UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020March 31, 2021
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 No. 1-6908
AMERICAN EXPRESS CREDIT CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | | | | |
| Delaware | | 11-1988350 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | |
| 200 Vesey Street, New York, New York | | 10285 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 640-2000
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| 0.625 percent Senior Notes, due November 22, 2021 | AXP/21 | New York Stock Exchange |
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER GENERAL INSTRUCTION H(2).
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☑ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | | | | | | | |
| Class | | Outstanding at November 5, 2020May 6, 2021 |
| Common Stock (par value $0.10 per share) | | 1,504,938 | | Shares |
AMERICAN EXPRESS CREDIT CORPORATION
FORM 10-Q
INDEX
| | | | | | | | | | | | | | | | | |
| | | Page No. |
| | | | | |
| | | | | 1411 | |
| | | | | 1512 | |
| | | | | 1613 | |
| | | | | 1714 | |
| | | | | 1815 | |
| | | | | 1916 | |
| | | | | 1 | |
| | | | | 3027 | |
| | | |
| | | | | 31 | |
| Item 5 | | | | 3228 | |
| | | | | 3329 | |
| | 3430 | |
Throughout this report the termsterm “Credco” or “management” refer to American Express Credit Corporation and its subsidiaries on a consolidated basis, and the termsterm “American Express” or “its” referrefers to American Express Company and its subsidiaries on a consolidated basis, unless stated or the context implies otherwise.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Overview
Credco is a wholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly owned subsidiary of American Express Company (American Express). Both American Express and TRS are bank holding companies.
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Express charge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.
Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section.
Business Environment
Management’s discussion of theCredco’s results of Credco isshould be read in the context of the wider business environment for American Express.
Businesses American Express’ results for the first quarter continued to reflect the steady improvement towards pre-pandemic spending levels that started during the second half of last year, with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and economiesgovernment stimulus programs, particularly in the U.S. At the same time, certain international countries around the globe continue to be significantly affectedface challenges with renewed lockdowns and travel restrictions, and there remains uncertainty relating to the ongoing spread and severity of the virus. While American Express is encouraged by the COVID-19 pandemic. Theretrends it saw in the first quarter, to the extent that the pandemic continues to have negative impacts on economies, American Express’ results will be a high degreeaffected, with credit trends, spending volumes and marketing investments to rebuild growth momentum, being the key drivers of uncertainty in terms ofits financial performance.
American Express is starting to lap the directionearly impacts of the pandemic andon its impact on the economy, how governments will react to changesbusiness, which caused a significant decline in the environment, including possible future stimulus programs (or the failure to implement such programs), and developmentsits transaction volumes starting in political and social conditions.
ReflectiveMarch 2020 as a result of the broader economy and spending trendssharp contraction of the global economy. Year-over-year comparisons for this quarter thus reflect two months of pre-pandemic results in last year’s first quarter.
American Express’ customer segments, its billed businessworldwide volumes decreased year-over-year for the quarter, was down 19 percent (20 percent on an FX adjusted basis) as comparedwith U.S. volumes declining by a lower amount than international volumes, due to the prior year1. Since mid-April,slower pace of recovery from the pandemic in certain international countries. American Express has seen steady improvement in its overall billed business. Proprietary billed business, which accounted for 86 percent of its total billings in the third quarter and drives most of American Express’ financial results, showedcontinued to see different recovery trends for non-T&EGoods & Services (G&S) and T&ETravel and Entertainment (T&E) spend. Non-T&EG&S spend, which has historically accountedaccounts for a large portionthe majority of its billed business,American Express’ volumes and had recovered to pre-pandemic levels growing 1 percent as compared toin the prior year.second half of 2020, increased year-over-year. T&E spend remained significantly impacted, although American Express continued to be down 69 percent year-over-year, though American Express saw a modestsee signs of improvement, during the quarter primarily driven by proprietary consumer T&E spend.spend in the U.S. T&E spend represents spend on travel and entertainment, which primarily includes airline, cruise, lodging and dining merchant categories. To the extent American Express continues to see significant year-over-year declinescategories, and G&S spend represents transactions in billed business, its future results will be materially impacted.all other merchant categories.
American Express’ Card Member receivableloans declined 10 percent, which was a larger decline than the decrease in spend volumes due to higher paydown rates driven in part by the continued liquidity and financial strength in its customer base. American Express expects recovery in loan balances increased relative to the second quarter, driven bycontinue to lag the improvement in billed business. In contrast, Card Member loan balancesspend volumes. The total balance of loans and receivables in American Express’ financial relief programs saw a small decline relativemoderate sequential reduction as compared to the second quarter, as the improvement in billed business was offset byprior quarter; however, they remain significantly higher paydown rates in the third quarter. American Express’ credit metrics in the third quarter were solid with year-over-year declines in delinquency rates for both Card Member receivables and Card Member loans.than pre-pandemic levels.
1
Provisions for credit losses decreased for American Express,and resulted in a net benefit, primarily due to a modest reserve release in the current year versus a reserve build in the prior year and lower net write-offs. The reserve release reflectedin the current quarter was driven by improving macroeconomic indicators, including unemployment and gross domestic product (GDP), and improved credit performance and lower loan volumes, partially offset byperformance. However, American Express maintains a more cautious view of the global macroeconomic outlook due to continuing high levels of uncertainty regarding the pace of a recovery in the economy. Credco’s provisions for credit losses also decreased referand resulted in a net benefit. Refer to Results“Results of OperationsOperations” in MD&A for additional information.
1The foreign currency adjusted information assumes a constant exchange rate betweenimproved credit performance was driven by American Express’ strong risk management practices and the periods being compared for purposesrecord levels of currency translation into U.S. dollars (i.e., assumesgovernment stimulus and the foreign exchange rates used to determine results forbroad availability of forbearance programs in the current period apply to the corresponding prior year period against which such results are being compared).environment.
To support its customers and merchants, American Express continued to offer financial and other assistance, add product benefits to reflect today’s environment, and provide the high level of customer service they expect and rely on. During the first half of the year, American Express created Customer Pandemic Relief programs to provide short-term support for customers impacted by COVID-19. These programs are no longer widely available, with negligible balances remaining in the programs as of September 30, 2020. American Express also provides longer-term financial relief programs.
Although the external environment remains uncertain in the near term, American Express is confident in how it is managing the company for the long term. The investments American Express is making set a foundation to rebuild its growth momentum and return to pre-pandemic levels of earnings and financial performance.
See “Certain Legislative, Regulatory and Other Developments” and “Risk Factors”“Cautionary Note Regarding Forward-Looking Statements” for information on legislative and regulatory changes, additional impacts of the COVID-19 pandemic and related containment efforts as well as other matters that could have a material adverse effect on Credco’s results of operations and financial condition.
Critical Accounting Estimates
Please see the “Critical Accounting Estimates” section of Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 for a full description of all of Credco’s critical accounting estimates. The critical accounting estimate related to Reserves for Card Member Credit Losses presented below has been updated to reflect the adoption of the Current Expected Credit Loss (CECL) methodology.
Reserves for Card Member Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and Card Member loans, including those purchased by Credco.
Reserves for Card Member credit losses represent management’s best estimate of the expected credit losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires management to estimate lifetime expected credit losses by incorporating historical loss experience and current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date.
In estimating expected credit losses, American Express uses a combination of statistically based models and analysis of the results produced by these models. These quantitative and qualitative components entail a significant amount of judgment. The primary areas of judgment used in measuring the quantitative components of American Express’ reserves relate to the determination of the appropriate R&S Period, the modeling of the probability of and exposure at default, and the methodology to incorporate current and future economic conditions. American Express uses these models and assumptions, combined with historical loss experience, to calculate the reserve rates that are applied to the outstanding Card Member receivable or Card Member loan balances, to produce its reserves for expected credit losses. Beyond the R&S Period, American Express estimates expected credit losses using its historical loss experience. The qualitative component is intended to capture expected losses that may not have been fully captured in the quantitative component. Through an established governance structure, American Express considers certain external and internal factors, including emerging portfolio characteristics and trends, which consequentially may increase or decrease the reserves for credit losses on Card Member receivables and Card Member loans.
The R&S Period, which is approximately 3 years, represents the maximum time-period beyond the balance sheet date over which American Express can reasonably estimate expected credit losses, using all available portfolio information, current economic conditions and forecasts of future economic conditions. Card Member receivable products are contractually required to be paid in full; therefore, American Express has assumed the balances will be either paid or written-off within the R&S Period. Card Member loan products do not have a contractual term and balances can revolve if minimum required payments are made, causing some balances to remain outstanding beyond the R&S Period.
Within the R&S Period, American Express’ models use past loss experience and current and future economic conditions to estimate the probability of default, exposure at default and expected recoveries to estimate net losses at default. A significant area of judgment relates to how American Express applies future Card Member payments to the reporting period balances when determining the exposure at default. The nature of revolving loan products inherently includes a relationship between future payments and spend behavior, which creates complexity in the application of how future payments are either partially or entirely attributable to the existing balance at the end of the reporting period. Using historical customer behavior and other factors, American Express has assumed that future payments are first allocated to interest and fees associated with the reporting period balance and future spend. American Express then allocates a portion of the payment to the estimated higher minimum payment amount due because of any future spend. Any remaining portion of the future payment would then be allocated to the remaining balance.
CECL requires that the R&S Period include an assumption about current and future economic conditions. American Express incorporates multiple macroeconomic scenarios obtained from an independent third party. The estimated credit losses calculated from each macroeconomic scenario are reviewed by American Express and are weighted to reflect its judgment about uncertainty around the scenarios. These macroeconomic scenarios contain certain variables, including unemployment rates and real gross domestic product (GDP), that are significant to American Express’ models.
Macroeconomic Sensitivity
To demonstrate the sensitivity of estimated credit losses to the macroeconomic scenarios, American Express compared its modeled estimate under a baseline scenario to its modeled estimate under a pessimistic downside scenario. For every 10 percentage points change in weighting from the baseline scenario to the pessimistic downside scenario, Credco’s estimated credit losses increased by approximately $3.0 million. Credco’s Consolidated Balance Sheets primarily contain Card Member receivables, which have a shorter average estimated life than Card Member loans and consequently are less sensitive to shifts within various economic scenarios than American Express.
The modeled estimates under these scenarios were influenced by the duration, severity and timing of changes in economic variables within each scenario and these macroeconomic scenarios, under different conditions or using different assumptions, could result in significantly different estimated credit losses. It is difficult to estimate how potential changes in specific factors might affect the estimated credit losses, and current results may not be indicative of the potential future impact of macroeconomic forecast changes.
In addition, this sensitivity analysis relates only to the modeled credit loss estimates under two scenarios without considering American Express’ judgment on the relative weighting for those and other scenarios, including the weight that has been placed on downside scenarios at the balance sheet date, or any potential changes in other adjustments to the quantitative calculation or the impact of American Express’ judgment for qualitative factors, which may have a positive or negative effect on the results. Thus, the results of this sensitivity analysis are hypothetical and are not intended to estimate or reflect Credco’s expectations of any changes in the overall reserves for credit losses due to changes in the macroeconomic environment.
The following table reflects the range of key variables in the macroeconomic scenarios utilized for the computation of Reserves for credit losses:
| | | | | | | | | | | |
| September 30, 2020 | | June 30, 2020 |
U.S. Unemployment Rate | | | |
Third quarter of 2020 | 10% - 11% | | 8% - 10% |
Fourth quarter of 2020 | 10% - 12% | | 9% - 11% |
Fourth quarter of 2021 | 8% - 13% | | 9% - 11% |
U.S. GDP Growth (Contraction) (a)
| | | |
Third quarter of 2020 | 23% - 8% | | 16% - 10% |
Fourth quarter of 2020 | 3% - (6%) | | 0.6% - (4%) |
Fourth quarter of 2021 | 6% - 3% | | 8% - 7% |
(a)Real GDP quarter over quarter percentage change seasonally adjusted to annualized rates.
Refer to the “Business Environment” and Table 3 in MD&A and Note 1 and Note 3 to the “Consolidated Financial Statements” for a further description of the impact of CECL, both at implementation and for the nine months ended September 30, 2020.
The process of estimating these reserves requires a high degree of judgment. To the extent American Express’ expected credit loss models are not indicative of future performance, Credco’s actual losses could differ significantly from its judgments and expectations, resulting in either higher or lower future provisions for credit losses in any period.
Results of Operations for the NineThree Months Ended September 30,March 31, 2021 and 2020 and 2019
Net income depends largely on the volume of Card Member receivables and Card Member loans purchased, the discount rate used to determine purchase price, interest earned, interest expense, collectability of purchased Card Member receivables and Card Member loans, and income taxes.
As a result of the adoption of CECL on January 1, 2020, there is a lack of comparability These discussions should be read in both the reserves and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordanceconjunction with the incurred loss methodology in effect for prior periods. Refer to Note 3 todiscussion under “Business Environment,” which contains further information on the “Consolidated Financial Statements” for further information.COVID-19 pandemic and the related impacts on Credco’s results of operations.
