AMERICAN EXPRESS CREDIT CORP - FORM 10-Q

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EX-4.3 - AMERICAN EXPRESS CREDIT CORP	c59396_ex4-3.htm
EX-4.1 - AMERICAN EXPRESS CREDIT CORP	c59396_ex4-1.htm
EX-4.2 - AMERICAN EXPRESS CREDIT CORP	c59396_ex4-2.htm
EX-31.2 - AMERICAN EXPRESS CREDIT CORP	c59396_ex31-2.htm
EX-12.2 - AMERICAN EXPRESS CREDIT CORP	c59396_ex12-2.htm
EX-32.2 - AMERICAN EXPRESS CREDIT CORP	c59396_ex32-2.htm
EX-31.1 - AMERICAN EXPRESS CREDIT CORP	c59396_ex31-1.htm
EX-32.1 - AMERICAN EXPRESS CREDIT CORP	c59396_ex32-1.htm
EX-12.1 - AMERICAN EXPRESS CREDIT CORP	c59396_ex12-1.htm

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, 2009

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

For the transition period from ____ to ____

Commission File No. 1-6908

AMERICAN EXPRESS CREDIT CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		11-1988350
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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.

x Yes o No

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No

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


Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

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


Class		Outstanding at November 16, 2009


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, 2009 and 2008	3

		Consolidated Balance Sheets – September 30, 2009 and December 31, 2008	4

		Consolidated Statements of Cash Flows – Nine months ended September 30, 2009 and 2008	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION

	Item 1A.	Risk Factors	31

	Item 6.	Exhibits	31

		Signatures	32

		Exhibit Index	E-1

- 2 -


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008

				Restated						Restated


Revenues

Discount revenue earned from purchased cardmember receivables and loans	$	143		$	569		$	524		$	1,818
Interest income from affiliates		101			201			320			583
Interest income from investments		16			76			73			219
Finance revenue		12			14			37			31
Other		40			30			(7	)		40

Total revenues		312			890			947			2,691


Expenses

Provisions for losses, net of recoveries		56			192			163			548
Interest expense		132			345			450			1,061
Interest expense to affiliates		6			60			38			215
Service fees to affiliates		—			50			1			152
Other		1			1			2			3

Total expenses		195			648			654			1,979


Pretax income		117			242			293			712
Income tax provision		10			26			24			87

Net income		107			216			269			625
Retained earnings at beginning of period		3,533			3,361			3,446			3,162
Dividends		(125	)		(50	)		(200	)		(260	)

Retained earnings at end of period	$	3,515		$	3,527		$	3,515		$	3,527


	September 30, 2009			December 31, 2008

				Restated


Assets

Cash and cash equivalents	$	181		$	8,855
Cardmember receivables, less reserves: 2009, $144; 2008, $204		9,079			10,655
Cardmember loans, less reserves: 2009, $19; 2008, $14		447			484
Loans to affiliates		9,831			11,726
Investment securities		2,048			3,084
Deferred charges and other assets		678			801
Due from affiliates		5,150			3,660

Total assets	$	27,414		$	39,265


Liabilities and Shareholder’s Equity

Short-term debt	$	1,130		$	7,367
Short-term debt to affiliates		4,158			8,317
Current portion of long-term debt		2,538			5,201
Long-term debt		15,759			14,809

Total debt		23,585			35,694
Accrued interest and other liabilities		409			538

Total liabilities		23,994			36,232


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		3,515			3,446
Accumulated other comprehensive loss, net of tax:
Net unrealized securities gains, net of tax: 2009, $(9); 2008, $(15)		16			28
Net unrealized derivatives losses, net of tax: 2009, $4; 2008, $19		(8	)		(35	)
Foreign currency translation adjustments, net of tax: 2009, $13; 2008, $13		(265	)		(568	)

Total accumulated other comprehensive loss		(257	)		(575	)

Total shareholder’s equity		3,420			3,033

Total liabilities and shareholder’s equity	$	27,414		$	39,265


1.	Basis of Presentation

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

	The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in Amendment No.1 to the Annual Report on Form 10-K (Form 10-K/A) of Credco for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission (SEC) on November 16, 2009. Significant accounting policies disclosed therein have not changed.

	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 and 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 relating to cardmember receivables and loans, fair value measurement, and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ.

