UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 1-6908
AMERICAN EXPRESS CREDIT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 11-1988350 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
One Christina Centre, 301 North Walnut Street | ||
Suite 1002, Wilmington, Delaware | 19801-2919 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number including area code:(302) 594-3350 | ||
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 INSTRUCTIONS 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. | ||||
Yes X No _____ | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): | ||||
Large accelerated filer _____ Accelerated filer _____ Non-accelerated filer X | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | ||||
Yes _____ No X | ||||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
Class | Outstanding at November 12, 2007 | |
Common Stock (par value $.10 per share) | 1,504,938 Shares |
AMERICAN EXPRESS CREDIT CORPORATION
FORM 10-Q
INDEX
Page No. | ||||||
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
Consolidated Statements of Income and Retained | ||||||
Earnings – Three and nine months ended September 30, | ||||||
2007 and 2006 | 3 | |||||
Consolidated Balance Sheets – | ||||||
September 30, 2007 and December 31, 2006 | 4 | |||||
Consolidated Statements of Cash Flows – | ||||||
Nine months ended September 30, 2007 and 2006 | 5 | |||||
Notes to Consolidated Financial Statements | 6 | |||||
Item 2. | Management’s Discussion and Analysis | |||||
of Financial Condition and Results | ||||||
of Operations | 9 | |||||
Item 4. | Controls and Procedures | 16 | ||||
PART II. | OTHER INFORMATION | |||||
Item 6. | Exhibits | 17 | ||||
Signatures | 18 | |||||
Exhibit Index | E-1 |
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AMERICAN EXPRESS CREDIT CORPORATION
PART I. FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(Millions)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 | ||||||||
Revenues | ||||||||||||||||
Discount revenue earned from purchased | ||||||||||||||||
cardmember receivables and loans | $ | 735 | $ | 607 | $ | 2,088 | $ | 1,575 | ||||||||
Interest income from affiliates | 168 | 138 | 471 | 378 | ||||||||||||
Interest income from investments | 73 | 58 | 203 | 155 | ||||||||||||
Finance charge revenue | 13 | 11 | 38 | 35 | ||||||||||||
Other | 3 | 4 | 8 | 8 | ||||||||||||
Total revenues | 992 | 818 | 2,808 | 2,151 | ||||||||||||
Expenses | ||||||||||||||||
Provision for losses, net of recoveries(1) | 194 | 181 | 508 | 396 | ||||||||||||
Interest expense | 426 | 334 | 1,197 | 936 | ||||||||||||
Interest expense to affiliates | 110 | 89 | 325 | 236 | ||||||||||||
Service fees to affiliates | 49 | 32 | 141 | 55 | ||||||||||||
Other | 2 | 1 | 4 | 4 | ||||||||||||
Total expenses | 781 | 637 | 2,175 | 1,627 | ||||||||||||
Pretax income | 211 | 181 | 633 | 524 | ||||||||||||
Income tax provision | 20 | 21 | 69 | 71 | ||||||||||||
Net income | 191 | 160 | 564 | 453 | ||||||||||||
Dividends | (150 | ) | (100 | ) | (450 | ) | (200 | ) | ||||||||
Adoption of FIN 48 | - | - | (15 | ) | - | |||||||||||
Retained earnings at beginning of period | 3,260 | 3,273 | 3,202 | 3,080 | ||||||||||||
Retained earnings at end of period | $ | 3,301 | $ | 3,333 | $ | 3,301 | $ | 3,333 |
See Notes to Consolidated Financial Statements.
(1) | Provision for losses are shown net of recoveries of $46 million and $30 million for the three months ended September 30, 2007 and 2006, respectively, and $135 million and $117 million for the nine months ended September 30, 2007 and 2006, respectively. |
Earnings per share and dividends per share are not reported because Credco is a wholly-owned subsidiary of American Express Travel Related Services Company, Inc.