Credco’s consolidated net income decreasedincreased by $195$118 million to $130$140 million, as compared to net income of $325$22 million for the same period in 2019.2020. The year-over-year decreaseincrease was primarily driven by an increase in netinterest income is primarily drivenand a decline in provision and interest expense, partially offset by lower discount revenue earned from Card Member receivables, lower interest income from affiliates and higher provisions for credit losses, partially offset by decline in interest expense.receivables.
Table 1: Total Revenues Summary
| | Nine Months Ended September 30, | | Change | |
| Three Months Ended March 31, | | Three Months Ended March 31, | | Change |
| (Millions, except percentages) | (Millions, except percentages) | | 2020 | | | 2019 | | | 2020 vs. 2019 | (Millions, except percentages) | | 2021 | | | 2020 | | | 2021 vs. 2020 |
| Discount revenue earned from purchased | Discount revenue earned from purchased | | | | | | | Discount revenue earned from purchased | | | | | | |
| | Card Member receivables and Card Member loans | | $ | 562 | | | $ | 913 | | | $ | (351) | | | (38) | % | | | Card Member receivables and Card Member loans | | $ | 65 | | | $ | 207 | | | $ | (142) | | | (69) | % | |
| Interest income from affiliates and other | Interest income from affiliates and other | | 66 | | | 267 | | | (201) | | | (75) | | | Interest income from affiliates and other | | 102 | | | 37 | | | 65 | | | # | |
| Finance revenue | Finance revenue | | 63 | | | 58 | | | 5 | | | 9 | | | Finance revenue | | 17 | | | 22 | | | (5) | | | (23) | | |
| Total revenues | Total revenues | | | $ | 691 | | | | $ | 1,238 | | | | $ | (547) | | | (44) | % | | Total revenues | | | $ | 184 | | | | $ | 266 | | | | $ | (82) | | | (31) | % | |
Total revenues
Discount revenue decreased, due to lower volumes of and lower discount rates on, Card Member receivables and Card Member loans purchased.
Interest income increased, reflecting a higher expectation as to the collectability of collateralized loan arrangements as a result of improvements in the credit environment.
Finance revenue decreased, primarily due to lower average outstanding Card Member loan balances and lower average interest rates.balances.
Table 2: Total Expenses Summary
| | Nine Months Ended September 30, | | Change | |
| Three Months Ended March 31, | | Three Months Ended March 31, | | Change |
| (Millions, except percentages) | (Millions, except percentages) | | 2020 | | 2019 | | 2020 vs. 2019 | (Millions, except percentages) | | 2021 | | 2020 | | 2021 vs. 2020 |
| Provisions for credit losses | Provisions for credit losses | | $ | 264 | | | $ | 170 | | | $ | 94 | | | 55% | Provisions for credit losses | | $ | (14) | | | $ | 103 | | | $ | (117) | | | # |
| Interest expense | Interest expense | | 169 | | | 417 | | | (248) | | | (59) | | Interest expense | | 33 | | | 79 | | | (46) | | | (58) |
| Interest expense to affiliates | Interest expense to affiliates | | 70 | | | 337 | | | (267) | | | (79) | | Interest expense to affiliates | | 2 | | | 53 | | | (51) | | | (96) |
| Other, net | Other, net | | (14) | | | (66) | | | 52 | | | (79) | | Other, net | | 2 | | | (11) | | | 13 | | | # |
| Total expenses | Total expenses | | $ | 489 | | | $ | 858 | | | $ | (369) | | | (43) | % | Total expenses | | $ | 23 | | | $ | 224 | | | $ | (201) | | | (90) | % |
Total expenses
Provisions for credit losses on Card Member receivablesdecreased and Card Member loans increased forresulted in a net benefit due to reserve releases in the nine months ended September 30, 2020, primarilycurrent year versus reserve builds in the prior year and lower net write-offs driven by higherimproved credit performance. The reserve releases in the current quarter were driven by improving macroeconomic indicators, including unemployment and GDP, as well as improved credit performance. The significant reserve builds reflectingin the prior year were due to the deterioration of the global macroeconomic outlook, in the current year, including unemployment and GDP, partially offset byas a decline in outstanding balances. Refer to Table 3 for additional information.result of the onset of the COVID-19 pandemic.
Interest expense decreased, primarily due to scheduled debt maturities and lower interest rates during the period.
Interest expense to affiliates decreased, primarily due to a decrease in average debt balances and lower interest rates.
Other, net expenses increased, primarily driven by lower forward point gains.
Table 3: Provisions for Credit Losses Summary
| | Nine Months Ended September 30, | | Change | |
| Three Months Ended March 31, | | Three Months Ended March 31, | | Change |
| (Millions, except percentages) | (Millions, except percentages) | | 2020 | | 2019 | | 2020 vs. 2019 | (Millions, except percentages) | | 2021 | | 2020 | | 2021 vs. 2020 |
| Card Member receivables | Card Member receivables | | | | | | | Card Member receivables | | | | | | |
| Net write-offs | Net write-offs | | $ | 160 | | | $ | 166 | | | $ | (6) | | (4) | % | Net write-offs | | $ | 18 | | | $ | 50 | | | $ | (32) | | (64) | % |
Reserve build (release)(a) | | 88 | | | (6) | | | 94 | | # | |
Reserve (release) build (a) | | Reserve (release) build (a) | | (40) | | | 50 | | | (90) | | # |
| Total | Total | | 248 | | | 160 | | | 88 | | 55 | | Total | | (22) | | | 100 | | | (122) | | # |
| Card Member loans | Card Member loans | | Card Member loans | |
| Net write-offs | Net write-offs | | 11 | | | 7 | | | 4 | | 57 | | Net write-offs | | 4 | | | 2 | | | 2 | | # |
Reserve build(a) | Reserve build(a) | | 5 | | | 3 | | | 2 | | 67 | | Reserve build (a) | | 4 | | | 1 | | | 3 | | # |
| Total | Total | | 16 | | | 10 | | | 6 | | 60 | | Total | | 8 | | | 3 | | | 5 | | # |
| Total provisions for credit losses | Total provisions for credit losses | | $ | 264 | | | $ | 170 | | | $ | 94 | | 55 | % | Total provisions for credit losses | | $ | (14) | | | $ | 103 | | | $ | (117) | | # |
# Denotes a variance greater thanof 100 percent
(a)Reserve build (release) represents the portion of the provisions for credit losses for the period, related to increasing or decreasing reserves for credit losses as a result of, among other things, changes in volume, macroeconomic outlook, portfolio composition and credit quality of portfolios. Reserve build represents the amount by which the provision for credit losses exceeds net write-offs, while reserve release represents the amount by which net write-offs exceeds the provision for credit losses.
Refer to Note 3 to the "Consolidated Financial Statements" for the range of key variables in the macroeconomic scenarios utilized for the computation of Credco’s reserves for credit losses.
Income taxes
The effective tax rate was 43.513.0 percent and 16.047.6 percent for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and 35.6 percent and 14.5 percent for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate for the three month period primarily reflected changes in the level and geographic mix of pretax income. The increase in the effective tax rate for the nine month period primarily reflected amonths ended March 31, 2020 includes an $18 million discrete tax charge of $33 million related to the attribution of taxable income to jurisdictions outside the U.S, as well as changes in the level and geographic mix of pretax income.U.S. Refer to Note 7 to the “Consolidated Financial Statements” for additional information.
Card Member receivables and Card Member loans
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, Credco owned $11.0$11.5 billion and $25.6$12.2 billion, respectively, of gross Card Member receivables. Card Member receivables represent amounts due on American Express charge card products and are recorded at the time they are purchased from the seller. Included in Card Member receivables are Credco Receivables Corporation’s (CRC) purchases of participation interests from American Express Receivables Financing Corporation VIII LLC (RFC VIII) in conjunction with TRS’ securitization program. As of September 30, 2020both March 31, 2021 and December 31, 2019,2020, CRC owned approximately $4.2 billion and $8.1 billion, respectively, of such participation interests.
Effective February 1, 2020, TRS removed U.S. Consumer and Small Business Card Member receivables from the American Express Issuance Trust II (the Charge Trust) and substantially replaced them with U.S. Corporate Card Member receivables in two phases. On February 1, 2020 and April 20, 2020, TRS transferred $5.2 billion and $1.7 billion, respectively, of U.S. Corporate Card Member receivables to the Charge Trust. Since Credco maintains participation interests in the Charge Trust, these transactions resulted in Credco (i) no longer having a $7.2 billion interest in U.S. Consumer and Small Business Card Member receivables and (ii) having an interest in the U.S. Corporate Card Member receivables in the Charge Trust. The settlement of $7.2 billion related to the U.S. Consumer and Small Business portfolio was used to repay borrowings from American Express Company leading to a reduction in Long-term debt to affiliates of $7.2 billion.
The net volume of Card Member receivables and Card Member loans purchased during the ninethree months ended September 30,March 31, 2021 and 2020 and 2019 was approximately $111.9$38 billion and $233.8$41 billion, respectively.
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, Credco owned gross Card Member loans totaling $453$459 million and $697$500 million, respectively. These loans generally represent revolving amounts due on American Express lending card products.
The following table summarizes selected information related to the Card Member receivables portfolio as of September 30:March 31:
Table 4: Selected Information Related to Card Member Receivables
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions, except percentages and where indicated) | | | | 2020 | | | | 2019 | |
Total gross Card Member receivables (a) | | | $ | 10,987 | | | | $ | 24,955 | | |
Loss reserves - Card Member receivables (a) | | | $ | 110 | | | | $ | 168 | | |
| Loss reserves as a % of receivables | | | | 1.0 | | % | | | 0.7 | | % |
Average life of Card Member receivables (# in days) (b) | | | | 33 | | | | | 30 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions, except percentages and where indicated) | | | | 2021 | | | | 2020 | |
Total gross Card Member receivables (a) | | | $ | 11,545 | | | | $ | 9,406 | | |
Credit loss reserves - Card Member receivables (a) | | | $ | 30 | | | | $ | 69 | | |
| Credit loss reserves as a % of receivables | | | | 0.3 | | % | | | 0.7 | | % |
Average life of Card Member receivables (# in days) (b) | | | | 29 | | | | | 42 | | |
(a)Refer to Notes 1, 2 and 3 to the “Consolidated Financial Statements” for further discussion.
(b)Represents the average life of Card Member receivables owned by Credco, based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month, during the periods indicated, to the volume of Card Member receivables purchased by Credco.
Loans to Affiliates and Other
Credco’s loans to affiliates and other represent floating-rate interest-bearing borrowings by American Express Company, wholly owned subsidiaries of TRS and the joint ventures that issue American Express cards in certain countries.
The components of loans to affiliates and other as of September 30, 2020March 31, 2021 and December 31, 20192020 were as follows:
Table 5: Loans to Affiliates and Other
| | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2020 | | | 2019 |
| American Express Company | | $ | 3,211 | | $ | — |
| American Express Services Europe Limited | | | 2,551 | | | 4,206 |
| American Express Australia Limited | | | 1,480 | | | 2,052 |
| Amex Global Holdings C.V. | | | 1,140 | | | 888 |
| Amex Bank of Canada | | | 806 | | | 1,587 |
| American Express Company (Mexico) S.A. de C.V. | | | 476 | | | 534 |
| American Express Bank (Mexico) S.A. | | | 360 | | | 404 |
| American Express International, Inc., Singapore Branch | | | 265 | | | 413 |
| American Express International (NZ), Inc. | | | 49 | | | 70 |
| Alpha Card S.C.R.L./C.V.B.A | | | 19 | | | 120 |
| American Express Saudi Arabia (C) JSC | | | — | | | 71 |
Total (a) | | $ | 10,357 | | $ | 10,345 |
| | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2021 | | | 2020 |
| American Express Company | | $ | 3,226 | | $ | 2,772 |
| American Express Services Europe Limited | | | 2,543 | | | 2,881 |
| American Express Australia Limited | | | 1,705 | | | 1,745 |
| Amex Global Holdings C.V. | | | 1,430 | | | 1,430 |
| Amex Bank of Canada | | | 809 | | | 857 |
| American Express Company (Mexico) S.A. de C.V. | | | 530 | | | 540 |
| American Express International, Inc., Singapore Branch | | | 295 | | | 303 |
| American Express Bank (Mexico) S.A. | | | 252 | | | 257 |
| American Express International (NZ), Inc. | | | 51 | | | 56 |
| Alpha Card S.C.R.L./C.V.B.A | | | 18 | | | 25 |
| American Express Saudi Arabia (C) JSC | | | — | | | 24 |
Total (a) | | $ | 10,859 | | $ | 10,890 |
(a)As of September 30, 2020March 31, 2021 and December 31, 2019,2020, approximately $5.6$6.0 billion and $8.2$6.4 billion, respectively, were collateralized by the underlying Card Member receivables and Card Member loans transferred with recourse.
Due from/to Affiliates
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, amounts due from affiliates were $11$36 million and $652$6 million, respectively. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, amounts due to affiliates were $3.4$3.3 billion and $2.1$4.3 billion, respectively. These amounts relate primarily to timing differences from the purchase of Card Member receivables, net of remittances from TRS and its subsidiaries, as well as from operating activities. As of both September 30, 2020March 31, 2021 and December 31, 2019,2020, due to affiliates also includes an amount pertaining to tax liability related to the Tax Cuts and Jobs Act of 2017.