	Restatement of Previously Issued Financial Statements

	As discussed in the Form 10-K/A, Credco restated its Consolidated Financial Statements for the years ended December 31, 2008 and 2007 and certain quarters in 2008 and 2007 as well as its Quarterly Reports on Form 10-Q for the periods ended June 30, 2009 and March 31, 2009. The restatement has no effect on Credco’s net cash flows provided by (used in) operating activities, investing activities and financing activities. All dollar amounts and percentages herein have been adjusted for the effect of the restatement adjustments.

	The restatement is the result of the correction of a non-cash error in the accounting for a net investment in a consolidated foreign subsidiary that stemmed from a funding structure executed in 2004. In the course of preparing the financial statements for the third quarter of 2009, an error was identified in the initial set up of this structure in Credco’s subsidiary ledgers that caused an incorrect automated bookkeeping entry to be recorded beginning in the third quarter of 2007 when a portion of the funding for this net investment was refinanced. As a result of this incorrect automated bookkeeping entry, (i) other revenues in Credco’s Consolidated Statements of Income and (ii) accrued interest and other liabilities, retained earnings and the foreign currency translation adjustments account included in the accumulated other comprehensive income (loss) component of shareholder’s equity in Credco’s Consolidated Balance Sheets were incorrect beginning in the third quarter of 2007.

	The restatement also includes the impact of (i) certain other unrelated immaterial errors primarily impacting income tax provision in Credco’s Consolidated Statements of Income and (ii) the correction of an asset line reclassification affecting cardmember receivables and due from affiliates in Credco’s Consolidated Balance Sheets.

	Certain disclosures in Notes 4 and 6 have been restated consistent with the Consolidated Financial Statements.

	The following tables set forth the effects of the restatement adjustments on affected line items with Credco’s previously reported Consolidated Statements of Income for the three and nine months ended September 30, 2008 and the Consolidated Balance Sheets for the year ended December 31, 2008.



September 30, 2008	Three Months Ended					Nine Months Ended

(Millions)	As Previously Reported			Restated		As Previously Reported			Restated


Other revenues	$	(11	)	$	30	$	(7	)	$	40
Total revenues	$	849		$	890	$	2,644		$	2,691
Pretax income	$	201		$	242	$	665		$	712
Income tax provision	$	12		$	26	$	69		$	87
Net income	$	189		$	216	$	596		$	625



December 31, 2008
(millions)	As Previously Reported			Restated


Accrued interest and other liabilities	$	473		$	538
Total liabilities	$	36,167		$	36,232
Retained earnings	$	3,322		$	3,446
Foreign currency translation adjustments, net of tax	$	(379	)	$	(568	)
Total accumulated other comprehensive loss	$	(386	)	$	(575	)
Total shareholder’s equity	$	3,098		$	3,033


	Recently Issued Accounting Standards

	Effective for interim and annual periods ending after September 15, 2009, the Financial Accounting Standards Board (FASB) Accounting Standards Codification^TM (the Codification) is the single source of authoritative literature of U.S. generally accepted accounting principles (GAAP). The Codification consolidates all authoritative accounting literature into one internet-based research tool, which supersedes all pre-existing non-SEC accounting and reporting standards, excluding separate rules and other interpretive guidance released by the Securities and Exchange Commission. New accounting guidance is now issued in the form of Accounting Standards Updates, which update the Codification. Credco has adopted the Codification in the period ending September 30, 2009, and as a result has replaced references to standards that were issued prior to the Codification with a description of the applicable accounting guidance.

	The FASB recently issued the following accounting standards, which are effective beginning January 1, 2010. Credco is currently assessing the impact of these standards.


	•	An amendment to the accounting guidance for transfers of financial assets (originally issued as Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”): The amendment eliminated the concept of a qualifying special purpose entity (QSPE), therefore requiring these entities to be evaluated under the accounting guidance for consolidation of variable interest entities (VIE). Other changes include additional considerations when determining if sale accounting is appropriate, as well as enhanced disclosures requirements. The new standard is to be applied prospectively to transactions completed after the effective date.

	•	An amendment to the accounting guidance for consolidation of VIEs (originally issued as FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”): The new standard eliminates the scope exception for QSPEs and requires an entity to reconsider its previous consolidation conclusions reached under the VIE consolidation model, including (i) whether an entity is a VIE, (ii) whether the enterprise is the VIE’s primary beneficiary, and (iii) the required financial statement disclosures. The new standard can be applied as of the effective date, with a cumulative-effect adjustment to retained earnings recognized on that date, or retrospectively, with a cumulative-effect adjustment to retained earnings recognized as of the beginning of the first year adjusted.