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AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
(Unaudited)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 2,917 | $ | 737 | ||||
Investment securities | 2,029 | 2,299 | ||||||
Investment securities restricted | 999 | 716 | ||||||
Cardmember receivables, less reserves: 2007, $746; 2006, $739 | 26,109 | 26,854 | ||||||
Cardmember loans, less reserves: 2007, $9; 2006, $10 | 371 | 346 | ||||||
Loans with affiliates | 10,959 | 9,691 | ||||||
Deferred charges and other assets | 372 | 313 | ||||||
Due from affiliates | 1,314 | 7 | ||||||
Total assets | $ | 45,070 | $ | 40,963 | ||||
Liabilities and Shareholder’s Equity | ||||||||
Short-term debt | $ | 9,225 | $ | 5,883 | ||||
Short-term debt with affiliates | 8,741 | 9,586 | ||||||
Long-term debt | 23,108 | 21,790 | ||||||
Total debt | 41,074 | 37,259 | ||||||
Accrued interest and other liabilities | 383 | 285 | ||||||
Total liabilities | 41,457 | 37,544 | ||||||
Shareholder’s Equity | ||||||||
Common stock, $.10 par value, authorized 3 million shares; | ||||||||
issued and outstanding 1.5 million shares | 1 | 1 | ||||||
Capital surplus | 161 | 161 | ||||||
Retained earnings | 3,301 | 3,202 | ||||||
Accumulated other comprehensive income (loss), net of tax: | ||||||||
Net unrealized securities gains | 16 | 5 | ||||||
Net unrealized derivatives (losses) gains | (3 | ) | 10 | |||||
Foreign currency translation adjustments | 137 | 42 | ||||||
Other | - | (2 | ) | |||||
Total accumulated other comprehensive income | 150 | 55 | ||||||
Total shareholder’s equity | 3,613 | 3,419 | ||||||
Total liabilities and shareholder’s equity | $ | 45,070 | $ | 40,963 |
See Notes to Consolidated Financial Statements.
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AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
|
| 2007 |
| 2006 | ||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 564 | $ | 453 | ||||
Adjustments to reconcile net income to net cash | ||||||||
provided by operating activities: | ||||||||
Provision for losses | 643 | 513 | ||||||
Amortization and other | 8 | 7 | ||||||
Deferred taxes | (34 | ) | 7 | |||||
Changes in operating assets and liabilities: | ||||||||
Due from affiliates | 19 | 17 | ||||||
Other operating assets and liabilities | 12 | 361 | ||||||
Net cash provided by operating activities | 1,212 | 1,358 | ||||||
Cash Flows from Investing Activities | ||||||||
Net decrease (increase) in cardmember receivables and | ||||||||
loans | 134 | (958 | ) | |||||
Purchase of investments | - | (2,404 | ) | |||||
Maturities of investments | - | 2,419 | ||||||
Net increase in loans with affiliates | (447 | ) | (656 | ) | ||||
Net increase in due from affiliates | (1,326 | ) | (944 | ) | ||||
Net cash used in investing activities | (1,639 | ) | (2,543 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Net (decrease) increase in short-term debt with affiliates with | ||||||||
maturities of ninety days or less | (845 | ) | 222 | |||||
Net increase (decrease) in short-term debt with maturities of | ||||||||
ninety days or less | 3,120 | (1,333 | ) | |||||
Issuance of debt | 5,562 | 9,551 | ||||||
Redemption of debt | (4,769 | ) | (6,182 | ) | ||||
Dividends paid | (450 | ) | (200 | ) | ||||
Net cash provided by financing activities | 2,618 | 2,058 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (11 | ) | - | |||||
Net increase in cash and cash equivalents | 2,180 | 873 | ||||||
Cash and cash equivalents at beginning of period | 737 | 1,051 | ||||||
Cash and cash equivalents at end of period | $ | 2,917 | $ | 1,924 |
See Notes to Consolidated Financial Statements.
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AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Annual Report on Form 10-K of American Express Credit Corporation (Credco) and its subsidiaries for the year ended December 31, 2006. Significant accounting policies disclosed therein have not changed. Certain prior year amounts have been reclassified to conform to the current year presentation of the Consolidated Balance Sheets, Consolidated Statements of Income and Consolidated Statements of Cash Flows, including disclosures related to foreign currency translation adjustment and net cardmember receivables and loans. In addition, beginning prospectively on September 30, 2007, certain cardmember receivables were reclassified to loans with affiliates. On September 18, 2007, American Express Company (American Express) announced that it entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) to Standard Chartered PLC, subject to certain regulatory approvals. Credco purchases certain AEB customer loans. At September 30, 2007, approximately $1.3 million of AEB customer loans were included in cardmember loans. Credco is a wholly-owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly-owned subsidiary of American Express. American Express Overseas Credit Corporation Limited, together with its subsidiaries (AEOCC), Credco Receivables Corporation (CRC), Credco Finance, Inc., together with its subsidiaries (CFI), American Express Canada Credit Corporation (AECCC), American Express Canada Finance Limited (AECFL), American Express Capital Australia (AECA), American Express Sterling Funding Limited Partnership together with its subsidiary (AESLP), American Express Euro Funding Limited Partnership (AEELP) and American Express Credit Mexico LLC, together with its subsidiaries, are wholly-owned subsidiaries of Credco. The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses and investment securities valuation. These accounting estimates reflect the best judgment of management, but actual results could differ. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has recently issued the following accounting standards, which are effective beginning January 1, 2008. Credco is currently evaluating the impact of these accounting standards. |
- Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157),establishes a framework for measuring fair value and applies broadly to financial and non-financial assets andliabilities measured at fair value under existing authoritative accounting pronouncements. SFAS No. 157establishes a fair value hierarchy that prioritizes inputs to valuation techniques used for financial instrumentswithout active markets and for non-financial assets and liabilities. SFAS No. 157 also expands disclosurerequirements regarding methods used to measure fair value and the effects on earnings.