Cash and Cash Equivalents
Deposits with Affiliates
Deposits
InAs of March 31, 2021 and December 31, 2020, the monthamount of June 2020, Credco restructured a number of its intercompany loan arrangements to further enhance funding flexibilitydeposits were $0.6 billion and effectiveness. Credco borrowed $7.1$0.5 billion, from TRS to repay borrowings from AE Exposure Management Limited of $4.7 billion. The excess of $2.2 billion wasrespectively, which represents cash deposited with American Express National Bank (AENB), which was reported as part of Cash and cash equivalents as of June 30, 2020. During the third quarter, amounts were withdrawn from AENB to meet business funding requirements resulting in $1.0 billion in deposits remaining with AENB as of September 30, 2020..
Restricted Cash with Affiliates
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the amount of interest-bearing restricted cash was $114$66 million and $116$120 million, respectively, recorded within Other assets on the Consolidated Balance Sheets. These amounts representwhich represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.
Short-term Debt to Affiliates
Short-term debt to affiliates consists primarily of interest-bearing master notes payable on demand. Components of short-term debt to affiliates as of September 30, 2020March 31, 2021 and December 31, 20192020 were as follows:
Table 6: Short-term Debt to Affiliates
| | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2020 | | | 2019 |
American Express Travel Related Services Company, Inc.(a) | | $ | 7,073 | | | $ | — | |
AE Exposure Management Limited(a) | | | 982 | | | | 5,731 | |
| American Express Europe LLC | | | 227 | | | | 219 | |
| American Express Holdings Netherlands CV | | | 192 | | | | 192 | |
| Accertify, Inc. | | | 93 | | | | 82 | |
| American Express Swiss Holdings GmbH | | | 1 | | | | 1 | |
| Total | | $ | 8,568 | | | $ | 6,225 | |
(a) Refer to “Deposits” in MD&A and Note 1 to the “Consolidated Financial Statements” for additional information.
| | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2021 | | | 2020 |
| American Express Travel Related Services Company, Inc. | | $ | 7,073 | | | $ | 7,073 | |
| AE Exposure Management Limited | | | 1,239 | | | | 1,193 | |
| American Express Europe LLC | | | 480 | | | | — | |
| American Express Holdings Netherlands CV | | | 192 | | | | 192 | |
| Accertify, Inc. | | | 119 | | | | 107 | |
| American Express Swiss Holdings GmbH | | | 4 | | | | 4 | |
| Total | | $ | 9,107 | | | $ | 8,569 | |
Long-term Debt to Affiliates
Long-term debt to affiliates consists primarily of master note agreements with original contractual maturity dates of one year or greater and are not payable on demand. Components of long-term debt to affiliates as of September 30, 2020March 31, 2021 and December 31, 20192020 were as follows:
Table 7: Long-term Debt to Affiliates
| | (Millions) | (Millions) | | 2020 | | 2019 | (Millions) | | 2021 | | 2020 |
American Express Company (a) | American Express Company (a) | | $ | 568 | | | $ | 8,959 | | American Express Company (a) | | $ | 496 | | | $ | 454 | |
Amex Funding Management (Europe) Limited (b) | Amex Funding Management (Europe) Limited (b) | | 348 | | | 333 | | Amex Funding Management (Europe) Limited (b) | | 353 | | | 368 | |
| Total | Total | | $ | 916 | | | $ | 9,292 | | Total | | $ | 849 | | | $ | 822 | |
(a)Amounts payable by November 2023. Refer to "Card Member receivables and Card Member loans" in MD&A and Note 1 to the “Consolidated Financial Statements” for additional information.
(b)Amounts payable by September 2021.
Service Fees to Affiliates
Credco’s affiliates do not explicitly charge Credco a service fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables purchased than would be the case if servicing fees were charged. If a servicing fee had been charged by these affiliates from which Credco purchases receivables, fees to affiliates for servicing receivables would have been approximately $186$59 million and $234$65 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Correspondingly, discount revenue would have increased by approximately the same amounts in these periods.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
Credco’s balance sheet management objectives are to maintain:
•A broad, deep and diverse set of funding sources to finance its assets and meet operating requirements; and
•Liquidity programs that enable Credco to continuously meet expected future financing obligations and business requirements for at least a twelve-month period in the event it is unable to continue to raise new funds under its traditional funding programs during a substantial weakening in economic conditions.
Credco is closely monitoring the rapidly changing macroeconomic environment and is actively managing its balance sheet to reflect evolving circumstances. Credco’s objective is to remain financially strong against a backdrop of a highlyan uncertain operating environment and outlook.
Funding Strategy
American Express has in place an enterprise-wide funding policy. The principal funding objective is to maintain broad and well-diversified funding sources to allow American Express, including Credco, to meet its maturing obligations, cost-effectively finance current and future asset growth in its global businesses as well as to maintain a strong liquidity profile.
Credco has historically relied on intercompany borrowings and the debt capital markets to fulfill a substantial amount of its funding needs. It has a variety of funding sources available to access the debt capital markets, including senior unsecured debt and commercial paper. Credco continues to assess its funding needs and investor demand and could change the mix of its existing sources as well as add new sources to its funding mix. Credco’s funding plans can vary due to various risks and uncertainties, such as the disruption of financial markets or reductions in market capacity and demand for securities offered by Credco as well as any regulatory changes or changes in its long-term or short-term credit ratings. Many of these risks and uncertainties are beyond Credco’s control.
Credco’s funding strategy is designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies: Fitch Ratings (Fitch), Moody’s Investor Services (Moody’s) and Standard & Poor’s (S&P). Such ratings help support Credco’s access to cost-effective unsecured funding as part of its overall funding strategy.
Table 8: Unsecured Debt Ratings
| | | | | | | | | | | | | | | | | | | | |
| Credit Agency | | Short-Term Ratings | | Long-Term Ratings | | Outlook |
| Fitch | | F1 | | A | | NegativeStable |
| Moody’s | | Prime-1 | | A2 | | Negative |
| S&P | | A-2 | | A- | | Stable |
These ratings are not a recommendation to buy or hold any of Credco’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
Downgrades in the ratings of Credco’s unsecured debt could result in higher funding costs, as well as higher fees related to borrowings under its unused lines of credit.credit facilities. Declines in credit ratings could also reduce Credco’s borrowing capacity in the unsecured term debt and commercial paper markets. The overall level of the funding provided by Credco to other American Express affiliates is impacted by a variety of factors, among them Credco’s ratings. To the extent that Credco is subject to a higher cost of funds, whether due to an adverse ratings action or otherwise, the affiliates could continue to use, or could increase their use of, alternative sources of funding for their receivables that offer better pricing.
Short-term Funding Programs
Short-term borrowings, such as commercial paper, is defined as debt with original contractual maturity of twelve months or less. Credco’s issuance and sale of commercial paper is primarily utilized for working capital needs. The amount of short-term borrowings issued in the future will depend on Credco’s funding strategy, its needs and market conditions. AsCredco had nil commercial paper outstanding as of September 30, 2020both March 31, 2021 and December 31, 2019, Credco had nil and $3.0 billion, respectively, of commercial paper outstanding.2020. The average commercial paper outstanding was $0.8 billionnil and $0.3$0.6 billion for the ninethree months ended September 30, 2020March 31, 2021 and the year ended December 31, 2019,2020, respectively.
Long-term Debt Programs
Long-term debt is raised through the offering of debt securities both in and outside the United States. Long-term debt is generally defined as any debt with an original contractual maturity greater than twelve months. During the ninethree months ended September 30, 2020,March 31, 2021, Credco did not issue any unsecured debt securities. Credco had the following long-term debt outstanding as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
Table 9: Long-Term Debt Outstanding
| | (Billions) | (Billions) | | 2020 | | 2019 | (Billions) | | 2021 | | 2020 |
Long-term debt outstanding (a) | Long-term debt outstanding (a) | | $ | 7.0 | | | $ | 13.5 | | Long-term debt outstanding (a) | | $ | 7.0 | | | $ | 7.0 | |
Average long-term debt (b) | Average long-term debt (b) | | $ | 9.8 | | | $ | 16.4 | | Average long-term debt (b) | | $ | 7.0 | | | $ | 9.1 | |
(a)The outstanding balances include (i) unamortized discount, (ii) the impact of movements in exchange rates on foreign currency denominated debt and (iii) the impact of fair value hedge accounting on certain fixed-rate notes that have been swapped to floating rate through the use of interest rate swaps.
(b)Average long-term debt outstanding during the ninethree months ended September 30, 2020March 31, 2021 and the year ended December 31, 2019,2020, respectively.
Credco has the ability to issue debt securities under the shelf registration statement filed with the Securities and Exchange Commission (SEC). The latest shelf registration statement filed with the SEC is for an unspecified amount of debt securities. As of September 30, 2020both March 31, 2021 and December 31, 2019,2020, Credco had $7.0 billion and $13.5 billion of debt securities outstanding, respectively, issued under the SEC registration statement.outstanding. Credco may redeem from time to time certain debt securities within 31 days prior to the original contractual maturity dates in accordance with the optional redemption provisions of those debt securities.
Credco has a program in Australia for the issuanceThe covenants of debt securitiesinstruments issued by Credco impose the requirement that Credco maintain a minimum consolidated net worth of up$50 million, which limits the amount of dividends Credco can pay to approximately $4.2 billion (AUD 6 billion). There were no outstanding notes under this program as of September 30, 2020 and December 31, 2019.
TRS, its parent company. During the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, Credco did not pay any cash dividends to TRS. When considering the amount of dividends it pays, Credco takes into account the amount of capital required to maintain capital strength, support business growth and meet the expectations of debt investors, including the covenants of debt instruments issued by Credco that impose the requirement for Credco to maintain a minimum consolidated net worth of $50 million.investors. To the extent excess capital is available, it may be distributed to TRS, Credco’s parent company, via dividends. There are no significant restrictions on the ability of Credco to obtain funds from its subsidiaries by dividend or loan. Additionally, there are no limitations on the amount of debt that can be issued by Credco, provided it maintains the minimum fixed charge coverage ratio (FCCR) of 1.25. As of September 30, 2020,March 31, 2021, Credco was in compliance with all restrictive covenants contained in its debt agreements.
Liquidity Management
The liquidity objective of American Express and its subsidiaries, including Credco, is to maintain access to a diverse set of on-and off-balance sheet liquidity sources and seek to maintain liquidity sources in amounts sufficient to meet their expected future financial obligations and business requirements for liquidity for a period of at least twelve months in the event they are unable to raise new funds under their regular funding programs during a substantial weakening in economic conditions.
The liquidity management strategy includes a number of elements, including, but not limited to:
•Maintaining diversified funding sources;
•Maintaining unencumbered liquid assets and off-balance sheet liquidity sources;
•Projecting cash inflows and outflows under a variety of economic and market scenarios; and
•Establishing clear objectives for liquidity risk management, including compliance with regulatory requirements; and
•Incorporating liquidity risk management as appropriate into American Express’ capital adequacy framework.requirements.
Credco believes that it currently maintains sufficient liquidity sources to meet all internal and regulatory liquidity requirements. As of September 30, 2020,March 31, 2021, Credco had Cash and cash equivalents of $1.0 billion and itapproximately $692 million which primarily represents the amount deposited with AENB, which was driven by the restructuring of a number of its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Refer to “Deposits” in MD&A for additional information.AENB. In addition to its actual holdings of Cash and cash equivalents, Credco maintains access to additional liquidity, in the form of Cash and cash equivalents held by certain affiliates, through intercompany loan agreements, access to securitizationssecuritization of Card Member receivables through sales of receivables to TRS for securitization by RFC VIII and the ChargeAmerican Express Issuance Trust II, and a committed bank credit facility.
Committed Bank Credit Facility
Credco maintained a U.S. dollar-denominated committed syndicated bank credit facility as of September 30, 2020March 31, 2021 of $3.5 billion with a maturity date of October 15, 2022. As of September 30, 2020,March 31, 2021, no amounts were drawn on this facility. Credco may, from time to time, use this facility in the ordinary course of business to fund working capital needs. Any undrawn portion of this facility could serve as backstop for the amount of commercial paper outstanding. The availability of this facility is subject to Credco’s compliance with certain financial covenants that require maintenance of a 1.25 minimum required fixed charge coverage ratio (FCCR). TheFCCR. FCCR is the ratio of income beforeearnings available for fixed charges (interest expenses including interest expense to affiliates) and income taxes to fixed charges for the applicable period. The FCCREarnings available for Credco was 1.85fixed charges are defined as net income before fixed charges and 1.54 forincome tax provision plus, effective the nine months ended September 30,fourth quarter of 2020, and year ended December 31, 2019, respectively.certain capital contributions, if any, made by TRS to Credco.
The committed syndicated bank credit facility does not contain a material adverse change clause, which might otherwise preclude borrowing under the credit facility, nor is it dependent on Credco’s credit rating.