2.	Investment Securities

	The following is a summary of investment securities at September 30, 2009 and December 31, 2008:



(Millions)	September 30, 2009								December 31, 2008

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

U.S. Government agency obligations	$	2,022	$	26	$	—	$	2,048	$	2,640	$	37	$	—	$	2,677
U.S. Government treasury obligations		—		—		—		—		400		7		—		407

Total	$	2,022	$	26	$	—	$	2,048	$	3,040	$	44	$	—	$	3,084


	All of Credco’s investment securities are classified as available-for-sale. There were no realized gains or losses on investment securities for the nine months ended September 30, 2009.

	Fair Value

	The following is a description of the valuation techniques utilized by Credco to measure the fair value of its investment securities, including the three general classifications of such items pursuant to the fair value hierarchy (Level 1, Level 2, and Level 3). These techniques may produce fair values that may not be indicative of a future sale, or reflective of future fair values. The use of different techniques to determine the fair value of these types of investment securities could result in different estimates of fair value at the reporting date.

	• Level 1 - When available, quoted market prices are used to determine fair value and the investment securities are classified within Level 1 of the fair value hierarchy. Credco has not classified any investment securities in Level 1 of the fair value hierarchy.

	• Level 2 - When quoted prices in an active market are not available, the fair market values for Credco’s investment securities are obtained from a pricing service engaged by Credco, and Credco receives one price for each security. The fair values provided by the pricing service are estimated by using a pricing model, where the inputs to the model are based on observable market inputs. The underlying inputs to the valuation techniques applied by the pricing service are typically benchmark yields, benchmark security prices, credit spreads, reported trades, broker-dealer quotes, all with reasonable levels of transparency. The pricing service did not apply any adjustments to the pricing models used. In addition, Credco did not apply any adjustments to prices received from the pricing service. Although the underlying inputs are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing model used does entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.

	• Level 3 - In certain circumstances, the fair market value for Credco’s investment securities could be based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions would be unobservable in either an active or inactive market. Credco has not classified any investment securities in Level 3 of the fair value hierarchy.

	As of September 30, 2009 and December 31, 2008, all of Credco’s investment securities are classified within Level 2 of the fair value hierarchy. Credco periodically reaffirms its understanding of the valuation techniques used by its pricing service. No adjustments were deemed necessary to the prices provided by the pricing service as a result of current market conditions.

	Other-Than-Temporary Impairment

	Credco reviews and evaluates its investment securities at least quarterly, and more often as market conditions may require, to identify investment securities that have indications of other-than-temporary impairment. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, Credco considers several metrics when evaluating investment securities for other-than-temporary impairment. The key factors considered include the determination of the extent to which the decline in the fair value of the security is due to increased default risk for the specific issuer, or market interest rate risk. With respect to increased default risk, Credco assesses the collectibility of principal and interest payments by monitoring issuers’ credit ratings, related changes to those ratings, specific credit events associated with the individual issuers as well as the credit ratings of financial guarantors, where applicable, and the extent to which amortized cost exceeds fair value and the duration and size of that difference.


4.	Comprehensive Income

	The components of comprehensive income, net of related tax, were as follows:




(Millions)	Location	Other assets				Other liabilities

		Fair Value (a)				Fair Value (a)

		September 2009		December 2008		September 2009		December 2008

Derivatives designated as hedging instruments
Interest rate contracts
Fair value hedges		$	351	$	431	$	—	$	—
Cash flow hedges			—		—		12		54
Foreign exchange contracts
Net investment hedges			12		39		17		22

Total derivatives designated as hedging instruments			363		470		29		76

Derivatives not designated as hedging instruments
Interest rate contracts			—		—		7		5
Foreign exchange contracts			111		75		29		39

Total derivatives not designated as hedging instruments			111		75		36		44

Total derivatives (b)		$	474		545	$	65	$	120


	With respect to market interest rate risk, including benchmark interest rates and credit spreads, Credco assesses whether it has the intent to sell the investment securities, and whether it is more likely than not that Credco will not be required to sell the investment securities before recovery of any unrealized losses. As of September 30, 2009 and December 31, 2008, Credco did not hold any investment securities that were in an unrealized loss position.

