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

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Form 10-Q for AMERICAN EXPRESS CO


29-Jul-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 the second quarter of 2013 reflect a continued healthy spending growth and strong credit performance in both the United States and internationally. The rate of spending growth was relatively consistent with the past several quarters, and was higher than in the prior quarter internationally. 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 7 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. Total expenses increased 1 percent over the prior year, reflecting in part the Company's commitment to contain operating expenses. Operating expenses declined 4 percent as compared to the year ago period, reflecting in part cardmember reimbursements in 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 second quarter of 2013, marketing and promotion expense was approximately 9.5 percent of revenues.

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 uneven. 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 June 30, 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                           Six Months Ended
                                                         June 30,                                    June 30,

                                              2013            2012        Change          2013            2012        Change
Card billed business: (billions)
United States                           $    159.7      $    148.7            7%    $    309.7      $    288.3            7%
Outside the United States                     78.0            72.9            7%         152.5           144.5            6%

Total                                   $    237.7      $    221.6            7%    $    462.2      $    432.8            7%

Total cards-in-force: (millions)
United States                                 52.5            51.2            3%          52.5            51.2            3%
Outside the United States                     51.8            48.9            6%          51.8            48.9            6%

Total                                        104.3           100.1            4%         104.3           100.1            4%

Basic cards-in-force: (millions)
United States                                 40.7            39.8            2%          40.7            39.8            2%
Outside the United States                     41.8            39.2            7%          41.8            39.2            7%

Total                                         82.5            79.0            4%          82.5            79.0            4%

Average discount rate                         2.52 %          2.54 %                      2.52 %          2.53 %
Average basic cardmember spending
(dollars)(a)                            $    4,097      $    3,948            4%    $    8,002      $    7,720            4%
Average fee per card (dollars)(a)       $       40      $       39            3%    $       40      $       39            3%
Average fee per card adjusted
(dollars)(a)                            $       44      $       43            2%    $       44      $       43            2%

(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 $66 million and $64 million for the three months ended June 30, 2013 and 2012, respectively, and $131 million and $129 million for the six months ended June 30, 2013 and 2012, respectively. 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                           As of or for the
                                                                       Three Months Ended                          Six Months Ended
                                                                            June 30,                                   June 30,

(Millions, except percentages and where indicated)              2013           2012         Change          2013           2012        Change
Worldwide cardmember receivables:
Total receivables (billions)                                $   44.1       $   41.5           6 %       $   44.1       $   41.5          6 %
Loss reserves:
Beginning balance                                           $    410       $    424          (3)%       $    428       $    438         (2)%
Provisions(a)                                                    160            134          19 %            314            283         11 %
Other additions(b)                                                41             29          41 %             82             58         41 %
Net write-offs(c)                                               (180 )         (164 )        10 %           (358 )         (346 )        3 %
Other deductions(d)                                              (45 )          (31 )        45 %            (80 )          (41 )       95 %

Ending balance                                              $    386       $    392          (2)%       $    386       $    392         (2)%

% of receivables                                                 0.9 %          0.9 %                        0.9 %          0.9 %
Net write-off rate - principal only - USCS(e)                    1.9 %          2.0 %                        2.0 %          2.2 %
Net write-off rate - principal and fees - USCS(e)                2.1 %          2.2 %                        2.1 %          2.3 %
30 days past due as a % of total - USCS                          1.6 %          1.7 %                        1.6 %          1.7 %
Net loss ratio as a % of charge volume - ICS/GCS                0.13 %         0.10 %                       0.12 %         0.10 %
90 days past billing as a % of total - ICS/GCS                   0.8 %          0.7 %                        0.8 %          0.7 %