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AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115” (SFAS No. 159), provides companies with an option to reportselected financial assets and liabilities at fair value.
FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (FIN 39-1), permits areporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) orthe obligation to return cash collateral (a payable) against fair value amounts recognized for derivativeinstruments executed with the same counterparty under the same master netting arrangement. Credco does notexpect FIN 39-1 to have a material impact on its Consolidated Financial Statements.
Emerging Issues Task Force Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), clarifies when income tax benefits from dividends paid on share-basedpayment awards should be recognized in equity or the income statement. Credco does not expect EITF 06-11to have a material impact on its Consolidated Financial Statements.
2. Investment Securities
The following is a summary of investment securities at September 30, 2007 and December 31, 2006:
Available-for-Sale |
| 2007 |
| 2006 | ||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||
Unrealized | Unrealized | Fair | Unrealized | Unrealized | Fair | |||||||||||||||||||||
(Millions) |
| Cost |
| Gains |
| Losses |
| Value |
| Cost |
| Gains | Losses |
| Value | |||||||||||
U.S. Treasury and government | ||||||||||||||||||||||||||
agency securities | $ | 2,012 | $ | 17 | $ | - | $ | 2,029 | $ | 2,294 | $ | 7 | $ | (2 | ) | $ | 2,299 | |||||||||
U.S. Treasury and government | ||||||||||||||||||||||||||
agency securities - restricted | 990 | 9 | - | 999 | 714 | 2 | - | 716 | ||||||||||||||||||
Total | $ | 3,002 | $ | 26 | $ | - | $ | 3,028 | $ | 3,008 | $ | 9 | $ | (2 | ) | $ | 3,015 |
During the nine months ended September 30, 2007, there were no purchases or maturities of U.S. Treasury and government agency securities. All of Credco’s investment securities are Available-for-Sale. There were no realized gains or losses on U.S. Treasury and government agency securities for the nine months ended September 30, 2007.
In conjunction with its liquidity investment portfolio, Credco has securities lending agreements with other financial institutions. Under these agreements, certain investment securities are loaned on an overnight basis to financial institutions, and are secured by collateral equal to at least 102 percent of the fair market value of the investment securities lent. Collateral received by Credco can be in the form of cash or marketable U.S. Treasury or government agency securities. Credco may only retain or sell these securities in the event of a borrower default. Credco’s loaned investment securities are considered restricted and pledged assets and, therefore, have been reclassified as investment securities restricted on the Consolidated Balance Sheet. The marketable securities received as collateral are not recorded on its Consolidated Balance Sheet, as Credco is not permitted to sell or repledge these securities absent a borrower default. Fees received from the securities lending transactions are recorded as interest income from investments. At September 30, 2007, $999 million of investment securities were loaned under these agreements.