	Supplemental Information

	Contractual maturities of investment securities classified as available-for-sale as of September 30, 2009 are as follows:


3.	Fair Values of Financial Instruments

	GAAP requires the disclosure of the estimated fair value of financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements for the fair value of financial instruments exclude leases, equity method investments, affiliate investments, pension and benefit obligations, insurance contracts, and all non-financial instruments.

	The following table discloses fair value information for Credco’s financial assets and financial liabilities, as of the dates presented:


(Billions)	September 30, 2009				December 31, 2008

	Carrying Value		Fair Value		Carrying Value		Fair Value

Financial Instrument Assets:
Assets for which carrying values equal or approximate fair value	$	17	$	17	$	27	$	27
Loans to affiliates	$	10	$	10	$	12	$	12
Financial Instrument Liabilities:
Liabilities for which carrying values equal or approximate fair value	$	5	$	5	$	16	$	16
Long-term debt	$	18	$	18	$	20	$	18


The fair values of these financial instruments are estimates based upon market conditions and perceived risks as of September 30, 2009 and December 31, 2008, and require management judgment. These figures may not be indicative of their future fair values. The fair value of Credco cannot be estimated by aggregating the amounts presented.


	The following methods were used to determine estimated fair values:

	Financial Assets for Which Carrying Values Equal or Approximate Fair Value

	Financial assets for which carrying values equal or approximate fair values include cash and cash equivalents, cardmember receivables, accrued interest, and certain other assets. For these assets, the carrying values approximate fair value because they are short-term in duration or variable rate in nature.

	In addition, the following financial assets are carried at fair value:

	Investment Securities

	Investment securities are recorded at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in accumulated other comprehensive loss. Gains and losses are recognized in the Consolidated Statements of Income upon disposition of the securities or when management determines that a decline in value below amortized cost is other-than-temporary. Refer to Note 2 for additional information regarding investment securities, including the valuation methodologies used to calculate fair value.

	Derivative Financial Instruments

	Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income or Consolidated Balance Sheets (accumulated other comprehensive loss) based upon the nature of the derivative. Refer to Note 5 for additional information regarding derivative financial instruments, including the valuation methodologies used to calculate fair value.

	Financial Liabilities for Which Carrying Values Equal or Approximate Fair Value

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

	*Financial Liabilities Carried at Other Than Fair Value*

	Long-Term Debt

	Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using either quoted market prices or discounted cash flows based on Credco’s current borrowing rates for similar types of borrowing.


	See the Consolidated Balance Sheets for Credco’s accumulated other comprehensive loss position.

5.	Derivatives and Hedging Activities

	Credco uses derivative financial instruments to manage exposure to various market risks. Market risk is the risk to earnings or value resulting from, for example, movements in interest rates, foreign exchange rates, or equity market prices. Credco’s market risk exposures primarily arise through:

		•	Interest rate risk associated with the cost of financing its receivables and loans; and

		•	Foreign exchange risk within its international operations and from foreign currency denominated assets and liabilities.

	General principles and the overall framework for managing market risk across Credco are defined in the Market Risk Policy approved by American Express’ Enterprise-wide Risk Management Committee (ERMC). Market risk is centrally managed by the Market Risk Committee, chaired by the Chief Market Risk Officer of American Express.

	Derivative financial instruments derive their value from an underlying variable or multiple variables, including interest rates, foreign exchange rates, and equity indices or prices. These instruments can increase, reduce or otherwise alter exposure to various market risks and, for that reason, are an integral component of Credco’s market risk and related asset/liability management strategy and processes. Credco uses derivatives to manage these exposures that arise within its business operations, but does not engage in derivative financial instruments for trading purposes.

	For the receivables Credco owns related to charge card and fixed rate lending products, interest rate exposure is managed by shifting the mix of funding toward fixed rate debt and by using derivative instruments, with an emphasis on interest rate swaps, which effectively fix interest expense for the length of the swap. Credco regularly reviews its hedging strategy and may modify it. In addition, Credco may change the amount hedged and the hedge percentage may change based on changes in business volumes and mix, among other factors.

	Foreign exchange risk is generated by foreign currency denominated balance sheet exposures, translation exposure associated with Credco’s net investments in foreign operations, and foreign currency earnings in international units. Credco’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means,


	(a)	The fair values of Credco’s derivative instruments are classified within Level 2 of the fair value hierarchy.


