 3,996 | $ | 493 | $ | 4,489 | |||
2010 |
2,535 | | 2,535 | ||||||
2011 |
2,333 | | 2,333 | ||||||
2012 |
1,194 | | 1,194 | ||||||
2013 |
1,219 | | 1,219 | ||||||
After 5 years |
736 | | 736 | ||||||
Total |
$ | 12,013 | $ | 493 | $ | 12,506 |
22
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Income Taxes
The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In June 2008, the IRS completed its field examination of the Companys federal tax returns for the years 1997 through 2002. In July 2009, the IRS completed its field examination of the Companys federal tax returns for the years 2003 and 2004. However, all of these years continue to remain open as a consequence of certain issues under appeal.
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 $602 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 $602 million of unrecognized tax benefits, approximately $333 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 $269 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 Companys effective tax rate:
Three Months Ended June 30, 2009 (a) |
Six Months Ended June 30, 2009 (a) |
Full Year 2008 (b) | |||||||
Effective tax rate |
18 | % | 18 | % | 20 | % |
(a) | Each of the periods reflects recurring, permanent tax benefits. However, the lower tax rate for the three and six months ended June 30, 2009 reflects the larger impact of the benefits on a decreased level of pretax income. |
(b) | The full year 2008 effective tax rate reflected tax benefits related to the resolution of certain prior years tax items. |
23
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Preferred Shares and Warrants
Capital Purchase Program
On January 9, 2009, under the United States Department of the Treasury (Treasury Department) Capital Purchase Program (CPP), the Company issued to the Treasury Department for aggregate proceeds of $3.39 billion: (1) 3.39 million shares of Fixed Rate (5 percent) Cumulative Perpetual Preferred Shares, Series A, and (2) a ten-year warrant (the Warrant) for the Treasury Department to purchase up to 24 million common shares at an exercise price of $20.95 per share. Upon issuance, $3.16 billion of the proceeds was allocated to the Preferred Shares, and $232 million of the proceeds was allocated to the Warrant based on their relative fair values at the date of issuance. The value of the Preferred Shares was scheduled to accrete to the face value of $3.39 billion over five years.
On June 9, 2009, the Company received notification from the Treasury Department that it had met the requirements to repurchase the CPP Preferred Shares and completed this repurchase on June 17, 2009. As a pre-condition to the repurchase of the Preferred Shares, the Treasury Department and the Companys Banking Regulator required that the Company raise capital in the public markets. Accordingly, on May 18, 2009, the Company issued to the public $3.0 billion of non-guaranteed senior debt, comprising $1.25 billion of 7.25 percent, five-year notes and $1.75 billion of 8.125 percent, ten-year notes. Additionally, on June 5, 2009, the Company completed a $500 million public equity offering by issuing 19.8 million common shares at $25.25 per share. The underwriters retained a 30-day option to purchase 3 million additional shares at $25.25 per share. On June 10, 2009, the underwriters exercised that option to purchase an additional 1.9 million common shares.
At the date of the CPP Preferred Shares repurchase (June 17, 2009), the $3.39 billion cash paid exceeded the $3.18 billion carrying amount of the Preferred Shares. The $212 million excess represents an in-substance Preferred Shares dividend reducing EPS to common shareholders by $0.18 for the three and six months ended June 30, 2009, respectively. Refer to Note 12.
On July 1, 2009, the Company submitted notice to the Treasury Department of its intent to repurchase the Warrant issued under the CPP, including the Companys determination of fair value. On July 29, 2009, the Company repurchased for $340 million the Warrant from the Treasury Department. Taking into consideration the CPP Preferred Share dividends and the repayment of the Warrant, the Treasury Department earned an annualized 26 percent return on its investment.
24
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Earnings Per Common Share (EPS)
Basic EPS is computed using average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of non-participating share awards and other financial instruments that may be converted into common shares. The following table presents computations of basic and diluted EPS:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Millions, except per share amounts) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Numerator: |
||||||||||||||||
Basic and diluted: |
||||||||||||||||
Income from continuing operations |
$ | 342 | $ | 660 | $ | 785 | $ | 1,704 | ||||||||
Preferred shares dividends, accretion, and recognition of remaining unaccreted dividends (a) |
(234 | ) | | (306 | ) | | ||||||||||
Earnings allocated to participating share awards |
(1 | ) | (3 | ) | (5 | ) | (9 | ) | ||||||||
Income from continuing operations attributable to common shareholders |
107 | 657 | 474 | 1,695 | ||||||||||||
Loss from discontinued operations |
(5 | ) | (7 | ) | (11 | ) | (60 | ) | ||||||||
Net income attributable to common shareholders |
$ | 102 | $ | 650 | $ | 463 | $ | 1,635 | ||||||||
Denominator: |
||||||||||||||||
Basic: weighted-average common stock |
1,162 | 1,154 | 1,159 | 1,153 | ||||||||||||
Add: weighted-average stock options and warrants |
3 | 9 | 2 | 10 | ||||||||||||
Diluted |
1,165 | 1,163 | 1,161 | 1,163 | ||||||||||||
Basic Earnings Per Common Share: |
||||||||||||||||
Income from continuing operations attributable to common shareholders |
$ | 0.09 | $ | 0.57 | $ | 0.41 | $ | 1.47 | ||||||||
Loss from discontinued operations |
| (0.01 | ) | (0.01 | ) | (0.05 | ) | |||||||||
Net income attributable to common shareholders |
$ | 0.09 | $ | 0.56 | $ | 0.40 | $ | 1.42 | ||||||||
Diluted Earnings Per Common Share: |
||||||||||||||||
Income from continuing operations attributable to common shareholders |
$ | 0.09 | $ | 0.56 | $ | 0.41 | $ | 1.46 | ||||||||
Loss from discontinued operations |
| | (0.01 | ) | (0.05 | ) | ||||||||||
Net income attributable to common shareholders |
$ | 0.09 | $ | 0.56 | $ | 0.40 | $ | 1.41 |
(a) | Includes the accelerated preferred dividend accretion of $212 million, due to the repurchase of $3.39 billion of preferred shares issued as part of the CPP. |
For the three months ended June 30, 2009 and 2008, unexercised stock options of 77 million and 29 million shares, respectively, and for the six months ended June 30, 2009 and 2008, unexercised stock options of 77 million and 25 million shares, respectively, were not included in the computation of diluted EPS. In addition, for the six months ended June 30, 2009, 24 million Warrant shares were not included in the computation of diluted EPS. These stock option and Warrant shares were not included because their respective exercise prices were greater than the average market price of the Companys common shares. See Notes 10 and 22 to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, for discussion of the Companys subordinated debentures, including the circumstances under which additional common shares would be reflected in the computation of EPS.