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AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. | Comprehensive Income | ||||||||||||||||
The components of comprehensive income, net of related tax, were as follows: | |||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
(Millions) | September 30, | September 30, | |||||||||||||||
|
| 2007 |
|
| 2006 |
|
| 2007 |
|
| 2006 |
| |||||
Net income | $ | 191 | $ | 160 | $ | 564 | $ | 453 | |||||||||
Other comprehensive income (loss): | |||||||||||||||||
Net unrealized securities gains | 19 | 26 | 11 | 22 | |||||||||||||
Net unrealized derivatives losses | (25 | ) | (52 | ) | (13 | ) | (32 | ) | |||||||||
Foreign currency translation adjustments | 36 | 17 | 95 | 30 | |||||||||||||
Total | $ | 221 | $ | 151 | $ | 657 | $ | 473 | |||||||||
4. | Income Taxes | ||||||||||||||||
Credco adopted FASB Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48) as of January 1, 2007. The initial adoption of FIN 48 resulted in a charge of approximately $15 million to the January 1, 2007 balance of retained earnings. As of January 1, 2007, and including the impact of the initial adoption charge to retained earnings, Credco’s total gross benefits for tax positions that have not been recognized through the financial statements were approximately $44 million, exclusive of interest and penalties described below. Included in the $44 million are approximately $38 million of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in a future period. There have not been any significant changes in Credco’s unrecognized tax benefits as of September 30, 2007. Credco’s continuing practice is to recognize interest and penalties relating to unrecognized tax benefits in the income tax provision, which therefore has an impact on the effective tax rate. As of January 1, 2007, Credco had $8 million ($5 million after-tax) accrued for the payment of interest and penalties. There have not been any significant changes in Credco’s accrual for the payment of interest and penalties as of September 30, 2007. The taxable income of Credco is included in the consolidated U.S. federal income tax return of American Express. Under an agreement with TRS, taxes are recognized on a separate company basis. If benefits for all future tax deductions, foreign tax credits and net operating losses 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. American Express is currently under examination by the IRS for the years 1997- 2004. Credco routinely assesses the likelihood of additional assessments in each of the taxing jurisdictions and has established a liability for unrecognized tax benefits that Credco’s management believes to be adequate. Once established, unrecognized tax benefits are adjusted if more accurate information is available, or a change in circumstance, or an event occurs necessitating a change to the liability. It is reasonably possible that the unrecognized tax benefits will significantly increase or decrease within the next twelve months. Due to the inherent complexities and the number of tax years currently under examination, it is not possible to quantify the impact such changes may have on the effective tax rate. |
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AMERICAN EXPRESS CREDIT CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
American Express Credit Corporation (Credco) was incorporated in Delaware in 1962 and was acquired by American Express Company (American Express) in December 1965. On January 1, 1983, Credco became a wholly-owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), a wholly-owned subsidiary of American Express. Credco is primarily engaged in the business of financing non-interest-bearing 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 designated currencies outside the United States. Credco also purchases certain interest-bearing and discounted revolving loans and extended payment plan receivables comprised of American Express credit cards, Sign & Travel® and Extended Payment Option receivables and certain American Express Bank Ltd. (AEB) customer loans, although interest-bearing and revolving loans are primarily funded by subsidiaries of TRS other than Credco. American Express cards and American Express credit cards are collectively referred to herein as the card.
On September 18, 2007, American Express Company (American Express) announced that it entered into an agreement to sell its international banking subsidiary, AEB to Standard Chartered PLC, subject to certain regulatory approvals. Credco purchases certain AEB customer loans. At September 30, 2007, approximately $1.3 million of AEB customer loans were included in cardmember loans.
Results of Operations for the Nine Months Ended September 30, 2007 and 2006
Credco’s consolidated net income rose 25 percent to $564 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. The year-over-year increase was primarily due to an increase in discount revenue earned on purchased cardmember receivables and loans and an increase in interest income earned on loans to affiliates and investments, offset by an increase in interest expense to affiliates, others and provision for losses, net of recoveries and loan service fees.
The following is an analysis of the changes attributable to the increase (decrease) in key revenue and expense accounts for the nine month period ended September 30, 2007, compared with the nine month period ended September 30, 2006, (millions):
Discount revenue earned on purchased cardmember receivables and loans: | |||
Volume of receivables purchased | $ | 44 | |
Discount rates | 469 | ||
Total | $ | 513 | |
Interest income from affiliates: | |||
Average loans and deposits with affiliates | $ | 51 | |
Interest rates | 42 | ||
Total | $ | 93 | |
Interest income from investments: | |||
Average investments outstanding | $ | 8 | |
Interest rates | 40 | ||
Total | $ | 48 | |
Provision for losses, net of recoveries: | |||
Volume of receivables purchased | $ | 19 | |
Provision rates and volume of recoveries | 93 | ||
Total | $ | 112 |
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AMERICAN EXPRESS CREDIT CORPORATION
Interest expense: | |||
Average debt outstanding | $ | 115 | |
Interest rates | 146 | ||
Total | $ | 261 | |
Interest expense with affiliates: | |||
Average debt outstanding | $ | 18 | |
Interest rates | 71 | ||
Total | $ | 89 |
Discount Revenue Earned on Purchased Cardmember Receivables and Loans
Discount revenue increased 33 percent or $513 million to $2.1 billion for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. The year-over-year increase was primarily due to an increase in both discount rates and to a lesser extent volume of receivables purchased. Volume of receivables and loans purchased for the nine months ended September 30, 2007, was four percent higher than the same period a year ago; purchased volume does not include those cardmember receivables transferred with recourse to Credco and cardmember receivables and loans funded by loans to affiliates. Discount rates, which vary over time due to changes in market interest rates or changes in the collectibility of cardmember receivables, increased an average of approximately 22 basis points compared to the nine months ended September 30, 2006.