	(b)	GAAP permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between Credco and its derivative counterparty. At September 30, 2009 and December 31, 2008, $7 million and $8 million, respectively, of derivative assets and liabilities have been offset and represents the impact of legally enforceable master netting agreements that provide for the net settlement of all contracts in accordance with GAAP.



	Statement of Income

	Derivative contract gain/(loss)						Hedged item gain/(loss)

Derivative relationship	Location	Amount recognized, net of tax					Location	Amount recognized, net of tax						Ineffective net gains (losses), net of tax

(Millions)		2009			2008			2009			2008			2009			2008

Fair value hedges:
Interest rate contracts	Other revenues	$	37		$	8	Other revenues	$	(41	)	$	(8	)	$	(4	)	$	—


For the nine months ended September 30:


	Statement of Income

	Derivative contract gain/(loss)						Hedged item gain/(loss)

Derivative relationship	Location	Amount recognized, net of tax					Location	Amount recognized, net of tax						Ineffective net gains (losses), net of tax

(Millions)		2009			2008			2009			2008			2009			2008

Fair value hedges:
Interest rate contracts	Other revenues	$	(52	)	$	2	Other revenues	$	52		$	(2	)	$	—		$	—


	Cash Flow Hedges

	A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows attributable to a particular risk of an existing recognized asset or liability, or a forecasted transaction. Credco hedges existing long-term variable-rate debt, the rollover of short-term borrowings and the anticipated forecasted issuance of additional funding through the use of derivative instruments, primarily interest rate swaps. These derivative instruments effectively convert floating rate debt to a fixed rate debt for the duration of the swap. As of September 30, 2009, Credco hedged $1.2 billion of its floating rate debt to fixed rate debt using interest rate swaps.

	For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives are recorded in accumulated other comprehensive (loss) income and reclassified into earnings when the hedged cash flows are recognized into earnings. The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact, primarily in interest expense. Any ineffective portion of the gain or loss, as determined by the accounting requirements, is reported as a component of other revenues.

	In the normal course of business, as the hedged cash flows are recognized into earnings, Credco expects to reclassify $(9) million of net pretax losses on derivative instruments from accumulated other comprehensive loss to earnings during the next 12 months.

	Net Investment Hedges

	A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. Credco designates foreign currency derivatives, primarily forward agreements, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on Credco’s investments in non-U.S. subsidiaries. The effective portions of financial instruments that qualify as net investment hedges are recorded in accumulated other comprehensive (loss) income as part of the cumulative translation adjustment. Any ineffective portions of net investment hedges are recognized in other revenues during the period of change.

	The following table summarizes the impact of cash flow hedges and net investment hedges on the consolidated financial statements for the three and nine months ended September 30, 2009 and 2008, respectively:

	For the three months ended September 30:



(Millions)	Derivative impact on OCI gain (loss), net of tax												Derivative ineffectiveness gain (loss), net of tax

	Recognized in Other Comprehensive Income					Location Reclassified into Income	Amount Reclassified into Income						Location Reclassified into Income	Amount

Derivative relationship	2009			2008			2009			2008				2009		2008

Cash flow hedges:
Interest rate contracts	$	—		$	—	Interest expense	$	(6	)	$	(23	)	Other revenues	$	—	$	—

Net investment hedges:
Foreign exchange contracts	$	(15	)	$	59	Other revenues	$	—		$	—		Other revenues	$	—	$	—

AMERICAN EXPRESS CREDIT CORP - FORM 10-Q - November 16, 2009

Attached files

AMERICAN EXPRESS CREDIT CORP Reports

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	Derivatives Not Designated as Hedges

	Credco has derivatives that act as economic hedges and are not designated for hedge accounting treatment. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily forward contracts and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. For Credco’s economic hedges, the changes in the fair value of the derivative instrument significantly offset within the Consolidated Statements of Income, the related foreign exchange gains or losses on the underlying hedged exposures. From time to time, Credco may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business.