Table 10: Computation in support of fixed charge coverage ratio
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | Three Months Ended
March 31, 2021 | | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Earnings: | | | | | | | |
| Net income | $ | 140 | | | $ | 201 | | | $ | 418 | | | $ | 387 | |
| Income tax provision | 21 | | | 121 | | | 94 | | | 29 | |
| Interest expense including interest expense to affiliates | 35 | | | 276 | | | 954 | | | 851 | |
Capital contributions from TRS (a) | — | | | — | | | N/A | | N/A |
| Earnings available for fixed charges | $ | 196 | | | $ | 598 | | | $ | 1,466 | | | $ | 1,267 | |
| Fixed charges - Interest expense including interest expense to affiliates | $ | 35 | | | $ | 276 | | | $ | 954 | | | $ | 851 | |
| Fixed charge coverage ratio | 5.60 | | | 2.17 | | | 1.54 | | | 1.49 | |
Table(a) Effective fourth quarter of Contents2020, capital contributions from TRS is part of earnings available for fixed charges.OTHER MATTERS
Certain Legislative, Regulatory and Other Developments
Government Responses to COVID-19 Pandemic
In response to the COVID-19 pandemic, authorities around the world have implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. In addition to these measures, which have substantially curtailed household and business activity, fiscal and monetary policy measures have been deployed for the stated purpose of attempting to mitigate the adverse effects on the economy. In the United States, this has included the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and a number of emergency lending and liquidity facilities established by the Federal Reserve.
There have also been various governmental actions taken or proposed to provide forms of relief, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance with respect to certain loans and fees.
Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known. Credco continues to monitor federal, state and international regulatory developments in relation to the COVID-19 pandemic and their potential impact on its operations.
Cautionary Note Regarding Forward-Looking Statements
Various statements have been made in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in Credco’s other reports filed with or furnished to the SECSecurities and Exchange Commission (SEC) and in other documents. In addition, from time to time, Credco, through its management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue,”“continue” and similar expressions are intended to identify forward-looking statements. Credco cautions you that the risk factors described below as well as those in Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 and the “Risk Factors” section in this Quarterly Report2020 are not exclusive. There may also be other risks that Credco is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Credco undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from Credco’s forward-looking statements include, but are not limited to, the following:
•American Express’ ability to rebuild growth momentum and improve its financial performance to pre-pandemic levels, which will depend in part on a recovery in consumer travel and therefore on how soon lockdowns ease, travel restrictions lift and the general public begins to feel comfortable traveling again; discount revenue recovering broadly in-line with billed business; credit performance and reserve levels; identifying attractive investment opportunities that help rebuild growth momentum, and scale next horizon opportunities; its ability to control operating expenses; the effective tax rate remaining consistent with current expectations; and its ability to continue its share repurchase program; any of which could be impacted by, among other things, the factors identified in the subsequent paragraphs;
•American Express’ ability to grow volumes, revenues and EPS, which could be impacted by, among other things, uncertainty regarding the duration, extentcontinued spread of COVID-19 (including new variants) and severity of the pandemic;pandemic and the availability, distribution and use of effective treatments and vaccines; a further deterioration in global economic and business conditions andconditions; consumer and business spending generally;not growing in line with expectations, including G&S spending not continuing to grow and T&E spending not rebounding to around 70 percent of 2019 levels by the end of 2021; an inability or unwillingness of Card Members to pay amounts owed to American Express; insufficient governmental stimulusgovernment support and relief programs to address the ongoing impact of the pandemic; prolonged measures to contain the spread of COVID-19 (including travel restrictions) or premature easing of such containment measures, both of which could further exacerbate the effects on business activity and American Express’ Card Members, partners and merchants; health concerns associated with the pandemic continuing to affect consumer behavior, spending levels and preferences, and travel patterns and demand even after government restrictions are lifted and economies reopen;reopen, including domestic travel not continuing to recover in 2021; American Express’ and Credco’s inability to effectively manage risk in an uncertain environment; market volatility, changes in capital and credit market conditions and the availability and cost of capital; issues impacting brand perceptions and its reputation; the amount and efficacy of investments in share, scale and relevance; an inability of business partners to meet their obligations to American Express and its customers due to slowdowns or disruptions in their businesses, bankruptcy andor liquidation, or otherwise; the impact of any future contingencies, including, but not limited to, restructurings, impairments, changes in reserves, legal costs, the imposition of fines or civil money penalties and increases in Card Member reimbursements; and the impact of regulation and litigation, which could affect the profitability of American Express’ business activities, limit its ability to pursue business opportunities, require changes to business practices or alter its relationships with partners, merchants and Card Members;
•future credit performance and the amount and timing of future credit reserve builds and releases, which will depend in part on changes in consumer behavior that affect loan and receivable balances (such as paydown and revolve rates) and delinquency and write-off rates; macroeconomic factors such as unemployment rates, GDP and the volume of bankruptcies; the performance of accounts as they graduate and exit from financial relief programs; collections capabilities;capabilities and recoveries of previously written-off loans and receivables; the enrollment in, and effectiveness of, hardship programs and troubled debt restructurings; continued government support for the availability of government stimulus programs for borrowers;economy; and governmental actions that provide forms of relief with respect to certain loans and fees, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance;
•the amountgrowth rate of receivables and loans outstanding being higher or lower than current expectations, which will depend on the behavior of Card Members and their actual spending, borrowing and borrowing patternspaydown patterns; government stimulus, liquidity and financial strength in American Express’ customer base and the availability of forbearance programs; American Express’ ability to effectively manage risk and enhance the Card Member value propositions; credit actions, including line size and other adjustments to credit availability; and the effectiveness of its strategies to capture a greater share of existing Card Members’ spending and borrowings, reduce Card Member attrition and attract new customers;
•factors beyond Credco’s control such as resurgences of COVID-19 cases, whether and when populations achieve herd immunity, severe weather conditions, natural and man-made disasters, power loss, disruptions in telecommunications, or terrorism and other catastrophic events, any of which could significantly affect demand for and spending on American Express cards, delinquency rates, Card Member receivable and Card Member loan balances and other aspects of its business and results of operations or disrupt its global network systems and ability to process transactions;
•credit trends, which will depend in part on the economic environment, including, among other things, the rate of bankruptcies and the unemployment rate, which can affect spending on card products and debt payments by individual and corporate customers;
•the effectiveness of Credco’s risk management policies and procedures, including Credco’s ability to accurately estimate the provisions for credit losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, and operational risk;
•fluctuations in foreign currency exchange rates;
•negative changes in Credco’s credit ratings, which could result in decreased liquidity and higher borrowing costs;
•changes in laws or government regulations affecting American Express’ business, including the potential impact of regulations adopted by regulators relating to certain credit and charge card practices;
•the effect of fluctuating interest rates, which could affect Credco’s borrowing costs and have an adverse effect on the market price of notes issued by Credco;
•the impact on American Express’ business of changes in the substantial and increasing worldwide competition in the payments industry;
•the impact on American Express’ business resulting from a failure in or breach of operational or security systems, processes or infrastructure, or those of third parties, including as a result of cyberattacks, which could compromise the confidentiality, integrity, privacy and/or security of data, disrupt operations, reduce the use and acceptance of American Express cards and lead to regulatory scrutiny, litigation, remediation and response costs, and reputational harm;
•the impact on American Express’ business that could result from litigation such as class actions or from government regulation or supervision; and
•Credco’s ability to satisfy its liquidity needs and execute on its funding plans, which will depend on, among other things, Credco’s future business growth, the impact of global economic, political and other events on market capacity, Credco’s credit ratings, demand for securities offered by Credco, performance by Credco’s counterparties under its bank credit facilities and other lending facilities, and regulatory changes.changes;
•Credco’s tax rate not remaining consistent with current expectations, which could be impacted by, among other things, its geographic mix of income, further changes in tax laws and regulation, unfavorable tax audits and other unanticipated tax items;
•American Express’ ability to increase Card Member acquisition activities, provide additional value to Card Members and refresh its premium products, which will be impacted in part by competition, brand perceptions and reputation, and its ability to develop and market value propositions that appeal to Card Members and new customers and offer attractive services and rewards programs, which will depend in part on ongoing investments in Card Member acquisition efforts, addressing changing customer behaviors, new product innovation and development, and enrollment processes, including through digital channels, and infrastructure to support new products, services and benefits;
•American Express’ ability to innovate and strengthen its global network, which will depend in part on its ability to update its systems and platforms, the amount American Express invests in the network and its ability to make funds available for such investments, and technological developments, including capabilities that allow greater digital integration;
•American Express’ ability to introduce new and expanded digital capabilities, which will depend on its success in evolving its products and processes for the digital environment, developing new features in the Amex app and enhancing its digital channels, building partnerships and executing programs with other companies, effectively utilizing artificial intelligence to address servicing and other customer needs, and supporting the use of its products as a means of payment through online and mobile channels, all of which will be impacted by investment levels, new product innovation and development and infrastructure to support new products, services and benefits; and
•Credco’s funding plan being implemented in a manner inconsistent with current expectations, which will depend on various factors such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities Credco offers, regulatory changes, ability to securitize and sell receivables and loans and the performance of receivables and loans previously sold in securitization transactions.
A further description of these uncertainties and other risks can be found in the 20192020 Form 10-K and the Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2020,other reports filed with the Securities and Exchange Commission.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | Three Months Ended September 30, | Nine Months Ended September 30, | |
| Millions | | 2020 | | 2019 | 2020 | | 2019 | |
Three Months Ended March 31 (Millions) | | Three Months Ended March 31 (Millions) | | 2021 | | 2020 |
| Revenues | Revenues | | Revenues | |
Discount revenue earned from purchased Card Member receivables and
Card Member loans | Discount revenue earned from purchased Card Member receivables and
Card Member loans | | $ | 38 | | | $ | 305 | | $ | 562 | | | $ | 913 | | Discount revenue earned from purchased Card Member receivables and
Card Member loans | | $ | 65 | | | $ | 207 | |
| Interest income from affiliates and other | Interest income from affiliates and other | | 19 | | | 62 | | 66 | | | 267 | | Interest income from affiliates and other | | 102 | | | 37 | |
| Finance revenue | Finance revenue | | 19 | | | 21 | | 63 | | | 58 | | Finance revenue | | 17 | | | 22 | |
| Total revenues | Total revenues | | 76 | | | 388 | | 691 | | | 1,238 | | Total revenues | | 184 | | | 266 | |
| Expenses | Expenses | | | | | | | Expenses | | | | |
| Provisions for credit losses | Provisions for credit losses | | (12) | | | 56 | | 264 | | | 170 | | Provisions for credit losses | | (14) | | | 103 | |
| Interest expense | Interest expense | | 37 | | | 117 | | 169 | | | 417 | | Interest expense | | 33 | | | 79 | |
| Interest expense to affiliates | Interest expense to affiliates | | 5 | | | 102 | | 70 | | | 337 | | Interest expense to affiliates | | 2 | | | 53 | |
| Other, net | Other, net | | 0 | | | (18) | | (14) | | | (66) | | Other, net | | 2 | | | (11) | |
| Total expenses | Total expenses | | 30 | | | 257 | | 489 | | | 858 | | Total expenses | | 23 | | | 224 | |
| Pretax income | Pretax income | | 46 | | | 131 | | 202 | | | 380 | | Pretax income | | 161 | | | 42 | |
| Income tax provision | Income tax provision | | 20 | | | 21 | | 72 | | | 55 | | Income tax provision | | 21 | | | 20 | |
| Net income | Net income | | $ | 26 | | | $ | 110 | | $ | 130 | | | $ | 325 | | Net income | | $ | 140 | | | $ | 22 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | Three Months Ended September 30, | Nine Months Ended September 30, | |
| Millions | | 2020 | | 2019 | 2020 | | 2019 | |
Three Months Ended March 31 (Millions) | | Three Months Ended March 31 (Millions) | | 2021 | | 2020 |
| Net income | Net income | | $ | 26 | | | $ | 110 | | $ | 130 | | | $ | 325 | | Net income | | $ | 140 | | | $ | 22 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments, net of tax | Foreign currency translation adjustments, net of tax | | 10 | | | (24) | | (68) | | | (39) | | Foreign currency translation adjustments, net of tax | | (9) | | | (137) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | | 10 | | | (24) | | (68) | | | (39) | | Other comprehensive income (loss) | | (9) | | | (137) | |
