UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,

WASHINGTON, D.C. 20549

FORM 10-Q

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedQuarterly Period Ended June 30, 2011

2012

or

  [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition periodTransition Period from            to            

Commission Filefile No. 1-6908

AMERICAN EXPRESS CREDIT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 
Delaware 

11-1988350

(State or other jurisdiction of

incorporation or organization)

 (I.R.S. Employer Identification No.)
incorporation or organization) 

World Financial Center

200 Vesey Street,
New York, New  York

 

10285

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number including area code:                     (866) 572-4944                    

            None

Registrant’s telephone number including area code:(866) 572-4944
None

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

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 INSTRUCTIONSINSTRUCTION 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.

þYes  X              NoYeso No

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

þYes  X              NoYeso No

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

Large accelerated filer  ¨

  

Accelerated filer  ¨

Non-accelerated filerx

  
Large accelerated filer

o

Accelerated fileroNon-accelerated filerþSmaller reporting companyo¨

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

oYes          No  X  Yesþ No

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

Class

 
Class 

Outstanding at August 10, 20119, 2012

Common Stock (par value $.10 per share) 1,504,938 Shares

AMERICAN EXPRESS CREDIT CORPORATION

FORM 10-Q

INDEX

Part I.  Financial Information  Page No.
Part I. Financial Information
  

Item 1.

  

Financial Statements

  
  
Item 1. Financial Statements
  

Consolidated Statements of Income and Retained Earnings —– Three and Six Months Ended June 30, 20112012 and 20102011

   1 
    

Consolidated Balance Sheets —Statements of Comprehensive Income – Three and Six Months Ended June 30, 20112012 and  December 31, 20102011

   2 
    

Consolidated Statements of Cash Flows — Six Months EndedBalance Sheets – June 30, 20112012 and 2010December 31, 2011

   3 
    

Notes to Consolidated Financial Statements

Note 1 — Basis of PresentationCash Flows – Six Months Ended June 30, 2012 and 2011

   4 

Note 2 — Fair ValuesNotes to Consolidated Financial Statements

   45 
Note 3 — Cardmember Receivables and Loans
  7
Note 4 — Reserves for Losses

Item 2.

  9

Note 5 — Comprehensive Income

11
Note 6 — Derivatives and Hedging Activities
11
Note 7 — Variable Interest Entity
16
Note 8 — Income Taxes
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   1719 
  

Item 4.

  

Item 4. Controls and Procedures

28
Part II. Other Information
Item 1A. Risk Factors

   29 
Part II.  Other Information  
Item 6. Exhibits
  29

Item 1A.

  

SignaturesRisk Factors

   30 

Item 6.

Exhibits

   30 
Exhibit Index
EX-10.1
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

Signatures

31

Exhibit Index

E-1

EX-12.1

EX-12.2

EX-31.1

EX-31.2

EX-32.1

EX-32.2

EX-101.INS INSTANCE DOCUMENT

EX-101.SCH SCHEMA DOCUMENT

EX-101.CAL CALCULATION LINKBASE DOCUMENT

EX-101.DEF DEFINITION LINKBASE DOCUMENT

EX-101.LAB LABELS LINKBASE DOCUMENT

EX-101.PRE PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

AND RETAINED EARNINGS

(Unaudited)

                                                                                        

 

     
 		Three Months Ended
June 30,		  
  		  
 		Six Months Ended
June 30,

(Millions)

     2012    2011    2012   

2011

Revenues

       

Discount revenue earned from purchased cardmember receivables and loans

    $149   $130   $256   $               233 

Interest income from affiliates

     124    127    257   248 

Interest income from investments

     2    —    4   2 

Finance revenue

     10    9    21   19 
    

 

 

  

 

 

  

 

 

  

 

Total revenues

     285    266    538   502 
    

 

 

  

 

 

  

 

 

  

 

Expenses

       

Provisions for losses

     40    29    63   51 

Interest expense

     183    167    368   329 

Interest expense to affiliates

     6    3    9   7 

Other, net

     (33)   (37)   (60)  (58)
    

 

 

  

 

 

  

 

 

  

 

Total expenses

     196    162    380   329 
    

 

 

  

 

 

  

 

 

  

 

Pretax income

     89    104    158   173 

Income tax (benefit)

     (16)   (3)   (37)  (3)
    

 

 

  

 

 

  

 

 

  

 

Net income

     105    107    195   176 

Retained earnings at beginning of period

     3,016    3,477    3,028   3,496 

Dividends

     (90)   (69)   (192)  (157)
    

 

 

  

 

 

  

 

 

  

 

Retained earnings at end of period

    $3,031   $3,515   $3,031   $            3,515 
    

 

 

  

 

 

  

 

 

  

 

 

(Unaudited)
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Millions) 2011  2010  2011  2010 
Revenues
                
Discount revenue earned from purchased cardmember receivables and loans $130  $95  $233  $232 
Interest income from affiliates  127   110   248   220 
Interest income from investments  —   9   2   19 
Finance revenue  9   9   19   20 
             
Total revenues  266   223   502   491 
             
                 
Expenses
                
Provisions for losses  29   16   51   74 
Interest expense  167   128   329   258 
Interest expense to affiliates  3   5   7   8 
Other, net  (37)  (17)  (58)  (30)
             
Total expenses  162   132   329   310 
             
Pretax income  104   91   173   181 
Income tax benefit  (3)  (1)  (3)  (6)
             
Net income  107   92   176   187 
Retained earnings at beginning of period  3,477   3,503   3,496   3,408 
Dividends  (69)  (95)  (157)  (95)
             
Retained earnings at end of period $3,515  $3,500  $3,515  $3,500 
             

See Notes to Consolidated Financial Statements.

1

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

                                                                                        

 

     
 		Three Months Ended
June 30,		  
  		  
 		Six Months Ended
June 30,

(Millions)

     2012    2011    2012   

2011

Net income

    $105   $107   $195   $                176

Other comprehensive income (loss):

       

Net unrealized derivative gains, net of tax of: 2012, nil and nil; 2011, nil and nil

     —    —    1   —

Foreign currency translation adjustments, net of tax of: 2012, $32 and $(7); 2011, $(6) and nil

     (180)   9    (58)  151
    

 

 

  

 

 

  

 

 

  

 

Other comprehensive (loss) income

     (180)   9    (57)  151
    

 

 

  

 

 

  

 

 

  

 

Comprehensive (loss) income

    $(75)  $116   $138   $                327
    

 

 

  

 

 

  

 

 

  

 

 

(Unaudited)
         
  June 30,  December 31, 
(Millions, except share data) 2011  2010 
Assets
        
Cash and cash equivalents $79  $988 
Cardmember receivables, less reserves: 2011, $106; 2010, $112  12,970   12,261 
Cardmember loans, less reserves: 2011, $6; 2010, $9  367   371 
Loans to affiliates  10,550   10,987 
Deferred charges and other assets  644   627 
Due from affiliates  4,934   3,987 
       
Total assets $29,544  $29,221 
       
         
Liabilities and Shareholder’s Equity
        
         
Liabilities
        
Short-term debt $761  $645 
Short-term debt to affiliates  3,986   3,781 
Long-term debt  19,689   18,983 
       
Total debt  24,436   23,409 
Due to affiliates  913  ��1,742 
Accrued interest and other liabilities  462   507 
       
Total liabilities  25,811   25,658 
       
         
Shareholder’s Equity
        
Common stock, $.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares  —   — 
Additional paid-in-capital  162   162 
Retained earnings  3,515   3,496 
Accumulated other comprehensive income (loss), net of tax:        
Foreign currency translation adjustments, net of tax: 2011, $49; 2010, $49  56   (95)
       
Total accumulated other comprehensive income (loss)  56   (95)
       
Total shareholder’s equity  3,733   3,563 
       
Total liabilities and shareholder’s equity $29,544  $29,221 
       

See Notes to Consolidated Financial Statements.

2

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS

(Unaudited)

                                            

 

(Millions, except share data)

     
 		June 30,
2012		  
  		 

December 31, 2011

Assets

     

Cash and cash equivalents

    $187   $               480 

Cardmember receivables, less reserves: 2012, $86; 2011, $71

     16,168   12,736 

Cardmember loans, less reserves: 2012, $4; 2011, $5

     412   406 

Loans to affiliates

     12,442   11,437 

Deferred charges and other assets

     255   393 

Due from affiliates

     2,987   5,689 
    

 

 

  

 

Total assets

    $32,451   $          31,141 
    

 

 

  

 

Liabilities and Shareholder’s Equity

     

Liabilities

     

Short-term debt

    $568   $               634 

Short-term debt to affiliates

     3,848   4,035 

Long-term debt

     23,566   21,164 
    

 

 

  

 

Total debt

     27,982   25,833 

Due to affiliates

     962   1,702 

Accrued interest and other liabilities

     431   475 
    

 

 

  

 

Total liabilities

     29,375   28,010 
    

 

 

  

 

Shareholder’s Equity

     

Common stock, $.10 par value, authorized 3 million shares; issued and outstanding
1.5 million shares

     —   — 

Additional paid-in capital

     161   162 

Retained earnings

     3,031   3,028 

Accumulated other comprehensive loss:

     

Net unrealized derivative losses, net of tax of: 2012, nil; 2011, nil

     —   (1)

Foreign currency translation adjustments, net of tax of: 2012, $(10); 2011, $(3)

     (116)  (58)
    

 

 

  

 

Total accumulated other comprehensive loss

     (116)  (59)
    

 

 

  

 

Total shareholder’s equity

     3,076   3,131 
    

 

 

  

 

Total liabilities and shareholder’s equity

    $32,451   $          31,141 
    

 

 

  

 

 

(Unaudited)
         
Six Months Ended June 30,(Millions) 2011  2010 
Cash Flows from Operating Activities
        
Net income $176  $187 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provisions for losses  51   74 
Amortization and other  3   12 
Deferred taxes  (47)  — 
Changes in operating assets and liabilities:        
Due from affiliates, net  112   63 
Other operating assets and liabilities  37   3 
       
Net cash provided by operating activities  332   339 
       
         
Cash Flows from Investing Activities
        
Net increase in cardmember receivables and loans  (633)  (2,745)
Maturities of investments  —   175 
Net decrease (increase) in loans to affiliates  714   (19)
Net (increase) decrease in due from affiliates  (1,930)  1,524 
       
Net cash used in investing activities  (1,849)  (1,065)
       
         
Cash Flows from Financing Activities
        
Net increase in short-term debt to affiliates  177   1,254 
Net increase in short-term debt  117   444 
Issuance of long-term debt  1,332   415 
Principal payments on long-term debt  (857)  (1,515)
Dividends paid  (157)  (95)
       
Net cash provided by financing activities  612   503 
       
Effect of exchange rate changes on cash and cash equivalents  (4)  — 
       
Net decrease in cash and cash equivalents  (909)  (223)
Cash and cash equivalents at beginning of period  988   304 
       
Cash and cash equivalents at end of period $79  $81 
       

See Notes to Consolidated Financial Statements.