25
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Details of Certain Consolidated Statements of Income Lines
As a result of becoming a bank holding company, the Company has made certain additional required disclosures for 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 three and six months ended June 30:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||
Delinquency fees |
$ | 163 | $ | 243 | $ | 372 | $ | 523 | ||||
Foreign currency conversion revenue |
165 | 205 | 308 | 394 | ||||||||
Other |
111 | 142 | 212 | 295 | ||||||||
Total other commissions and fees |
$ | 439 | $ | 590 | $ | 892 | $ | 1,212 | ||||
The following is a detail of other revenues for the three and six months ended June 30:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||
Gain on investment securities |
$ | 222 | $ | | $ | 223 | $ | 3 | ||||
Insurance premiums |
75 | 87 | 151 | 168 | ||||||||
Other |
373 | 491 | 746 | 867 | ||||||||
Total other revenues |
$ | 670 | $ | 578 | $ | 1,120 | $ | 1,038 | ||||
The following is a detail of marketing, promotions, rewards and cardmember services for the three and six months ended June 30:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||
Marketing and promotion |
$ | 352 | $ | 663 | $ | 697 | $ | 1,257 | ||||
Cardmember rewards |
1,029 | 1,129 | 1,875 | 2,169 | ||||||||
Cardmember services |
131 | 132 | 242 | 254 | ||||||||
Total marketing, promotion, rewards and cardmember services |
$ | 1,512 | $ | 1,924 | $ | 2,814 | $ | 3,680 | ||||
The following is a detail of other, net expenses for the three and six months ended June 30:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Occupancy and equipment |
$ | 392 | $ | 412 | $ | 750 | $ | 787 | ||||||||
Communications |
106 | 115 | 210 | 230 | ||||||||||||
MasterCard and Visa settlements |
(213 | ) | (68 | ) | (423 | ) | (140 | ) | ||||||||
Other (a) |
324 | 373 | 577 | 747 | ||||||||||||
Total other, net expense |
$ | 609 | $ | 832 | $ | 1,114 | $ | 1,624 | ||||||||
(a) | The three and six months ended June 30, 2009 include a $59 million benefit related to prior periods from the completion of certain account reconciliations. Also included in the three and six months ended June 30, 2009 was a $61 million unfavorable impact and a $5 million benefit related to fair value hedge ineffectiveness, respectively. |
26
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Reportable Operating Segment Information
The Company is a leading global payments, network, and travel company that is principally engaged in businesses comprising four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and the Global Network & Merchant Services (GNMS). The following table presents certain operating segment information:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Revenues, excluding interest income: |
||||||||||||||||
USCS |
$ | 2,271 | $ | 2,943 | $ | 4,617 | $ | 5,966 | ||||||||
ICS |
823 | 992 | 1,595 | 1,929 | ||||||||||||
GCS |
1,035 | 1,405 | 2,016 | 2,640 | ||||||||||||
GNMS |
888 | 1,025 | 1,701 | 1,967 | ||||||||||||
Corporate & Other, including adjustments and eliminations |
334 | 136 | 429 | 268 | ||||||||||||
Total |
$ | 5,351 | $ | 6,501 | $ | 10,358 | $ | 12,770 | ||||||||
Interest income: |
||||||||||||||||
USCS |
$ | 748 | $ | 1,189 | $ | 1,694 | $ | 2,497 | ||||||||
ICS |
399 | 524 | 799 | 1,034 | ||||||||||||
GCS |
21 | 49 | 42 | 95 | ||||||||||||
GNMS |
1 | 1 | 2 | 2 | ||||||||||||
Corporate & Other, including adjustments and eliminations |
119 | 94 | 225 | 171 | ||||||||||||
Total |
$ | 1,288 | $ | 1,857 | $ | 2,762 | $ | 3,799 | ||||||||
Interest expense: |
||||||||||||||||
USCS |
$ | 214 | $ | 539 | $ | 432 | $ | 1,148 | ||||||||
ICS |
131 | 260 | 280 | 512 | ||||||||||||
GCS |
53 | 146 | 111 | 283 | ||||||||||||
GNMS |
(21 | ) | (57 | ) | (43 | ) | (117 | ) | ||||||||
Corporate & Other, including adjustments and eliminations |
170 | 15 | 322 | 48 | ||||||||||||
Total |
$ | 547 | $ | 903 | $ | 1,102 | $ | 1,874 | ||||||||
Revenues net of interest expense: |
||||||||||||||||
USCS |
$ | 2,805 | $ | 3,593 | $ | 5,879 | $ | 7,315 | ||||||||
ICS |
1,091 | 1,256 | 2,114 | 2,451 | ||||||||||||
GCS |
1,003 | 1,308 | 1,947 | 2,452 | ||||||||||||
GNMS |
910 | 1,083 | 1,746 | 2,086 | ||||||||||||
Corporate & Other, including adjustments and eliminations |
283 | 215 | 332 | 391 | ||||||||||||
Total |
$ | 6,092 | $ | 7,455 | $ | 12,018 | $ | 14,695 | ||||||||
Income (Loss) from continuing operations: |
||||||||||||||||
USCS |
$ | (200 | ) | $ | 21 | $ | (225 | ) | $ | 544 | ||||||
ICS |
64 | 115 | 103 | 248 | ||||||||||||
GCS |
71 | 227 | 157 | 378 | ||||||||||||
GNMS |
236 | 299 | 473 | 522 | ||||||||||||
Corporate & Other |
171 | (2 | ) | 277 | 12 | |||||||||||
Total |
$ | 342 | $ | 660 | $ | 785 | $ | 1,704 | ||||||||
27
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Companys excess liquidity funding and the related net negative interest spread are no longer included within the reportable operating segment results (primarily USCS and GCS segments) and are reported in the Corporate & Other segment. The segment results for prior quarters have not been revised for this change. The following table shows the impact of the change in the segment results as follows:
For the three months ended June 30, 2009:
(Millions) | USCS | GCS | ICS | Corporate & Other |
Total | |||||||||||
Income (Loss) from continuing operations (a) |
$ | 38.5 | $ | 10.6 | $ | 0.2 | $ | (49.3 | ) | $ | |
For the six months ended June 30, 2009:
(Millions) | USCS | GCS | ICS | Corporate & Other |
Total | |||||||||||
Income (Loss) from continuing operations (a) |
$ | 82.0 | $ | 34.5 | $ | 0.5 | $ | (117.0 | ) | $ | |
(a) | The impact on reportable operating segment debt and asset balances for this change was a decrease to USCS and GCS of $17.9 billion and $7.1 billion, respectively, and an increase to Corporate & Other of $25.0 billion. |
28
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Derivatives and Hedging Activities
The Company uses derivative financial instruments to manage exposure to various market risks. Market risk is the risk to earnings or value resulting from movements in, for example, interest rates, foreign exchange rates or equity market prices. The Companys 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.
Derivative financial instruments derive their value from an underlying variable or multiple variables such as interest rate, foreign exchange, and equity indices or prices. These instruments can increase, reduce or otherwise alter exposure to various market risks and, for that reason, are an integral component of the Companys market risk and related asset/liability management strategy and processes. The Company uses derivatives to manage market risk exposures that arise within its business operations, but does not engage in derivative financial instruments for trading purposes.
For the Companys 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 Companys foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivative financial instruments such as foreign exchange forwards, options, and cross-currency swap contracts, which can help lock in the value of the Companys exposure to specific currencies.
Fair Value Measurements
The fair value of the Companys derivatives is estimated by using pricing models that do not contain a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those models are readily observable from actively quoted markets. The valuation models used by the Company are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, equity indices or prices, and volatility.
Credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value derivatives are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure.
29
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company manages derivative counterparty credit risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next twelve months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by the Companys Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with the Companys ERMC guidelines and procedures and determines the risk mitigation actions, when necessary. Additionally, the Company may, on occasion, enter into master netting agreements.
As of June 30, 2009 and December 31, 2008, the credit and nonperformance risks associated with the Companys derivative counterparties were not significant.
The following table summarizes the total gross fair value, excluding interest accruals, of derivative product assets and liabilities at June 30, 2009 and December 31, 2008:
Other assets | Other liabilities | |||||||||||
(Millions) | Fair Value (a) | Fair Value (a) | ||||||||||
Location |
June 2009 |
December 2008 |
June 2009 |
December 2008 | ||||||||
Derivatives designated as hedging instruments |
||||||||||||
Interest rate contracts |
||||||||||||
Fair value hedges |
$ | 647 | $ | 1,072 | $ | | $ | | ||||
Cash flow hedges |
| | 76 | 125 | ||||||||
Foreign exchange contracts |
||||||||||||
Net investment hedges |
53 | 535 | 407 | 165 | ||||||||
Total derivatives designated as hedging instruments |
$ | 700 | $ | 1,607 | $ | 483 | $ | 290 | ||||
Derivatives not designated as hedging instruments |
||||||||||||
Interest rate contracts |
$ | 11 | $ | 9 | $ | 4 | $ | 20 | ||||
Foreign exchange contracts |
121 | 166 | 109 | 173 | ||||||||
Total derivatives not designated as hedging instruments |
132 | 175 | 113 | 193 | ||||||||
Total derivatives (b) |
$ | 832 | $ | 1,782 | $ | 596 | $ | 483 |
(a) | The fair values of the Companys 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 June 30, 2009 and December 31, 2008, $54 million and $39 million, respectively, of derivative assets and liabilities have been offset and represents the impact of legally enforceable master netting agreements that provide for the net settlement of all contracts in accordance with FIN 39. |
30
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2009, the Company hedged $12.4 billion of its fixed-rate debt to floating rate debt using interest rate swaps.
To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness. Hedge ineffectiveness may be caused by differences between the debts interest coupon and the benchmark rate, which is in turn primarily due to credit spreads at inception of the hedging relationship, which is not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt.
The following tables summarize the impact of fair value hedges associated with the Companys fixed-rate long-term debt described above on the consolidated financial statements for the three and six months ended June 30:
For the three months ended June 30:
Statement of Income
(Millions) | Derivative contract gain(loss) |
Hedged item gain(loss) |
|||||||||||||||||||||||
Derivative relationship |
Location |
Amount recognized, net of tax |
Location |
Amount recognized, net of tax |
Ineffective net gains (losses), net of tax | ||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||
Fair value hedges: |
|||||||||||||||||||||||||
Interest rate contracts |
Other expenses, net | $ | (266 | ) | $ | (193 | ) | Other expenses, net | $ | 226 | $ | 193 | $ | (40 | ) | $ | |
For the six months ended June 30:
Statement of Income
(Millions) | Derivative contract gain(loss) |
Hedged item gain(loss) |
||||||||||||||||||||||
Derivative relationship |
Location |
Amount recognized, net of tax |
Location |
Amount recognized, net of tax |
Ineffective net gains (losses), net of tax | |||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Fair value hedges: |
||||||||||||||||||||||||
Interest rate contracts |
Other expenses, net | $ | (277 | ) | $ | (111 | ) | Other expenses, net | $ | 280 | $ | 112 | $ | 3 | $ | 1 |
31
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 fixed rate debt for the duration of the swap. As of June 30, 2009, the Company hedged $2.3 billion of its floating 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 $53 million of net pretax losses on derivative instruments from accumulated other comprehensive (loss) income into earnings during the next 12 months.
Currently, the longest period of time over which the Company is hedging its exposure to variability in future cash flows for forecasted transactions is approximately less than one year, and is related to certificates of deposit.
Net Investment Hedges
A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company designates foreign currency derivatives, primarily foreign exchange forwards, as hedges of net investments in certain foreign operations. These derivatives reduce exposure to changes in currency exchange rates on the Companys 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.