| Comprehensive income | | $ | 36 | | | $ | 86 | | $ | 62 | | | $ | 286 | | |
| Comprehensive income (loss) | | Comprehensive income (loss) | | $ | 131 | | | $ | (115) | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | (Millions, except share data) | (Millions, except share data) | | September 30,
2020 | | December 31,
2019 | (Millions, except share data) | | March 31,
2021 | | December 31,
2020 |
| Assets | Assets | | | | | Assets | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 1,019 | | | $ | 33 | | Cash and cash equivalents | | $ | 692 | | | $ | 601 | |
| Card Member receivables, less reserves for credit losses: 2020, $110; 2019, $162 | | 10,877 | | | 25,395 | | |
| Card Member loans, less reserves for credit losses: 2020, $22; 2019, $10 | | 431 | | | 687 | | |
| Card Member receivables, less reserves for credit losses: 2021, $30; 2020, $70 | | Card Member receivables, less reserves for credit losses: 2021, $30; 2020, $70 | | 11,515 | | | 12,087 | |
| Card Member loans, less reserves for credit losses: 2021, $24; 2020, $20 | | Card Member loans, less reserves for credit losses: 2021, $24; 2020, $20 | | 435 | | | 480 | |
| Loans to affiliates and other | Loans to affiliates and other | | 10,357 | | | 10,345 | | Loans to affiliates and other | | 10,859 | | | 10,890 | |
| Due from affiliates | Due from affiliates | | 11 | | | 652 | | Due from affiliates | | 36 | | | 6 | |
| Other assets | Other assets | | 287 | | | 245 | | Other assets | | 244 | | | 244 | |
| Total assets | Total assets | | $ | 22,982 | | | $ | 37,357 | | Total assets | | $ | 23,781 | | | $ | 24,308 | |
| Liabilities and Shareholder’s Equity | Liabilities and Shareholder’s Equity | | | | | Liabilities and Shareholder’s Equity | | | | |
| Liabilities | Liabilities | | Liabilities | |
| Short-term debt | | $ | 0 | | | $ | 3,216 | | |
| Short-term debt to affiliates | Short-term debt to affiliates | | 8,568 | | | 6,225 | | Short-term debt to affiliates | | $ | 9,107 | | | $ | 8,569 | |
| Long-term debt | Long-term debt | | 6,985 | | | 13,469 | | Long-term debt | | 6,982 | | | 7,037 | |
| Long-term debt to affiliates | Long-term debt to affiliates | | 916 | | | 9,292 | | Long-term debt to affiliates | | 849 | | | 822 | |
| Total debt | Total debt | | 16,469 | | | 32,202 | | Total debt | | 16,938 | | | 16,428 | |
| Due to affiliates | Due to affiliates | | 3,414 | | | 2,133 | | Due to affiliates | | 3,342 | | | 4,344 | |
| Accrued interest and other liabilities | Accrued interest and other liabilities | | 331 | | | 435 | | Accrued interest and other liabilities | | 475 | | | 641 | |
| Total liabilities | Total liabilities | | $ | 20,214 | | | $ | 34,770 | | Total liabilities | | $ | 20,755 | | | $ | 21,413 | |
| Shareholder’s Equity | Shareholder’s Equity | | | | | Shareholder’s Equity | | | | |
Common stock, $0.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares as of September 30, 2020 and December 31, 2019 | | 0 | | | 0 | | |
Common stock, $0.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares as of March 31, 2021 and December 31, 2020 | | Common stock, $0.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares as of March 31, 2021 and December 31, 2020 | | 0 | | | 0 | |
| Additional paid-in capital | Additional paid-in capital | | 161 | | | 161 | | Additional paid-in capital | | 161 | | | 161 | |
| Retained earnings | Retained earnings | | 3,762 | | | 3,513 | | Retained earnings | | 3,973 | | | 3,833 | |
| Accumulated other comprehensive loss | | |
| Foreign currency translation adjustments, net of tax of: 2020, $66; 2019, $25 | | (1,155) | | | (1,087) | | |
| Total accumulated other comprehensive loss | | (1,155) | | | (1,087) | | |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | |
| Foreign currency translation adjustments, net of tax of: 2021, $7; 2020, $5 | | Foreign currency translation adjustments, net of tax of: 2021, $7; 2020, $5 | | (1,108) | | | (1,099) | |
| Total accumulated other comprehensive income (loss) | | Total accumulated other comprehensive income (loss) | | (1,108) | | | (1,099) | |
| Total shareholder’s equity | Total shareholder’s equity | | 2,768 | | | 2,587 | | Total shareholder’s equity | | 3,026 | | | 2,895 | |
| Total liabilities and shareholder’s equity | Total liabilities and shareholder’s equity | | $ | 22,982 | | | $ | 37,357 | | Total liabilities and shareholder’s equity | | $ | 23,781 | | | $ | 24,308 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30 (Millions) | | 2020 | | 2019 | |
Three Months Ended March 31 (Millions) | | Three Months Ended March 31 (Millions) | | 2021 | | 2020 |
| Cash Flows from Operating Activities | Cash Flows from Operating Activities | | | | | Cash Flows from Operating Activities | | | | |
| Net income | Net income | | $ | 130 | | | $ | 325 | | Net income | | $ | 140 | | | $ | 22 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |
| Provisions for credit losses | Provisions for credit losses | | 264 | | | 170 | | Provisions for credit losses | | (14) | | | 103 | |
| Amortization of underwriting expense | Amortization of underwriting expense | | 10 | | | 15 | | Amortization of underwriting expense | | 2 | | | 4 | |
| Deferred taxes | Deferred taxes | | (31) | | | 12 | | Deferred taxes | | 24 | | | (6) | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Interest, taxes and other amounts due to/from affiliates | Interest, taxes and other amounts due to/from affiliates | | (11) | | | 37 | | Interest, taxes and other amounts due to/from affiliates | | (11) | | | (4) | |
| Other operating assets and liabilities | Other operating assets and liabilities | | 428 | | | 484 | | Other operating assets and liabilities | | (305) | | | 108 | |
| Net cash provided by operating activities | | 790 | | | 1,043 | | |
| Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | | (164) | | | 227 | |
| Cash Flows from Investing Activities | Cash Flows from Investing Activities | | | | | Cash Flows from Investing Activities | | | | |
Net decrease (increase) in Card Member receivables and Card Member loans (a) | | 9,081 | | | (666) | | |
Net decrease in Card Member receivables and Card Member loans (a) | | Net decrease in Card Member receivables and Card Member loans (a) | | 640 | | | 10,640 | |
Net decrease (increase) in loans to affiliates and other (b)(a) | Net decrease (increase) in loans to affiliates and other (b)(a) | | 48 | | | (304) | | Net decrease (increase) in loans to affiliates and other (b)(a) | | 94 | | | (4,364) | |
| Net increase (decrease) in due to/from affiliates | | 1,854 | | | (155) | | |
| Net cash provided by (used in) investing activities | | 10,983 | | | (1,125) | | |
| Net (decrease) in due to affiliates and (increase) in due from affiliates | | Net (decrease) in due to affiliates and (increase) in due from affiliates | | (1,061) | | | (1,199) | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | (327) | | | 5,077 | |
| Cash Flows from Financing Activities | Cash Flows from Financing Activities | | | | | Cash Flows from Financing Activities | | | | |
| Net decrease in short-term debt | Net decrease in short-term debt | | (3,216) | | | (793) | | Net decrease in short-term debt | | 0 | | | (1,642) | |
| Net increase in short-term debt to affiliates | Net increase in short-term debt to affiliates | | 2,344 | | | 305 | | Net increase in short-term debt to affiliates | | 538 | | | 2,021 | |
| Principal payments of long-term debt | Principal payments of long-term debt | | (6,600) | | | (7,150) | | Principal payments of long-term debt | | 0 | | | (2,450) | |
| Proceeds from long-term debt to affiliates | Proceeds from long-term debt to affiliates | | 8,006 | | | 26,964 | | Proceeds from long-term debt to affiliates | | 41 | | | 8,006 | |
Principal payments of long-term debt to affiliates (b)(a) | Principal payments of long-term debt to affiliates (b)(a) | | (11,320) | | | (19,313) | | Principal payments of long-term debt to affiliates (b)(a) | | 0 | | | (11,235) | |
| Net cash (used in) provided by financing activities | | (10,786) | | | 13 | | |
| Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | | (3) | | | 3 | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 984 | | | (66) | | |
| Cash, cash equivalents and restricted cash at beginning of period | | 149 | | | 195 | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 1,133 | | | $ | 129 | | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 579 | | | (5,300) | |
| Effect of foreign currency exchange rates on cash and cash equivalents | | Effect of foreign currency exchange rates on cash and cash equivalents | | 3 | | | (10) | |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | 91 | | | (6) | |
| Cash and cash equivalents at beginning of period | | Cash and cash equivalents at beginning of period | | 601 | | | 149 | |
| Cash and cash equivalents at end of period | | Cash and cash equivalents at end of period | | $ | 692 | | | $ | 143 | |
| | Cash, cash equivalents and restricted cash reconciliation | Cash, cash equivalents and restricted cash reconciliation | | Sep-20 | | Dec-19 | | Sep-19 | | Dec-18 | Cash, cash equivalents and restricted cash reconciliation | | Mar-21 | | Dec-20 | | Mar-20 | | Dec-19 |
Cash and cash equivalents per Consolidated Balance Sheets (c) | Cash and cash equivalents per Consolidated Balance Sheets (c) | | $ | 1,019 | | | $ | 33 | | | $ | 33 | | | $ | 102 | | Cash and cash equivalents per Consolidated Balance Sheets (c) | | $ | 692 | | | $ | 601 | | | $ | 143 | | | $ | 149 | |
Restricted cash included in Other assets per Consolidated Balance Sheets (d) | | 114 | | | 116 | | | 96 | | | 93 | | |
| Total cash, cash equivalents and restricted cash | | $ | 1,133 | | | $ | 149 | | | $ | 129 | | | $ | 195 | | |
Restricted cash included in Cash and cash equivalents (b) | | Restricted cash included in Cash and cash equivalents (b) | | 66 | | | 120 | | | 108 | | | 116 | |
Total Cash and cash equivalents excluding restricted cash (c) | | Total Cash and cash equivalents excluding restricted cash (c) | | $ | 626 | | | $ | 481 | | | $ | 35 | | | $ | 33 | |
| | Supplemental cash flow information | Supplemental cash flow information | | 2020 | | 2019 | Supplemental cash flow information | | 2021 | | 2020 |
| Non-cash Investing activities | Non-cash Investing activities | | Non-cash Investing activities | |
Sales of U.S. Corporate Card Member receivables to TRS (a) | Sales of U.S. Corporate Card Member receivables to TRS (a) | | $ | 5,493 | | | $ | — | | Sales of U.S. Corporate Card Member receivables to TRS (a) | | $ | 0 | | | $ | 5,196 | |
Lending to American Express Company (a) | Lending to American Express Company (a) | | (416) | | | — | | Lending to American Express Company (a) | | 0 | | | (119) | |
Termination of intercompany loan agreement with American Express Limited and American Express International, Inc.(b) | | 0 | | | 5,109 | | |
| Non-cash Financing activities | Non-cash Financing activities | | Non-cash Financing activities | |
Settlement of borrowings with American Express Company (a)(b) | | $ | (5,077) | | | $ | (5,109) | | |
Settlement of borrowings with American Express Company (a) | | Settlement of borrowings with American Express Company (a) | | $ | 0 | | | $ | (5,077) | |
(a)Primarily driven by removal ofDuring the three months ended March 31, 2020, American Express Travel Related Services Company, Inc. (TRS) removed U.S. Consumer and Small Business Card Member receivables from the American Express Issuance Trust II (the Charge Trust) and replacement of the samesubstantially replaced them with U.S. Corporate Card Member receivables by American Express Travel Related Services Company, Inc. (TRS) during the three months ended March 31, 2020.receivables. To effect this change, on January 7, 2020, Credco sold $5.2 billion of U.S. Corporate Card Member receivables to TRS. Settlement of this transaction was undertaken through borrowings from American Express Company.
(b)As a result of funding structure changes in the ordinary course of business, Credco terminated the intercompany loan agreement with American Express Limited and American Express International, Inc. and settled the related borrowings from American Express Company during the nine months ended September 30, 2019.
(c)Primarily represents deposits with American Express National Bank (AENB). Refer to Note 1 for additional information.
(d)Represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.
(c)Primarily includes deposits with American Express National Bank (AENB).
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2020 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings |
| Balances as of June 30, 2020 | | $ | 2,732 | | | $ | 0 | | | $ | 161 | | | $ | (1,165) | | | $ | 3,736 | |
| Net income | | 26 | | | — | | | — | | | — | | | 26 | |
| Other comprehensive income | | 10 | | | — | | | — | | | 10 | | | — | |
| Balances as of September 30, 2020 | | $ | 2,768 | | | $ | 0 | | | $ | 161 | | | $ | (1,155) | | | $ | 3,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of December 31, 2020 | | $ | 2,895 | | | $ | 0 | | | $ | 161 | | | $ | (1,099) | | | $ | 3,833 | |
| Net income | | 140 | | | — | | | — | | | — | | | 140 | |
| Other comprehensive income (loss) | | (9) | | | — | | | — | | | (9) | | | |
| Balances as of March 31, 2021 | | $ | 3,026 | | | $ | 0 | | | $ | 161 | | | $ | (1,108) | | | $ | 3,973 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2020 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings |
| Balances as of December 31, 2019 | | $ | 2,587 | | | $ | 0 | | | $ | 161 | | | $ | (1,087) | | | $ | 3,513 | |
Cumulative effect of change in accounting principle - Reserve for Credit Losses (a) | | 119 | | | — | | | — | | | — | | | 119 | |
| Net income | | 130 | | | — | | | — | | | — | | | 130 | |
| Other comprehensive loss | | (68) | | | — | | | — | | | (68) | | | — | |
| Balances as of September 30, 2020 | | $ | 2,768 | | | $ | 0 | | | $ | 161 | | | $ | (1,155) | | | $ | 3,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2019 (Millions) | | Total | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings |
| Balances as of June 30, 2019 | | $ | 2,396 | | | $ | 0 | | | $ | 161 | | | $ | (1,075) | | | $ | 3,310 | |
| Net income | | 110 | | | — | | | — | | | — | | | 110 | |
| Other comprehensive loss | | (24) | | | — | | | — | | | (24) | | | — | |
| Balances as of September 30, 2019 | | $ | 2,482 | | | $ | 0 | | | $ | 161 | | | $ | (1,099) | | | $ | 3,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2019 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings |
| Balances as of December 31, 2018 | | $ | 2,196 | | | $ | 0 | | | $ | 161 | | | $ | (1,060) | | | $ | 3,095 | |
| Net income | | 325 | | | — | | | — | | | — | | | 325 | |
| Other comprehensive loss | | (39) | | | — | | | — | | | (39) | | | — | |
| Balances as of September 30, 2019 | | $ | 2,482 | | | $ | 0 | | | $ | 161 | | | $ | (1,099) | | | $ | 3,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of December 31, 2019 | | $ | 2,587 | | | $ | 0 | | | $ | 161 | | | $ | (1,087) | | | $ | 3,513 | |
Cumulative effect of change in accounting principle - Reserve for Credit Losses (a) | | 119 | | | | | | | | | 119 |
| Net income | | 22 | | | — | | | — | | | — | | | 22 | |
| Other comprehensive income (loss) | | (137) | | | — | | | — | | | (137) | | | — | |
| Balances as of March 31, 2020 | | $ | 2,591 | | | $ | 0 | | | $ | 161 | | | $ | (1,224) | | | $ | 3,654 | |
(a)Represents $140 million, net of tax of $21 million, related to the impact as of January 1, 2020, of adopting the new accounting guidanceCurrent Expected Credit Loss (CECL) Methodology for the recognition of credit losses on certain financial instruments.