3

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

                                            

 

Six Months Ended June 30 (Millions)

     2012   

2011

Cash Flows from Operating Activities

     

Net income

    $195   $                 176 

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

     

Provisions for losses

     63   51 

Amortization and other

     12   3 

Deferred taxes

     (4)  (47)

Changes in operating assets and liabilities:

     

Interest, taxes and other amounts due from affiliates, net

     70   112 

Other operating assets and liabilities

     50   37 
    

 

 

  

 

Net cash provided by operating activities

     386   332 
    

 

 

  

 

Cash Flows from Investing Activities

     

Net increase in cardmember receivables and loans

     (3,566)  (633)

Net (increase) decrease in loans to affiliates

     (1,076)  714 

Net decrease (increase) in due from affiliates

     1,907   (1,930)
    

 

 

  

 

Net cash used in investing activities

     (2,735)  (1,849)
    

 

 

  

 

Cash Flows from Financing Activities

     

Net (decrease) increase in short-term debt to affiliates

     (178)  177 

Net (decrease) increase in short-term debt

     (66)  117 

Issuance of long-term debt

     3,480   1,332 

Principal payments on long-term debt

     (1,000)  (857)

Dividends paid

     (192)  (157)
    

 

 

  

 

Net cash provided by financing activities

     2,044   612 
    

 

 

  

 

Effect of exchange rate changes on cash and cash equivalents

     12   (4)
    

 

 

  

 

Net decrease in cash and cash equivalents

     (293)  (909)

Cash and cash equivalents at beginning of period

     480   988 
    

 

 

  

 

Cash and cash equivalents at end of period

    $187   $                   79 
    

 

 

  

 

 

See Notes to Consolidated Financial Statements.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

American Express Credit Corporation (Credco), together with its subsidiaries, is a wholly-ownedwholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly-ownedwholly owned subsidiary of American Express Company (American Express). American Express charge cards and American Express credit cards are collectively referred to herein as the Card.

card.

Credco is engaged in the business of financing non-interest-bearingnon-interest-earning cardmember receivables arising from the use of the American Express® Card, the American Express® Gold Card, Platinum Card®, Corporate Card and other American Express cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-bearinginterest-earning and discounted revolving loans generated by cardmember spending on American Express credit cards issued in non-U.S. markets, although interest-bearinginterest-earning and revolving loans are primarily funded by subsidiaries of TRS other than Credco.

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 can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.

American Express provides Credco with financial support with respect to maintenance of its minimum overall 1.25 fixed charge coverage ratio, which is achieved by adjusting thecharging appropriate discount rates on the purchases 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 adjusteddetermined to generate income for Credco that is sufficient to maintain its minimum fixed charge coverage ratio.

The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements included in the Annual Report on Form 10-K (Form 10-K) of Credco for the year ended December 31, 2010. Significant accounting policies disclosed therein have not changed.

2011.

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

Accounting

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates are an integral partand assumptions that affect the reported amounts of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses relating to cardmember receivablesassets, liabilities, revenues and loans, fair value measurement and income taxes. These accounting estimates reflect the best judgment of management, but actualexpense. Actual results could differ.

be different from these estimates and assumptions.

Certain reclassifications of prior period amounts have been made to conform to the current presentation. These reclassifications did not have an impact on Credco’s financial position, results of operations or cash flows.

2.Fair Values

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

U.S. generally accepted accounting principles (GAAP) provide

GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

 -

Quoted prices for similar assets or liabilities in active marketsmarkets;

 -

Quoted prices for identical or similar assets or liabilities in markets that are not activeactive;

 -

Inputs other than quoted prices that are observable for the asset or liabilityliability;

 -

Inputs that are derived principally from or corroborated by observable market data by correlation or other meansmeans.

4

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 3 — Inputs that are unobservable and reflect Credco’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

assumptions surrounding the timing and amount of expected cash flows). Credco did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) during the six months ended June 30, 2012 or during the year ended December 31, 2011, although the disclosed fair value of certain assets that are not carried at fair value, as presented later in this Note, are classified within Level 3.

Credco monitors the timingmarket conditions and amountevaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of expected cash flows).

the levels of the fair value hierarchy, Credco elects to disclose the fair value measurement at the beginning of the reporting period during which the transfer occurred.

Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes Credco’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy as Level 2 (as described in the preceding paragraphs), as of June 30, 20112012 and December 31, 2010:2011:

                                            

 

(Millions)

     2012   

2011

Assets:

      

Derivatives(a)

    $523   $                614
    

 

 

   

 

Total assets

    $523   $                614
    

 

 

   

 

Liabilities:

      

Derivatives(a)

    $23   $                  28
    

 

 

   

 

Total liabilities

    $23   $                  28
    

 

 

   

 

 

        
(Millions) 2011  2010
Assets:
       
Derivatives(a)
 $454  $498
      
Total assets $454  $498
      
        
Liabilities:
       
Derivatives(a)
 $60  $81
      
Total liabilities $60  $81
      

 
(a)

Refer to Note 65 for the fair values of derivative assets and liabilities on a further disaggregated basis and the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between Credco and its derivative counterparty. These balances have been presented gross in the table above.basis.

Credco did not measure any financial instruments at fair value using significantly unobservable inputs (Level 3) during the six months ended June 30, 2011 or during the year ended December 31, 2010 nor were there transfers between levels of the valuation hierarchy during those periods.
GAAP requires disclosure of the estimated fair value of all financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements for the fair value of financial instruments exclude leases, equity method investments, affiliate investments, pension and benefit obligations, insurance contracts and all non-financial instruments.

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

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

techniques:

Derivative Financial Instruments

The fair value of Credco’s derivative financial instruments which could be presented as either assets or liabilities on the Consolidated Balance Sheets, is estimated by a third-party valuation service that uses proprietary pricing models or by internal pricing models. The pricing models, do not contain a high level of subjectivity aswhere the valuation techniques used do not require significant judgment, and inputs to those models are readily observable from actively quoted markets. The pricing models used are consistently applied and reflect the contractual terms of the derivatives includingas described below. Credco reaffirms its understanding of the periodvaluation techniques used by the third-party valuation service at least annually. Credco’s derivative instruments are classified within Level 2 of maturity, and market-based parametersthe fair value hierarchy.

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

The fair value of foreign exchange forward contracts is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the forward contracts such as the notional amount, maturity dates and contract rate, as well as relevant foreign currency forward curves, and discount rates equity indices or prices, and volatility.

consistent with the underlying economic factors of the currency in which the cash flows are denominated.

Credit valuation adjustments are necessary when the market parameters, such as a benchmark curve, used to value derivatives are not indicative of the credit quality of Credco or its counterparties. Credco considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure. Refer to Note 65 for additional fair value information.

5

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial Assets and Financial Liabilities Carried at Other Than Fair Value

The following table discloses the estimated fair value for Credco’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:2012:

                                                                                        

 

     
 		Carrying
Value		  
  		  Corresponding Fair Value Amount

(Billions)

      Total    Level 2   

Level 3

Financial Assets:

       

Financial assets for which carrying values equal or approximate fair value(a)

    $19.4   $19.4   $19.4   $                  —

Financial assets carried at other than fair value Cardmember loans

    $0.4   $0.4   $—   $                 0.4

Loans to affiliates

    $12.4   $12.5   $8.8   $                 3.7

Financial Liabilities:

       

Financial liabilities for which carrying values equal or approximate fair value

    $5.8   $5.8   $5.8   $                  —

Financial liabilities carried at other than fair value
Long-term debt

    $23.6   $24.0   $24.0   $                  —

 

                
  2011  2010
  Carrying  Fair  Carrying  Fair
(Billions) Value  Value  Value  Value
Financial Assets:
               
Assets for which carrying values equal or approximate fair value $19  $19  $18  $18
Loans to affiliates $11  $11  $11  $11
Financial Liabilities:
               
Liabilities for which carrying values equal or approximate fair value $6  $6  $7  $7
Long-term debt $20  $20  $19  $19

(a)

Includes $20 million of cash considered as Level 1.

The fair values of these financial instrumentsassets/liabilities are estimates based upon the market conditions and perceived risks as of June 30, 2011 and December 31, 2010,2012, and require management judgment. These figures may not be indicative of their future fair values. The fair value of Credco cannot be reliably estimated by aggregating the amounts presented.

The

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

For the financial assets and liabilities that are not required to be measured at fair value on a recurring basis (categorized in the valuation hierarchy table above), Credco applies the following methods were usedvaluation techniques to determine estimatedmeasure fair values:

value:

Financial Assets for Which Carrying Values Equal or Approximate Fair Value

Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, cardmember receivables, cardmember loans, due from affiliates, accrued interest and certain other assets. For these assets, the carrying values approximate fair value because they are short term in duration, have no defined maturity or variable rate in nature.

have a market-based interest rate.

Financial Assets Carried at Other Than Fair Value

Cardmember loans

Cardmember loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for Credco’s cardmember loans Credco uses a discounted cash flow model. Due to the lack of a comparable whole loan sales market for similar credit card receivables and a lack of observable pricing inputs thereof, Credco uses various inputs derived from an equivalent securitization market to estimate fair value. Such inputs include projected income (inclusive of future interest payments), estimated pay-down rates, discount rates and relevant credit costs.

Loans to affiliates

Loans to affiliates are recorded at historical cost on the Consolidated Balance Sheets. FairIn estimating the fair value is estimatedfor Credco’s loan to affiliates, Credco uses discounted cash flow models. For loans to affiliates collateralized by cardmember loans, Credco derives the value of the loan based on either the fair value of the underlying collateral orused to finance the terms implicit inloans using a discounted cash flow model with inputs as detailed above (cardmember loans), and as such is classified as Level 3. For the loan agreements as compared with currentremaining loans to affiliates, the models use market termsobservable interest rates and adjust those rates for similar loans.

necessary risks.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial Liabilities for Which Carrying Values Equal or Approximate Fair Value

Financial liabilities for which carrying values equal or approximate fair value include short-term debt, short-term debt to affiliates, accrued interest and certain other liabilities for which the carrying values approximate fair value because they are short term in duration, variable rate in nature or have no defined maturity.

maturity or have a market-based interest rate.

Financial Liabilities Carried at Other Than Fair Value

Long-term debt

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

6

comparable maturities.

Nonrecurring Fair Value Measurements

Credco did not have any assets that were measured at fair value for impairment on a nonrecurring basis during the six months ended June 30, 2012 or during the year ended December 31, 2011.

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.Cardmember Receivables and Loans

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

Cardmember Receivables

Cardmember receivables represent amounts due from customers of American Express and certain of its affiliates’ charge payment card payment product customers.products. For American Express, thesethe cardmember receivables are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant. Each charge card transaction is authorized based on its likely economics reflecting a cardmember’s most recent credit information and spend patterns. GlobalAdditionally, global spend limits are established to limit the maximum exposure for American Express from high risk and some high spend charge cardmembers, and accounts of high risk, out of pattern charge cardmembers can be monitored even if they are current. Express.

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

Credco records these cardmember receivables at the time they are purchased from TRS and certain of its subsidiaries that issue the Cardcard (card issuers). The total volume of cardmember receivables purchased during the six months ended June 30, 2012 and 2011 was $96.1 billion and $88.8 billion, respectively. Cardmember receivable balances are presented on the Consolidated Balance Sheets, net of reserves for losses (refer to Note 4), and typically include principal and any related accrued fees.. Cardmember receivables also include participation interests purchased from an affiliate. Participation interests in cardmember receivables represent undivided interests in the cash flows of the non-interest-bearingnon-interest-earning cardmember receivables and are purchased without recourse byreceivables. In conjunction with TRS’ securitization program, Credco, through its wholly owned subsidiary, Credco Receivables Corporation (CRC), which is a wholly-owned subsidiary of Credco,purchases participation interests from American Express Receivables Financing Corporation V LLC (RFC V)., a wholly owned subsidiary of TRS that receives an undivided, pro rata interest in cardmember receivables transferred to the American Express Issuance Trust (AEIT) by TRS. AEIT is a special purpose entity that is consolidated by RFC V. As of June 30, 20112012 and December 31, 2010,2011, CRC owned approximately $3.6$5.5 billion and $3.7$3.0 billion, respectively, of participation interests in cardmember receivables purchased without recourse from RFC V.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Cardmember receivables as of June 30, 20112012 and December 31, 20102011 consisted of:

                                            

 

(Millions)

     2012   

2011

U.S. Consumer and Small Business Services

    $5,142   $             2,843

International and Global Commercial Services(a)

     11,112   9,964
    

 

 

   

 

Cardmember receivables

     16,254   12,807

Less: Reserve for losses

     86   71
    

 

 

   

 

Cardmember receivables, net(b)

    $16,168   $           12,736
    

 

 

   

 

 

        
(Millions) 2011  2010
U.S. Consumer and Small Business Services $3,346  $3,497
International and Global Commercial Services(a)
  9,730   8,876
      
Cardmember receivables, gross  13,076   12,373
Less: Cardmember receivables reserve for losses  106   112
      
Cardmember receivables, net(b)
 $12,970  $12,261
      

(a)

International is comprised of consumer and small business services.