32
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the impact of cash flow hedges and net investment hedges on the consolidated financial statements for the three and six months ended June 30:
For the three months ended June 30:
(Millions) | Derivative impact on OCI gain (loss), net of tax | Derivative ineffectiveness gain (loss), net of tax | ||||||||||||||||||
Recognized in Other Comprehensive Income |
Location Reclassified |
Amount Reclassified into Income |
Location Reclassified |
Amount | ||||||||||||||||
Derivative relationship |
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate contracts |
$ (5 | ) | $ 49 | Interest expense | $ (19 | ) | $ (41 | ) | Other expenses, net | $ 2 | $ | |||||||||
Net investment hedges: |
||||||||||||||||||||
Foreign exchange contracts |
$ (459 | ) | $ (120 | ) | Other expenses, net | $ | $ | Other expenses, net | $ | $ |
For the six months ended June 30:
(Millions) | Derivative impact on OCI gain (loss), net of tax | Derivative ineffectiveness gain (loss), net of tax | ||||||||||||||||||
Recognized in Other Comprehensive Income |
Location Reclassified |
Amount Reclassified into Income |
Location Reclassified |
Amount | ||||||||||||||||
Derivative relationship |
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate contracts |
$ (17 | ) | $ (85 | ) | Interest expense | $ (48 | ) | $ (70 | ) | Other expenses, net | $ | $ | ||||||||
Net investment hedges: |
||||||||||||||||||||
Foreign exchange contracts |
$ (371 | ) | $ (287 | ) | Other expenses, net | $ | $ | Other expenses, net | $ | $ |
Derivatives Not Designated as Hedges
The Company has derivatives that act as economic hedges and are not designated for hedge accounting treatment. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options, and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivative instrument effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business.
For derivative financial instruments that are not designated as hedges, changes in fair value are reported in current period earnings.
33
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the impact of derivatives not designated as hedges on the consolidated financial statements for the three and six months ended June 30:
For the three months ended June 30:
(Millions) |
|||||||||
Derivative relationship |
Income Statement classification of gain (loss) on derivatives not designated as hedges |
Amount recognized net of tax | |||||||
2009 | 2008 | ||||||||
Derivatives not designated as hedges |
|||||||||
Interest rate contracts |
Other expense, net |
$ | 11 | $ | 9 | ||||
Foreign exchange contracts |
Interest and dividends on investment securities |
| | ||||||
Interest expense on short-term borrowings |
1 | (1 | ) | ||||||
Other expense, net |
25 | (20 | ) | ||||||
Total |
$ | 37 | $ | (12 | ) |
For the six months ended June 30:
(Millions) | |||||||||
Derivative relationship |
Income Statement classification of gain (loss) on derivatives not designated as hedges |
Amount recognized net of tax | |||||||
2009 | 2008 | ||||||||
Derivatives not designated as hedges |
|||||||||
Interest rate contracts |
Other expense, net |
$ | 11 | $ | 5 | ||||
Foreign exchange contracts |
Interest and dividends on investment securities |
1 | | ||||||
Interest expense on short-term borrowings |
1 | (1 | ) | ||||||
Other expense, net |
28 | 18 | |||||||
Total |
$ | 41 | $ | 22 |
34
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Guarantees
The Company provides cardmember protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business that are within the scope of FASB Financial Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
In relation to its maximum amount of undiscounted payments as seen below, to date the Company has not experienced any significant losses related to its FIN 45 guarantees. The Companys initial recognition of guarantees within the scope of FIN 45 is at fair market value, which has been determined in accordance with the fair value measurement provisions of SFAS No. 157.
The following table provides information related to such guarantees at June 30, 2009 and December 31, 2008:
Maximum amount of undiscounted future payments(a) (Billions) |
Amount of related liability(b) (Millions) | |||||||||||
Type of Guarantee |
June 30, 2009 | December 31, 2008 | June 30, 2009 | December 31, 2008 | ||||||||
Card and travel operations (c) |
$ | 66 | $ | 69 | $ | 103 | $ | 99 | ||||
Other (d) |
1 | 1 | 101 | 93 | ||||||||
Total |
$ | 67 | $ | 70 | $ | 204 | $ | 192 |
(a) | Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The Merchant Protection guarantee is calculated using managements best estimate of maximum exposure based on all eligible claims as measured against annual billed business volumes. |
(b) | Included as part of other liabilities on the Companys Consolidated Balance Sheets. |
(c) | Includes Credit Card Registry, Return Protection, Account Protection and Merchant Protection, which the Company offers directly to cardmembers. The Company generally has no collateral or other recourse provisions related to these guarantees. |
(d) | Other primarily includes guarantees related to the Companys business dispositions, real estate and various tax items. |
35
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. Restructuring Charges
During the second quarter, the Company recorded restructuring charges of approximately $200 million to further reduce its operating costs in light of the uncertain economic outlook. These restructuring activities are expected to result in the elimination of approximately 4,000 positions or about 6 percent of the Companys total worldwide workforce. The reductions will occur across all business units, markets and staff groups. The restructuring activities related principally to downsizing and reorganizing certain operations.
During the three and six months ended June 30, 2009, the Company recorded $182 million and $177 million of new restructuring charges, net of adjustments of previously accrued amounts due to revisions of prior estimates. Restructuring charges and any subsequent adjustments related to severance obligations are included in salaries and employee benefits in the Companys Consolidated Statements of Income, while charges pertaining to other exit costs are included in occupancy and equipment, professional services, and other net expenses.
The following table summarizes the Companys restructuring reserves activity for the three and six months ended June 30, 2009:
For the three months ended June 30, 2009:
(Millions) |
Severance (a) | Other (b) | Total | |||||||||
Liability balance at March 31, 2009 |
$ | 288 | $ | 36 | $ | 324 | ||||||
Restructuring charges, net of $18 in adjustments (c) |
159 | 23 | 182 | |||||||||
Payments |
(89 | ) | (5 | ) | (94 | ) | ||||||
Other non-cash (d) |
9 | | 9 | |||||||||
Liability balance at June 30, 2009 (e) |
$ | 367 | $ | 54 | $ | 421 |
For the six months ended June 30, 2009:
(Millions) |
Severance (a) | Other (b) | Total | |||||||||
Liability balance at December 31, 2008 |
$ | 365 | $ | 62 | $ | 427 | ||||||
Restructuring charges, net of $23 in adjustments (c) |
155 | 22 | 177 | |||||||||
Payments |
(159 | ) | (30 | ) | (189 | ) | ||||||
Other non-cash (d) |
6 | | 6 | |||||||||
Liability balance at June 30, 2009 (e) |
$ | 367 | $ | 54 | $ | 421 |
(a) | Accounted for in accordance with SFAS No. 112, Employers Accounting for Post Employment Benefits and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. |
(b) | Other primarily includes facility exit and contract termination costs. |
(c) | Net adjustments of $18 million during the three months ended June 30, 2009, ($12 million in ICS, $1 million in GCS, and $5 million in Corporate & Other) and $23 million during the six months ended June 30, 2009, ($12 million in ICS, $(1) million in GCS, $3 million in GNMS, and $9 million in Corporate & Other) primarily related to higher employee redeployments to other positions within the Company. |
(d) | Consists primarily of foreign exchange impacts. |
(e) | The majority of cash payments related to the remaining restructuring liabilities are expected to be completed in 2010, with the exception of certain smaller amounts related to contractual long-term severance arrangements which are expected to be completed in 2011, and certain lease obligations which will continue until their expiration in 2022. |
36
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Companys restructuring charges, net of adjustments by reportable segment for the three and six months ended June 30, 2009, and the cumulative amounts relating to the restructuring programs that were in progress during 2009 and initiated at various dates between 2006 and 2009.
2009 Total Restructuring Charges net of Adjustments |
Cumulative Restructuring Expense Incurred to Date On In- Progress Restructuring Programs |
|||||||||||||||||||
(Millions) |
Q1 | Q2 | Total | Severance | Other | Total | ||||||||||||||
USCS |
$ | | $ | 18 | $ | 18 | $ | 70 | $ | 6 | $ | 76 | ||||||||
ICS |
| 20 | 20 | 98 | 4 | 102 | ||||||||||||||
GCS |
2 | 77 | 79 | 213 | 25 | 238 | ||||||||||||||
GNMS |
(3 | ) | 16 | 13 | 49 | 2 | 51 | |||||||||||||
Corporate & Other |
(4 | ) | 51 | 47 | 153 | 58 | 211 | (a) | ||||||||||||
Total |
$ | (5 | ) | 182 | $ | 177 | $ | 583 | $ | 95 | $ | 678 | (b) |
(a) | The Corporate & Other segment includes certain 2009 and 2008 severance and other charges of $34 million and $133 million, respectively, related to Company-wide support functions which were not allocated to the Companys operating segments, as these were corporate initiatives and are consistent with how such charges were reported internally. Had the Company allocated the second quarter 2009 charges to the operating segments, 24 percent would have remained in Corporate & Other while the balance would have been charged out as follows: USCS (37 percent), ICS (13 percent), GCS (13 percent) and GNMS (13 percent). |
(b) | As of June 30, 2009, the total expenses to be incurred for previously approved restructuring activities that were in progress are not expected to be materially different than the cumulative expenses incurred to date for these programs. |
18. Contingencies
The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Companys consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
19. Subsequent Events
The Company has performed an evaluation of subsequent events through August 3, 2009, which is the date the financial statements were issued.