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Company
American Express Credit Corporation (Credco) is a wholly owned subsidiary of TRS, which is a wholly owned subsidiary of American Express Company (American Express).
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Express charge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.
Credco executes material transactions with its affiliates. The agreements between Credco and its affiliates provide that the parties intend that the transactions thereunder be conducted on an arm’s-length basis; however, there canbasis and the price at which receivables are sold to Credco be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.at fair value.
Credco maintains its fixed charge coverage ratio (FCCR) at a minimum of 1.25, which1.25. The FCCR is achieved by charging appropriate discount rates on the purchase of receivables Credco makes from, and the interest rates on the loans Credco provides to, TRS and other American Express subsidiaries. Each monthly period, the discount and interest rates are determined to generate income for Credco that is sufficient to maintain its minimum FCCR, whilst maintainingcomplying with the parties’ intention for these transactions to occur on an arm’s-length basis. Should it be required, American ExpressTRS would provide Credco with financial support in the form of capital contributions with respect to maintenance of its 1.25 minimum FCCR.FCCR as required in its committed bank credit facility. The revenue earned by Credco from purchasing Card Member receivables and Card Member loans at a discount is reported as Discount revenue earned from purchased Card Member receivables and Card Member loans on the Consolidated Statements of Income.
The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Credco’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. If not materially different, certain note disclosures included therein have been omitted from these Consolidated Financial Statements.
The interim Consolidated Financial Statements included in this report have not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim Consolidated Financial Statements, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting estimates reflect the best judgment of management, but actual results could differ.
Recently Adopted Accounting Standards
Effective January 1, 2020, Credco adopted the new credit reserving methodology, applicable to certain financial instruments, known as the Current Expected Credit Loss (CECL) methodology under a modified retrospective transition. The CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. Upon implementation, Card Member receivable reserves decreased by $147 million and Card Member loan reserves increased by $7 million, along with the associated current and deferred tax impact of $21 million, and cumulative effect adjustment to the opening balance of retained earnings, net of tax, of $119 million. There were no material changes to Credco’s business processes or internal controls as a result of adopting the new guidance. Refer to Note 3 for additional information on how management estimates reserves for credit losses in accordance with CECL methodology.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Information
Effective February 1, 2020, TRS removed U.S. Consumer and Small Business Card Member receivables from the Charge Trust and substantially replaced them with U.S. Corporate Card Member receivables in two phases. On February 1, 2020 and April 20, 2020, TRS transferred $5.2 billion and $1.7 billion, respectively, of U.S. Corporate Card Member receivables to the Charge Trust. Since Credco maintains participation interests in the Charge Trust, these transactions resulted in Credco (i) no longer having a $7.2 billion interest in U.S. Consumer and Small Business Card Member receivables and (ii) having an interest in the U.S. Corporate Card Member receivables in the Charge Trust. The settlement of $7.2 billion related to the U.S. Consumer and Small Business portfolio was used to repay borrowings from American Express Company leading to a reduction in Long-term debt to affiliates of $7.2 billion.
In the month of June 2020, Credco restructured a number of its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Credco borrowed $7.1 billion from TRS to repay borrowings from AE Exposure Management Limited of $4.7 billion. The excess of $2.2 billion was deposited with AENB, which was reported as part of Cash and cash equivalents as of June 30, 2020. During the third quarter, amounts were withdrawn from AENB to meet business funding requirements resulting in $1.0 billion in deposits remaining with AENB as of September 30, 2020.
2. Card Member Receivables and Card Member Loans
American Express’ charge and lending payment card products result in the generation of Card Member receivables and Card Member loans. Reserves for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
Card Member receivables as of September 30, 2020March 31, 2021 and December 31, 20192020 consisted of:
| | (Millions) | (Millions) | | 2020 | | 2019 | (Millions) | | 2021 | | 2020 |
Global Consumer Services Group (b)(a) | Global Consumer Services Group (b)(a) | | $ | 1,733 | | | $ | 9,847 | | Global Consumer Services Group (b)(a) | | $ | 1,889 | | | $ | 2,157 | |
Global Commercial Services (b) | Global Commercial Services (b) | | 9,254 | | | 15,710 | | Global Commercial Services (b) | | 9,656 | | | 10,000 | |
Card Member receivables (c)(b) | Card Member receivables (c)(b) | | 10,987 | | | 25,557 | | Card Member receivables (c)(b) | | 11,545 | | | 12,157 | |
| Less: Reserve for credit losses | | 110 | | | 162 | | |
| Less: Reserves for credit losses | | Less: Reserves for credit losses | | 30 | | | 70 | |
Card Member receivables, net (d)(c) | Card Member receivables, net (d)(c) | | $ | 10,877 | | | $ | 25,395 | | Card Member receivables, net (d)(c) | | $ | 11,515 | | | $ | 12,087 | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a)Comprised of International Consumer Services as of September 30, 2020 and U.S. and International Consumer Services as of December 31, 2019.Services.
(b)During the three months ended March 31, 2020, $7.2 billion of U.S. Consumer and Small Business Card Member receivables were transferred out of the Charge Trust resulting in a reduction of the same amount in Credco’s participation interest in such receivables. Refer to Note 1 for additional information.
(c)Net of deferred discount revenue totaling $53$21 million and $75$19 million as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
(d)(c)Card Member receivables modified in a troubled debt restructuring (TDR) program were immaterial.
Card Member loans as of September 30, 2020March 31, 2021 and December 31, 20192020 consisted of:
| | (Millions) | (Millions) | | 2020 | | 2019 | (Millions) | | 2021 | | 2020 |
Global Consumer Services Group (a) | Global Consumer Services Group (a) | | $ | 453 | | | $ | 697 | | Global Consumer Services Group (a) | | $ | 459 | | | $ | 500 | |
| Less: Reserve for credit losses | | 22 | | | 10 | | |
| Less: Reserves for credit losses | | Less: Reserves for credit losses | | 24 | | | 20 | |
Card Member loans, net (b) | Card Member loans, net (b) | | $ | 431 | | | $ | 687 | | Card Member loans, net (b) | | $ | 435 | | | $ | 480 | |
(a)Comprised of International Consumer Services.
(b)Card Member loans modified in a TDR program were immaterial.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Card Member Receivables and Card Member Loans Aging
Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member receivables and Card Member loans as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
| 2020 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total | |
2021 (Millions) | | 2021 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total |
| Card Member Receivables: | Card Member Receivables: | | | | | | | | | | | Card Member Receivables: | | | | | | | | | | |
| Global Consumer Services Group | Global Consumer Services Group | | $ | 1,714 | | | $ | 7 | | | $ | 4 | | | $ | 8 | | | $ | 1,733 | | Global Consumer Services Group | | $ | 1,872 | | | $ | 6 | | | $ | 3 | | | $ | 8 | | | $ | 1,889 | |
| Global Commercial Services | Global Commercial Services | | Global Commercial Services | |
| Global Small Business Services | Global Small Business Services | | 913 | | | 5 | | | 2 | | | 3 | | | 923 | | Global Small Business Services | | 970 | | | 3 | | | 1 | | | 4 | | | 978 | |
Global Corporate Payments (a) | Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 53 | | | 8,331 | | Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 27 | | | 8,678 | |
| Card Member Loans: | Card Member Loans: | | Card Member Loans: | |
| Global Consumer Services Group | Global Consumer Services Group | | $ | 445 | | | $ | 2 | | | $ | 1 | | | $ | 5 | | | $ | 453 | | Global Consumer Services Group | | $ | 452 | | | $ | 2 | | | $ | 2 | | | $ | 3 | | | $ | 459 | |
| 2019 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total | |
2020 (Millions) | | 2020 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total |
| Card Member Receivables: | Card Member Receivables: | | | | | | | | | | | Card Member Receivables: | | | | | | | | | | |
| Global Consumer Services Group | Global Consumer Services Group | | $ | 9,766 | | | $ | 29 | | | $ | 16 | | | $ | 36 | | | $ | 9,847 | | Global Consumer Services Group | | $ | 2,139 | | | $ | 5 | | | $ | 4 | | | $ | 9 | | | $ | 2,157 | |
| Global Commercial Services | Global Commercial Services | | Global Commercial Services | |
| Global Small Business Services | Global Small Business Services | | 1,996 | | | 10 | | | 5 | | | 9 | | | 2,020 | | Global Small Business Services | | 1,047 | | | 3 | | | 2 | | | 5 | | | 1,057 | |
Global Corporate Payments (a) | Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 105 | | | 13,690 | | Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 32 | | | 8,943 | |
| Card Member Loans: | Card Member Loans: | | Card Member Loans: | |
| Global Consumer Services Group | Global Consumer Services Group | | $ | 689 | | | $ | 3 | | | $ | 2 | | | $ | 3 | | | $ | 697 | | Global Consumer Services Group | | $ | 493 | | | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 500 | |
(a)Global Corporate Payments (GCP) reflects global, large and middle market corporate accounts. Delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if collection procedures are initiated on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes. See also (b).
(b)Delinquency data for periods other than 90+ days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.
Credit Quality Indicators for Card Member Receivables and Card Member Loans
The following tables present the key credit quality indicators as of or for the nine months ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total | | Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total |
| Card Member Receivables: | | | | | | | | |
| Global Consumer Services Group | | 1.62 | % | | 1.10 | % | | 1.04 | % | | 0.94 | % |
| Global Small Business Services | | 2.14 | % | | 1.08 | % | | 1.31 | % | | 1.18 | % |
| Global Corporate Payments | | 1.49 | % | | (b) | | (c) | | (b) |
| Card Member Loans: | | | | | | | | |
| Global Consumer Services Group | | 2.66 | % | | 1.77 | % | | 1.44 | % | | 0.93 | % |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the key credit quality indicators as of or for the three months ended March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total | | Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total |
| Card Member Receivables: | | | | | | | | |
| Global Consumer Services Group | | 0.86 | % | | 0.90 | % | | 1.11 | % | | 1.65 | % |
| Global Small Business Services | | 1.57 | % | | 0.82 | % | | 1.60 | % | | 1.66 | % |
| Global Corporate Payments | | 0.41 | % | | (b) | | 0.97 | % | | (b) |
| Card Member Loans: | | | | | | | | |
| Global Consumer Services Group | | 3.46 | % | | 1.53 | % | | 1.78 | % | | 1.49 | % |
(a)Represents the amount of Card Member receivables or Card Member loans owned by Credco that are written off, net of recoveries, expressed as a percentage of the average Card Member receivable or Card Member loan balances in each of the periods indicated.
(b)For GCP Card Member receivables, delinquency data is tracked based on days past billing status rather than days past due. Delinquency data for periods other than 90+ days past billing is not available due to system constraints. 90+ Days Past Billing as a % of total is 0.64%0.31% and 0.66% for the nine months ended September 30,1.66% as of March 31, 2021 and 2020, and 2019, respectively.
(c)Net loss ratio was the credit quality indicator for GCP Card Member receivables for prior periods, and represents the amount of Card Member receivables owned by Credco that are written off, net of recoveries, expressed as a percentage of the volume of Card Member receivables purchased by Credco. The net loss ratio for the nine months ended September 30, 2019 was 0.06%.
Refer to Note 3 for additional indicators, including external environmental qualitative factors, American Express considers in its evaluation process for reserves for credit losses.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Reserves for Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and Card Member loans, including those purchased by Credco. Reserves for credit losses represent management’sCredco’s best estimate of the expected credit losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires Credco’s management to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period), which is approximately three years, beyond the balance sheet date. American Express makes various judgments combined with historical loss experience to calculatedetermine a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses.
American Express uses a combination of statistically-based models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key models: Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses using its historicalby immediately reverting to long-term average loss rates.
•PD models are used to estimate the likelihood an account will be written-off.