 
(b)

Cardmember receivables modified in a troubled debt restructuring (TDR) program were immaterial.

Cardmember Loans

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

Credco records these cardmember loans at the time they are purchased from TRS and certain of its affiliates. The total volume of cardmember loans purchased during the six months ended June 30, 2012 and 2011 was $1.6 billion and $1.4 billion, respectively. Cardmember loans are presented on the Consolidated Balance Sheets, net of reserves for cardmember losses (refer to Note 4), and include principal, accrued interest and fees receivable. Credco’s policy generally is to cease accruing for interest receivable on a cardmember loan at the time the account is written off. Credco establishesoff, and establish reserves for interest that Credco believes will not be collected.

Cardmember loans as of June 30, 2012 and December 31, 2011 were as follows:

                                            

 

(Millions)

     2012   

2011

International Card Services

    $416   $                411

Less: Reserve for losses

     4   5
    

 

 

   

 

Cardmember loans, net(a)

    $412   $                406
    

 

 

   

 

 

7

(a)

Cardmember loans modified in a troubled debt restructuring (TDR) program were immaterial.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Cardmember loans, consisting of loans in the International card services portfolio, as of June 30, 2011 and December 31, 2010 consisted of:
        
(Millions) 2011  2010
Cardmember loans, gross $373  $380
Less: Cardmember loans reserve for losses  6   9
      
Cardmember loans, net(a)
 $367  $371
      
(a)There are no cardmember loans modified in a TDR program.

Cardmember Receivables and Cardmember Loans Aging

Generally, a cardmember account is considered past due if payment is not received within 30 days after the billing statement date. The following table represents the aging of cardmember receivables and cardmember loans as of June 30, 20112012 and December 31, 2010:2011:

                                                                                                              

 

2012 (Millions)

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

Total

Cardmember Receivables:

        

U.S. Consumer and Small Business Services

    $5,078   $25   $11   $28   $             5,142

International and Global Commercial Services(a)

     (b)   (b)   (b)  $74   $           11,112

Cardmember Loans:

        

International Card Services(c)

    $409   $3   $1   $3   $                416

 

        

 

2011 (Millions)

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

Total

Cardmember Receivables:

        

U.S. Consumer and Small Business Services

    $2,804   $14   $8   $17   $             2,843

International and Global Commercial Services(a)

     (b)   (b)   (b)  $82   $             9,964

Cardmember Loans:

        

International Card Services(c)

    $404   $3   $1   $3   $                411

 

                    
      30-59  60-89      
      Days  Days  90+ Days   
2011(Millions) Current  Past Due  Past Due  Past Due  Total
Cardmember Receivables:
                   
U.S. Consumer and Small Business Services $3,298  $21  $8  $19  $3,346
International and Global Commercial Services(a)
  (b)  (b)  (b)  71   9,730
                    
Cardmember Loans:
                   
International Card Services(c)
 $364  $5  $1  $3  $373
                    
 
      30-59  60-89      
      Days  Days  90+ Days   
2010(Millions) Current  Past Due  Past Due  Past Due  Total
Cardmember Receivables:
                   
U.S. Consumer and Small Business Services $3,453  $18  $8  $18  $3,497
International and Global Commercial Services(a)
  (b)  (b)  (b)  76   8,876
                    
Cardmember Loans:
                   
International Card Services(c)
 $367  $7  $2  $4  $380

(a)

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

 
(b)

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

 
(c)

Cardmember loans over 90 days past due continue to accrue interest.

8

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Quality Indicators for Cardmember Receivables and Cardmember Loans

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

                                                                                        

 

     2012    2011

 

     
 
 		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

Cardmember Receivables:

       

U.S. Consumer and Small Business Services

     1.49%   1.24%   1.33%  1.42%

Cardmember Loans:

       

International Card Services

     0.48%   1.68%   0.81%  1.77%

 

     2012    2011

 

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

90 Days

Past Billing

as a % of Receivables

Cardmember Receivables:

       

International and Global Commercial Services

     0.07%   0.67%   0.06%  0.70%

 

                 
  2011  2010 
      30 Days      30 Days 
  Net  Past Due  Net  Past Due 
  Write-off  as a % of  Write-off  as a % of 
  Rate(a) Total  Rate(a) Total 
U.S. Consumer and Small Business Services — Cardmember Receivables  1.3%  1.4%  1.5%  1.4%
International Card Services — Cardmember Loans  0.8%  2.5%  2.8%  4.3%
                 
  2011  2010 
  Net Loss  90 Days  Net Loss  90 Days 
  Ratio as a  Past  Ratio as a  Past 
  % of  Billing  % of  Billing 
  Charge  as a % of  Charge  as a % of 
  Volume(b) Receivables  Volume(b) Receivables 
International and Global Commercial Services — Cardmember Receivables  0.1%  0.7%  0.2%  1.2%

(a)

Credco’s write-offs, net of recoveries, represent the amount of cardmember receivables or cardmember loans owned by Credco that are written off, consisting of principal, interest and/or fees, expressed as a percentage of the average cardmember receivables or cardmember loans balances during the period.

 
(b)

Credco’s write-offs, net of recoveries, represent the amount of cardmember receivables owned by Credco that are written off, consisting of principal and fees, expressed as a percentage of the volume of cardmember receivables purchased by Credco during the period.

Refer to Note 4 for other factors,additional indicators, including external environmental factors, that management considers as part ofin its monthly evaluation ofprocess for reserves for losses.

4.Reserves for Losses
Reserves for Losses — Cardmember Receivables and Loans

Reserves for losses relating to cardmember receivables and loans represent management’s best estimate of the losses inherent in Credco’s outstanding portfolios. Credco’s total provisions for losses were $51 millionportfolio of loans and $74 million for the six months ended June 30, 2011 and 2010, respectively.receivables. Management’s evaluation process requires certain estimates and judgments.

Reserves for these losses are primarily based upon statistical models that analyze portfolio performance and reflect management’s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including loss migration rates and average losses and recoveries over an appropriate historical period. Management considers whether to adjust the analytic models for specific factors such as increased risk in certain portfolios, impact of risk management initiatives on portfolio performance and concentration of credit risk based on factors such as tenure,vintage, industry or geographic regions. In addition, management adjustsmay increase or decrease the reserves for losses on cardmember loans for other external environmental factors, including leading economicvarious indicators related to employment, spend, sentiment, housing and market indicators, suchcredit, as the unemployment rate, Gross Domestic Product (GDP), home price indices, non-farm payrolls, personal consumption expenditures index, consumer confidence index, purchasing managers index, bankruptcy filings andwell as the legal and regulatory environment. Generally, due to the short-term nature of cardmember receivables, the impact of additional external factors on the losses inherent losses within the cardmember receivables portfolio is not significant. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past-due amounts, reserves as a percentage of cardmember receivables or loans and net write-off coverage.

9

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cardmember loans and receivables balances are written offwritten-off when management deemsconsiders amounts to be uncollectible, andwhich is generally determined by the number of days past due whichand is generallytypically no later than 180 days past due.days. Cardmember loans and receivables in bankruptcy or owed by deceased individuals are written off upon notification. Recoveriesnotification and recoveries are recognized on a cash basis.
as they are collected.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in Cardmember Receivables Reserve for Losses

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

                                            

 

(Millions)

     2012  

2011

Balance, January 1

    $71  $               112 

Additions:

     

Provisions(a)

     63  52 

Other credits(b)

     29  23 

Deductions:

     

Net write-offs(c)

     (77)  (65)

Other debits(d)

     —   (16)
    

 

 

  

 

Balance, June 30

    $86  $               106 
    

 

 

  

 

 

         
(Millions) 2011  2010 
Balance, January 1 $112  $141 
Additions:        
Cardmember receivables provisions(a)
  52   69 
Other credits(b)
  23   21 
Deductions:        
Cardmember receivables net write-offs(c)
  (65)  (111)
Other debits(d)
  (16)  (2)
       
Balance, June 30(e)
 $106  $118 
       

(a)Represents loss provisions for cardmember receivables consisting of principal (resulting

Provisions resulting from authorized transactions) and fee reserve components.transactions.

 
(b)

Primarily represents reserve balances applicable to participation interests in cardmember receivables purchased from an affiliate. Credco purchases cardmember receivables at fair value but due to system constraints records the gross receivable amount and the corresponding reserve balance, which are included in its fair value estimate. Specifically, Credco’s systems do not have the ability to track multiple accounting bases for cardmember receivables. Participation interests in cardmember receivables purchased from an affiliate totaled $2.7$3.3 billion and $2.0$2.7 billion for the six months ended June 30, 2012 and 2011, and 2010, respectively.

 
(c)Represents

Net write-offs consisting of principal (resulting from authorized transactions) and fee components, lessinclude recoveries of $52$50 million and $58$52 million for the six months ended June 30, 2012 and 2011, and 2010, respectively.

 
(d)

Primarily relates to reserves for losses attributable to participation interests in cardmember receivables sold to an affiliate. Participation interests in cardmember receivables sold to an affiliate totaled $2.2 billionnil and nil for the six months ended June 30, 2011 and 2010, respectively.

(e)Volume of receivables purchased was $88.8 billion and $75.3$2.2 billion for the six months ended June 30, 2012 and 2011, and 2010, respectively.

Changes in Cardmember Loans Reserve for Losses

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

                                            

 

(Millions)

     2012  

2011

Balance, January 1

    $5  $                   9 

Additions:

     

Provisions(a)

     —   (1)

Deductions:

     

Net write-offs(b)

     (1)  (2)
    

 

 

  

 

Balance, June 30

    $4  $                   6 
    

 

 

  

 

 

         
(Millions) 2011  2010 
Balance, January 1 $9  $19 
Additions:        
Cardmember loans provisions(a)
  (1)  5 
Deductions:        
Cardmember loans net write-offs(b)
  (2)  (8)
       
Balance, June 30(c)
 $6  $16 
       

(a)Represents loss provisions for cardmember loans consisting of principal (resulting

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

 
(b)Cardmember loans net

Net write-offs include recoveries of $4$3 million and $5$4 million for the six months ended June 30, 2012 and 2011, and 2010, respectively.

(c)Volume of loans purchased was $1.4 billion and $1.5 billion for the six months ended June 30, 2011 and 2010, respectively.

10

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and changes in accumulated other comprehensive income (loss) (AOCI), which is a balance sheet item in the Shareholder’s Equity section of Credco’s Consolidated Balance Sheets. AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. The components of comprehensive income (loss), net of tax, were as follows:
                 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
(Millions) 2011  2010  2011  2010 
Net income $107  $92  $176  $187 
Other comprehensive income (loss):                
Net unrealized securities losses  —   (4)  —   (8)
Net unrealized derivatives gains  —   —   —   1 
Foreign currency translation adjustments  9   (119)  151   (290)
             
Total $116  $(31) $327  $(110)
             
6.Derivatives and Hedging Activities

Credco uses derivative financial instruments (derivatives) to manage exposureexposures to various market risks. Market risk is the risk to earnings or value resulting from movements in market prices. Credco’s market risk exposure is primarily generated by:

•Interest rate risk in its funding activities; and
•Foreign exchange risk in its operations outside the United States.
General principles and the overall framework for managing market risk across American Express and its subsidiaries, including Credco, are defined in the Market Risk Policy, which is the responsibility of the Asset-Liability Committee (ALCO). Market risk limits and escalation triggers in that policy are approved by the ALCO and by the Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally monitored for compliance with policy and limits by the Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer of American Express. Market risk management is also guided by policies covering the use of derivatives, funding and liquidity and investments.
Derivatives derive their value from an underlying variable or multiple variables, including interest rate and foreign exchange rate. 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 engage in derivatives for trading purposes.

