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AXP > SEC Filings for AXP > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for AMERICAN EXPRESS CO


29-Apr-2013

Quarterly Report


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

Business Introduction

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company's principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company's range of products and services include:

charge and credit card products;

expense management products and services;

consumer and business travel services;

stored-value products such as Travelers Cheques and other prepaid products;

network services;

merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and

fee services, including fraud prevention services and the design of customized customer loyalty and rewards programs.

The Company's products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

The Company competes in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, the Company is facing increasing competition from non-traditional players, such as online networks, telecom providers and software-as-a-service providers, that leverage new technologies and customers' existing charge and credit card accounts and bank relationships to create payment or other fee-based solutions. The Company is transforming its existing businesses and creating new products and services for the digital marketplace as the Company seeks to increase its share of online spend, enhance customers' digital experiences and develop platforms for online and mobile commerce.

The Company's products and services generate the following types of revenue for the Company:

Discount revenue, which is the Company's largest revenue source, represents fees generally charged to merchants when cardmembers use their cards to purchase goods and services at merchants on the Company's network;

Net card fees, which represent revenue earned for annual card membership fees;

Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions;

Other commissions and fees, which are earned on foreign exchange conversions and card-related fees and assessments;

Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with partners of our Global Network Services (GNS) business (including royalties and signing fees), publishing revenues and other miscellaneous revenue and fees; and

Interest on loans, which principally represents interest income earned on outstanding balances.


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In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for cardmember credit and fraud losses.

Financial Targets

The Company seeks to achieve three financial targets, on average and over time:

Revenues net of interest expense growth of at least 8 percent;

Earnings per share (EPS) growth of 12 to 15 percent; and

Return on average equity (ROE) of 25 percent or more.

If the Company achieves its EPS and ROE targets, it will seek to return on average and over time approximately 50 percent of the capital it generates to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein.

Forward-Looking Statements and Non-GAAP Measures

Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the "Forward-Looking Statements" section below. In addition, certain information included within this Form 10-Q constitute non-GAAP financial measures. The Company's calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

Bank Holding Company

The Company is a bank holding company under the Bank Holding Company Act of 1956 and the Federal Reserve Board (Federal Reserve) is the Company's primary federal regulator. As such, the Company is subject to the Federal Reserve's regulations, policies and minimum capital standards.

Current Economic Environment/Outlook

The Company's results for first quarter of 2013 reflect healthy spending growth and strong credit performance in both the United States and internationally. The rate of spending growth was consistent with last quarter, however it was slower than in the first quarter of the prior year, reflecting in part the impact of a continuing slow growth economic environment. The Company also saw its average loans continue to grow modestly year over year, which, along with a higher net yield and a lower cost of funds related to the charge card portfolio, led to a 10 percent increase in net interest income. At the same time, lending loss rates remain near all-time lows.

The positive impacts of billings and loan growth were partially offset by lower lending reserve releases this year as compared to the prior year. In the first quarter, operating expenses grew by 1 percent as compared to the prior year. The Company's aim is to have operating expenses grow at an annual rate of less than 3 percent over the next two years, with the 2012 operating expenses, excluding the restructuring charge taken in the fourth quarter of 2012, as the base.

The Company continues to invest in growth opportunities in the United States and internationally. For the first quarter of 2013, marketing and promotion expense was approximately 7.9 percent of revenues. The Company continues to aim to keep this ratio at approximately 9 percent for the full year.

As discussed below within Certain Legislative, Regulatory and Other Developments, the regulatory environment continues to evolve and has heightened the focus that all financial companies, including the Company, must have on their controls and processes. The review of products and practices will be a continuing focus of the Company, as well as by regulators.


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Competition remains extremely intense across the Company's businesses. In addition, the global economic environment remains sluggish. While the Company's business is diversified, including the corporate card business, a large international business and GNS partners around the world, any impact of potential U.S. income tax law changes and continued budget and debt ceiling discussions in Washington remains uncertain. In addition, the current instability in Europe could further adversely affect global economic conditions, including continued pressure on consumer and corporate confidence and spending. Europe accounted for approximately 11 percent of the Company's total billed business for the quarter ended March 31, 2013.