Worldwide cardmember loans:
Total loans (billions)                                      $   63.1       $   61.0           3 %       $   63.1       $   61.0          3 %
Loss reserves:
Beginning balance                                           $  1,367       $  1,680         (19)%       $  1,471       $  1,874        (22)%
Provisions(a)                                                    334            253          32 %            577            438         32 %
Other additions(b)                                                30             24          25 %             62             51         22 %
Net write-offs - principal only(c)                              (309 )         (329 )        (6)%           (613 )         (678 )      (10)%
Net write-offs - interest and fees(c)                            (39 )          (41 )        (5)%            (77 )          (85 )       (9)%
Other deductions(d)                                              (41 )          (40 )         3 %            (78 )          (53 )      47 %

Ending balance                                              $  1,342       $  1,547         (13)%       $  1,342       $  1,547        (13)%

Ending reserves - principal only                            $  1,290       $  1,492         (14)%       $  1,290       $  1,492        (14)%
Ending reserves - interest and fees                         $     52       $     55          (5)%       $     52       $     55         (5)%
% of loans                                                       2.1 %          2.5 %                        2.1 %          2.5 %
% of past due                                                    188 %          202 %                        188 %          202 %
Average loans (billions)                                    $   62.5       $   60.6           3 %       $   62.7       $   60.7          3 %
Net write-off rate - principal only(e)                           2.0 %          2.2 %                        2.0 %          2.2 %
Net write-off rate - principal, interest and fees(e)             2.2 %          2.4 %                        2.2 %          2.5 %
30 days past due as a % of total                                 1.1 %          1.3 %                        1.1 %          1.3 %
Net interest income divided by average loans(f)                  7.7 %          7.4 %                        7.9 %          7.5 %
Net interest yield on cardmember loans(f)                        9.1 %          9.0 %                        9.3 %          9.1 %


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American Express Company

Selected Statistical Information

(continued)

(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) For cardmember receivables, includes net write-offs resulting from unauthorized transactions of $(40) million and $(30) million for the three months ended June 30, 2013 and 2012, respectively; foreign currency translation adjustments of $(4) million and $(5) million for the three months ended June 30, 2013 and 2012, respectively; and other adjustments of $(1) million and $4 million for the three months ended June 30, 2013 and 2012, respectively. For cardmember loans, includes net write-offs for unauthorized transactions of $(30) million and $(25) million for the three months ended June 30, 2013 and 2012, respectively; foreign currency translation adjustments of $(10) million and $(11) million for the three months ended June 30, 2013 and 2012, respectively; and other adjustments of $(1) million and $(4) million for the three months ended June 30, 2013 and 2012, respectively. Refer to Note 4 to the Consolidated Financial Statements for the components of other deductions for the six months ended June 30, 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.

Calculation of Net Interest Yield on Cardmember Loans






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

(Millions, except percentages and where indicated)                   2013            2012            2013             2012
Net interest income                                            $    1,202      $    1,121      $    2,445      $   2,254
Exclude:
Interest expense not attributable to the Company's
cardmember loan portfolio                                             295             341             606            705
Interest income not attributable to the Company's
cardmember loan portfolio                                             (88 )          (104 )          (183 )         (213)

Adjusted net interest income(a)                                $    1,409      $    1,358      $    2,868      $   2,746

Average loans (billions)                                       $     62.5      $     60.6      $     62.7      $    60.7
Exclude:
Unamortized deferred card fees, net of direct acquisition
costs of cardmember loans, and other (billions)                      (0.3 )          (0.2 )          (0.3 )         (0.2)

Adjusted average loans(billions)(a)                            $     62.2      $     60.4      $     62.4      $    60.5

Net interest income divided by average loans                          7.7 %           7.4 %           7.9 %           7.5%
Net interest yield on cardmember loans(a)                             9.1 %           9.0 %           9.3 %           9.1%

(a) Net interest yield on cardmember loans, adjusted net interest income, and adjusted average loans are non-GAAP measures. Refer to "Glossary of Selected Terminology" for the definitions of these terms. 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.