37
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
American Express Company (the Company), a bank holding company, is a leading global payments and travel company. The Companys principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Companys businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Global Consumer Groups range of products and services include charge and credit card products for consumers and small businesses worldwide primarily through its U.S. bank subsidiaries and affiliates; consumer travel services; and stored value products such as Travelers Cheques and prepaid products. The Global Business-to-Business Group offers business travel, corporate cards and other expense management products and services; network services for the Companys network partners; and merchant acquisition and merchant processing, point-of-sale, servicing and settlement and marketing products and services for merchants. The Companys various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising.
The Companys products and services generate the following types of revenue for the Company:
| Discount revenue, which is the Companys largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Companys network; |
| Net card fees, which represent revenue earned for annual charge card memberships; |
| Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions; |
| Other commissions and fees, which are earned on foreign exchange conversion fees and card-related fees and assessments; |
| Securitization income, net, which is the net earnings related to cardmember loans financed through securitization activities; |
| Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services (GNS) partners including royalties and signing fees, publishing revenues, and other miscellaneous revenue and fees; and |
| Interest and fees on loans, which represents interest income earned on outstanding balances, card fees and balance transfer fees related to the cardmember lending portfolio. |
In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses.
Historically, the Company has sought to achieve a number of financial targets, on average and over time:
| Total revenues net of interest expense growth of at least 8 percent; |
| Earnings per share growth of 12 to 15 percent; |
| Return on average equity (ROE) of 33 to 36 percent. |
In addition, assuming achievement of such financial targets, the Company has sought to return at least 65 percent of the capital it generates to shareholders as a dividend or through the repurchase of common stock.
The Company met or exceeded these targets for most of the past decade. However, during 2008 and the first half of 2009, its performance fell short of the targets as economic and market conditions deteriorated in many parts of the world. As long as these difficult conditions persist, it is unlikely that the Company will achieve its on average and over time financial objectives. The share repurchase program was suspended in 2008 and, as a result, the portion of capital generated that is returned to shareholders is likely to be significantly below recent levels.
38
When economic conditions improve, the Company believes it will be positioned, over the long term, to generate revenue and earnings growth in line with its historical target levels. However, evolving market, regulatory and rating agency expectations will likely cause the Company, as well as other financial institutions, to maintain in future years a higher level of capital than they would have historically maintained. These higher capital requirements would in turn lead, all other things being equal, to lower future ROE than the Company has historically targeted. While the Company is not establishing a new target at this time, it currently believes that it will ultimately be positioned to deliver a ROE in excess of 20 percent over time. As the capital requirements for financial institutions become clearer, management will have greater visibility into this area. At that time, the Company will provide updated long-term ROE and capital distribution targets.
Certain reclassifications of prior year amounts have been made to conform to the current presentation. These reclassifications did not have an impact on the Companys results of operations or cash flows.
During the fourth quarter of 2008, the Company became a bank holding company under the Bank Holding Company Act of 1956, and the Federal Reserve Board (Federal Reserve) became the Companys primary federal regulator.
Certain of the statements in this Form 10-Q report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See the Forward-Looking Statements section below.
Current Economic Environment/Outlook
During the second quarter of 2009, cardmember spending remained under pressure within all of the Companys businesses. While the year-over-year spending decline was fairly consistent through the first five months of the year, the decline has moderated slightly in June and July, and will likely moderate further as comparisons to last year results continue to get easier.
In addition to the challenging economic environment, all card issuers continue to face increased regulation as policy makers around the world step up efforts to modify practices in the payments industry.
To address the current economic conditions and to better position the Companys cost structure for an anticipated slower economic growth environment over the medium term after the recession, the Company undertook additional reengineering initiatives as described below, which resulted in the recognition of a restructuring charge in this quarter. The Companys operating expense trends in the second quarter reflected the cost reduction resulting from these reengineering programs. Based on its progress to date, the Company is on track to realize additional operating expense benefits this year.
Consistent with the business and economic environments, the Company has begun to change its pricing structure for certain products. Through a combination of cost reduction and revenue-building actions, the Company expects to further increase its financial flexibility. As discussed further below, the Company will continue to selectively and prudently invest in longer-term business-building actions and programs with the objective of capitalizing on its strong brand and competitive position in the payments industry.
The Company continues to remain cautious about the business environment. While cardmember spending remained weak during the second quarter, increases in net write-offs during the quarter were less than initially anticipated, due largely to lower than expected bankruptcy-driven write-offs. In addition, lending past due trends continued to improve due in part to actions taken by the Company that included a number of underwriting, customer management and collection initiatives. Assuming delinquency rates continue around current levels and bankruptcies increase somewhat, the Company now expects managed lending write-off rates in the U.S. during the next two quarters to be below 10 percent1.
1 | The managed basis presentation includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the owned basis (GAAP) information and the managed basis information is attributable to the effects of securitized activities. The Company is not presenting estimates of owned net write-of rates comparable to the managed data above because the owned write-off rates are not determinable at this time. For further discussion of the Companys owned and managed basis presentation, refer to the information set forth under U.S. Card Services in the section captioned Differences Between GAAP and Managed Presentations. |
39
The net result of all of these factors positions the Company to invest in its businesses at a somewhat greater level than previously expected. The $1.5 billion of investment-related reengineering savings included within the previously announced $2.6 billion of targeted reengineering savings would be offset to the extent of such investments.
Notwithstanding the challenging environment, the Company continues to be focused on generating earnings in excess of its dividend payment. The Companys objectives in this environment are maintaining liquidity and profitability and investing selectively for growth.
While some of the recent trends give the Company confidence in its ability to meet its key goals, the benefits related to the lower than expected provision costs will most likely be directed towards marketing and promotion, investments and other business initiatives. The Companys investments in the third and fourth quarters will focus on a number of key business goals, including:
| The Companys premium lending strategy, evidenced by the investments in its partnership expansion with Delta and the recent extension of the Starwood partnership; |
| Activities surrounding the Companys more proactive charge card product and marketing efforts; |
| Various merchant acceptance, corporate services and GNS expansion initiatives; and |
| Activities surrounding the Companys data and information management capabilities. |
Reengineering Initiatives
In response to the adverse economic conditions and to better position the Companys cost structure for an anticipated slower economic growth environment over the medium term after the recession, the Company took various actions in the latter part of 2008 that resulted in recording pretax reengineering charges of $449 million ($291 million after-tax) to reduce its cost structure. The reengineering plan included lowering staff levels and compensation expense and reducing operating costs and related investment spending.
The Company began the execution and implementation of these initiatives in the fourth quarter of 2008, primarily associated with severance and other costs related to the elimination of approximately 7,000 positions or approximately 10 percent of its total worldwide workforce. Actions taken under the reengineering plan were initially anticipated to generate benefits, from previously anticipated spending levels in 2009, of $700 million from staffing and compensation decisions, $125 million from lower operating costs, and $1.0 billion in reduced investment spending, for a total of approximately $1.8 billion. As described above, the Company may revise its targeted reengineering savings if operating results for the second half of 2009 improve due to continued favorable credit trends in its businesses.
The Company undertook another large companywide reengineering initiative in the second quarter of 2009 to help further reduce its operating costs in light of the challenging economic conditions that continued to exist in the first half of 2009. These latest reengineering activities, which affected virtually all of the Companys business units and staff groups, resulted in a pretax restructuring charge in the second quarter of 2009 of approximately $200 million ($130 million after-tax) before consideration of reversals of amounts accrued in prior quarters. The reengineering activities will result in the elimination of approximately 4,000 positions, which constitutes approximately 6 percent of the Companys worldwide workforce. The total pretax charge included approximately $177 million in employee severance obligations and other employee- related costs and approximately $23 million in other costs principally relating to the termination of certain real property leases and other contracts.
40
The reengineering activities commenced in the second quarter related principally to downsizing and reorganizing certain operations due to a contraction of some of the Companys businesses. Actions taken under the reengineering plan are anticipated to generate incremental cost benefits of $175 million from staffing and compensation decisions, $125 million from lower operating costs, and $500 million in reduced investment spending, for a total of approximately $0.8 billion in 2009.
Substantially all of the reengineering activities are expected to be completed by the end of 2009, with the remainder expected to be completed by the first half of 2010. The Company estimates that all of the severance and employee-related costs and a significant majority of the other costs will result in future cash expenditures.
Cumulatively through these reengineering initiatives, the Company is expecting to eliminate approximately 11,000 positions, which accounts for approximately 17 percent of the global workforce at the end of the third quarter of 2008. While the Company believes it is on track to realize estimated savings of $2.6 billion through these reengineering initiatives over the course of 2009, the better than expected credit trends discussed earlier will likely lead to increased marketing and promotion and other investment spending, thus reducing the $1.5 billion of savings included within the Companys total reengineering targets to the extent of such increased spending.