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

Interest rate risk in its funding activities; and

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

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

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interest rate exposure within Credco’s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt compared to fixed-rate debt. In addition, interest rate swaps are used from time to time to syntheticallyeconomically convert fixed-rate debt obligations to variable-rate obligations or to convert variable-rate debt obligations to fixed-rate obligations. Credco may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors.

Foreign exchange risk is generated by (i) funding foreign currency cardmember receivables and loans with U.S. dollars and (ii) foreign subsidiary equity and foreign currency earnings in unitsentities outside the United States. Credco hedges this market exposure to the extent it is economically justified through various means, including the use of derivatives such as foreign exchange forwards and cross-currency swap contracts, which can help “lock-in” the value ofmitigate Credco’s exposure to specific currencies. Exposures from foreign subsidiary equity in Credco’s unitsentities outside the United States are hedged through various means, including the use of foreign currency debt and foreign exchange forwards executed either by Credco or TRS.

Derivatives may give rise to counterparty credit risk, which is the risk that a derivative counterparty will default on, or otherwise be unable to perform pursuant to, an uncollateralized derivative exposure. Credco manages this risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as

11

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved by American Express and rated as investment grade. Counterparty risk exposures are centrally monitored by American Express’ Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with American Express’ ERMC guidelines and procedures and determines the risk mitigation actions, when necessary.Express. Additionally, in order to mitigate the bilateral counterparty credit risk associated with derivatives, Credco has in certain limited instances entered into master netting agreements with its derivative counterparties including master netting agreements, that may provide a right of offset for certain exposures between the parties.
To further mitigate bilateral counterparty credit risk, Credco exercises its rights under executed credit support agreements with certain of its derivative counterparties. These agreements require that, in the event the fair value change in the net derivatives position between the two parties exceeds certain dollar thresholds, the party in the net liability position posts collateral to its counterparty.

In relation to Credco’s credit risk, under the terms of the derivative agreements it has with its various counterparties, Credco is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. AsBased on the assessment of credit risk of Credco’s derivative counterparties as of June 30, 20112012 and December 31, 2010, the counterparty2011, Credco does not have derivative positions that warrant credit risk associated with Credco’s derivatives was not significant.

valuation adjustments.

Credco’s derivatives are carried at fair value on the Consolidated Balance Sheets. The accounting for changes in fair value depends on the instruments’ intended use and the resulting hedge designation, if any, as discussed below. Refer to Note 2 for a description of Credco’s methodology for determining the fair value of its derivatives.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the total gross fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 20112012 and December 31, 2010:2011:

                                                                                        

 

     
 

 

Deferred Charges and
Other Assets

Fair Value

  
  

  

  
 

 

Accrued Interest and
Other Liabilities

Fair Value

(Millions)

     2012    2011    2012   

2011

Derivatives designated as hedging instruments:

       

Interest rate contracts

       

Fair value hedges

    $485   $488   $—   $                 — 

Cash flow hedges

     —    —    —   1 

Foreign exchange contracts

       

Net investment hedges

     13    28    7   12 
    

 

 

  

 

 

  

 

 

  

 

Total derivatives designated as hedging instruments

    $498   $516   $7   $                 13 
    

 

 

  

 

 

  

 

 

  

 

Derivatives not designated as hedging instruments:

       

Foreign exchange contracts

    $25   $98   $16   $                 15 
    

 

 

  

 

 

  

 

 

  

 

Total derivatives not designated as hedging instruments

    $25   $98   $16   $                 15 
    

 

 

  

 

 

  

 

 

  

 

Total derivatives gross

    $523   $614   $23   $                 28 
    

 

 

  

 

 

  

 

 

  

 

Cash collateral netting(a)

     (390)   (330)   —   — 

Derivative asset and derivative liability netting(a)

     (3)   (3)   (3)  (3)
    

 

 

  

 

 

  

 

 

  

 

Total derivatives, net

    $130   $281   $20   $                 25 
    

 

 

  

 

 

  

 

 

  

 

 

                
  Deferred Charges and  Accrued Interest and
  Other Assets  Other Liabilities
  Fair Value  Fair Value
(Millions) 2011  2010  2011  2010
Derivatives designated as hedging instruments:               
Interest rate contracts               
Fair value hedges $428  $444  $9  $38
Cash flow hedges  —   2   —   2
Foreign exchange contracts           ��   
Net investment hedges  8   —   2   16
            
Total derivatives designated as hedging instruments $436  $446  $11  $56
            
Derivatives not designated as hedging instruments:               
Interest rate contracts $1  $1  $3  $3
Foreign exchange contracts  17   51   46   22
            
Total derivatives not designated as hedging instruments $18  $52  $49  $25
            
Total derivatives(a)
 $454  $498  $60  $81
            

(a)

As permitted under GAAP, permitsbalances represent the netting of cash collateral received and posted under credit support agreements, and the netting of derivative assets and derivative liabilities when a legally enforceableunder master netting agreement exists between Credco and its derivative counterparty. As of both June 30, 2011 and December 31, 2010, $1 million of derivative assets and liabilities have been offset and presented net on the Consolidated Balance Sheets.agreements.

Derivative Financial Instruments that Qualify for Hedge Accounting

Derivatives executed for hedge accounting purposes are documented and designated as such when Credco enters into the contracts. In accordance with its risk management policies, Credco structures its hedges with veryterms similar terms to that of the hedged items.item being hedged. Credco formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged items. These assessments usually are made through the application of a regression analysis method. If it is determined that a derivative is not highly effective as a hedge, Credco will discontinue the application of hedge accounting.

12

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Hedges

A fair value hedge involves a derivative designated to hedge Credco’s exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to syntheticallyeconomically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As of June 30, 20112012 and December 31, 2010,2011, Credco hedged $9.3$14.3 billion and $8.9$11.6 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness and is reflected in earnings as a component of other net expenses. Hedge ineffectiveness may be caused by differences between the debt’s interest coupon and the benchmark rate, which are primarily due to credit spreads at inception of the hedging relationship that are not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR, rates, as these so-called basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt. If a fair value hedge is de-designated or no longer considered to be effective, changes in fair value of the derivative continue to be recorded through earnings but the hedged asset or liability is no longer adjusted for changes in fair value due toresulting from changes in interest rates. The existing basis adjustment of the hedged asset or liability is then amortized or accreted as an adjustment to yield over the remaining life of that asset or liability.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the impact on the Consolidated Statements of Income and Retained Earnings associated with Credco’s hedges of fixed-rate long-term debt:

                                                                                                                        

 

For the Three Months Ended June 30:(Millions)

 

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

  
 		Net hedge
ineffectiveness

Derivative Relationship

    

Income Statement Line Item

     Amount   

Income Statement Line Item

     Amount   
         2012    2011        2012    2011    2012   

2011

Interest rate contracts

    Other, net expenses    $34   $98   Other, net expenses    $(32)  $(97)  $2   $         1

 

 

                                                                                                                        

For the Six Months Ended June 30:(Millions)

     

 

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

  
 		Net hedge
ineffectiveness

Derivative Relationship

    

Income Statement Line Item

     Amount   

Income Statement Line Item

     Amount   
         2012    2011        2012    2011    2012   

2011

Interest rate contracts

    Other, net expenses    $(4)  $13   Other, net expenses    $(3)  $(22)  $(7)  $      (9)

 

For the Three Months Ended June 30,
                            
(Millions) Gains (losses) recognized in income
  Derivative contract  Hedged item  Net hedge
    Amount    Amount  ineffectiveness
Derivative Relationship Location 2011  2010  Location 2011  2010  2011  2010
Interest rate contracts Other, net expenses $98  $130  Other, net expenses $(97) $(116) $1  $14
For the Six Months Ended June 30,
                            
(Millions) Gains (losses) recognized in income
  Derivative contract  Hedged item  Net hedge
    Amount    Amount  ineffectiveness
Derivative Relationship Location 2011  2010  Location 2011  2010  2011  2010
Interest rate contracts Other, net expenses $13  $200  Other, net expenses $(22) $(180) $(9) $20

Credco also recognized a net reduction in interest expense on long-term debt and other of $64$73 million and $63$64 million for the three months ended June 30, 20112012 and 2010,2011, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges. For the six months ended June 30, 20112012 and 2010,2011, the impact on interest expense was a net reduction in interest expense on long-term debtof $141 million and other of $127 million, and $128 million, respectively.

13

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flow Hedges

A cash flow hedge involves a derivative designated to hedge Credco’s exposure to variable future cash flows attributable to a particular risk. Such exposures may relate to either an existing recognized asset or liability, or a forecasted transaction. Credco hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivatives, primarily interest rate swaps. These derivative instruments syntheticallyeconomically convert floating-rate debt obligations to fixed-rate obligations for the duration of the instrument. As of June 30, 20112012 and December 31, 2010,2011, Credco hedged $0.8 billion$301 million and $305 million, respectively, of its floating-rate debt using interest rate swaps, respectively.

swaps.

For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivatives is recorded in AOCIaccumulated other comprehensive income (AOCI) and reclassified into earnings when the hedged cash flows are recognized in earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income and Retained Earnings in the same line item in which the hedged instrument or transaction is recognized, primarily in interest expense. Any ineffective portion of the gain or loss on the derivatives is reported as a component of other net expenses. If a cash flow hedge is de-designated or terminated prior to maturity, the amount previously recorded in AOCI is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized into earnings immediately.

In the normal course of business, as the hedged cash flows are recognized into earnings, Credco expects to reclassify an insignificant amount of net pretax losses on derivatives from AOCI into earnings during the next 12 months.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the impact of cash flow hedges on the Consolidated Statements of Income and Retained Earnings:

                                                                                          

 

For the Three Months Ended June 30:(Millions)

 

    

Gains (losses) recognized in income

         
 
 		Amount reclassified
from AOCI into
income		  
  
  		      
 		Net hedge
ineffectiveness

Description

    

Income Statement Line Item

     2012    2011   

Income Statement Line Item

     2012   

2011

Cash flow hedges:(a)

               

Interest rate contracts

    Interest expense    $—   $—   Other, net expenses    $—   $          —

 

                                                                                          

 

For the Six Months Ended June 30:(Millions)

 

    

Gains (losses) recognized in income

         
 
 		Amount reclassified
from AOCI into
income		  
  
  		      
 		Net hedge
ineffectiveness

Description

    

Income Statement Line Item

     2012    2011   

Income Statement Line Item

     2012   

2011

Cash flow hedges:(a)

               

Interest rate contracts

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

 

For the Three Months Ended June 30,
                    
(Millions) Gains (losses) recognized in income
    Amount     
    reclassified from    Net hedge
    AOCI into income    ineffectiveness
  Location 2011  2010  Location 2011  2010
Cash flow hedges:(a)
                   
Interest rate contracts Interest expense $—  $—  Other, net expenses $—  $—
For the Six Months Ended June 30,
                    
(Millions) Gains (losses) recognized in income
    Amount     
    reclassified from    Net hedge
    AOCI into income    ineffectiveness
  Location 2011  2010  Location 2011  2010
Cash flow hedges:(a)
                   
Interest rate contracts Interest expense $(1) $(2) Other, net expenses $—  $—

(a)

During the three and six months ended June 30, 20112012 and 2010,2011, there were no forecasted transactions that were considered no longer probable to occur.