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Consolidated Results of Operations for the Three Months Ended June 30, 2013 and 2012

The Company's consolidated net income for the three months ended June 30, 2013 increased $66 million or 5 percent and diluted EPS increased $0.12 or 10 percent, as compared to the same period in the prior year.

The Company's total revenues net of interest expense increased 4 percent, total expenses increased 1 percent and total provisions for losses increased 29 percent for the three months ended June 30, 2013, as compared to the same period in the prior year.

Total Revenues Net of Interest Expense

Consolidated total revenues net of interest expense for the three months ended June 30, 2013 increased $280 million or 4 percent, as compared to the same period in the prior year, reflecting increases of 5 percent in both U.S. Card Services (USCS) and Global Network and Merchant Services (GNMS), 1 percent in Global Commercial Services (GCS), while remaining flat in International Card Services (ICS). The increase in total revenues net of interest expense primarily reflects higher discount revenue, higher net card fees and increased interest and fees on loans.

Discount revenue for the three months ended June 30, 2013 increased $247 million or 6 percent, as compared to the same period in the prior year, as a result of 7 percent growth in billed business volumes, partially offset by faster growth in GNS billings than overall Company billings and a slight decline in the average discount rate. The average discount rate was 2.52 percent and 2.54 percent for the three months ended June 30, 2013 and 2012, respectively. As indicated in prior quarters, over time changes in the mix of spending by location and industry, volume-related pricing discounts, certain pricing initiatives, strategic investments, 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 both increased 7 percent for the three months ended June 30, 2013, as compared to the same period in the prior year. The increase in billed business in the United States and outside United States reflects an increase in average spending per proprietary basic card and an increase 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 June 30, 2013 compared to the same period in the prior year.

                                                                            2013

                                                                                  Percentage Increase
                                                                                             Assuming
                                                                Percentage              No Changes in
                                                                  Increase           Foreign Exchange
                                                                (Decrease)                   Rates(a)
Worldwide(b)
Billed business                                                          7 %                       8%
Proprietary billed business                                              6                        7
GNS billed business(c)                                                  14                       17
Airline-related volume (10% of worldwide billed
business)                                                                2                        2
United States(b)
Billed business                                                          7
Proprietary consumer card billed business(d)                             7
Proprietary small business billed business(d)                           10
Proprietary corporate services billed business(e)                        7
T&E-related volume (27% of U.S. billed business)                         5
Non-T&E-related volume (73% of U.S. billed
business)                                                                8
Airline-related volume (9% of U.S. billed
business)                                                                2
Outside the United States(b)
Billed business                                                          7                        9
Japan, Asia Pacific & Australia (JAPA) billed
business                                                                 8                       13
Latin America & Canada (LACC) billed business                            8                       10
Europe, Middle East & Africa (EMEA) billed
business                                                                 7                        6
Proprietary consumer and small business billed
business(f)                                                              3                        6
JAPA billed business                                                    (4 )                      4
LACC billed business                                                     6                        7
EMEA billed business                                                     6                        6
Proprietary corporate services billed business(e)                        2                        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 three or six months ended June 30, 2013 apply to the period(s) 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 $32 million or 5 percent for the three months ended June 30, 2013, as compared to the same period in the prior year, primarily reflecting fee increases as well as an increase in proprietary cards-in-force, and a greater mix of premium products.

Travel commissions and fees decreased $26 million or 5 percent for the three months ended June 30, 2013, as compared to the same period in the prior year, primarily due to a 1 percent decline in worldwide travel sales as well as a decline in revenue recognized in the period from travel suppliers. Business travel sales declined 2 percent while U.S. consumer travel sales increased 3 percent.

Other commissions and fees increased $30 million or 5 percent for the three months ended June 30, 2013, as compared to the same period in the prior year, primarily driven by slightly higher late fees and foreign currency conversion revenues.

Other revenues decreased $84 million or 13 percent for the three months ended June 30, 2013, as compared to the same period in the prior year, primarily due to cardmember reimbursements in the second quarter of

. . .

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