Interest Income from Affiliates
Interest income from affiliates increased 25 percent or $93 million to $471 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. The year-over-year increase is primarily due to an increase in both the volume of loans with affiliates and the interest rates charged to affiliates. The average interest rate charged to affiliates during the nine months ended September 30, 2007, was 42 basis points higher than the average interest rate charged to affiliates in the same nine month period a year ago, primarily due to greater floating rate interest-bearing borrowings with affiliates.
Interest Income from Investments
Interest income from investments increased 31 percent or $48 million to $203 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. The year-over-year increase is due the replacement of matured U.S. Treasury securities in 2006 primarily with higher yielding government agency securities. The average interest rate on the total investment portfolio increased approximately 75 basis points for the nine months ended September 30, 2007, as compared to the same nine month period a year ago.
Provision for Losses, Net of Recoveries
The provision for losses, net of recoveries increased 28 percent or $112 million to $508 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. The year-over-year increase primarily reflects current trends in loss rate offset by results from collection activities.
Interest Expense and Interest Expense to Affiliates
Interest expense and interest expense to affiliates increased 28 percent and 38 percent, respectively, for the nine months ended September 30, 2007, as compared to the same period a year ago, due to an increase in both the levels of debt funding and higher effective cost of funds. The average interest rate on debt outstanding during the nine months ended September 30, 2007, was 48 basis points higher than the same period a year ago. The average rate due to affiliates during the nine months ended September 30, 2007, was 89 basis points higher than the same period a year
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AMERICAN EXPRESS CREDIT CORPORATION
ago, primarily due to the fact that a high proportion of the interest-bearing borrowings due to affiliates were at floating rate.
Service Fees to Affiliates
Credco pays fees to affiliates for the related servicing of the receivables purchased and other services. Service fees to affiliates increased $86 million for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006, due to an increase in servicing provided by service level agreements with affiliates.
Income Taxes
Credco's effective tax rate for the nine months ended September 30, 2007 was 11 percent compared with 14 percent for the nine month period ended September 30, 2006.
Cardmember Receivables
At September 30, 2007 and December 31, 2006, Credco owned $26.9 billion and $27.6 billion, respectively of cardmember receivables and participation interests in cardmember receivables.
Credco generally purchases, without recourse, cardmember receivables and cardmember loans arising from the use of the card throughout the world pursuant to agreements with TRS and certain of its subsidiaries that issue the card. During the nine months ended September 30, 2007 and December 31, 2006, Credco purchased $215.0 billion and $213.9 billion of cardmember receivables, respectively.
Participation interests in cardmember receivables represent undivided interests in the cash flows of the non-interest-bearing cardmember receivables and are purchased without recourse by Credco Receivables Corporation (CRC), from American Express Receivables Corporation V LLC (RFC V). During May 2005, TRS established the American Express Issuance Trust (AEIT), which is used to securitize cardmember receivables originated by TRS and its subsidiaries. AEIT is a non-qualifying special purpose entity that is consolidated by RFC V. RFC V, in turn, is consolidated by TRS. CRC purchases participation interests without recourse held by AEIT from RFC V. At September 30, 2007 and December 31, 2006, CRC owned approximately $6.7 billion and $8.2 billion, respectively, of participation interests purchased from RFC V. On November 1, 2007, CRC sold back $2.0 billion, net of reserve, of gross seller's interest in the charge cardmember receivables to RFC V. RFC V, in turn, through the AEIT Trust securitized $2.0 billion of charge cardmember receivables through the public issuance of investor certificates.