14

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Investment Hedges

A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. Credco primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on Credco’s investments in non-U.S. subsidiaries. The effective portion of the gain or loss(loss) on net investment hedges, isnet of taxes, recorded in AOCI as part of the cumulative translation adjustment.adjustment, was $55 million and $(15) million for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, the effective portion of the (loss) on net investment hedges, net of taxes, was $(12) million and $(38) million, respectively. Any ineffective portion of the gain or loss on net investment hedges is recognized in other net expenses during the period of change. No ineffectiveness or other amounts were reclassified from AOCI into income for the six months ended June 30, 20112012 or 2010.

2011.

Derivatives Not Designated as Hedges

Credco has derivatives that act as economic hedges, but are not designated as such for hedge accounting purposes. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options and cross-currency swaps.forwards. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, Credco may enter into interest rate swaps to specifically manage funding costs related to American Express’ proprietary card business.

For derivatives that are not designated as hedges, changes in fair value are reported in current period earnings.

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated Statements of Income and Retained Earnings:

For the Three Months Ended June 30,
           
(Millions) Gains (losses) recognized in income 
    Amount 
 Location 2011  2010 
Interest rate contracts Other, net expenses $—  $1 
Foreign exchange contracts Other, net expenses  (14)  (15)
  Interest expense  —   23 
         
Total   $(14) $9 
         
For the Six Months Ended June 30,
          
(Millions) Gains (losses) recognized in income 
 Amount                                                                   
 Location 2011 2010 

Interest rate contracts Other, net expenses $— $1 
For the Three Months Ended June 30:(Millions)For the Three Months Ended June 30:(Millions)

    

Pretax gains (losses)

         Amount

Description

    

Income Statement Line Item            

     2012  

2011

Foreign exchange contracts Other, net expenses 12  (22)    Other, net expenses    $61   $                  (8)
 Interest expense — 43 
               

 

  

 

Total   $12 $22         $61   $                  (8)
               

 

  

 

15

                                                                  

 

For the Six Months Ended June 30:(Millions)

 

    

Pretax gains (losses)

         Amount

Description

    

Income Statement Line Item            

     2012  

2011

Foreign exchange contracts

    Other, net expenses    $—   $                  23
        

 

 

  

 

Total

        $—   $                  23
        

 

 

  

 

 

AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.6.Variable Interest Entity

Credco has established a variable interest entity (VIE), American Express Canada Credit Corporation (AECCC), used primarily to loan funds to affiliates. CredcoAECCC has a shelf registration in Canada for a medium-term note program providing for the issuance of notes by AECCC. All notes issued under this program are fully guaranteed by Credco. These medium-term note issuances are the primary source of financing loans to the Canadian affiliate. Credco is considered the primary beneficiary of the entity and owns all of the outstanding voting interests and therefore, consolidates the entity in accordance with accounting guidance governing consolidation of variable interest entities.VIEs. Total assets as of both June 30, 20112012 and December 31, 20102011 were $2.3 billion and $2.4 billion, and arerespectively, the majority of which were eliminated in consolidation. Total liabilities as of both June 30, 20112012 and December 31, 20102011 were both $2.3 billion, and arewere primarily recorded in long-term debt. As of June 30, 20112012 and December 31, 2010, $1262011, $73 million and $501$74 million, respectively, of liabilities were eliminated in consolidation. The assets of the VIE are not used solely to settle the obligations of the VIE. The note holders of the VIE have recourse to Credco.

8.7.Income Taxes

The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with TRS, 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 a TRS consolidated reporting basis.

American Express is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which American Express has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In June 2008, theThe IRS has completed its field examination of American Express’ federal tax returns for the years 1997 through 2002. In July 2009, the IRS completed its field examination of American Express’ federal tax returns for the years 2003 and 2004. In April 2011, unagreed issues for 1997-2004 were resolved at IRS Appeals. Additional2004, however refund claims for those years continue to be reviewed by the IRS. In addition, American Express is currently under examination by the IRS for the years 2005 through 2007.

Credco believes it is reasonably possible that theits unrecognized tax benefits could decrease within the next 12 months by as much as $455$605 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. Of the $455$605 million of unrecognized tax benefits, approximately $452$596 million relaterelates to amounts recorded to equity that if recognized would be recorded in shareholder’s equity, and would not impact the effective rate. With respect to the remaining $3$9 million, it is not possible to quantify the impact such changesa change may have on the effective tax rate and net income due to the inherent complexities and the number of tax years currently under examination.open for examination in multiple jurisdictions. Resolution of the prior years’ items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes Credco’s effective tax rate:

             
  Three Months Ended  Six Months Ended  Year ended 
  June 30, 2011  June 30, 2011  December 31, 2010 
Effective tax rate(a) (b)
  (2.9)%  (1.7)%  (7.4)%
rates were (17.9) percent and (23.4) percent for the three and six months ended June 30, 2012, respectively, and (2.9) percent and (1.7) percent for the three and six months ended June 30, 2011, respectively. The tax rate in each of the periods reflects expenses in the United States attracting a 35 percent statutory benefit and foreign earnings taxed at lower rates and indefinitely reinvested as well as the impact of certain discrete state tax items. The tax rates for the three and six months ended June 30, 2011 also reflect the impact of the favorable resolution of certain prior years’ tax items.

The tax rates in all periods reflect the favorable impact of the tax benefit related to Credco’s ongoing funding activities outside the United States. The availability of this benefit in future years is largely dependent on a provision of the U.S. Internal Revenue Code that Congress has not yet renewed.

(a) Each of the periods reflects recurring, permanent tax benefits in relation to the level of pretax income and geographic mix of business.
(b)The income tax provision for the three and six months ended June 30, 2011, includes the impact of certain discrete state tax items and the impact of the favorable resolution of certain prior years’ tax items.

16

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

Overview

American Express Credit Corporation (Credco), together with its subsidiaries, is a wholly-ownedwholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly-ownedwholly owned subsidiary of American Express Company (American Express).

American Express charge cards and American Express credit cards are collectively referred to herein as the card.

Credco is engaged in the business of financing non-interest-bearingnon-interest-earning cardmember receivables arising from the use of the American Express® Card, the American Express® Gold Card, Platinum Card®, Corporate Card and other American Express cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-bearinginterest-earning and discounted revolving loans generated by cardmember spending on American Express credit cards issued in non-U.S. markets, although interest-bearinginterest-earning and revolving loans are primarily funded by subsidiaries of TRS other than Credco. American Express charge cards and American Express credit cards are collectively referred to herein as the Card.

Certain of the statements in this Form 10-Q report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Forward-Looking Statements” section.

Current BusinessEconomic Environment/Outlook

Credco’s results for

During the second quarter of 2011 continued to reflect strong spending growth and improved credit performance of the underlying cardmember receivables and loan portfolios at American Express. During the quarter2012 cardmember spending volumes grew both in the United States and outside the United States,internationally, and across all of American Express’ businesses.

businesses, but at a slower pace than recent quarters. The improving credit trends contributed toslower spending growth reflects in part the continuation of a reduction in loan and receivable write-offs over the coursechallenging global economic environment.

Competition remains extremely intense across all of the second quarter of 2011 when compared to 2010. During the quarter, reserve coverage ratios remained at appropriate levels.

Despite the continued momentum across American Express’ businesses,businesses. In addition, the global economic and regulatory environment remains uncertain. The uncertain environment includes questionscurrent instability in Europe in particular, and concerns about thesovereign defaults and creditworthiness of sovereign issuers within Europe and the short and long-term effectsliquidity of the Standard & Poor’s (S&P) credit downgrade of U.S. government-issued securities. Sovereign defaults or credit downgradesEuropean banking systems, also could lead to disruptions inadversely affect global economic conditions, including continued downward pressure on consumer and corporate confidence and spending, disrupting the moneydebt capital markets changes in theand impacting foreign exchange value of the Euro or the U.S. dollar, or both, reduce the attractiveness and value of U.S. and European assets, or increase borrowing costs for consumers and companies in Europe and the United States.
rates.

Results of Operations for the Six Months Ended June 30, 20112012 and 2010

2011

Pretax income depends primarily on the volume of cardmember receivables and loans purchased, the discount factor used to determine purchase price, interest earned, interest expense and the collectibility of cardmember receivables and loans purchased.

Credco’s consolidated net income decreased $11increased $19 million or 611 percent for the six months ended June 30, 20112012 as compared to the same period in 2010.2011. The year-over-year decreaseincrease is primarily due to lower interestdiscount revenue earned from purchased cardmember receivables and loans and income from investments and higher interest expense,tax benefit, partially offset by higher interest income from affiliates and lower provisions for losses.

17expense.

The following table summarizes the changes attributable to the increase (decrease) in key revenue and expense accounts for the six months ended June 30:

                                            

 

(Millions)

     2012  

2011

Discount revenue earned from purchased cardmember receivables and loans:

     

Volume of receivables and loans purchased

    $25  $                 39 

Discount rates

     (2)  (38)
    

 

 

  

 

Total

    $23  $                    1
    

 

 

  

 

Interest income from affiliates:

     

Average loans to affiliates

    $1  $                 23 

Interest rates

     8  5 
    

 

 

  

 

Total

    $9  $                 28 
    

 

 

  

 

Interest income from investments:

     

Average investments outstanding

    $(1)  $                (17)

Interest rates

     3  — 
    

 

 

  

 

Total

    $2  $                (17)
    

 

 

  

 

Finance revenue:

     

Average cardmember loans outstanding

    $2  $                  (3)

Interest rates

     —   2 
    

 

 

  

 

Total

    $2  $                  (1)
    

 

 

  

 

Interest expense:

     

Average debt outstanding

    $37  $                  (2)

Interest rates

     2  73 
    

 

 

  

 

Total

    $39  $                  71 
    

 

 

  

 

Interest expense to affiliates:

     

Average debt outstanding

    $(1)  $                    1 

Interest rates

     3  (2)
    

 

 

  

 

Total

    $2  $                  (1)
    

 

 

  

 

 

         
(Millions) 2011  2010 
Discount revenue earned from purchased cardmember receivables and loans:        
Volume of receivables and loans purchased $39  $144 
Discount rates  (38)  (293)
       
Total $1  $(149)
       
         
Interest income from affiliates:        
Average loans to affiliates $23  $(2)
Interest rates  5   3 
       
Total $28  $1 
       
         
Interest income from investments:        
Average investments outstanding $(17) $(47)
Interest rates  —   9 
       
Total $(17) $(38)
       
         
Finance revenue:        
Average cardmember loans outstanding $(3) $— 
Interest rates  2   (5)
       
Total $(1) $(5)
       
         
Interest expense:        
Average debt outstanding $(2) $(25)
Interest rates  73   (35)
       
Total $71  $(60)
       
         
Interest expense to affiliates:        
Average debt outstanding $1  $(17)
Interest rates  (2)  (7)
       
Total $(1) $(24)
       

Discount revenue earned fromon purchased cardmember receivables and loans

Discount revenue increased $110 percent or $23 million to $233$256 million for the six months ended June 30, 2011,2012, as compared to $232$233 million for the same period in 2010,2011, primarily due to an increase in the volume of receivables purchased, partially offset by a decrease in discount rates. Volume of receivables purchased for the six months ended June 30, 2011 increased 17 percent from $75 billion for the same period in 2010 to $88 billion, primarily due to increased cardmember spending.purchased. Discount rates, which vary over time due to changes in market interest rates or changes in the collectabilitycollectibility of cardmember receivables, decreased an average of 5 basis points from 0.31 percent for the six months ended June 30, 2010 towere flat at 0.26 percent for the six months ended June 30, 2012 and 2011.

18

Volume of cardmember receivables and loans purchased for the six months ended June 30, 2012 increased 11 percent to $98 billion from $88 billion for the same period in 2011, primarily due to increased cardmember spending.