Discontinued Operations
For the appropriate periods, the operating results, assets and liabilities, and cash flows of American Express Bank Ltd. (AEB), which was sold to Standard Chartered PLC (Standard Chartered) in 2008, and American Express International Deposit Company (AEIDC), which will be sold to Standard Chartered in the third quarter of 2009, have been removed from the Corporate & Other segment and reported separately within the discontinued operations captions on the Companys Consolidated Financial Statements and notes related thereto.
Refer to Note 2 to the Consolidated Financial Statements for further discussion of the Companys discontinued operations.
41
American Express Company
Selected Statistical Information
(Billions, except percentages and where indicated)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Card billed business (a): |
||||||||||||||||
United States |
$ | 104.8 | $ | 123.5 | $ | 202.2 | $ | 238.1 | ||||||||
Outside the United States |
46.6 | 57.4 | 88.4 | 109.2 | ||||||||||||
Total |
$ | 151.4 | $ | 180.9 | $ | 290.6 | $ | 347.3 | ||||||||
Total cards-in-force (millions) (b): |
||||||||||||||||
United States |
49.8 | 53.5 | 49.8 | 53.5 | ||||||||||||
Outside the United States |
38.7 | 36.6 | 38.7 | 36.6 | ||||||||||||
Total |
88.5 | 90.1 | 88.5 | 90.1 | ||||||||||||
Basic cards-in-force (millions) (b): |
||||||||||||||||
United States |
38.7 | 41.9 | 38.7 | 41.9 | ||||||||||||
Outside the United States |
33.9 | 31.6 | 33.9 | 31.6 | ||||||||||||
Total |
72.6 | 73.5 | 72.6 | 73.5 | ||||||||||||
Average discount rate (c) |
2.55 | % | 2.56 | % | 2.55 | % | 2.56 | % | ||||||||
Average basic cardmember spending (dollars) (d) |
$ | 2,712 | $ | 3,199 | $ | 5,155 | $ | 6,185 | ||||||||
Average fee per card (dollars) (d) |
$ | 35 | $ | 34 | $ | 35 | $ | 34 | ||||||||
Average fee per card adjusted (dollars)(d) |
$ | 39 | $ | 39 | $ | 39 | $ | 39 |
(a) | Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards. Card billed business is reflected in the United States or outside the United States based on where the cardmember is domiciled. |
(b) | Total cards-in-force represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements. |
(c) | This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and GNS) retained by the Company from merchants it acquires, prior to payments to third parties unrelated to merchant acceptance. |
(d) | Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs, plus card fees included in interest and fees on loans (including related amortization of deferred direct acquisition costs), divided by average worldwide proprietary cards-in-force. The card fees related to cardmember loans included in interest and fees on loans were $45 million and $34 million for the quarters ended June 30, 2009 and 2008, respectively. The card fees related to cardmember loans included in interest and fees on loans were $85 million and $70 million for the six months ended June 30, 2009 and 2008, respectively. The adjusted average fee per card is computed in the same manner, but excludes amortization of deferred direct acquisition costs (a portion of which is charge card related and included in net card fees and a portion of which is lending related and included in interest and fees on loans). The amount of amortization excluded was $62 million and $82 million for the quarters ended June 30, 2009 and 2008, respectively. The amount of amortization excluded was $132 million and $159 million for the six months ended June 30, 2009 and 2008, respectively. The Company presents adjusted average fee per card because management believes that this metric presents a useful indicator of card fee pricing across a range of its proprietary card products. |
42
Selected Statistical Information (continued)
(Billions, except percentages and where indicated)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Worldwide cardmember receivables: |
||||||||||||||||
Total receivables |
$ | 31.4 | $ | 39.9 | $ | 31.4 | $ | 39.9 | ||||||||
Loss reserves (millions): |
||||||||||||||||
Beginning balance |
$ | 810 | $ | 1,221 | $ | 810 | $ | 1,149 | ||||||||
Provision |
237 | 241 | 573 | 586 | ||||||||||||
Net write-offs |
(340 | ) | (293 | ) | (672 | ) | (550 | ) | ||||||||
Other |
7 | (23 | ) | 3 | (39 | ) | ||||||||||
Ending balance |
$ | 714 | $ | 1,146 | $ | 714 | $ | 1,146 | ||||||||
% of receivables |
2.3 | % | 2.9 | % | 2.3 | % | 2.9 | % | ||||||||
Net write-off rate USCS |
5.2 | % | 3.9 | % | 5.0 | % | 3.8 | % | ||||||||
30 days past due as a % of total USCS |
2.6 | % | 3.0 | % | 2.6 | % | 3.0 | % | ||||||||
Net loss ratio as a % of charge volume ICS |
0.36 | % | 0.22 | % | 0.35 | % | 0.21 | % | ||||||||
90 days past due as a % of total ICS |
3.0 | % | 2.4 | % | 3.0 | % | 2.4 | % | ||||||||
Net loss ratio as a % of total GCS |
0.22 | % | 0.10 | % | 0.20 | % | 0.11 | % | ||||||||
90 days past due as a % of total GCS |
1.9 | % | 1.6 | % | 1.9 | % | 1.6 | % | ||||||||
Worldwide cardmember lending owned basis (a): |
||||||||||||||||
Total loans |
$ | 32.5 | $ | 49.6 | $ | 32.5 | $ | 49.6 | ||||||||
30 days past due loans as a % of total |
4.3 | % | 3.4 | % | 4.3 | % | 3.4 | % | ||||||||
Loss reserves (millions): |
||||||||||||||||
Beginning balance |
$ | 3,013 | $ | 1,919 | $ | 2,570 | $ | 1,831 | ||||||||
Provision |
1,291 | 1,506 | 2,692 | 2,282 | ||||||||||||
Net write-offs principal |
(847 | ) | (678 | ) | (1,629 | ) | (1,244 | ) | ||||||||
Net write-offs interest and fees |
(131 | ) | (149 | ) | (286 | ) | (276 | ) | ||||||||
Other (b) |
(107 | ) | (4 | ) | (128 | ) | 1 | |||||||||
Ending balance |
$ | 3,219 | $ | 2,594 | $ | 3,219 | $ | 2,594 | ||||||||
Ending Reserves principal |
$ | 3,035 | $ | 2,395 | $ | 3,035 | $ | 2,395 | ||||||||
Ending Reserves interest and fees |
$ | 184 | $ | 199 | $ | 184 | $ | 199 | ||||||||
% of loans |
9.9 | % | 5.2 | % | 9.9 | % | 5.2 | % | ||||||||
% of past due |
230 | % | 155 | % | 230 | % | 155 | % | ||||||||
Average loans |
$ | 35.2 | $ | 49.6 | $ | 37.2 | $ | 50.2 | ||||||||
Net write-off rate |
9.6 | % | 5.5 | % | 8.8 | % | 5.0 | % | ||||||||
Net interest yield on cardmember loans (c) |
9.7 | % | 8.5 | % | 10.2 | % | 8.7 | % | ||||||||
Worldwide cardmember lending managed basis (d): |
||||||||||||||||
Total loans |
$ | 62.9 | $ | 76.5 | $ | 62.9 | $ | 76.5 | ||||||||
30 days past due loans as a % of total |
4.3 | % | 3.3 | % | 4.3 | % | 3.3 | % | ||||||||
Net write-offs-principal (millions) |
$ | 1,541 | $ | 974 | $ | 2,933 | $ | 1,794 | ||||||||
Average loans |
$ | 63.9 | $ | 75.8 | $ | 66.0 | $ | 75.9 | ||||||||
Net write-off rate |
9.7 | % | 5.1 | % | 8.9 | 4.7 | % | |||||||||
Net interest yield on cardmember loans (c) |
9.9 | % | 9.0 | % | 10.4 | % | 9.3 | % |
(a) | Owned, a GAAP basis measurement, reflects only cardmember loans included on the Companys Consolidated Balance Sheets. |
(b) | For the quarter and six months ended June 30, 2009, other primarily includes $144 million of reserves that were removed in connection with securitizations during the period. The offset is in the allocated cost of the associated retained subordinated securities. This amount also includes foreign currency translation adjustments. The prior period primarily includes foreign currency translation adjustments. |
43
(c) | See below for calculations of net interest yield on cardmember loans. The Company believes net interest yield on cardmember loans (on both an owned and managed basis) is useful to investors because it provides a measure of profitability of the Companys cardmember lending portfolio. |
(d) | Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. The difference between the owned basis (GAAP) information and managed basis information is attributable to the effects of securitization activities. Refer to the information set forth under U.S. Card Services Selected Financial Information for further discussion of the managed basis presentation. |
Selected Statistical Information (continued)
Calculation of net interest yield on cardmember loans
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(Millions) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
Owned Basis: |
||||||||||||||||
Net interest income |
$ | 741 | $ | 954 | $ | 1,660 | $ | 1,925 | ||||||||
Average loans (billions) |
$ | 35.2 | $ | 49.6 | $ | 37.2 | $ | 50.2 | ||||||||
Adjusted net interest income (a) |
$ | 853 | $ | 1,056 | $ | 1,886 | $ | 2,180 | ||||||||
Adjusted average loans (billions) (b) |
$ | 35.4 | $ | 49.7 | $ | 37.3 | $ | 50.3 | ||||||||
Net interest yield on cardmember loans (c) |
9.7 | % | 8.5 | % | 10.2 | % | 8.7 | % | ||||||||
Managed Basis (d): |
||||||||||||||||
Net interest income (e) |
$ | 1,464 | $ | 1,594 | $ | 3,186 | $ | 3,248 | ||||||||
Average loans (billions) |
$ | 63.9 | $ | 75.8 | $ | 66.0 | $ | 75.9 | ||||||||
Adjusted net interest income (f) |
$ | 1,576 | $ | 1,695 | $ | 3,411 | $ | 3,503 | ||||||||
Adjusted average loans (billions) (g) |
$ | 64.0 | $ | 76.0 | $ | 66.1 | $ | 75.9 | ||||||||
Net interest yield on cardmember loans (c) |
9.9 | % | 9.0 | % | 10.4 | % | 9.3 | % |
(a) | Represents net interest income allocable to the Companys owned cardmember lending portfolio, which excludes the impact of card fees on loans and balance transfer fees attributable to the Companys owned cardmember lending portfolio. |
(b) | Represents average owned loans excluding the impact of deferred card fees net of deferred direct acquisition costs for owned cardmember loans. |