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

	The following table summarizes the impact of derivatives not designated as hedges on the consolidated financial statements for the three and nine months ended September 30, 2009 and 2008, respectively:

	For the three months ended September 30:



Derivative Relationship	Income Statement classification of gain (loss) on derivatives not designated as hedges	Amount recognized net of tax

*(Millions)*		2009		2008

Derivatives not designated as hedges
Interest rate contracts	Other revenues	$	—	$	(1	)
Foreign exchange contracts	Other revenues		44		(110	)
	Interest expense		2		4

Total		$	46	$	(107	)


6.	Income Taxes

	The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with TRS, provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on a TRS consolidated reporting basis.

	American Express is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which American Express has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In June 2008, the IRS completed its field examination of American Express’ federal tax returns for the years 1997 through 2002. In July 2009, the IRS completed its field examination of American Express’ federal tax returns for the years 2003 and 2004. However, all of these years continue to remain open as a consequence of certain issues under appeal.

	Credco had approximately $105 million and $63 million of unrecognized tax benefits at September 30, 2009 and December 31, 2008, respectively. The change is primarily due to an increase in unrecognized tax benefits relating to the attribution of taxable income to a particular jurisdiction or jurisdictions. Included in the $105 million and $63 million of unrecognized tax benefits at September 30, 2009 and December 31, 2008, respectively, are corresponding benefits of approximately $88 million and $53 million, respectively, that, if recognized, would favorably affect the tax rate in a future period. These benefits primarily relate to Credco’s gross permanent benefits and corresponding foreign tax credits and federal tax effects. Credco had approximately $25 million and $15 million accrued for the payment of interest and penalties at September 30, 2009 and December 31, 2008, respectively. For the three and nine months ended September 30, 2009, Credco recognized a net charge of approximately $2 million and $10 million of interest and penalties, respectively.

	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 may 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 and net income.

	Credco’s effective tax rate was 8 percent for both the three and nine months ended September 30, 2009, respectively, compared with 13 percent for the full year 2008.


7.	Subsequent Events

	Credco has performed an evaluation of subsequent events through November 16, 2009, which is the date the financial statements were issued.

	As
	Previously
(millions)	Reported	Restated
2007	1.38	1.38
2008	1.50	1.62


	Current Economic Environment/Outlook

	While year-over-year cardmember spending volume comparisons remained negative during the third quarter, monthly comparisons have recently improved as spending levels have stabilized. This pattern was fairly consistent across all of American Express’ businesses. In addition, the number of cardmember transactions on American Express’ network was relatively flat year-over-year. If third quarter spending volumes continue through the fourth quarter, which is subject to various uncertainties such as consumer confidence and the strength of the economy, among other factors, American Express would expect further narrowing of the decline in growth metrics given easier year-over-year comparisons. Credit trends continued to show overall improvement. Charge card losses have moderated in the United States and worldwide past-due trends have improved.

	In October 2008, American Express moved to increase its flexibility in funding U.S. consumer and small business charge card receivables by amending the receivables purchase agreements between Credco and each of American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) (together, the Banks). The previous agreements called for the Banks, which issue American Express’ U.S. consumer and small business charge cards, to sell all unsecuritized receivables related to spending on those cards to Credco. The amended agreements give the Banks the flexibility to continue to sell the receivables to Credco or to retain the receivables and fund them from their own sources. These amendments will allow American Express to shift, from time-to-time, the funding of those receivables from Credco to the Banks. Credco, which raises funds for the purpose of buying receivables through the sale of commercial paper, as well as through the issuance of medium- and long-term debt securities, can transfer proceeds of its funding activities in excess of its needs broadly to other subsidiaries of American Express, including to the Banks. The new arrangements between Credco and the Banks will have no impact on Credco’s funding of U.S. corporate charge card receivables and charge card receivables outside the United States.

	Certain prior year amounts have been reclassified to conform to the current year presentation of the Consolidated Statement of Cash Flows.

	Results of Operations for the Nine Months ended September 30, 2009 and 2008

	Pretax income depends primarily on the volume of cardmember receivables purchased, the discount factor used to determine purchase price, the relationship of the total discount to Credco’s interest expense, and the collectibility of cardmember receivables purchased.

	Credco’s consolidated net income decreased 57 percent to $269 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The year-over-year decrease was primarily due to a decrease in discount revenue earned from a smaller base of purchased cardmember receivables and loans, interest income earned on loans to affiliates, and interest income from investments, partially offset by a decrease in interest expense and provisions for losses, net of recoveries. A portion of the decrease in net income was also due to the year-over-year decrease in other revenues for the reasons described below.