•EAD models are used to estimate the balance of an account at the time of write-off. This includes balances less expected repayments based on historical payment and revolve behavior, which vary by customer. Due to the nature of revolving loan portfolios, the EAD models are complex and involve assumptions regarding the relationship between future spend and payment behaviors.
•Recovery models are used to estimate amounts that are expected to be received from Card Members after default occurs, typically as a result of collection efforts. Future recoveries are estimated taking into consideration the time of default, time elapsed since default and macroeconomic conditions.
American Express also estimates the likelihood and magnitude of recovery of previously written off accounts considering how long ago the account was written off and future economic conditions. American Express models are developed using historical loss experience covering the economic cycle and consider the impact of account characteristics on expected losses.
Future economic conditions that are incorporated over the R&S Period include multiple macroeconomic scenarios provided to American Express by an independent third party. American Express reviews these economic scenarios quarterly and uses theirapplies judgment to weight them in order to reflect the uncertainty surrounding these scenarios. These macroeconomic scenarios contain certain variables, including unemployment rates and real gross domestic product (GDP), that are significant to American Express’ models.
American Express also evaluates whether to include qualitative reserves to cover losses that are expected but, in its assessment, may not be adequately represented in the quantitative methods or the economic assumptions. American Express considers whether to adjust the quantitative reserves (higher or lower) to address possible limitations within the models or factors not included within the models, such as external conditions, emerging portfolio trends, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due accounts, or managementAmerican Express’ risk actions.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lifetime losses for most of Credco’s Card Member receivables and Card Member loans are evaluated at an appropriate level of granularity, including assessment on a pooled basis where financial assets share similar risk characteristics, such as past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credit losses on accrued interest are measured and presented as part of Reserves for credit losses on the Consolidated Balance Sheets and within the Provisions for credit losses in the Consolidated Statements of Income, rather than reversing interest income.
Card Member receivable and Card Member loan balances are written off when American Express considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due for pay in full or revolving loans. Card Member receivables and Card Member loans in bankruptcy or owed by deceased individuals are generally written off upon notification.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reflects the range of macroeconomic scenario key variables used in conjunction with other inputs, to calculate reserves for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continuescredit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Unemployment Rate | | U.S. GDP Growth (Contraction) (a) |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 |
| First quarter of 2021 | | 6% | | 7% - 8% | | 3% | | 4% - (5)% |
| Fourth quarter of 2021 | | 6% - 9% | | 7% - 11% | | 6% - (2)% | | 6% - (2)% |
| Fourth quarter of 2022 | | 4% - 11% | | 6% - 12% | | 4% - 2% | | 4% - 3% |
| Fourth quarter of 2023 | | 4% - 10% | | 4% - 10% | | 5% - 2% | | 5% - 3% |
(a) Real GDP quarter over quarter percentage change seasonally adjusted to be reported in accordance with the incurred loss methodology in effect for prior periods.annualized rates.
Changes in Card Member Receivables Reserve for Credit Losses
Card Member receivables reserve for credit losses decreased for the three months ended September 30, 2020, primarilyMarch 31, 2021, driven by improving macroeconomic indicators including unemployment and GDP, as well as improved credit performance.
Card Member receivables reserve for credit losses increased for the ninethree months ended September 30,March 31, 2020, primarily driven by the deterioration of the global macroeconomic outlook, including unemployment and Gross Domestic Product (GDP), partially offset byGDP, as a decline in outstanding balances.result of the onset of the COVID-19 pandemic.
The following table presents changes in the Card Member receivables reserve for credit losses for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Beginning Balance (a) | | $ | 184 | | | $ | 172 | | | $ | 15 | | | $ | 167 | |
Provisions (b) | | (16) | | | 52 | | | 248 | | | 160 | |
Net write-offs (c) | | (59) | | | (55) | | | (160) | | | (166) | |
Other adjustments (d) | | 1 | | | (1) | | | 7 | | | 7 | |
| Ending Balance | | $ | 110 | | | $ | 168 | | | $ | 110 | | | $ | 168 | |
| | | | | | | | | | | | | | |
| (Millions) | | 2021 | 2020 | |
| Beginning Balance | | $ | 70 | | $ | 15 | | |
Provisions (a) | | (22) | | 100 | | |
Net write-offs (b) | | (18) | | (50) | | |
Other adjustments (c) | | 0 | | 4 | | |
| Ending Balance | | $ | 30 | | $ | 69 | | |
(a)For the nine months ended September 30, 2020, beginning balance includes a decrease of $147 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)(b)Net of recoveries of $21 million and $30$24 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively and $59 million and $94 million for the nine months ended September 30, 2020 and 2019, respectively.
(d)(c)For the three months ended September 30, 2020 and 2019, primarily includes foreign currency translation adjustments. For the nine months ended September 30,March 31, 2020, primarily includes reserve adjustments related to the removal of U.S. Consumer and Small Business Card Member receivables of $7.2 billion from the Charge Trust and forTrust. For all the nine months ended September 30, 2019, primarilyyears presented, also includes reserve balances related to new groups of, and participation interests in, Card Member receivables purchased from affiliates, totaling $2.7 billion and participation interests in Card Member receivables sold to an affiliate totaling $1.1 billion.foreign currency translation adjustments.
Changes in Card Member Loans Reserve for Credit Losses
Card Member loans reserve for credit losses remained flatincreased for the three months ended September 30, 2020.March 31, 2021, primarily driven by deterioration of credit performance.
The following table presents changes in the Card Member loans reserve for credit losses increased for the ninethree months ended September 30,March 31:
| | | | | | | | | | | | | | | | | |
| (Millions) | | 2021 | | 2020 | |
| Beginning Balance | | $ | 20 | | | $ | 17 | | |
Provisions (a) | | 8 | | | 3 | | |
Net write-offs (b) | | (4) | | | (2) | | |
| Ending Balance | | $ | 24 | | | $ | 18 | | |
(a)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(b)Net of recoveries of $0.7 million and $0.5 million for the three months ended March 31, 2021 and 2020, primarily driven by deterioration of the global macroeconomic outlook, including unemployment and GDP, and changes in portfolio mix, partially offset by a decline in outstanding balances.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in the Card Member loans reserve for credit losses for the three and nine months ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Beginning Balance (a) | | $ | 23 | | | $ | 7 | | | $ | 17 | | | $ | 5 | |
Provisions (b) | | 4 | | | 4 | | | 16 | | | 10 | |
Net write-offs (c) | | (5) | | | (3) | | | (11) | | | (7) | |
| Ending Balance | | $ | 22 | | | $ | 8 | | | $ | 22 | | | $ | 8 | |
(a)For the nine months ended September 30, 2020, beginning balance includes an increase of $7 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)Net of recoveries of $0.6 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively and $2.0 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively.
4. Derivatives and Hedging Activities
Credco uses derivative financial instruments to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates and foreign exchange rates, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of Credco’s market risk management. Credco does not transact in derivatives for trading purposes.
A majority of Credco’s derivative assets and liabilities as of March 31, 2021 and December 31, 2020 are subject to master netting agreements with its derivative counterparties. Accordingly, where appropriate, Credco has elected to present derivative assets and liabilities with the same counterparty on a net basis in the Consolidated Balance Sheets.
In relation to Credco’s credit risk, certain of Credco’s bilateral derivative agreements include provisions that allow Credco or the counterpartyCredco’s counterparties to terminate the agreement and settle the fair value of existing positions in the event of a downgrade of one’s partyCredco’s debt credit rating below investment grade.grade and settle the outstanding net liability position. As of September 30, 2020,March 31, 2021, these derivatives were not in a significantmaterial net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties and its own credit risk as of September 30, 2020March 31, 2021 and December 31, 2019,2020, no credit risk adjustment to the derivative portfolio was required.
A majority of Credco’s derivative assets and liabilities as of September 30, 2020 and December 31, 2019 are subject to master netting agreements with its derivative counterparties. Credco presents derivative assets and liabilities subject to enforceable netting arrangements with the same counterparty on a net basis on the Consolidated Balance Sheets.
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Assets | | Other Liabilities |
| | Fair Value | | Fair Value |
| (Millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Derivatives designated as hedging instruments: | | | | | | | | |
Fair value hedges - Interest rate contracts (a)(b) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net investment hedges - Foreign exchange contracts | | 43 | | | 12 | | | 60 | | | 44 | |
| Total derivatives designated as hedging instruments | | 43 | | | 12 | | | 60 | | | 44 | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Foreign exchange contracts | | 62 | | | 31 | | | 39 | | | 182 | |
| Total derivatives, gross | | 105 | | | 43 | | | 99 | | | 226 | |
Derivative asset and derivative liability netting (c) | | (36) | | | (27) | | | (36) | | | (27) | |
| Total derivatives, net | | $ | 69 | | | $ | 16 | | | $ | 63 | | | $ | 199 | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Assets | | Other Liabilities |
| | Fair Value | | Fair Value |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Derivatives designated as hedging instruments: | | | | | | | | |
Fair value hedges - Interest rate contracts (a) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net investment hedges - Foreign exchange contracts | | 35 | | | 1 | | | 25 | | | 195 | |
| Total derivatives designated as hedging instruments | | 35 | | | 1 | | | 25 | | | 195 | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Foreign exchange contracts | | 25 | | | 48 | | | 78 | | | 89 | |
| Total derivatives, gross | | 60 | | | 49 | | | 103 | | | 284 | |
Derivative asset and derivative liability netting (b) | | (20) | | | (15) | | | (20) | | | (15) | |
| Total derivatives, net | | $ | 40 | | | $ | 34 | | | $ | 83 | | | $ | 269 | |
(a)For Credco’s centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.
(b)Credco posted $17 million and $20 million as of September 30, 2020 and December 31, 2019, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets on Credco’s Consolidated Balance Sheets and are not netted against the derivative balances.
(c)Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparties under an enforceable master netting arrangement.
Credco posted $8 million and $12 million as of March 31, 2021 and December 31, 2020, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets in Credco’s Consolidated Balance Sheets and are not netted against the derivative balances.
Fair Value Hedges
Credco is exposed to interest rate risk associated with its fixed-rate debt obligations. At the time of issuance, certain fixed-rate long-term debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. Credco hashad $3.5 billion and $8.8 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of September 30, 2020both March 31, 2021 and December 31, 2019, respectively.2020.
The following table presents the gains and losses recognized in Interest expense onin the Consolidated Statements of Income associated with the fair value hedges of Credco’s fixed-rate long-term debt for the three and nine months ended September 30:March 31:
| | | Gains (losses) | | Gains (losses) |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | Three Months Ended
March 31, | |
| (Millions) | (Millions) | | 2020 | | 2019 | | 2020 | | 2019 | (Millions) | | 2021 | | 2020 | |
| Fixed-rate long-term debt | Fixed-rate long-term debt | | $ | 12 | | | $ | (22) | | | $ | (54) | | | $ | (177) | | Fixed-rate long-term debt | | $ | 11 | | | $ | (66) | | |
| Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | (15) | | | 26 | | | 57 | | | 183 | | Derivatives designated as hedging instruments | | (12) | | | 79 | | |
| Total | Total | | $ | (3) | | | $ | 4 | | | $ | 3 | | | $ | 6 | | Total | | $ | (1) | | | $ | 13 | | |
The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $3.5 billion and $8.7 billion as of September 30, 2020both March 31, 2021 and December 31, 2019, respectively,2020, including the cumulative amount of fair value hedging adjustments of $52$29 million and $(2)$40 million for the respective periods.
Credco recognized a net decrease of $15$12 million and a net increase of $21$2 million in Interest expense on long-termLong-term debt for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and a net decrease of $27 million and a net increase of $81 million for the nine months ended September 30, 2020 and 2019, respectively, primarily related to the net settlements (interest(including interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Investment Hedges
Credco primarily designates foreign currency derivatives as net investment hedges to reduce its exposure to changes in currency exchange rates on its investments in non-U.S. subsidiaries. Credco had notional amounts of approximately $2.9$3.1 billion and $3.0$2.9 billion of foreign currency derivatives designated as net investment hedges as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was a losswere gains of $59$6 million and a gain of $50$346 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and gains of $71 million and $29 million for the nine months ended September 30, 2020 and 2019, respectively.
Derivatives Not Designated as Hedges
The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in a net gainsloss of $1 million and $20a net gain of $11 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $17 million and $69 million for the nine months ended September 30, 2020 and 2019, respectively, that are recognized in Other, net expenses onin the Consolidated Statements of Income.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Fair Values
Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes Credco’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s fair value hierarchy as Level 2, as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | (Millions) | (Millions) | | 2020 | | 2019 | | (Millions) | | 2021 | | 2020 | |
| Assets: | Assets: | | | Assets: | | |
Derivatives, gross (a) | Derivatives, gross (a) | | $ | 105 | | | $ | 43 | | | Derivatives, gross (a) | | $ | 60 | | | $ | 49 | | |
| Total Assets | Total Assets | | 105 | | | 43 | | | Total Assets | | 60 | | | 49 | | |
| Liabilities: | Liabilities: | | | | | | Liabilities: | | | | | |
Derivatives, gross (a) | Derivatives, gross (a) | | 99 | | | 226 | | | Derivatives, gross (a) | | 103 | | | 284 | | |
| Total Liabilities | Total Liabilities | | $ | 99 | | | $ | 226 | | | Total Liabilities | | $ | 103 | | | $ | 284 | | |
(a)Refer to Note 4 for the fair values of derivative assets and liabilities, on a further disaggregated basis.