Interest income from affiliates

Interest income from affiliates increased 134 percent or $28$9 million to $248$257 million for the six months ended June 30, 2011,2012, as compared to $220$248 million for the same period in 2010.2011. The average loan balances with affiliates were $10.9$11.0 billion and $9.9$10.9 billion for the six months ended June 30, 20112012 and 2010,2011, respectively. The effective annualized interest rate charged to affiliates increased by 1015 basis points from 4.45to 4.70 percent for the six months ended June 30, 2010 to2012 from 4.55 percent for the six months ended June 30,same period in 2011. The rate increase is driven by an increase in interest rates in the Australian market, a primary component in the rate used in Credco’s loan to its Australian affiliate.

Interest income from investments

Interest income from investments decreased 89increased 100 percent or $17$2 million to $2$4 million for the six months ended June 30, 2011,2012. The increase was primarily driven by higher effective annualized interest rates, partially offset by lower average investment balances.

Finance revenue

Finance revenue increased 11 percent or $2 million to $21 million for the six months ended June 30, 2012, as compared to $19 million for the same period in 2010.2011. The decreaseyear-over-year increase was driven by an increase in the maturity of the available-for-sale securities in 2010 and the decrease in interest rates. average cardmember loan balance outstanding.

Provisions for losses

The total average investment balances, including time deposits, were $0.3 billion and $2.2 billion inprovisions for losses increased 24 percent or $12 million to $63 million for the six months ended June 30, 2012, as compared to $51 million for the same period in 2011. The increase was primarily driven by an increase in the volume of cardmember receivables purchased.

Interest expense

Interest expense increased 12 percent or $39 million to $368 million for the six months ended June 30, 2012, as compared to $329 million for the same period in 2011. This was primarily due to an increase in the volume of average debt outstanding, which increased 10 percent to $22 billion for the six months ended June 30, 2012, as compared to $20 billion for the same period in 2011, and 2010, respectively. Theas well as an increase in effective annualannualized interest rate on investments decreased 23rates of 2 basis points from 1.72to 3.39 percent for the six months ended June 30, 20102012, from 3.37 percent for the same period in 2011.

Interest expense to 1.49affiliates

Interest expense to affiliates increased 29 percent or $2 million to $9 million for the six months ended June 30, 2012, as compared to $7 million for the same period in 2011. This was primarily driven by the effective annualized interest rate on average debt to affiliates, which increased 11 basis points to 0.38 percent for the six months ended June 30, 2011.

Finance revenue
Finance revenue decreased 52012, as compared to 0.27 percent or $1for the same period in 2011, partially offset by a decrease in the average debt outstanding to affiliates of 12 percent to $4.6 billion for the six months ended June 30, 2012 from $5.2 billion for the same period in 2011.

Other, net expenses

The benefit recorded in other, net expenses increased $2 million to $19a benefit of $60 million for the six months ended June 30, 2011 as compared to $20 million for the same period in 2010. The year-over-year decrease was driven by a decrease in the average loan balance outstanding, partially offset by an increase in average interest rates.

Provisions for losses
The provisions for losses decreased 31 percent or $23 million to $51 million for the six months ended June 30, 2011, as compared to $74 million for the same period in 2010. The decrease was primarily driven by improved credit performance of the underlying portfolios.
Interest expense
Interest expense increased 28 percent or $71 million to $329 million for the six months ended June 30, 2011, as compared to $258 million for the same period in 2010. The increase was primarily driven by the classification of forward points gain, which was recorded in interest expense in 2010 and is now recorded in other, net expenses. The forward points gain for the six months ended June 30, 2011 was $65 million. In addition, interest expense also increased due to a marginal increase in interest rates and average debt outstanding.
Interest expense to affiliates
Interest expense to affiliates decreased 13 percent or $1 million to $7 million for the six months ended June 30, 2011, as compared to $8 million for the same period in 2010, due to a decrease in interest rates, partially offset by an increase in average debt outstanding to affiliates of 8 percent to $5.2 billion for the six months ended June 30, 2011, as compared to $4.8 billion for the same period in 2010. The effective annualized interest rate on average debt due to affiliates as of June 30, 2011 decreased 4 basis points2012, from 0.31 percent in 2010 to 0.27 percent in 2011.
Other, net expenses
Other, net expenses, which was a benefit of $58 million for the six months ended June 30, 2011, increased $28 million from the previous year’s benefit of $30 million.2011. The increasechange in other, net expense was primarily due to the classificationa lower hedge ineffectiveness loss of $2 million. Other, net expenses include forward points gain, which was recorded in interest expense in 2010. The impactgains of forward points gain for 2011 was$64 million and $65 million in other, net expense, offset by an unfavorable impact related to hedge ineffectiveness resulting in a loss of $9 million in 2011, as compared to a gain of $20 million in 2010, and a gain of $8 million in 2010 as a result of recoveries from the investment in the Reserve Prime Fund.
Income taxes
Credco’s effective tax rate for the six months ended June 30, 2012 and June 30, 2011, respectively. Credco uses foreign exchange forward contracts to manage foreign exchange risk for certain cross currency funding activities. At inception, the difference between the spot rate and 2010 wasthe contractual forward rate, referred to as the forward points, generates gains (or losses) as a component of the derivative contract’s valuation.

Income taxes

The effective tax rates for the six months ended June 30, 2012 and 2011 were (23.4) percent and (1.7) percent, and (3.3) percent, respectively. EachThe tax rate in each of the periods primarily reflects the favorable impact of the tax benefit related to Credco’s ongoing funding activities outside the United States. The availability of this benefit in future years is largely dependent on a provision of the U.S. Internal Revenue Code that Congress has not yet renewed. Refer to “Forward-Looking Statements” below for further discussion of this provision. In addition, the tax rate for each of the periods reflects recurring permanentthe impact of certain discrete state tax benefits in relation to the level of pretax income.items. The effective tax rate for the six months ended June 30, 2011 also includesreflects the impact of certain discrete state tax items, partially offset by the favorable resolution of certain prior years’ tax items. Credco’s effective tax rate reflects the favorable impact of the consolidated tax benefit related to its ongoing funding activities outside the United States.

19

Cardmember Receivables and Cardmember Loans

As of June 30, 20112012 and December 31, 2010,2011, Credco owned $13.1$16.3 billion and $12.4$12.8 billion, respectively, of gross cardmember receivables, respectively.receivables. Cardmember receivables represent amounts due from charge card customers and are recorded at the time they are purchased from the seller. Included in cardmember receivables are Credco Receivable Corporation’s (CRC) purchases of the participation interests from American Express Receivables Financing Corporation V LLC (RFC V) in conjunction with TRS’ securitization program. As of June 30, 20112012 and December 31, 2010,2011, CRC owned approximately $3.6$5.5 billion and $3.7$3.0 billion, respectively, of such participation interests.

Cardmember

Gross cardmember receivables owned as of June 30, 20112012 increased approximately $709 million$3.4 billion from December 31, 2010,2011, primarily as a result of an increase in cardmember receivables purchased driven by an increase in the seller’s interest in the American Express Issuance Trust (AEIT) during the six months ended June 30, 2011. In conjunction with TRS’ securitization program, Credco, through its wholly-owned subsidiary, CRC, purchases participation interests from RFC V, a wholly-owned subsidiary of TRS that receives an undivided, pro rata interest in cardmember receivables transferred to AEIT by TRS.

2012.

As of June 30, 20112012 and December 31, 2010,2011, Credco owned gross cardmember loans totaling $373$416 million and $380$411 million, respectively. These loans consist of certain interest-bearinginterest-earning receivables comprised of American Express and American Express joint venture credit card receivables.

The following table summarizes selected information related to the cardmember receivables portfolio as of or for the six months ended June 30:

                                            

 

(Millions, except percentages and where otherwise noted)

     2012  

2011

Total gross cardmember receivables

    $16,254  $        13,076   

Loss reserves – cardmember receivables

    $86  $             106   

Loss reserves as a % of receivables

     0.53%  0.81%

Average life of cardmember receivables(in days)(a)

     29  29   

U.S. Consumer and Small Business gross cardmember receivables

    $5,142  $          3,346   

30 days past due as a % of total

     1.24%  1.42%

Average receivables

    $3,888  $          4,003   

Write-offs, net of recoveries

    $29  $               27   

Net write-off rate(b)

     1.49%  1.33%

International and Global Commercial gross cardmember receivables

    $11,112  $          9,730   

90 days past billing as a % of total

     0.67%  0.70%

Write-offs, net of recoveries

    $48  $               38   

Net loss ratio(c)

     0.07%  0.06%

 

         
(Millions, except percentages) 2011  2010 
Total gross cardmember receivables $13,076  $12,350 
Loss reserves — cardmember receivables $106  $118 
Loss reserves as a % of receivables  0.8%  1.0%
Average life of cardmember receivables(in days)(a)
  29   29 
         
U.S. Consumer and Small Business gross cardmember receivables $3,346  $3,912 
30 days past due as a % of total  1.4%  1.4%
Average receivables $4,003  $3,559 
Write-offs, net of recoveries $27  $26 
Net write-off rate(b)
  1.3%  1.5%
         
International and Global Commercial gross cardmember receivables $9,730  $8,438 
90 days past billing as a % of total  0.7%  1.2%
Write-offs, net of recoveries(c)
 $38  $85 
Net loss ratio(c)(d)
  0.1%  0.2%

(a)

Represents the average life of cardmember 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 years indicated, to the volume of cardmember receivables purchased by Credco.

 
(b)

Credco’s write-offs, net of recoveries, representare expressed as a percentage of the average amount of cardmember receivables owned by Credco that are written off, consisting of principal and fees, expressed as a percentageat the beginning of the average cardmember receivables balance duringyear and at the period.end of each month in each of the six month periods indicated.

 
(c)Effective January 1, 2010, American Express revised the time period in which past due cardmember receivables for its International Card Services and Global Commercial Services segments are written off to 180 days past due or earlier, consistent with applicable bank regulatory guidance and the write-off methodology adopted for U.S. Consumer and Small Business receivables in the fourth quarter of 2008. Previously, these cardmember receivables were written off when 360 days past billing. Therefore, the net write-offs for the first quarter of 2010 include net write-offs resulting from this write-off methodology change, which decreased the 90 days past billing metrics and increased write-offs for these cardmember receivables but did not have a significant impact on provisions for losses.
(d)

Credco’s write-offs, net of recoveries, represent the amount of cardmember receivables owned by Credco that are written off, consisting of principal and fees, expressed as a percentage of the volume of cardmember receivables purchased by Credco duringin each of the period.periods indicated.

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Reserves for Cardmember Receivables and Cardmember Loans
The following is an analysis of the reserves for cardmember receivables and cardmember loans for the six months ended June 30:
         
(Millions) 2011  2010 
Balance, January 1 $121  $160 
Provisions for losses  51   74 
Accounts written-off(a)(b)
  (67)  (119)
Other(c)
  7   19 
       
Balance, June 30 $112  $134 
       
(a)Includes recoveries on accounts previously written-off of $56 million and $64 million during the six months ended June 30, 2011 and 2010, respectively.
(b)Includes $65 million of cardmember receivables net write-offs and $2 million of cardmember loans net write-offs during the six months ended June 30, 2011. Includes $111 million of cardmember receivable net write-offs and $8 million of cardmember loan net write-offs during the six months ended June 30, 2010.
(c)Primarily includes reserve balances applicable to net purchases of participation interests in cardmember receivables purchased from an affiliate.
Loans to Affiliates

Credco’s loans to affiliates represent fixed and floating rate interest-bearing intercompany borrowings by other wholly-ownedwholly owned subsidiaries of TRS. Components

The components of loans to affiliates as of June 30, 20112012 and December 31, 20102011 were as follows:

                                            

 

(Millions)

     2012   

2011

TRS Subsidiaries:

      

American Express Australia Limited

    $3,839   $             3,884

American Express Services Europe Limited

     2,886   2,849

Amex Bank of Canada

     2,504   2,725

American Express Company

     2,117   895

American Express Co. (Mexico) S.A. de C.V.