(c) | Net interest yield on cardmember loans represents the net spread earned on cardmember loans. Net interest yield on cardmember loans (both on an owned and managed basis) is computed by dividing adjusted net interest income by adjusted average loans, computed on an annualized basis. The calculation of net interest yield on cardmember loans (both on an owned and managed basis) includes interest and fees that are deemed uncollectible. For the owned basis presentation, reserves and net write-offs related to uncollectible interest and fees are recorded through provisions for losses - cardmember lending, and for the managed basis presentation, reserves and net write-offs related to uncollectible interest and fees are included as a reduction to securitization income, net; therefore, such reserves and net write-offs are not included in the net interest yield calculation. |
(d) | Includes on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans. Refer to the information set forth under U.S. Card Services Selected Financial Information for further discussion of the managed basis presentation. |
(e) | Includes the GAAP to managed basis securitization adjustments to interest income and interest expense as set forth under U.S. Card Services Selected Financial Information managed basis presentation. |
(f) | Represents net interest income allocable to the Companys managed cardmember lending portfolio, which excludes the impact of card fees on managed loans and balance transfer fees attributable to the Companys managed cardmember lending portfolio. |
(g) | Represents average managed loans excluding the impact of deferred card fees net of deferred direct acquisition costs for managed cardmember loans. |
44
The following discussions regarding Consolidated Results of Operations and Consolidated Liquidity and Capital Resources are presented on a basis consistent with GAAP unless otherwise noted.
Consolidated Results of Operations for the Three Months Ended June 30, 2009 and 2008
The Companys consolidated income from continuing operations for the three months ended June 30, 2009, decreased $318 million or 48 percent to $342 million as compared to the same period a year ago, and diluted earnings per share (EPS) from continuing operations declined $0.47 or 84 percent to $0.09.
The Companys consolidated net income for the three months ended June 30, 2009 decreased $316 million or 48 percent from the year ago period to $337 million, and diluted EPS decreased $0.47 or 84 percent to $0.09. Net income included a loss from discontinued operations of $5 million as compared to a $7 million loss from discontinued operations a year ago. For the twelve months ended, ROE was 13.2 percent, down from 31.1 percent a year ago.
The Companys revenues, expenses, and provisions for losses are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes reduced the growth rates of revenues net of interest expense, total expenses, and provisions for losses, 4 percent, 4 percent, and 2 percent, respectively, for the three months ended June 30, 2009.
Results from continuing operations for the three months ended June 30, 2009 included:
| A $211 million ($135 million after-tax) gain on the sale of 50 percent of the Companys equity holdings of Industrial and Commercial Bank of China (ICBC). |
| $182 million ($118 million after-tax) of net total reengineering costs, primarily reflecting a restructuring charge related to the Companys ongoing reengineering initiatives. |
Additionally, the second quarter of 2009 diluted EPS of $0.09 was negatively impacted by $0.18 per share as a result of the accelerated accretion of the dividends on the preferred shares repurchased from United States Department of the Treasury under the terms of the Capital Purchase Program, (CPP). Excluding the impact of the accelerated accretion, adjusted diluted EPS from continuing operations attributable to common shareholders would have been $0.27. Management believes adjusted diluted earnings per share from continuing operations attributable to common shareholders provides a useful metric to evaluate the ongoing operating performance of the Company.
Results from continuing operations for the three months ended June 30, 2008 included:
| A $136 million ($85 million after-tax) charge to the fair market value of the Companys interest-only strip; and |
| A $101 million tax benefit related to the resolution of certain prior years tax items. |
The second quarter of 2008 income from continuing operations included $7 million ($4 million after-tax) of reengineering costs.
Total Revenues Net of Interest Expense
Consolidated total revenues net of interest expense were $6.1 billion, down $1.4 billion or 18 percent from $7.5 billion in the same period a year ago. Total revenues net of interest expense decreased due to lower discount revenue, lower total interest income, reduced securitization income, net, lower other commissions and fees, reduced other commissions and fees and lower net card fees, partially offset by lower total interest expense and higher other revenues.
Discount revenue declined $686 million or 17 percent to $3.3 billion as a result of a 16 percent decrease in billed business. The greater discount revenue versus billed business decline reflects the relatively faster
45
growth in billed business related to GNS, where the Company shares discount revenue with card issuing partners. The average discount rate was 2.55 percent and 2.56 percent for the three months ended June 30, 2009 and 2008, respectively. As indicated in prior quarters, selective re-pricing initiatives, changes in the mix of business and volume-related pricing discounts will likely result in some erosion of the average discount rate over time.
U.S. billed business and billed business outside the United States were down 15 percent and 19 percent, respectively, primarily due to decreases in average spending per proprietary basic card.
The table below summarizes selected statistics for increases and decreases during the three months ended June 30, 2009:
Percentage Increase/(Decrease) |
Percentage Increase/(Decrease) Assuming No Changes in Foreign Exchange Rates |
|||||
Worldwide (a): |
||||||
Billed business |
(16 | )% | (13 | )% | ||
Proprietary billed business |
(18 | ) | (15 | ) | ||
GNS billed business (b) |
(3 | ) | 6 | |||
Average spending per proprietary basic card |
(15 | ) | (12 | ) | ||
Basic cards-in-force |
(1 | ) | ||||
United States (a): |
||||||
Billed business |
(15 | ) | ||||
Average spending per proprietary basic card |
(13 | ) | ||||
Basic cards-in-force |
(8 | ) | ||||
Proprietary consumer card billed business (c) |
(16 | ) | ||||
Proprietary small business billed business (c) |
(17 | ) | ||||
Proprietary Corporate Services billed business (d) |
(17 | ) | ||||
Outside the United States (a): |
||||||
Billed business |
(19 | ) | (7 | ) | ||
Average spending per proprietary basic card |
(21 | ) | (8 | ) | ||
Basic cards-in-force |
7 | |||||
Proprietary consumer and small business billed business (e) |
(20 | ) | (7 | ) | ||
Proprietary Corporate Services billed business (d) |
(33 | ) | (21 | ) |
(a) | Captions in the table above not designated as proprietary include both proprietary and Global Network Services data. |
(b) | Included in the Global Network and Merchant Services segment. |
(c) | Included in the U.S. Card Services segment. |
(d) | Included in the Global Commercial Services segment. |
(e) | Included in the International Card Services segment. |
Assuming no changes in foreign exchange rates, total billed business outside the United States reflected relatively flat volume levels in Latin America and Asia Pacific, and declines in the low double digits in Europe and Canada.
Total cards-in-force declined two percent due to the effect of certain credit-related actions, including the cancellation of approximately 2.7 million inactive consumer and small business-cards during the three months ended June 30, 2009, as well as more modest card acquisition activities. In the U.S. and non-U.S. businesses there was a decline in total cards in force of 3.6 million and an increase of 0.5 million, respectively, during the three months ended June 30, 2009.
46
Travel commissions and fees decreased $166 million or 29 percent to $407 million primarily reflecting a 39 percent decrease in worldwide travel sales, partly offset by a higher sales commission rate.
Other commissions and fees decreased $151 million or 26 percent to $439 million primarily driven by lower delinquency fees related to lower average owned loan balances and reduced spending-related foreign currency conversion revenues.
Securitization income, net decreased $229 million resulting in a loss of $(2) million primarily due to lower excess spread, net, driven by increased write-offs, partially offset by the second quarter of 2008 charge to the fair market value of the interest-only strip and lower interest expense due to lower rates paid on variable-rate investor certificates. Securitization income, net represents the non-credit provision components of the gains from securitization activities within the U.S. Card Services segment, fair market value changes of the related interest-only strip and excess spread related to securitized loans and servicing income, net of related discounts or fees. As of June 30, 2009, the fair market value of the interest-only strip was nil versus $136 million as of June 30, 2008.