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AMERICAN EXPRESS CREDIT CORPORATION
The following table summarizes selected information related to the cardmember receivables portfolio:
September 30, | December 31, | September 30, | |||||||||||||
| As of and for nine months ended (Millions, except percentages) |
| 2007 |
| 2006 |
| 2006 |
| |||||||
Total cardmember receivables | $ | 26,855 | $ | 27,593 | $ | 25,128 | |||||||||
90 days past due as a % of total | 3.6 | % | 3.3 | % | 3.3 | % | |||||||||
Loss reserves | $ | 746 | $ | 739 | $ | 695 | |||||||||
as a % of receivables | 2.8 | % | 2.7 | % | 2.8 | % | |||||||||
as a % of 90 days past due | 76 | % | 80 | % | 84 | % | |||||||||
Write-offs, net of recoveries | $ | 476 | $ | 415 | $ | 374 | |||||||||
Net write-off rate (1) | 0.22 | % | 0.19 | % | 0.18 | % | |||||||||
Average life of cardmember receivables (in days) (2) | 34 | 33 | 32 |
(1) | Credco’s write-offs, net of recoveries, expressed as a percentage of the volume of cardmember receivables purchased by Credco in each of the periods indicated. |
(2) | 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 periods indicated, to the volume of cardmember receivables purchased by Credco. |
Cardmember receivables decreased slightly from December 31, 2006, as a result of lower cardmember receivables purchased during the nine months ended September30, 2007, compared to the nine months ended December 31, 2006 due to seasonality. The cardmember receivables purchased for the nine months ended September 30, 2007, increased approximately four percent from the cardmember receivables purchased during the nine months ended September 30, 2006, due to overall business growth.
Cardmember Loans
At September 30, 2007 and December 31, 2006, Credco owned cardmember loans totaling $0.4 billion and $0.3 billion, respectively. These loans consist of certain interest-bearing and discounted extended payment plan receivables comprised principally of American Express credit card, Sign & Travel® and Extended Payment Option receivables. During the nine months ended September 30, 2007 and December 31, 2006, Credco purchased $1.2 billion and $770 million of cardmember loans, respectively.
The following table summarizes selected information related to the cardmember loans portfolio:
As of and for nine months ended (Millions, except | September 30, | December 31, | September 30, | ||||||||||||
| percentages) |
| 2007 |
| 2006 |
| 2006 |
| |||||||
Total cardmember loans | $ | 380 | $ | 356 | $ | 326 | |||||||||
Past due cardmember loans as a % of total: | |||||||||||||||
30-89 days | 5.1 | % | 5.9 | % | 5.7 | % | |||||||||
90+ days | 2.1 | % | 2.1 | % | 2.2 | % | |||||||||
Loss reserves | $ | 9 | $ | 10 | $ | 9 | |||||||||
as a % of cardmember loans | 2.5 | % | 2.8 | % | 2.7 | % | |||||||||
as a % of past due | 34 | % | 35 | % | 35 | % | |||||||||
Write-offs, net of recoveries | $ | 6 | $ | 5 | $ | 6 | |||||||||
Net write-off rate (1) | 2.10 | % | 1.91 | % | 1.94 | % |
(1) | Credco’s write-offs, net of recoveries, expressed as a percentage of the average amount of cardmember loans owned by Credco at the beginning of the year and at the end of each month in each of the periods indicated. |
Cardmember loans increased $24 million from December 31, 2006, primarily due to higher cardmember loans purchased, and increased $54 million from September 30, 2006, due primarily to increased volumes purchased from Singapore.
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AMERICAN EXPRESS CREDIT CORPORATION
Reserves for Cardmember Receivables and Cardmember Loans
The following is an analysis of the reserves for cardmember receivables and cardmember loans:
September 30, | September 30, | |||||||||||||
Nine months ended (Millions) |
| 2007 |
| 2006 | ||||||||||
Balance, beginning of period | $ | 749 | $ | 686 | ||||||||||
Provision for losses | 643 | 513 | ||||||||||||
Accounts written-off | (618 | ) | (497 | ) | ||||||||||
Other | (19 | ) | 2 | |||||||||||
Balance, end of period | $ | 755 | $ | 704 | ||||||||||
Loans with Affiliates | ||||||||||||||
Components of loans with affiliates were as follows: | ||||||||||||||
September 30, | December 31, | September 30, | ||||||||||||
(Millions) |
| 2007 |
|
| 2006 |
|
| 2006 | ||||||
TRS Parent | $ | - | $ | 531 | $ | 531 | ||||||||
TRS Subsidiaries: | ||||||||||||||
American Express Australia Limited | 3,803 | 3,529 | 3,252 | |||||||||||
American Express Services Europe Limited | 3,628 | 3,360 | 3,189 | |||||||||||
Amex Bank of Canada | 2,586 | 2,166 | 2,209 | |||||||||||
American Express Co. (Mexico) S.A. De C.V. | 432 | - | - | |||||||||||
American Express International, Inc. | 510 | 105 | 155 | |||||||||||
Total | $ | 10,959 | $ | 9,691 | $ | 9,336 |
Credco’s loans with affiliates represent fixed and floating rate interest-bearing intercompany borrowings by other wholly-owned TRS subsidiaries and American Express. Of the $11.0 billion outstanding as of September 30, 2007, $7.9 billion is due to the transfer of cardmember receivables and cardmember loans with recourse and is collateralized by third-party assets owned by American Express or TRS and its subsidiaries. Revenue earned from cardmember receivables with recourse and cardmember receivables and loans funded by loans to affiliates are recorded as interest income from affiliates in the Consolidated Statement of Income. The average yield earned on loans with affiliates is approximately 6.3 percent and 5.8 percent for the period ended September 30, 2007 and December 31, 2006, respectively. As of September 30, 2007, no significant amount of loss reserves have been recorded and no amount of loans is 30 days or greater past due. On February 9, 2007, the loan with TRS Parent of $531 million was repaid.