     468   455

American Express Bank (Mexico) S.A.

     365   355

American Express International, Inc.

     263   274
    

 

 

   

 

Total(a)

    $12,442   $           11,437
    

 

 

   

 

 

        
(Millions) 2011  2010
TRS Subsidiaries:       
American Express Australia Limited $3,884  $3,935
American Express Services Europe Limited  2,845   2,698
Amex Bank of Canada  2,500   2,969
American Express International, Inc.  401   519
American Express Co. (Mexico) S.A. de C.V.  513   483
American Express Bank (Mexico) S.A.  407   383
      
Total $10,550  $10,987
      

(a)

As of June 30, 2012, Credco had $12.4 billion of outstanding loans to affiliates, of which approximately $6.5 billion were collateralized by the underlying cardmember receivables and cardmember loans transferred with recourse and the remaining $5.9 billion were uncollateralized loans primarily with affiliated banks. As of December 31, 2011, Credco had $11.4 billion of outstanding loans to affiliates, of which approximately $6.6 billion were collateralized by the underlying cardmember receivables and cardmember loans transferred with recourse and the remaining $4.8 billion were uncollateralized loans primarily with affiliated banks.

Due to/fromfrom/to Affiliates

As of June 30, 20112012 and December 31, 2010,2011, amounts due tofrom affiliates were $0.9$3.0 billion and $1.7$5.7 billion, respectively. As of June 30, 20112012 and December 31, 2010,2011, amounts due fromto affiliates were $4.9$1.0 billion and $4.0$1.7 billion, respectively. These amounts relate primarily to timing differences resulting from the purchase of cardmember receivables, net of remittances from TRS, as well as tofrom operating activities.

21

activities.

Short-term Debt to Affiliates

Short-term debt to affiliates consists primarily of master note agreements for which there is no stated term. Credco does not expect any changes to its short-term funding strategies with affiliates.

Components of short-term debt to affiliates as of June 30, 20112012 and December 31, 20102011 were as follows:

                                            

 

(Millions)

     2012   

2011

AE Exposure Management Ltd.

    $2,443   

$             2,477

American Express Europe Limited

     580   

764

American Express Swiss Holdings

     285   

258

American Express Holdings (Netherlands) C.V.

     226   

225

National Express Company, Inc.

     133   

155

Other

     181   

156

    

 

 

   

 

Total

    $3,848   $             4,035
    

 

 

   

 

 

        
(Millions) 2011  2010
AE Exposure Management Ltd $1,965  $2,789
American Express Company  784   11
American Express Europe Limited  415   100
American Express Holdings (Netherlands) C.V.  295   295
American Express Swiss Holdings  239   191
National Express Company, Inc.  154   158
Other  134   237
      
Total $3,986  $3,781
      

Service Fees to Affiliates

Certain affiliates do not explicitly charge Credco a servicing fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables sold to Credco than would be the case if servicing fees were charged explicitly, as the discount rate on receivables purchased by Credco is adjusted to generate income for Credco that is sufficient to maintain its minimum fixed charge coverage ratio.charged. If a servicing fee werehad been charged by these other affiliates from which Credco purchases receivables, servicing fees to affiliates would have been higher by approximately $62$69 million and $60$62 million for the six months ended June 30, 20112012 and 2010,2011, 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

•A broad, deep and diverse set of funding sources to finance its assets and meet operating requirements; and
•Liquidity programs that enable Credco to satisfy all maturing financing obligations for at least a 12-month period should some or all of its funding sources become inaccessible.

Liquidity programs that enable Credco to continuously meet expected future financing obligations and business requirements for at least a 12-month period even in the event it is unable to continue to raise new funds under its traditional funding programs.

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, as well as to maintain a strong liquidity profile. The diversity of funding sources by type of debt instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions, or from any one type of debt, maturity or investor. The mix of Credco’s funding in any period will seek to achieve cost-efficiency consistent with both maintaining diversified sources and achieving its liquidity objectives. Credco’s funding strategy and activities are integrated into its asset-liability management activities.

Credco, like many financial services companies, has historically relied on 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 debentures and commercial paper. One of the principal tenets of Credco’s funding strategy is to issue debt with a wide range of maturities to distribute its refinancing requirements across future periods. 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 plan is subject to various risks and uncertainties, such as the disruption of financial markets or 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.

22

Credco’s funding strategy for 20112012 is to raise funds to meet short-term borrowings outstanding, which includes seasonal and other working capital needs and changes in receivables and other asset balances, while maintainingseeking to maintain access to a sufficient amount of its own and its affiliates’ cash and readily-marketable securities that are easily convertible to cash, in order to meet the scheduled maturities of all long-term borrowingsfunding obligations for a 12-month period. Credco has $2.3$3.3 billion of unsecured long-term debt that will mature during the next 12 months.

Credco’s funding strategy is designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies, includingagencies: Moody’s S&P,Investors Services (Moody’s), Standard & Poor’s (S&P), Fitch Ratings (Fitch) and Dominion Bond Rating Service (DBRS). Such ratings help support Credco’s access to cost effectivecost-effective unsecured funding as part of its overall financing programs.

funding strategy.

Credco’s short-term ratings, long-term ratings and outlook as disclosed by the four major credit rating agencies are as follows:

Credit

Agency

  

Short-Term

Ratings

  

Long-Term

Ratings

  

Outlook

Credit

DBRS

  Short-Term

R-1

(middle)

  Long-Term
AgencyRatingsRatingsOutlook
DBRSR-1 (middle)

A

(high)

  Stable

Fitch

  F1  A+  Stable

Moody’s

  Prime-1  A2  Stable(a)

S&P

  A-2  BBB+A-(a)  Stable
(a)

 (a)

In May 2011, Moody’sJune 2012, S&P revised its ratings outlook for American Express Company, TRS and rated operating subsidiarieslong-term rating from “Negative”BBB+ to “Stable”.A-.

A downgrade

Downgrades in the ratings of Credco’s unsecured debt rating could result in higher interest expense on Credco’s unsecured debt,funding costs, as well as higher fees related to borrowings under its unused lines of credit. In addition to increased funding costs, a declineDeclines in credit debt 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 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. However, downgradesDowngrades to certain of Credco’s unsecured debt ratings that have occurred overin the last several years have not caused a permanent increase inmaterially impacted Credco’s borrowing costs or resulted in a reduction in its borrowing capacity.

The long-term rating reflects a one notch upgrade to A- by S&P in June 2012.

Short-term Funding Programs

Credco’s issuance and sale of commercial paper is utilized for working capital needs, such as managing seasonal variations in receivables balances.needs. The amount of short-term borrowings issued in the future will depend on Credco’s funding strategy, its needs and market conditions. Credco’s commercial paper outstandings were fairly stable throughout 2011.2012. As of June 30, 20112012 and December 31, 2010,2011, Credco had $0.7$0.5 billion and $0.6 billion, respectively, of commercial paper outstanding, respectively.outstanding. The average commercial paper outstanding was $0.7$0.5 billion and $0.9$0.6 billion during the six months ended June 30, 20112012 and the year ended December 31, 2010,2011, respectively.

Credco’s total back-up liquidity coverage, which includesconsists of its undrawn committed bank facilities, was in excess of 10068 percent and 62 percent of its net short-term borrowings, including short-term debt to affiliates, as of June 30, 20112012 and December 31, 2010.2011, respectively. The undrawn committed bank credit facilities were $5.7$3.0 billion and $2.9 billion as of June 30, 2011.

232012 and December 31, 2011, respectively.

The following table presents information relating toselected statistics regarding Credco’s commercial paper balances outstanding as of:

 

(Billions)

            Period

     Ending       Average       Minimum      

Maximum

Q2’12

    $                             0.5     $                             0.5     $                             0.3     $                             0.7

Q1’12

     0.4      0.4      0.3     0.7

Q4’11

     0.6      0.5      0.3     0.8

Q3’11

     0.8      0.7      0.4     0.9

Q2’11

     0.7      0.7      0.5     0.8

Q1’11

     0.8      0.7      0.4     0.9

Q4’10

     0.6      0.8      0.5     1.0

Q3’10

     0.9      1.0      0.8     1.2

Q2’10

     1.4      0.9      0.8     1.4

Q1’10

     0.9      0.8      0.6     1.0

 

(Billions)
                     
Period    Ending  Average  Minimum  Maximum 
 Q2’11    $0.7  $0.7  $0.5  $0.8
 Q1’11     0.8   0.7   0.4   0.9
                     
 Q1’10     0.9   0.8   0.6   1.0
 Q2’10     1.4   0.9   0.8   1.4
 Q3’10     0.9   1.0   0.8   1.2
 Q4’10     0.6   0.8   0.5   1.0
                     
 Q1’09     1.8   3.7   1.4   7.4
 Q2’09     1.4   1.5   1.2   2.0
 Q3’09     1.1   1.1   0.9   1.3
 Q4’09     1.0   0.8   0.6   1.1

Long-term Debt Programs

Long-term debt is raised through the offering of debt securities in the United States and capital markets outside the United States. Long-term debt is generally defined as any debt with an original maturity greater than 12 months.

Credco had the following long-term debt outstanding as of June 30, 20112012 and December 31, 2010:2011:

                                            

 

(Billions)

     2012   

2011

Long-term debt outstanding

    $23.6   $               21.2

Average long-term debt

    $21.2   $               19.5

 

         
 
(Billions) 2011  2010 
Long-term debt outstanding $19.7  $19.0 
Average long-term debt $18.8  $19.0 

Credco has the ability to issue debt securities under shelf registrations 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 to be issued. During the six months ended June 30, 2011,second quarter of 2012, Credco issued $600$1.25 billion of senior unsecured debt from its U.S. shelf registration with a maturity of three years and a coupon of 1.75 percent and $750 million of senior unsecured debt from its U.S. shelf registration with a maturity of three years and a floating rate of 3-monththree-month LIBOR plus 85110 basis points from its U.S. shelf registration.points. As of June 30, 20112012 and December 31, 2010,2011, Credco had $10.2$14.8 billion and $10.5$12.3 billion respectively, of debt securities outstanding, respectively, issued under the SEC registration statement.

Credco has established a program for the issuance of debt instruments outside the United States, which is listed on the Luxembourg Stock Exchange. The prospectus for this program was renewed in January 2011 andIt allows for a maximum aggregate principal amount of debt instruments outstanding at any one time of $50 billion. During the six months ended June 30, 2011,2012, no notes were issued under this program. As of both June 30, 20112012 and December 31, 2010, $2.22011, $1.7 billion and $2.6 billion, respectively, were outstanding under this program, of which $2.2 billion and $2.1 billion were issued by Credco, respectively.

program.

Credco has also established a program in Australia for the issuance of debt securities of up to approximately $6.3$6.0 billion. During the six months ended June 30, 2011,2012, no notes were issued under this program. AsAssuming no changes in foreign currency exchange rates, as of both June 30, 20112012 and December 31, 2010,2011, the entire amount of approximately $5.8$6.0 billion and $5.6 billion, respectively, of notes were available for issuance under this program and $469 million and $456 million ofno notes were outstanding, respectively.

As of June 30, 2011, outstanding.

Credco maintained a shelf registration in Canada forhas also established a medium-term note program in Canada providing for the issuance, when necessary, of up to approximately $3.5$3.4 billion of notes by American Express Canada Credit Corporation (AECCC), an indirect wholly-ownedwholly owned subsidiary of Credco. This shelf registration for this program expired on June 27, 2012 and was subsequently renewed on August 9, 2012. All notes issued by AECCC under this shelf registration are guaranteed by Credco. DuringFor the six months ended June 30, 2011, Credco2012, no notes were issued C$325 million of senior unsecured debt with a maturity of three years and a floating rate of 1-month Canadian Dealer Offered Rate (CDOR) plus 105 basis points and C$400 million of senior unsecured debt with a maturity of five years and a coupon of 3.6 percent.under this program. As of both June 30, 20112012 and December 31, 2010,2011, AECCC had $2.2 billion and $1.8 billion outstanding under this program, respectively.program. The financial results of AECCC are included in the consolidated financial results of Credco.

