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AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Millions)		2017				2016				2017				2016
Revenues
Discount revenue earned from purchased Card Member receivables and loans		$	199			$	119			$	558			$	352
Interest income from affiliates and other			75				51				198				158
Finance revenue			12				10				35				29
Total revenues			286				180				791				539
Expenses
Provisions for losses			60				37				176				105
Interest expense			139				80				359				239
Interest expense to affiliates			17				5				39				16
Other, net			(15	)			(12	)			14				(13	)
Total expenses			201				110				588				347
Pretax income			85				70				203				192
Income tax provision			13				10				15				24
Net income			72				60				188				168
Retained earnings at beginning of period			3,427				3,222				3,311				3,114
Retained earnings at end of period		$	3,499			$	3,282			$	3,499			$	3,282

See Notes to Consolidated Financial Statements.

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AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

See Notes to Consolidated Financial Statements.

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See Notes to Consolidated Financial Statements.

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AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Consolidated Financial Statements.

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1.   Basis of Presentation

American Express Credit Corporation (Credco), together with its subsidiaries, 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).

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

Credco executes material transactions with its affiliates. The agreements between Credco and its affiliates provide that the parties intend that the transactions thereunder be conducted on an arm’s length basis; however, there can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.

American Express provides Credco with financial support with respect to maintenance of its minimum overall 1.25 fixed charge coverage ratio, which is achieved by charging appropriate discount rates on the purchases of receivables Credco makes from, and the interest rates on the loans Credco provides to, TRS and other American Express subsidiaries. Each monthly period, the discount and interest rates are determined to generate income for Credco that is sufficient to maintain its minimum fixed charge coverage ratio. The revenue earned by Credco from purchasing Card Member receivables and loans at a discount is reported as discount revenue on the Consolidated Statements of Income and Retained Earnings.

The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Credco’s Annual Report on Form 10-K for the year ended December 31, 2016 (Form 10-K). If not materially different, certain footnote disclosures included therein have been omitted from this Quarterly Report on Form 10-Q.

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

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting estimates reflect the best judgment of management, but actual results could differ.

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In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities. The guidance, which is effective January 1, 2018, makes targeted changes to current GAAP, specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial instruments. Credco expects that adopting this guidance will have an immaterial impact on its financial position, results of operations and cash flows, as well as on its accounting policies, business processes, systems and internal controls.

In June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, which is effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. Credco does not intend to adopt the new standard early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the CECL model will alter the assumptions used in estimating credit losses on Card Member receivables and loans, among other financial instruments, and may result in material increases to Credco’s credit reserves as the new guidance involves earlier recognition of expected losses for the life of the assets. American Express has established an enterprise-wide, cross-discipline governance structure to implement the new standard. American Express is currently identifying key interpretive issues, and is evaluating existing credit loss forecasting models and processes in relation to the new guidance to determine what modifications may be required.

In August 2017, the FASB issued new accounting guidance providing targeted improvements to the accounting for hedging activities, which is effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. Credco is evaluating the impact this guidance will have on its financial position, results of operations and cash flows, as well as the impact the standard will have on its accounting policies, business processes, systems and internal controls.

During the fourth quarter of 2015, American Express determined it would sell Card Member loans and receivables related to certain of its cobrand partnerships. As a result of the determination, Credco classified Card Member receivables related to the Costco portfolio purchased from American Express Receivables Financing Corporation VIII LLC (RFC VIII) in the form of participation interest as Card Member receivables held for sale (HFS) on its Consolidated Balance Sheets as of December 31, 2015 and March 31, 2016.

During the second quarter of 2016, American Express completed the sales of substantially all of its outstanding Card Member loans and receivables HFS, and consequently Credco also sold back all of its participation interests in Card Member receivables HFS to RFC VIII.

 

2.   Card Member Receivables and Loans

American Express’ charge and credit card products result in the generation of Card Member receivables and Card Member loans, respectively.

The net volume of Card Member receivables purchased during the nine months ended September 30, 2017 and 2016 was approximately $189 billion and $161 billion, respectively. As of September 30, 2017 and December 31, 2016, Credco Receivables Corporation (CRC) owned approximately $6.4 billion and $4.0 billion, respectively, of participation interests in Card Member receivables purchased without recourse from RFC VIII.