Liquidity and Capital Resources
Financing Activities
Credco’s funding requirements are met primarily by the sale of commercial paper, the issuance of medium- and long-term notes, borrowings under long-term bank credit facilities in certain international markets and equity capital. Credco has readily sold the volume of commercial paper necessary to meet its funding needs as well as to cover the daily maturities of commercial paper issued. During the nine months ended September 30, 2007, Credco had uninterrupted access to the commercial paper and capital markets to fund its business operations.
The commercial paper market represents the primary source of short-term funding for Credco. At September 30, 2007 and December 31, 2006, Credco had $9.0 billion and $5.8 billion of commercial paper outstanding, respectively. Average commercial paper outstanding was $7.5 billion and $7.6 billion for the nine months ended September 30, 2007 and December 31, 2006, respectively. Credco currently manages the level of short-term debt outstanding such that its total back-up liquidity, including available bank credit facilities and term liquidity portfolio investment
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AMERICAN EXPRESS CREDIT CORPORATION
securities, is not less than 100 percent of net short-term debt. Net short-term debt, which consists of commercial paper and certain other short-term borrowings less cash and cash equivalents, was $6.3 billion at September 30, 2007. Based on the maximum available borrowings under bank credit facilities and term liquidity portfolio investment securities, Credco’s total back-up liquidity coverage of net short-term debt was 174 percent at September 30, 2007.
Credco raises term funding primarily through the issuance of medium- and long-term debt securities in the U.S. and international capital markets. Medium-term debt is generally defined as any debt with an original maturity greater than 12 months but less than 36 months. Long-term debt is generally defined as any debt with an original maturity greater than 36 months. At September 30, 2007 and December 31, 2006, Credco had an aggregate of $11.5 billion and $12.4 billion, respectively, of medium-term debt outstanding at fixed and floating rates, a portion of which can be extended by the holders up to an additional four years. Credco’s outstanding long-term debt at September 30, 2007 and December 31, 2006 was $11.6 billion and $9.4 billion, respectively.
Credco also has the ability to issue debt securities under shelf registrations filed with the Securities and Exchange Commission (SEC). During the second quarter of 2006, Credco filed a shelf registration statement with the SEC for an unspecified amount of debt securities to be issued from time to time. During the nine months ended September 30, 2007, Credco issued $2.1 billion of floating medium-term notes. At September 30, 2007, Credco had $14.1 billion of debt securities outstanding, issued under SEC registration statements.
Credco, TRS, American Express Overseas Credit Corporation Limited (AEOCC), a wholly-owned subsidiary of Credco, American Express Centurion Bank, a wholly-owned subsidiary of TRS, American Express Bank, FSB, a wholly-owned subsidiary of TRS, and American Express Bank Ltd., a wholly-owned subsidiary of American Express, have established a program for the issuance, outside the U.S., of debt instruments to be listed on the Luxembourg Stock Exchange. As of September 30, 2007, the maximum aggregate principal amount of debt instruments outstanding at any one time under the program may not exceed $10 billion. During the third quarter of 2007, Credco issued approximately $606 million of fixed rate notes due in 2012. At September 30, 2007, $4.1 billion was outstanding under this program, of which $2.8 billion were issued by Credco.
American Express Canada Credit Corporation (AECCC), a wholly-owned subsidiary of Credco, had approximately $2.3 billion of total debt securities outstanding under the Canadian shelf registration program. At September 30, 2007, approximately $1.2 billion was available for issuance. All notes issued under this shelf registration are guaranteed by Credco. The financial results of AECCC are included in the consolidated financial results of Credco.
During the fourth quarter of 2006, Credco established a program for the issuance from time to time, in Australia, of up to approximately $5.2 billion. At September 30, 2007, approximately $4.4 billion was available for issuance under this program.