24

The most restrictive limitation on Credco’s ability to pay dividends to its parent imposed by the covenants of debt instruments issued by Credco isimpose the requirement that Credco maintain a minimum consolidated net worth of $50 million.million, which limits the amount of dividends Credco could pay to its parent. As of June 30, 2011,2012, management believes Credco is in compliance with all restrictive covenants contained in its debt agreements. During the six months ended June 30, 2012 and 2011, Credco paid $192 million and $157 million, respectively, of cash dividends to TRS. Additionally,The increase in the amount of dividends is primarily driven by higher levels of net income from periods prior to the second quarter of 2012 as compared to net income from comparable periods prior to the second quarter of 2011. When considering the amount of dividends it pays, Credco paid cash dividendstakes into account the amount of $500 millioncapital required to maintain capital strength, support business growth, and meet the expectations of debt investors. To the extent excess capital is available, it may be distributed to TRS, on July 7, 2011.Credco’s parent company, via dividends. There are no significant covenant 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 required fixed charge coverage ratio of 1.25.

Liquidity Strategy

General principles and the overall framework for managing liquidity risk across American Express on an enterprise-wide basis are set out in American Express’ Liquidity Risk Policy. The liquidity objective is to maintain access to a diverse set of oncash, readily marketable securities and off-balance sheetcontingent sources of liquidity, suchso that American Express and its subsidiaries, including Credco, can continuously meet their business requirements and expected future financing obligations and business requirements,for at least a 12-month period, even in the event they are unable to raise new funds under their regular funding programs.

Credco manages this objective by regularly accessing capital through its various funding programs, as well as by maintaining a variety of contingent sources of cash and financing, such as access to securitizations of cardmember receivables through sales of receivables to TRS for securitization by RFC V and AEIT, as well as committed bank facilities.

Credco incurs and accepts liquidity risk arising in the normal course of its activities. The liquidity risks that American Express, including Credco, isare exposed to can arise from a variety of sources, and thus the enterprise-wide liquidity management strategy includes a variety of parameters, assessments and guidelines, including, but not limited to:

Maintaining a diversified set of funding sources (refer to Funding Strategy section for more detail);

•Maintaining a diversified set of funding sources (refer to Funding Strategy section for more detail);
•Maintaining unencumbered liquid assets and off-balance sheet liquidity sources; and
•Projecting cash inflows and outflows from a variety of sources and under a variety of scenarios.

Maintaining unencumbered liquid assets and off-balance sheet liquidity sources; and

Projecting cash inflows and outflows from a variety of sources and under a variety of scenarios.

Credco’s current liquidity target is to maintain adequate liquidity in the form of cash and readily-marketable securities that are easily convertible into cash as well as access to additional liquidity through intercompany borrowing arrangements, to satisfy all maturing funding obligations for a period of 12 months, while continuing to maintain access to significant additional contingency liquidity sources. As of June 30, 20112012, Credco had $2.3$3.3 billion of unsecured long-term debt that will mature within 12 months.

As of June 30, 2011,2012, Credco had cash and cash equivalents of approximately $79$187 million. 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.

The yield Credco receives on its cash and cash equivalents is generally less than the interest expense on the sources of funding for these balances. Thus, Credco incurs substantial interest costs on these amounts. The level of net interest costs will beare dependent on the amount of itsCredco’s cash and cash equivalents, as well as the difference between its cost of funding these amounts and their investment yields.

Committed Bank Credit Facilities

Credco maintained the following$7.5 billion of committed syndicated bank credit facilities as of June 30, 2011:

             
  American       
(Billions) Express  Credco  Total 
Committed $0.8  $9.1  $9.9(a)
          
Outstanding $—  $4.2  $4.2 
          
(a)Credco has the right to borrow a maximum amount of $9.9 billion with a commensurate maximum $0.8 billion reduction in the amount available to American Express.

25

2012, of which the amount outstanding (drawn) was $4.5 billion.

Credco’s remaining committed bank credit facilities expire as follows:

 

(Billions)

    

 

2014

    $            2.0

2015

    3.0

2016

    2.5
    

 

Total

    $            7.5
    

 

 

     
     
(Billions)    
2011(a)
 $2.7
2012(b)
  7.2
   
Total $9.9
   
     
(a)These credit facilities were allowed to expire on July 21, 2011.
(b)Of the $7.2 billion committed bank credit facilities due to expire in 2012, $4.2 billion was drawn and outstanding from the Australian Credit Facility as of June 30, 2011. It was repaid on August 3, 2011 and a new Australian Syndicated Credit Facility in the amount of 4.5 billion Australian Dollars was entered into on the same day and has been fully drawn. The new facility was issued in tranches of which 2.0 billion Australian Dollars expires in 2014, and 2.5 billion Australian Dollars expires in 2016.

The availability of the credit lines is subject to Credco’s compliance with certain financial covenants that require maintenance of at least a 1.25 ratio of earnings to fixed charges. The ratio of earnings to fixed charges for Credco was 1.511.42 for the six months ended June 30, 2011.2012. The ratio of earnings to fixed charges for American Express for the six months ended June 30, 20112012 was 3.91.

4.14.

Committed bank credit facilities do not contain material adverse change clauses that would preclude borrowing under the credit facilities. Additionally, the facilities may not be terminated should there be a change in Credco’s credit rating.

In consideration of all its funding sources, Credco believes it would have theaccess to liquidity to satisfy all maturing obligations for at least a 12-month period in the event that access to the secured and unsecured fixed income capital markets is completely interrupted for that length of time. These events are not considered likely to occur.

26

Cautionary Note Regarding Forward-Looking Statements

Various statements have been made in this Quarterly Report on this Second Quarter 20112012 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 Securities and Exchange Commission (SEC)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, including those identified above and below, which could cause actual results to differ materially from such statements. The words “believe,” “expect,” “estimate,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. Credco cautions you that the risk factors described above and in Credco’s Annual Report on Form 10-K for the year ended December 31, 2011 and other factors described below 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:

•changes in global economic and business conditions, including consumer and business spending, the availability and cost of credit, unemployment and political conditions, all of which may significantly affect spending on American Express cards, delinquency rates, loan balances and other aspects of Credco’s business and results of operations;
•changes in capital and credit market conditions, including sovereign creditworthiness, which may significantly affect Credco’s ability to meet its liquidity needs, access to capital and cost of capital, including changes in interest rates; changes in market conditions affecting the valuation of Credco’s assets; or any reduction in Credco’s credit ratings or those of its subsidiaries, which could materially increase the cost and other terms of Credco’s funding, restrict its access to the capital markets or result in contingent payments under contracts;
•the effectiveness of Credco’s risk management policies and procedures, including Credco’s ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of cardmember receivables and loans;
•fluctuations in foreign currency exchange rates;
•changes in laws or government regulations affecting American Express’ business, including the potential impact of regulations adopted by federal bank regulators relating to certain credit and charge card practices, the impact of the CARD Act, and the impact of the Dodd-Frank Reform Act, which is subject to further extensive rulemaking, the implications of which are not fully known at this time; or potential changes in the Federal tax system that could substantially alter, among other things, the taxation of American Express’ international businesses or the allowance of deductions for significant expenses;
•the impact on American Express’ business that could result from litigation such as class actions or proceedings brought by governmental and regulatory agencies (including the lawsuit filed against American Express by the DOJ and certain state attorneys general); 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, Credco’s credit ratings, market capacity and demand for securities offered by Credco, performance by Credco’s counterparties under its bank credit facilities and other lending facilities, and regulatory changes.

credit trends, which will depend in part on the economic environment, including, among other things, the housing market and the rates of bankruptcies, which can affect spending on card products and debt payments by individual and corporate customers;

27

the effectiveness of Credco’s risk management policies and procedures, including Credco’s ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of cardmember receivables and 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 federal bank regulators relating to certain credit and charge card practices, the impact of the CARD Act, and the impact of the Dodd-Frank Reform Act, which is subject to further extensive rulemaking, the implications of which are not fully known at this time;

the effect of fluctuating interest rates, which could affect Credco’s borrowing costs;

the impact on American Express’ business resulting from continuing geopolitical uncertainty;

the impact on American Express’ business that could result from litigation such as class actions or proceedings brought by governmental and regulatory agencies (including the lawsuit filed against American Express by the U.S. Department of Justice and certain state attorneys general);

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; and

Credco’s results of operations being adversely impacted by other legislative action or inaction, including the failure of the United States Congress to renew legislation regarding the active financing exception to Subpart F of the Internal Revenue Code, which could increase Credco’s effective tax rate and have an adverse impact on net income.

ITEM 4. CONTROLS AND PROCEDURES

ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure 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”)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’s 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.

28

PART II. OTHER INFORMATION

ITEM 1A.RISK FACTORS
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, 2010.2011 (the 2011 Form 10-K). There are no material changes from the risk factors set forth in such Annual Report onthe 2011 Form 10-K. However, the risks and uncertainties that Credco faces are not limited to those set forth in the 20102011 Form 10-K. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect Credco’s business.

ITEM 6.EXHIBITS
ITEM 6. EXHIBITS

The exhibits required to be filed with this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

29

SIGNATURES

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)
  

AMERICAN EXPRESS CREDIT CORPORATION

(Registrant)

Date: August 10, 2011 9, 2012

By 

By

/s/ David L. Yowan

 

David L. Yowan

 

Chief Executive Officer

Date: August 9, 2012

 
 
Date: August 10, 2011 

By

By 

/s/ Kimberly R. Scardino

 

Kimberly R. Scardino

 

Vice President and Chief Accounting Officer

30

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

Exhibit

No.

 

Description

  

How Filed

Exhibit No.4(a) Description

Form of Permanent Global Registered Fixed Rate Medium-Term Senior Note,

Series E

  How FiledIncorporated by reference to Exhibit 4(i) to Registrant’s Registration Statement on Form S-3 dated June 18, 2012 (File No. 333-182197)
Exhibit 10.14(b) Syndicated Facility Subscription Agreement dated asForm of August 3, 2011.Permanent Global Registered Floating Rate Medium-Term Senior Note, Series E  Electronically filed herewith.Incorporated by reference to Exhibit 4(j) to Registrant’s Registration Statement on Form S-3 dated June 18, 2012 (File No. 333-182197)
Exhibit 4(c) Form of Monthly Extendible Note  Incorporated by reference to Exhibit 4(k) to Registrant’s Registration Statement on Form S-3 dated June 18, 2012 (File No. 333-182197)
Exhibit 4(d)Form of Medium-Term Note Master Note relating to the Registrant’s InterNotes® ProgramIncorporated by reference to Exhibit 4(l) to Registrant’s Registration Statement on Form S-3 dated June 18, 2012 (File No. 333-182197)
Exhibit 12.1 Computation in Support of Ratio of Earnings to Fixed Charges of American Express Credit Corporation.  Electronically filed herewith.
Exhibit 12.2 Computation in Support of Ratio of Earnings to Fixed Charges of American Express Company.  Electronically filed herewith.
Exhibit 31.1 Certification of David L. Yowan, Chief Executive Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.  Electronically filed herewith.
Exhibit 31.2 Certification of Anderson Y. Lee, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.  Electronically filed herewith.
Exhibit 32.1 Certification of David L. Yowan, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Electronically filed herewith.
Exhibit 32.2 Certification of Anderson Y. Lee, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Electronically filed herewith.
101.INS XBRL Instance Document*  
101.SCH XBRL Taxonomy Extension Schema Document*  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*  
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*  

*

These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

E-1