                            American Express Company

                        Selected Statistical Information

Refer to the "Glossary of Selected Terminology" for the definitions of certain
key terms and related information appearing within this section.






   Three Months Ended March 31,                           2013           2012       Change
   Card billed business: (billions)
   United States                                     $   150.0      $   139.6        7%
   Outside the United States                              74.5           71.6        4%

   Total                                             $   224.5      $   211.2        6%

   Total cards-in-force: (millions)
   United States                                          52.1           50.9        2%
   Outside the United States                              51.1           47.8        7%

   Total                                                 103.2           98.7        5%

   Basic cards-in-force: (millions)
   United States                                          40.5           39.6        2%
   Outside the United States                              41.1           38.2        8%

   Total                                                  81.6           77.8        5%

   Average discount rate                                  2.52 %         2.53 %
   Average basic cardmember spending (dollars)(a)    $   3,905      $   3,772        4%
   Average fee per card (dollars)(a)                 $      40      $      38        5%
   Average fee per card adjusted (dollars)(a)        $      44      $      42        5%

(a) Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The adjusted average fee per card, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $65 million for both the three months ended March 31, 2013 and 2012. The Company presents adjusted average fee per card because the Company believes this metric presents a useful indicator of card fee pricing across a range of its proprietary card products.


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                            American Express Company

                        Selected Statistical Information

                                  (continued)






As of or for the Three Months Ended March 31,
(Millions, except percentages and where indicated)            2013          2012       Change
Worldwide cardmember receivables
Total receivables (billions)                              $   43.4      $   41.5         5 %
Loss reserves
Beginning balance                                         $    428      $    438        (2)%
Provisions(a)                                                  154           149         3 %
Other additions(b)                                              41            29        41 %
Net write-offs(c)                                             (178 )        (182 )      (2)%
Other deductions(d)                                            (35 )         (10 )      #

Ending balance                                            $    410      $    424        (3)%

% of receivables                                               0.9 %         1.0 %
Net write-off rate - principal - USCS(e)                       2.0 %         2.3 %
Net write-off rate - principal and fees - USCS(e)              2.2 %         2.5 %
30 days past due as a % of total - USCS                        1.9 %         1.9 %
Net loss ratio as a % of charge volume - ICS/GCS              0.12 %        0.11 %
90 days past billing as a % of total - ICS/GCS                 0.8 %         0.7 %

Worldwide cardmember loans
Total loans (billions)                                    $   62.3      $   60.1        4 %
Loss reserves
Beginning balance                                         $  1,471      $  1,874       (22)%
Provisions(a)                                                  243           185        31 %
Other additions(b)                                              32            27        19 %
Net write-offs - principal(c)                                 (304 )        (349 )     (13)%
Net write-offs - interest and fees(c)                          (38 )         (44 )     (14)%
Other deductions(d)                                            (37 )         (13 )      #

Ending balance                                            $  1,367      $  1,680       (19)%

Ending Reserves - principal                               $  1,316      $  1,622       (19)%
Ending Reserves - interest and fees                       $     51      $     58       (12)%
% of loans                                                     2.2 %         2.8 %
% of past due                                                  170 %         201 %
Average loans (billions)                                  $   62.8      $   60.7         3 %
Net write-off rate - principal only(e)                         1.9 %         2.3 %
Net write-off rate - principal, interest and fees(e)           2.2 %         2.6 %
30 days past due as a % of total                               1.3 %         1.4 %
Net interest income divided by average loans(f)                8.0 %         7.5 %
Net interest yield on cardmember loans(f)                      9.5 %         9.2 %

# denotes a variance greater than 100 percent.

(a) Provisions for principal (resulting from authorized transactions) and fee reserve components.

(b) Provisions for unauthorized transactions.

(c) Consists of principal (resulting from authorized transactions) interest and/or fees, less recoveries.

(d) Refer to Note 4 to the Consolidated Financial Statements for the components of other deductions for the three months ended March 31, 2013 and 2012.

(e) The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because the Company's practice is to include uncollectible interest and/or fees as part of its total provision for losses, a net write-off rate including principal, interest and/or fees is also presented.

(f) Refer to the following table for the calculation of net interest yield on cardmember loans, a non-GAAP measure, net interest income divided by average loans, a GAAP measure, and the Company's rationale for presenting net interest yield on cardmember loans.