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
The following table summarizes the estimated fair values of Credco’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of September 30, 2020March 31, 2021 and December 31, 2019.2020. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of September 30, 2020March 31, 2021 and December 31, 2019,2020 and require management’sCredco’s judgment. These figures may not be indicative of future fair values, nor can the fair value of Credco be estimated by aggregating the amounts presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Value | | Corresponding Fair Value Amount |
2020 (Billions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | | | | |
| Financial assets for which carrying values | | | | | | | | | | |
| equal or approximate fair value | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 1.0 | | | $ | 1.0 | | | $ | 1.0 | | | $ | 0 | | | $ | 0 | |
Other financial assets (b) | | 11.1 | | | 11.1 | | | 0.1 | | | 11.0 | | | 0 | |
| Financial assets carried at other than fair value | | | | | | | | | | |
| Card Member loans, less reserves for credit losses | | 0.4 | | | 0.4 | | | 0 | | | 0 | | | 0.4 | |
| Loans to affiliates and other | | 10.4 | | | 10.5 | | | 0 | | | 5.2 | | | 5.3 | |
| Financial Liabilities: | | | | | | | | | | |
| Financial liabilities for which carrying values equal | | | | | | | | | | |
| or approximate fair value | | 11.6 | | | 11.6 | | | 0 | | | 11.6 | | | 0 | |
| Financial liabilities carried at other than fair value | | | | | | | | | | |
| Long-term debt | | 7.0 | | | 7.3 | | | 0 | | | 7.3 | | | 0 | |
| Long-term debt to affiliates | | $ | 0.9 | | | $ | 0.9 | | | $ | 0 | | | $ | 0.9 | | | $ | 0 | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | Carrying
Value | | Corresponding Fair Value Amount | | Carrying
Value | | Corresponding Fair Value Amount |
2019 (Billions) | | Total | | Level 1 | | Level 2 | | Level 3 | |
2021 (Billions) | | 2021 (Billions) | | Carrying
Value | | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | Financial Assets: | | | | | | | | | | | Financial Assets: | | | | | | | | |
| Financial assets for which carrying values | Financial assets for which carrying values | | Financial assets for which carrying values | |
| equal or approximate fair value | equal or approximate fair value | | equal or approximate fair value | |
Cash and cash equivalents (a) | Cash and cash equivalents (a) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Cash and cash equivalents (a) | | $ | 0.7 | | | $ | 0.7 | | | $ | 0.7 | | | $ | 0 | | | $ | 0 | |
Other financial assets (b) | Other financial assets (b) | | 26.3 | | | 26.3 | | | 0.1 | | | 26.2 | | | 0 | | Other financial assets (b) | | 11.6 | | | 11.6 | | | 0 | | | 11.6 | | | 0 | |
| Financial assets carried at other than fair value | Financial assets carried at other than fair value | | Financial assets carried at other than fair value | |
| Card Member loans, less reserves for credit losses | Card Member loans, less reserves for credit losses | | 0.7 | | | 0.7 | | | 0 | | | 0 | | | 0.7 | | Card Member loans, less reserves for credit losses | | 0.4 | | | 0.5 | | | 0 | | | 0 | | | 0.5 | |
| Loans to affiliates and other | Loans to affiliates and other | | 10.3 | | | 10.4 | | | 0 | | | 2.8 | | | 7.6 | | Loans to affiliates and other | | 10.9 | | | 11.1 | | | 0 | | | 5.5 | | | 5.6 | |
| Financial Liabilities: | Financial Liabilities: | | Financial Liabilities: | |
| Financial liabilities for which carrying values equal | Financial liabilities for which carrying values equal | | Financial liabilities for which carrying values equal | |
| or approximate fair value | or approximate fair value | | 11.2 | | | 11.2 | | | 0 | | | 11.2 | | | 0 | | or approximate fair value | | 12.1 | | | 12.1 | | | 0 | | | 12.1 | | | 0 | |
| Financial liabilities carried at other than fair value | Financial liabilities carried at other than fair value | | Financial liabilities carried at other than fair value | |
| Long-term debt | Long-term debt | | 13.5 | | | 13.7 | | | 0 | | | 13.7 | | | 0 | | Long-term debt | | 7.0 | | | 7.3 | | | 0 | | | 7.3 | | | 0 | |
| Long-term debt to affiliates | Long-term debt to affiliates | | $ | 9.3 | | | $ | 9.4 | | | $ | 0 | | | $ | 9.4 | | | $ | 0 | | Long-term debt to affiliates | | $ | 0.8 | | | $ | 0.9 | | | $ | 0 | | | $ | 0.9 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Value | | Corresponding Fair Value Amount |
2020 (Billions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | | | | |
| Financial assets for which carrying values | | | | | | | | |
| equal or approximate fair value | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 0 | | | $ | 0 | |
Other financial assets (b) | | 12.1 | | | 12.1 | | | 0 | | | 12.1 | | | 0 | |
| Financial assets carried at other than fair value | | | | | | | | | | |
| Card Member loans, less reserves for credit losses | | 0.5 | | | 0.5 | | | 0 | | | 0 | | | 0.5 | |
| Loans to affiliates and other | | 10.9 | | | 11.1 | | | 0 | | | 5.0 | | | 6.1 | |
| Financial Liabilities: | | | | | | | | | | |
| Financial liabilities for which carrying values equal | | | | | | | | | | |
| or approximate fair value | | 12.6 | | | 12.6 | | | 0 | | | 12.6 | | | 0 | |
| Financial liabilities carried at other than fair value | | | | | | | | | | |
| Long-term debt | | 7.0 | | | 7.4 | | | 0 | | | 7.4 | | | 0 | |
| Long-term debt to affiliates | | $ | 0.8 | | | $ | 0.8 | | | $ | 0 | | | $ | 0.8 | | | $ | 0 | |
(a)Amounts reflect interest-bearing deposits. Refer to Note 1 for additional information.deposits and interest-bearing restricted cash.
(b)Level 1 amounts reflect interest-bearing restricted cash and Level 2 fair value amounts primarily reflect Card Member receivables.
Nonrecurring Fair Value Measurements
During the ninethree months ended September 30, 2020March 31, 2021 and the year ended December 31, 2019,2020, Credco did 0t have any assets that were measured at fair value due to impairment on a nonrecurring basis.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Changes inIn Accumulated Other Comprehensive Income (Loss)
AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in Foreign Currency Translation Adjustments for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 were as follows:
| | | | | | | | |
Three Months Ended September 30, 2020 March 31, 2021 (Millions), net of tax | | Foreign Currency
Translation Adjustment Gains (Losses) |
Balances as of June 30,December 31, 2020 | | $ | (1,165)(1,099) | |
Net translation gains ofon investments in foreign operations | | 69(15) | |
Net losses related to hedges of investments in foreign operations | | (59)6 | |
Net change in accumulated other comprehensive lossincome (loss) | | 10(9) | |
Balances as of September 30, 2020March 31, 2021 | | $ | (1,155)(1,108) | |
| | | | | | | | |
NineThree Months Ended September 30,March 31, 2020 (Millions), net of tax
| | Foreign Currency
Translation Adjustment Gains (Losses) |
| Balances as of December 31, 2019 | | $ | (1,087) | |
Net translation losses ofon investments in foreign operations | | (139)(483) | |
Net gains related to hedges of investments in foreign operations | | 71346 | |
Net change in accumulated other comprehensive lossincome (loss) | | (68)(137) | |
Balances as of September 30,March 31, 2020 | | $ | (1,155)(1,224) | |
| | | | | | | | |
Three Months Ended September 30, 2019 (Millions), net of tax
| | Foreign Currency Translation Adjustment Gains (Losses) |
Balances as of June 30, 2019 | | $ | (1,075) | |
Net translation losses of investments in foreign operations | | (74) | |
Net gains related to hedges of investments in foreign operations | | 50 | |
Net change in accumulated other comprehensive loss | | (24) | |
Balances as of September 30, 2019 | | $ | (1,099) | |
The following table shows the tax impact for the three months ended March 31 for the changes in Foreign Currency Translation Adjustments presented above:
| | | | | | | | | | | | | | |
| | Tax expense |
| | Three Months Ended
March 31, |
| (Millions) | | 2021 | | 2020 |
| Net translation on investments in foreign operations | | $ | 0 | | | $ | 20 | |
| Net hedges of investments in foreign operations | | 2 | | | 109 | |
| Total tax impact | | $ | 2 | | | $ | 129 | |
| | | | | | | | |
Nine Months Ended September 30, 2019 (Millions), net of tax
| | Foreign Currency
Translation Adjustment Gains (Losses) |
Balances as of December 31, 2018 | | $ | (1,060) | |
Net translation losses of investments in foreign operations | | (68) | |
Net gains related to hedges of investments in foreign operations | | 29 | |
Net change in accumulated other comprehensive loss | | (39) | |
Balances as of September 30, 2019 | | $ | (1,099) | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows the tax impact for the three and nine months ended September 30 for the changes in Foreign Currency Translation Adjustments presented above:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tax expense (benefit) |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (Millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Net translation on investments in foreign operations | | $ | (1) | | | $ | (1) | | | $ | 19 | | | $ | 2 | |
| Net hedges of investments in foreign operations | | (19) | | | 15 | | | 22 | | | 9 | |
| Total tax impact | | $ | (20) | | | $ | 14 | | | $ | 41 | | | $ | 11 | |
NaN amounts were reclassified out of AOCI into the Consolidated Statements of Income associated with the sale or liquidation of a business for the three and nine months ended September 30, 2020 and 2019.
7. Income Taxes
The results of operations of Credco are included in the consolidated U.S. federal income tax returnsreturn of American Express. Under an agreement with American Express, the provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.
The effective tax rate was 43.513.0 percent and 16.047.6 percent for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and 35.6 percent and 14.5 percent for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate for the three month perioddecrease primarily reflected changes in the level and geographic mixprior period impact of pretax income. The increase in the effective tax rate for the nine month period primarily reflected aan $18 million discrete tax charge of $33 million related to the attribution and taxation of income to jurisdictions outside the U.S, as well as changesU.S. The tax rate in each of the level and geographic mixperiods also reflected the favorable impact of pretax income.Credco's ongoing funding activities outside the United States.
Credco’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to volatility in certain components of revenues and expenses that prevents Credco from projecting a reliable estimate of full year pretax income. A discrete calculation of the provision for income taxes is recorded for each interim period.
Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. Credco is currently under examination by the IRS for the 2017 and 2018 tax years.
Credco believes it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within the next 12 months, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. The resolution of such items would not have a material impact on Credco’s effective tax rate.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ITEM 4. CONTROLS AND PROCEDURES
Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in Credco’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Credco’s management, including Credco’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in Credco’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during Credco’sthe fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a discussion of Credco’s risk factors, see Part I, Item 1A. “Risk Factors” of Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Form 10-K) and Part II, Item 1A. “Risk Factors” of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the First Quarter2020 Form 10-Q)10-K). The information included in the “Risk Factors” section of the First Quarter Form 10-Q is incorporated by reference herein. The risks and uncertainties that Credco faces are not limited to those set forth in the 20192020 Form 10-K, as supplemented and updated in the First Quarter Form 10-Q.10-K. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect its business, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment and stimulus measures, continued outbreaks and increasing rates of infection, and the related impacts to economic and operating conditions.
ITEM 5. OTHER INFORMATION
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the Exchange Act), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
In 2020, American Express became aware of credit card accounts opened with American Express International, Inc. (Hong Kong branch) by the Acting Consul General of the Iranian Consulate in Hong Kong, and his predecessor, the now-former Consul General. American Express believes these cards were used only for personal expenses. The Acting Consul General had two cards, both of which were opened in 2018 and one of which was closed by client request on or about April 3, 2019, and the other of which was cancelled by American Express on or about June 16, 2020. The former Consul General’s card was issued in January 2019 and cancelled by American Express on or about March 13, 2019.American Express had negligible gross revenues and net profits attributable to these accounts.As all of the accounts were cancelled, American Express does not intend to continue to engage in this activity.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report:
| | | | | | | | | | | | | | |
| Exhibit No. | | Description | | How Filed |
| | | | | | | | | | | | | | |
| 31.1 | | | | Electronically filed herewith. |
| 31.2 | | | | Electronically filed herewith. |
| 32.1 | | | | Electronically filed herewith. |
| 32.2 | | | | Electronically filed herewith. |
| 101.INS | | XBRL Instance Document -The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Electronically filed herewith. |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Electronically filed herewith. |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Electronically filed herewith. |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Electronically filed herewith. |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Electronically filed herewith. |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | Electronically filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION
(Registrant)
| | | | | | | | | | | |
| | | |
Date: November 5, 2020May 6, 2021 | | By | /s/ David L. Yowan |
| | | David L. Yowan |
| | | Chief Executive Officer |
| | | |
Date: November 5, 2020May 6, 2021 | | By | /s/ Leah A. Schweller |
| | | Leah A. Schweller |
| | | Chief Accounting Officer |