Other revenues increased $92 million or 16 percent to $670 million, primarily reflecting the ICBC gain, partially offset by lower revenues from the CPS acquisition versus second quarter 2008 due to the migration of clients to the American Express network.
Interest income declined $569 million or 31 percent to $1.3 billion in 2009. Interest and fees on loans decreased 31 percent, due to a 29 percent decline in the average owned loan balance and a lower portfolio yield driven by reduced market interest rates and the impact of various customer assistance programs, partially offset by the benefit of certain repricing initiatives. Interest and dividends on investment securities decreased 10 percent primarily reflecting reduced investment yields, which more than offset increased liquidity-related investment levels. Interest on deposits with banks and others decreased 86 percent, primarily due to lower balance of deposits in other banks.
Interest expense decreased $356 million or 39 percent to $547 million in 2009. Interest on deposits decreased 15 percent, due to a lower cost of funds, which more than offset increased balances. Interest on short-term borrowings decreased 95 percent due to significantly lower short-term debt levels and a lower cost of funds. Interest on long-term debt decreased 32 percent, primarily reflecting a lower cost of funds driven by reduced market rates on variably-priced debt, as well as a slightly lower average balance of long-term debt outstanding. Other interest decreased $9 million.
Provisions for Losses
Consolidated provisions for losses decreased $240 million or 13 percent over last year to $1.6 billion, primarily due to the impact of lower average owned loan balances, partially offset by higher cardmember lending reserve levels due to increased net write-off and past due loan levels.
Charge card provisions decreased $4 million or 2 percent to $237 million, due to lower business volume and receivable levels in the second quarter of 2009, which more than offset the impact of higher losses and past due receivables.
Cardmember lending provisions decreased $234 million or 15 percent to $1.3 billion, primarily reflecting lower average owned lending balances, partially offset by higher cardmember reserve levels due to increased net write-off and past due loan levels.
Expenses
Consolidated expenses were $4.1 billion, down $767 million or 16 percent from $4.9 billion for the same period in 2008. The total expense decline reflected lower marketing and promotion expenses, reduced salaries and employee benefits expense, and lower cardmember rewards expense.
47
Marketing, promotion, rewards and cardmember services expenses decreased $412 million or 21 percent to $1.5 billion compared to a year ago, reflecting lower discretionary investment spending as part of the reengineering initiatives, and lower overall rewards-related spending volumes, partially offset by a slightly higher Membership Rewards redemption rate and a relatively lower decline in co-brand spending volumes.
Salaries and employee benefits expenses decreased $125 million or 8 percent to $1.4 billion, reflecting the impact of lower employee levels due to the Companys ongoing reengineering activities and reduced incentive-related costs. Included in the three months ended June 30, 2009 and 2008, was $154 million ($100 million after-tax) and $8 million ($5 million after-tax) of reengineering costs, respectively.
Other, net expenses decreased $223 million or 27 percent to $609 million due to the $150 million settlement payment from MasterCard in the second quarter of 2009, lower travel and entertainment expenses as part of the Companys ongoing reengineering initiatives, and a $59 million benefit related to prior periods from the completion of certain account reconciliations, partially offset by a $61 million unfavorable impact related to fair value hedge ineffectiveness.
Income Taxes
The effective tax rate was 18 percent and 15 percent for the three months ended June 30, 2009 and 2008, respectively. The tax rate for the three months ended June 30, 2009, reflects the impact of recurring permanent tax benefits on a relatively low level of pretax income. The tax rate for the three months ended June 30, 2008, included a $101 million tax benefit related to the resolution of certain prior years tax items.
Discontinued Operations
Loss from discontinued operations, net of tax, was $5 million and $7 million for the three months ended June 30, 2009 and 2008, respectively. Loss from discontinued operations, net of tax, for the three months ended June 30, 2009 and 2008, was $4 million and $5 million, respectively. The losses from discontinued operations arose primarily from mark-to-market adjustments and sales associated with the AEIDC investment portfolio.
Consolidated Results of Operations for the Six Months Ended June 30, 2009 and 2008
The Companys consolidated income from continuing operations for the six months ended June 30, 2009, decreased $919 million or 54 percent to $785 million as compared to the same period a year ago, and diluted earnings per share (EPS) from continuing operations declined $1.05 or 72 percent to $0.41.
The Companys consolidated net income for the six months ended June 30, 2009, decreased $870 million or 53 percent from the year ago period to $774 million, and diluted EPS decreased $1.01 or 72 percent to $0.40. Net income included a loss from discontinued operations of $11 million as compared to a $60 million loss from discontinued operations a year ago. For the twelve months ended, ROE was 13.2 percent, down from 31.1 percent a year ago.
The Companys revenues, expenses, and provisions for losses are affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. The currency rate changes reduced the growth rates of revenues net of interest expense, total expenses, and provisions for losses by 4 percent, 4 percent, and 2 percent, respectively, for the six months ended June 30, 2009.
Results from continuing operations for the six months ended June 30, 2009, included $182 million ($118 million after-tax) of net reengineering charges and a $211 million ($135 million after-tax) gain on the sale of a portion of the Companys equity holding in ICBC. The six months ended June 30, 2008, included an addition to lending credit reserves and a charge to the fair market value of the Companys interest-only strip, partially offset by a tax benefit relating to the resolution of certain prior years tax items.
48
Total Revenues Net of Interest Expense
Consolidated total revenues net of interest expense were $12.0 billion, down $2.7 billion or 18 percent from $14.7 billion in the same period a year ago. Total revenues net of interest expense decreased due to lower discount revenue, lower total interest income, reduced securitization income, net, lower other commissions and fees, reduced travel commissions and fees and higher other revenues, partially offset by lower total interest expense.
Discount revenue declined $1.3 billion or 17 percent to $6.4 billion as a result of a 16 percent decrease in billed business. The greater discount revenue versus billed business decline reflects the relatively faster growth in billed business related to GNS, where the Company shares discount revenue with card issuing partners. The average discount rate was 2.55 percent and 2.56 percent for the six months ended June 30, 2009 and 2008, respectively. As indicated in prior quarters, selective re-pricing initiatives, changes in the mix of business and volume-related pricing discounts will likely result in some erosion of the average discount rate over time.
U.S. billed business and billed business outside the United States were down 15 percent and 19 percent, respectively, primarily due to decreases in average spending per proprietary basic card.
The table below summarizes selected statistics for increases and decreases during the six months ended June 30, 2009:
Percentage Increase/(Decrease) |
Percentage Increase/(Decrease) Assuming No Changes in Foreign Exchange Rates |
|||||
Worldwide (a): |
||||||
Billed business |
(16 | )% | (12 | )% | ||
Proprietary billed business |
(18 | ) | (15 | ) | ||
GNS billed business (b) |
(4 | ) | 6 | |||
Average spending per proprietary basic card |
(17 | ) | (13 | ) | ||
Basic cards-in-force |
(1 | ) | ||||
United States (a): |
||||||
Billed business |
(15 | ) | ||||
Average spending per proprietary basic card |
(15 | ) | ||||
Basic cards-in-force |
(8 | ) | ||||
Proprietary consumer card billed business (c) |
(16 | ) | ||||
Proprietary small business billed business (c) |
(15 | ) | ||||
Proprietary Corporate Services billed business (d) |
(18 | ) | ||||
Outside the United States (a): |
||||||
Billed business |
(19 | ) | (5 | ) | ||
Average spending per proprietary basic card |
(23 | ) | (8 | ) | ||
Basic cards-in-force |
7 | |||||
Proprietary consumer and small business billed business (e) |
(21 | ) | (6 | ) | ||
Proprietary Corporate Services billed business (d) |
(31 | ) | (18 | ) |
(a) | Captions in the table above not designated as proprietary include both proprietary and Global Network Services data. |
(b) | Included in the Global Network and Merchant Services segment. |
(c) | Included in the U.S. Card Services segment. |
(d) | Included in the Global Commercial Services segment. |
(e) | Included in the International Card Services segment. |
49
Assuming no changes in foreign exchange rates, total billed business outside the United States reflected relatively flat volumes in Latin America and Asia, Pacific, high single digit decline in Canada, and low double-digit decline in Europe.
Total cards-in-force declined two percent due to the effect of certain credit-related actions, including the cancellation of approximately 2.7 million inactive consumer and small business-cards during the three months ended June 30, 2009, as well as more modest card acquisition activities. In the U.S. and non-U.S. businesses there was a decline in total cards in force of 4.2 million and an increase of 0.3 million, respectively, during the six months ended June 30, 2009.
Travel commissions and fees decreased $295 million or 28 percent to $772 million reflecting a 37 percent decrease in worldwide travel sales.
Other commissions and fees decreased $320 million or 26 percent to $892 million primarily driven by lower fees related to reduced average owned loan balances and credit-related actions and decreased cardmember spending levels.
Securitization income, net decreased $532 million or 79 percent to $139 million primarily due to lower excess spread, net, driven by increased write-offs partially offset by the second quarter of 2008 charge to the fair market value of the interest-only strip and lower interest expense due to lower rates paid on variable-rate investor certificates. Securitization income, net represents the non-credit provision components of the gains from securitization activities within the U.S. Card Services segment, fair market value changes of the related interest-only strip and excess spread related to securitized loans and servicing income, net of related discounts or fees. As of June 30, 2009, the fair market value of the interest-only strip was nil versus $136 million as of June 30, 2008.