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                            American Express Company

                        Selected Statistical Information

                                  (continued)

Calculation of Net Interest Yield on Cardmember Loans






Three Months Ended March 31,
(Millions, except percentages and where indicated)                 2013               2012
Net interest income                                       $       1,243      $     1,133
Exclude:
Interest expense not attributable to the Company's
cardmember loan portfolio                                           311              364
Interest income not attributable to the Company's
cardmember loan portfolio                                           (95 )           (109)

Adjusted net interest income(a)                           $       1,459      $     1,388

Average loans (billions)                                  $        62.8      $      60.7
Exclude:
Unamortized deferred card fees, net of direct
acquisition costs of cardmember loans, and other
(billions)                                                         (0.3 )           (0.2)

Adjusted average loans (billions)(a)                      $        62.5      $      60.5

Net interest income divided by average loans                        8.0 %             7.5%
Net interest yield on cardmember loans(a)                           9.5 %             9.2%

(a) Net interest yield on cardmember loans, adjusted net interest income, and adjusted average loans are non-GAAP measures. The Company believes adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on cardmember loans, which provides a measure of profitability of the Company's cardmember loan portfolio.

Consolidated Results of Operations for the Three Months Ended March 31, 2013 and 2012

The Company's consolidated net income for the three months ended March 31, 2013 increased $24 million or 2 percent and diluted EPS increased $0.08 or 7 percent as compared to the same period in the prior year.

The Company's total revenues net of interest expense, total provisions for losses and total expenses increased by approximately 4 percent, 21 percent and 1 percent, respectively, for the three months ended March 31, 2013 as compared to the same period in the prior year.

Total Revenues Net of Interest Expense

Consolidated total revenues net of interest expense increased $294 million or 4 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, reflecting increases of 5 percent in U.S. Card Service (USCS), 4 percent in Global Network & Merchant Services (GNMS), and 1 percent in both Global Commercial Services (GCS) and International Card Services (ICS). The increase in total revenues net of interest expense primarily reflects higher discount revenue, higher net interest income, and higher net card fees, partially offset by lower other revenues and travel commissions and fees.

Discount revenue increased $181 million or 4 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, primarily as a result of 6 percent growth in billed business volumes, partially offset by higher contra-revenue items, including cash rebate rewards, and a decline in the average discount rate. The average discount rate of 2.52 percent in the first quarter of 2013 decreased by 1 basis point compared to 2.53 percent in the first quarter 2012 and increased by 3 basis points compared to 2.49 percent in the fourth quarter of 2012. The increase in rate versus the fourth quarter of 2012 reflects the normal seasonal impact of a higher level of retail-related business volumes during that period. Changes in the mix of spending by location and industry, volume-related pricing discounts, strategic investments, certain pricing initiatives and other factors will likely result in some erosion of the average discount rate.

U.S. billed business and billed business outside the United States increased 7 percent and 4 percent, respectively, for the three months ended March 31, 2013 as compared to the prior year, reflecting increases in average spending per proprietary basic card and in basic cards-in-force.


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The table below summarizes selected statistics for billed business and average spend during the three months ended March 31, 2013 compared to the same period in the prior year.

                                                                       2013

                                                                             Percentage Increase
                                                                             (Decrease) Assuming
                                                            Percentage             No Changes in
                                                              Increase          Foreign Exchange
                                                            (Decrease)                  Rates(a)
Worldwide(b)
Billed business                                                      6 %                      7%
Proprietary billed business                                          6                       6
GNS billed business(c)                                               9                      12
Airline-related volume (10% of worldwide
billed business)                                                     -                       1
United States(b)
Billed business                                                      7
Proprietary consumer card billed
business(d)                                                          7
Proprietary small business billed
business(d)                                                         11
Proprietary Corporate Services billed
business(e)                                                          6
T&E-related volume (27% of U.S. billed
business)                                                            4
Non-T&E-related volume (73% of U.S. billed
business)                                                            9
Airline-related volume (9% of U.S. billed
business)                                                            1
Outside the United States(b)
Billed business                                                      4                       7
Japan, Asia Pacific & Australia (JAPA)
billed business                                                      6                       9
Latin America & Canada (LACC) billed
business                                                             6                       9
Europe, the Middle East & Africa (EMEA)
billed business                                                      2                       4
Proprietary consumer and small business
billed business(f)                                                   2                       5
JAPA billed business                                                (1 )                     4
LACC billed business                                                 5                       7
EMEA billed business                                                 2                       4
Proprietary Corporate Services billed
business(e)                                                         (2 )                     -

(a) The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year-earlier period against which such results are being compared). The Company believes the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare the Company's performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

(b) Captions in the table above not designated as "proprietary" or "GNS" include both proprietary and GNS data.