Credco paid cash dividends of $450 million to TRS during the nine months ended September 30, 2007. On November 9, 2007, Credco paid a cash dividend of $300 million to TRS.
The most restrictive limitation on dividends imposed by the debt instruments issued by Credco is the requirement that Credco maintain a minimum consolidated net worth of $50 million. There are no significant restrictions on the ability of Credco to obtain funds from its subsidiaries by dividend or loan. Additionally, there are no limitations on the amount of debt that can be issued by Credco.
Liquidity InvestmentPortfolio
During the normal course of business, funding activities may raise more proceeds than are necessary for immediate funding needs. These amounts are invested principally in high credit quality and highly liquid, short-term securities.
Credco also maintains a term liquidity portfolio comprised of high credit quality, highly liquid securities. At September 30, 2007, Credco held $3.0 billion in U.S. Treasury and government agency securities in this portfolio. The
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AMERICAN EXPRESS CREDIT CORPORATION
invested amounts of the term liquidity portfolio provide back-up liquidity, primarily for Credco’s commercial paper program.
In conjunction with its liquidity portfolio, Credco has securities lending agreements with financial institutions to enhance investment income. At September 30, 2007, approximately $999 million of investment securities were loaned under these agreements.
Committed Bank Credit Facilities
At September 30, 2007, Credco has the right to borrow a maximum amount of $11.3 billion (including amounts outstanding) under committed bank credit facilities, with a commensurate maximum $1.3 billion reduction in the amount available to American Express. These facilities expire as follows (billions): 2010, $1.9; 2011, $2.8; and 2012, $6.6. As of September 30, 2007, Credco had outstanding borrowings of $3.1 billion under these bank credit facilities related to the Australian credit facility. During the third quarter of 2007, the $5.0 billion U.S. credit facility was replaced by $2.0 billion that expire in 2010 and $3.0 billion that expire in 2012, and the Australian credit facility was renewed and extended until 2012.
The availability of the credit lines is subject to compliance with certain financial covenants by Credco, including the maintenance of a 1.25 ratio of earnings to fixed charges. The ratio of earnings to fixed charges for Credco was 1.42 for the nine months ended September 30, 2007. The ratio of earnings to fixed charges for American Express for the nine months ended September 30, 2007 was 2.38.
Forward-Looking Statements
Various statements have been made in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in Credco’s other reports filed with the 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 below, which could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. The factors described below are not exclusive. 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:
- credit trends and the rate of bankruptcies, which can affect spending on card products and debt paymentsby individual and corporate customers;
- Credco’s ability to accurately estimate the provision for losses in Credco’s outstanding portfolio ofcardmember receivables and loans;
- fluctuations in foreign currency exchange rates;
- negative changes in Credco’s credit ratings, which could result in decreased liquidity and higher borrowingcosts;
- the effect of fluctuating interest rates, which could affect Credco’s borrowing costs; and
- the impact on American Express Company’s business resulting from continuing geopolitical uncertainty.
OTHER REPORTING MATTERS
Accounting Developments
See “Recently Issued Accounting Standards” section of Note 1 to the Consolidated Financial Statements.
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AMERICAN EXPRESS CREDIT CORPORATION
Item 4. CONTROLS AND PROCEDURES
Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective. 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 the 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.
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AMERICAN EXPRESS CREDIT CORPORATION
PART II. OTHER INFORMATION
Item 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.
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AMERICAN EXPRESS CREDIT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION
(Registrant)
DATE: November 14, 2007 | By | /s/ Christopher S. Forno | ||
Christopher S. Forno | ||||
President and Chief Executive Officer | ||||
DATE: November 14, 2007 | By | /s/ Lawrence A. Belmonte | ||
Lawrence A. Belmonte | ||||
Vice President and Chief Accounting Officer |
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AMERICAN EXPRESS CREDIT CORPORATION
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Description | How Filed | ||
Exhibit 10.1 | Amended and Restated Agreement for Sale and Purchase of Receivables dated as of October 26, 2007 between American Express Centurion Bank and American Express Credit Corporation. | Electronically filed herewith. | |
Exhibit 10.2 | Amended and Restated Agreement for Sale and Purchase of Receivables dated as of October 26, 2007 between American Express Bank, FSB and American Express Credit Corporation. | Electronically filed herewith. | |
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 Christopher S. Forno, 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 David L. Yowan, 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 Christopher S. Forno, 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 David L. Yowan, 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. |
E-1