Card Member receivables as of September 30, 2017 and December 31, 2016 consisted of:

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3.   Reserves for Losses

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4.   Derivatives and Hedging Activities

Credco uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates and foreign exchange rates, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of Credco’s market risk management. Credco does not transact in derivatives for trading purposes.

In relation to Credco’s credit risk, under the terms of the derivative agreements it has with its various counterparties, Credco is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on its assessment of the credit risk of Credco’s derivative counterparties as of September 30, 2017 and December 31, 2016, no credit risk adjustment to the derivative portfolio was required.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2017 and December 31, 2016:

A majority of Credco’s derivative assets and liabilities as of September 30, 2017 and December 31, 2016 are subject to master netting agreements with its derivative counterparties. Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

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

 

The following table summarizes the gains (losses) recognized in Other expenses associated with Credco’s fair value hedges for the three and nine months ended September 30:

The effective portion of the gain or loss on net investment hedges, net of taxes, recorded in accumulated other comprehensive income (loss) (AOCI) as part of the cumulative translation adjustment, were losses of $95 million and $29 million for the three months ended September 30, 2017 and 2016, respectively, and losses of $263 million and $28 million for the nine months ended September 30, 2017 and 2016, respectively, with any ineffective portion recognized in Other expenses during the period. No ineffectiveness or other amounts associated with net investment hedges were reclassified from AOCI into income for the three and nine months ended September 30, 2017 and 2016.

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During the nine months ended September 30, 2017 and during the year ended December 31, 2016, Credco did not have any assets that were measured at fair value due to impairment on a nonrecurring basis.

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Credco has established a Variable Interest Entity (VIE), American Express Canada Credit Corporation (AECCC), used primarily to lend funds to affiliates, through the issuance of notes in Canada under a medium-term note program. All notes issued under this program are fully guaranteed by Credco. Credco is considered the primary beneficiary of the entity and owns all of the outstanding voting interests and, therefore, consolidates the entity. Total assets as of September 30, 2017 and December 31, 2016 were $1.9 billion and $1.7 billion, respectively, the majority of which were eliminated in consolidation. Total liabilities as of September 30, 2017 and December 31, 2016 were $1.9 billion and $1.7 billion, respectively. As of September 30, 2017 and December 31, 2016, $1.4 billion and $1.3 billion, respectively, of liabilities were eliminated in consolidation. The assets of the VIE are not used solely to settle the obligations of the VIE. The note holders of the VIE have recourse to Credco.

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

 

The following table shows the tax impact for the three and nine months ended September 30 for the changes in Foreign Currency Translation Adjustments presented above:

8.   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 American Express, 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 an American Express consolidated reporting basis.

The effective tax rate was 15.3 percent and 14.3 percent for the three months ended September 30, 2017 and 2016, respectively, and 7.4 percent and 12.5 percent for the nine months ended September 30, 2017 and 2016, respectively. The changes in tax rates primarily reflected the geographic mix of expenses in the United States attracting a 35 percent statutory benefit and foreign earnings taxed at lower rates, which are indefinitely reinvested.

The tax rate in each of the periods reflects the favorable impact of the tax benefit related to Credco’s ongoing funding activities outside the United States. Credco’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to volatility in certain components of revenues and expenses that prevents Credco from projecting a reliable estimate of full year pretax income. A discrete calculation of the provision for income taxes is recorded for each interim period.

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 February 2017, American Express received notification that all matters outstanding with the IRS for tax years 1997-2007 were resolved. The resolution of such matters did not impact Credco’s effective tax rate. American Express is currently under examination with the IRS for tax years 2008 through 2014.

During the nine months ended September 30, 2017, Credco’s unrecognized tax benefits decreased by $288 million. The decrease was primarily due to the resolution with the IRS of an uncertain tax position in January 2017, and resulted in the recognition of $289 million in shareholder’s equity, specifically within AOCI. Interest relating to unrecognized tax benefits also decreased by approximately $41 million due to the resolution of this uncertain tax position. The decrease in accrued interest had no impact on either the income tax provision or AOCI.

Credco believes it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within the next 12 months principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the attribution of taxable income to a particular jurisdiction or jurisdictions. The resolution of such items would not have a material impact on Credco’s effective tax rate.