Other revenues increased $82 million or 8 percent to $1.1 billion, primarily reflecting the ICBC gain, partially offset by lower revenues from the CPS acquisition due to the migration of clients to the American Express network.
Interest income declined $1.0 billion or 27 percent to $2.8 billion in 2009. Interest and fees on loans decreased 27 percent, primarily reflecting lower average owned balances. Interest and dividends on investment securities decreased 13 percent primarily reflecting reduced investment yields, which more than offset increased liquidity-related investment levels. Interest on deposits with banks and others decreased 76 percent, primarily due to significantly lower yields.
Interest expense decreased $772 million or 41 percent to $1.1 billion in 2009. Interest on deposits decreased 30 percent, due to a lower cost of funds, which more than offset increased balances. Interest on short-term borrowings decreased 89 percent due to a decrease in short-term debt levels and a lower cost of funds. Interest on long-term debt decreased 32 percent, primarily reflecting a lower cost of funds driven by reduced market rates on variably-priced debt, as well as a slightly lower average balance of long-term debt outstanding. Other interest decreased $11 million.
Provisions for Losses
Consolidated provisions for losses increased $352 million or 12 percent over last year to $3.4 billion, primarily reflecting lower owned average lending balances, partially offset by higher cardmember lending reserve levels due to increased net write-off and past due loan levels.
Charge card provisions decreased $13 million or 2 percent to $573 million, due to lower business volume and receivable levels in the second quarter of 2009, which more than offset the impact of higher losses and past due receivables.
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Cardmember lending provisions increased $371 million or 16 percent to $2.7 billion, primarily reflecting lower owned average lending balances, partially offset by higher cardmember reserve levels due to increased net write-off and past due loan levels.
Expenses
Consolidated expenses were $7.7 billion, down $1.8 billion or 19 percent from $9.4 billion for the same period in 2008. The total expense decline reflected lower marketing and promotion rewards and card member services, other, net expenses and salaries and employee benefits.
Marketing, promotion, rewards and cardmember services expenses decreased $866 million or 24 percent to $2.8 billion compared to a year ago, reflecting lower discretionary investment spending as part of the reengineering initiatives, and lower overall rewards-related spending volumes, partially offset by a slightly higher Membership Rewards redemption rate and a relatively lower decline in co-brand spending volume.
Salaries and employee benefits expenses decreased $342 million or 12 percent to $2.6 billion, reflecting the impact of lower employee levels due to the ongoing reengineering activities and reduced incentive-related costs. Included in the six months ended June 30, 2009 and 2008, was $150 million ($98 million after-tax) and $17 million ($11 million after-tax) of reengineering costs, respectively.
Other, net expenses decreased $510 million or 31 percent to $1.1 billion due to the settlement payment from MasterCard in the second quarter of 2009, lower travel and entertainment expenses as part of the Companys ongoing reengineering initiatives, a $59 million benefit related to prior periods from the completion of certain account reconciliations, and a $5 million benefit related to fair value hedge ineffectiveness.
Income Taxes
The effective tax rate was 18 percent and 24 percent for the six months ended June 30, 2009 and 2008, respectively. The effective tax rate for the six months ended June 30, 2009, reflects the impact of recurring permanent tax benefits on a decreased level of pretax income. The effective tax rate for the six months ended June 30, 2008, included $125 million of tax benefits related to the resolution of certain prior years tax items.
Discontinued Operations
Loss from discontinued operations, net of tax, was $11 million and $60 million for the six months ended June 30, 2009 and 2008, respectively. Loss from discontinued operations, net of tax, for the six months ended June 30, 2009 and 2008, primarily reflected net losses from AEIDC of $8 million and $75 million respectively, for mark-to-market adjustments and sales associated with the AEIDC investment portfolio.
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Investments
Investment Portfolios
The Companys investment portfolios support specific business purposes. The most significant business purposes and the related investments used to support those business purposes are as follows:
Business Purpose |
Primary Investments | |
Travelers Cheques | State and Municipal obligations Corporate debt obligations | |
Insurance | State and Municipal obligations | |
Liquidity | U.S. Government obligations U.S. Government-sponsored-enterprises senior unsecured obligations Corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP), that are guaranteed by the FDIC (In addition, the Company considers cash items such as money market funds and short-term time deposits as part of its liquidity resources.) | |
AEIDC discontinued operations | Mortgage and other asset-backed securities |
The Companys objective is to manage the type and mix of assets as well as their maturity profile in order to ensure that the cash and liquidity needs of the respective business purpose can be met without relying on the sale of investments prior to maturity. As a result, the Company generally holds its investments until their maturity. The Company nonetheless seeks to invest in portfolios of securities with sufficient liquidity that could be accessed prior to maturity should changes in cash needs occur.
State and Municipal Obligations
Total gross unrealized losses related to state and municipal obligations amounted to approximately $533 million and $1.0 billion at June 30, 2009 and December 31, 2008, respectively.
Unrealized losses within the Companys state and municipal obligations are caused by a variety of factors, which primarily relate to changes in market interest rates that apply across the entire market, and specific credit events associated with individual issuers. The magnitude of unrealized losses may also be influenced in part by temporary but sharp increases in the issuance or other supply of similar securities in the market and in part by the expected maturity of particular issues.
Approximately 57 percent of state and municipal obligations owned by the Company are insured by financial guarantors that guarantee timely payment of interest and ultimate payment of principal on insured obligations. To date, the Company has not realized any losses as a result of financial guarantors credit problems.
At June 30, 2009 the state and municipal obligations owned by the Company were rated as follows:
Higher of Financial Guarantors and Underlying Issuers Ratings |
Underlying Issuers Ratings without Regard to Guarantors |
|||||
AAA |
14 | % | 14 | % | ||
AA |
43 | % | 37 | % | ||
A |
34 | % | 39 | % | ||
BBB |
9 | % | 10 | % |
During the second quarter of 2009, the Company sold approximately $660 million (par value) of state and municipal obligations. These sales generated a pretax gain of approximately $10 million. The majority of the proceeds were reinvested in shorter-dated state and municipal obligations in order to better balance the maturities of these investments with the expected maturities of the related liabilities.
Government Sponsored Enterprises
At June 30, 2009, the Company owned approximately $6.5 billion of senior unsecured debentures issued by Government Sponsored Enterprises (GSEs): Fannie Mae, Freddie Mac, and Small Business Administration. On September 7, 2008, the Federal Housing Finance Agency (FHFA) announced the decision to place Fannie Mae and Freddie Mac into conservatorship run by FHFA. These actions were designed to protect the
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senior and subordinated debt and the mortgage-backed securities of the GSEs. The total net unrealized gains on these securities were approximately $53 million and $51 million at June 30, 2009 and December 31, 2008, respectively.
Mortgage and Other Asset-Backed Securities
The Companys exposure to mortgage and other asset-backed securities, excluding the investments in retained subordinated securities from the Companys securitization programs (which had fair values of $3.1 billion and $0.7 billion at June 30, 2009 and December 31, 2008, respectively), decreased to $149 million at June 30, 2009, from $288 million at December 31, 2008. This decrease was primarily driven by the liquidation of the AEIDC portfolio. Of the $149 million in mortgage and other asset-backed securities at June 30, 2009, $17 million pertained to AEIDC and are included in assets of discontinued operations.
The remaining $132 million ($75 million at December 31, 2008) in mortgage and other asset-backed securities are classified as available-for-sale within continuing operations. The increase is primarily due to the purchase of approximately $73 million of mortgage-backed securities to support the Companys U.S. Banking Subsidiaries Community Reinvestment Act requirements. These investments are all agency guaranteed mortgage-backed securities.
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Consolidated Capital Resources and Liquidity
Capital Strategy
The Companys objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to satisfy future business growth. The Company believes capital allocated to growing businesses with a return on risk-adjusted equity in excess of its costs will generate shareholder value.
The level and composition of the Companys equity capital are determined in large part by the Companys internal assessment of its portfolios, consolidated rating agency and regulatory capital requirements, and are also influenced by subsidiary capital requirements for the consolidated entity, the business environment, and by conditions in the debt funding markets. The Company, as a bank holding company, is subject to regulatory requirements administered by the U.S. federal banking agencies. The Federal Reserve has established specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items.
On May 7, 2009, the Company received a final report from the Federal Reserve with the results of the Supervisory Capital Assessment Program (SCAP), concluding that there would be no capital need under the more adverse economic assumptions modeled in the SCAP.
The following table presents the risk-based capital ratios and leverage ratio for the Company and its significant banking subsidiaries at June 30, 2009:
Well- Capitalized Ratio |
June 30, 2009 Actual |
|||||
Risk-Based Capital |
||||||
Tier 1 |
6 | % | ||||
American Express Company |
9.6 | % | ||||
Centurion Bank(a) |
11.1 | % | ||||
FSB(a) |
14.3 | % | ||||
Total |
10 | % | ||||
American Express Company |
11.7 | % | ||||
Centurion Bank(a)< |