(c) Included in the GNMS segment.

(d) Included in the USCS segment.

(e) Included in the GCS segment.

(f) Included in the ICS segment.

Net card fees increased $43 million or 7 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, reflecting higher average fees per card primarily due to fee increases and a greater mix of premium products in USCS and ICS as well as an increase in proprietary cards-in-force.

Travel commissions and fees decreased $14 million or 3 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, reflecting a 3 percent decrease in worldwide travel sales. Business travel sales declined 4 percent, while U.S. consumer travel sales increased 2 percent.

Other commissions and fees decreased $10 million or 2 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, driven by relatively flat delinquency fees and modest costs from cardmember remediation, partially offset by higher Loyalty Partner revenues in the ICS segment.


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Other revenues decreased $16 million or 3 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, primarily reflecting a favorable effect in the first quarter of 2012 due to revised estimates of the liability for uncashed Travelers Cheques in certain international markets, partially offset by a larger gain on the sale of investment securities in the first quarter of 2013.

Interest income increased $55 million or 3 percent for the three months ended March 31, 2013 as compared to the same period in the prior year. Interest on loans increased $72 million or 4 percent, driven by higher average loans and a reduction in the cardmember remediation reserve. Interest and dividends on investment securities decreased $13 million or 20 percent, primarily due to lower average investment securities. Interest on deposits with banks and others decreased $4 million or 13 percent, primarily due to a lower volume of interest-bearing transactions with financial institutions.

Interest expense decreased $55 million or 10 percent for the three months ended March 31, 2013 as compared to the same period in the prior year. Interest on deposits decreased $15 million or 12 percent, primarily due to a lower effective cost of funds, partially offset by an increase in average customer deposit balances. Interest on long-term debt and other decreased $40 million or 9 percent, reflecting a lower effective cost of funds and average long-term debt balances.

Provisions for Losses

Provisions for losses increased $85 million or 21 percent for the three months ended March 31, 2013 as compared to the same period in the prior year. Charge card provisions for losses increased $17 million or 10 percent, primarily due to higher ending receivables balances in the first quarter of 2013. Cardmember loan provisions for losses increased $63 million or 30 percent, primarily due to a lower reserve release in the first quarter of 2013 as compared to the same period in the prior year, partially offset by lower write-offs in the first quarter of 2013 due to improved credit performance. Other provisions for losses increased $5 million or 23 percent for the three months ended March 31, 2013 as compared to the same period in the prior year.

Expenses

Consolidated expenses increased $73 million or 1 percent for the three months ended March 31, 2013 as compared to the same period in the prior year. The increase reflects higher cardmember rewards expense, occupancy and equipment, and professional services, partially offset by lower salaries and employee benefits, marketing and promotion and cardmember services expenses.

Marketing and promotion expense decreased $10 million or 2 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, reflecting lower brand advertising, partially offset by higher acquisition spending in USCS.

Cardmember rewards expense increased $53 million or 4 percent for the three months ended March 31, 2013 as compared to the same period in the prior year, due to an increase in co-brand rewards expense of $62 million, partially offset by a decrease in the Membership Rewards expense of $9 million. The increase in co-brand rewards expenses is primarily related to higher spending volumes. The decrease in Membership Rewards is a result of a net $35 million expense reduction resulting from (i) a slower average ultimate redemption rate (URR) growth rate reducing expenses and (ii) a decline in the reduction in the weighted-average cost (WAC) increasing expenses (both comparing the first quarter of 2013 to the same period in the prior year), mostly offset by higher expenses in 2013 due to an increase in new points earned.


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The Company's Membership Rewards URR for current participants was 94 percent (rounded up) for the three months ended March 31, 2013, an increase from 93 . . .

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