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Overview

American Express Credit Corporation (Credco), together with its subsidiaries, 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). Both American Express and TRS are bank holding companies.

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

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

Business Overview

Management’s discussion of the results of Credco is in the context of the wider business environment for American Express.

American Express’ results for the third quarter reflect significant progress against its current priorities of accelerating revenue growth, optimizing investments and resetting the cost base.

Although American Express has some headwinds from regulation in markets around the world and intense competition, American Express remains focused on delivering differentiated value to its merchants, customers and business partners, while delivering appropriate returns to its shareholders.

Effective December 1, 2015, American Express transferred the Card Member loans and receivables related to its cobrand partnerships with JetBlue Airways Corporation and Costco Wholesale Corporation in the United States to Card Member loans and receivables held for sale (HFS) on its Consolidated Balance Sheets, the sales of which were completed on March 18, 2016 and June 17, 2016, respectively. For the periods from December 1, 2015 through the sale completion dates, the primary impacts beyond the HFS classification on the Consolidated Balance Sheets were to provisions for losses and credit metrics, which do not reflect amounts related to these HFS loans and receivables, as credit costs were reported in Other expenses through a valuation allowance adjustment. Since Credco owns participation interests in receivables purchased from American Express Receivables Financing Corporation VIII LLC (RFC VIII), Credco also sold back all of its participation interests in Card Member receivables HFS to RFC VIII.

Results of Operations for the Nine Months Ended September 30, 2017 and 2016

Net income depends largely on the volume of Card Member receivables and loans purchased, the discount rate used to determine purchase price, interest earned, interest expense, collectability of purchased Card Member receivables and loans, and income taxes.

Credco’s consolidated net income increased $20 million or 12 percent to $188 million, as compared to $168 million for the same period in 2016. The year-over-year increase is primarily due to higher Discount revenue earned from purchased Card Member receivables and loans, higher Interest income from affiliates and other and lower Income tax expense, partially offset by higher Interest expense, higher Provisions for losses and higher Other expenses.

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Discount revenue increased, due to higher discount rates as well as higher volumes of receivables purchased.

Interest income increased, primarily due to higher interest rates.

Finance revenue increased, primarily due to higher average outstanding Card Member loan balances during 2017.

Table 2: Total Expense Summary

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Loans to Affiliates and Other

Credco’s loans to affiliates and other represent floating-rate interest-bearing borrowings by American Express Company, other wholly owned subsidiaries of TRS and the joint ventures that issue American Express cards in certain countries. The components of loans to affiliates and other as of September 30, 2017 and December 31, 2016 were as follows:

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Service Fees to Affiliates

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Downgrades in the ratings of Credco’s unsecured debt could result in higher funding costs, as well as higher fees related to borrowings under its unused lines of credit. Declines in credit ratings could also reduce Credco’s borrowing capacity in the unsecured term debt and commercial paper markets. The overall level of the funding provided by Credco to other American Express affiliates is impacted by a variety of factors, among them Credco’s ratings. To the extent that Credco is subject to a higher cost of funds, whether due to an adverse ratings action or otherwise, the affiliates could continue to use, or could increase their use of, alternative sources of funding for their receivables that offer better pricing.

Short-term Funding Programs

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The committed syndicated bank credit facility does not contain a material adverse change clause, which might otherwise preclude borrowing under the credit facility, nor is it dependent on Credco’s credit rating.

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Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in Credco’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Credco’s management, including Credco’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have not been any changes in Credco’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during Credco’s fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

For a discussion of Credco’s risk factors, see Part I, Item 1A. “Risk Factors” of the 2016 Form 10-K. There are no material changes from the risk factors set forth in the 2016 Form 10-K. However, the risks and uncertainties that Credco faces are not limited to those set forth in the 2016 Form 10-K. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect Credco’s business.

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

American Express Global Business Travel (GBT) and certain entities that may be considered affiliates of GBT have informed American Express that during the third quarter of 2017 approximately 73 visas were obtained from Iranian embassies and consulates around the world in connection with certain travel arrangements on behalf of clients. GBT had negligible gross revenues and net profits attributable to these transactions and intends to continue to engage in these activities on a limited basis so long as such activities are permitted under U.S. law.

 

ITEM 6.   EXHIBITS

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

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EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K