	The following table summarizes the changes attributable to the increase (decrease) in key revenue and expense accounts for the nine month period ended September 30, 2009, compared with the nine month period ended September 30, 2008 (millions):


Discount revenue earned on purchased cardmember receivables and loans:
Volume of receivables and loans purchased	$	(1,082	)
Discount rates		(212	)

Total	$	(1,294	)


Interest income from affiliates:
Average loans to affiliates	$	(53	)
Interest rates		(210	)

Total	$	(263	)


Interest income from investments:
Average investments outstanding	$	49
Interest rates		(195	)

Total	$	(146	)


Provisions for losses, net of recoveries:
Volume of receivables purchased	$	(392	)
Provisions rates and volume of recoveries		7

Total	$	(385	)

Interest expense:
Average debt outstanding	$	(408	)
Interest rates		(203	)

Total	$	(611	)

Interest expense to affiliates:
Average debt outstanding	$	9
Interest rates		(186	)

Total	$	(177	)


	Discount Revenue Earned on Purchased Cardmember Receivables and Loans

	Discount revenue decreased 71 percent or $1,294 million to $524 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, due to a decrease in both the volume of receivables purchased and discount rates. Volume of receivables and loans purchased for the nine months ended September 30, 2009, was 59 percent lower than the same period a year ago, primarily due to the amendment of the receivables purchase agreements between Credco and the Banks. 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, decreased an average of approximately 26 basis points compared to the nine months ended September 30, 2008.

	Interest Income from Affiliates

	Interest income from affiliates decreased 45 percent or $263 million to $320 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The year-over-year decrease is due to a decrease in both the interest rates charged to affiliates and, to a lesser extent, the volume of loans to affiliates. The average interest rate charged to affiliates during the nine months ended September 30, 2009, was 195 basis points lower than the average interest rate charged to affiliates in the same nine month period a year ago.


	Interest Income from Investments

	Interest income from investments decreased 67 percent or $146 million to $73 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The year-over-year decrease is due to the decrease of the average interest rate on the total investment portfolio of approximately 179 basis points for the nine months ended September 30, 2009, as compared to the same nine month period a year ago, as well as the maturity of $1 billion of U.S. Treasury securities in 2009.

	Other Revenues

	Other revenues decreased $47 million to $(7) million for the nine months ended September 30, 2009 as compared to the prior year period primarily as a result of the change in value of foreign exchange forward contracts.

	Provisions for Losses, Net of Recoveries

	The provisions for losses, net of recoveries, decreased 70 percent or $385 million to $163 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The year-over-year decrease primarily reflects a reduction in the volume of receivables purchased, due to the amendment of the receivables purchase agreements with the Banks previously discussed.

	Interest Expense and Interest Expense to Affiliates

	Interest expense and interest expense to affiliates decreased 58 percent and 82 percent, respectively, for the nine months ended September 30, 2009, as compared to the same period a year ago. Interest expense decreased due to lower interest rates and lower average debt outstanding. Interest expense to affiliates decreased due to lower interest rates, partially offset by an increase in average debt with affiliates outstanding. The average interest rate on debt outstanding during the nine months ended September 30, 2009, was 98 basis points lower than the same period a year ago. The average rate due to affiliates during the nine months ended September 30, 2009, was 184 basis points lower than the same period a year ago.

	Service Fees to Affiliates

	Service fees to affiliates decreased to $1 million for the nine months ended September 30, 2009, as compared to $152 million for the nine months ended September 30, 2008, due to a decrease in servicing provided under service level agreements with affiliates as a result of the previously discussed amendment of the receivables purchase agreements with the Banks.

	Income Taxes

	Credco’s effective tax rate was 8 percent and 12 percent for the nine months ended September 30, 2009, and 2008, respectively.

	Cardmember Receivables

	At September 30, 2009, and December 31, 2008, Credco owned $9.2 billion and $10.9 billion of cardmember receivables, respectively. Cardmember receivables represent amounts due from charge card customers and are recorded at the time they are purchased from the seller. Included in cardmember receivables are Credco Receivables Corporation (CRC)’s purchases of the participation interests from American Express Receivables Financing Corporation V LLC (RFC V) in conjunction with TRS’ securitization program. At September 30, 2009, and December 31, 2008, CRC owned approximately $1.9 billion and $2.4 billion, respectively, of participation interests purchased from RFC V.