UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file No. 1-6908
AMERICAN EXPRESS CREDIT CORPORATION
(Exact name of registrant as specified in its charter) | | | | | | | | | | | | | | | | | | | | |
| Delaware | | 11-1988350 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | |
| 200 Vesey Street, New York, New York | | 10285 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 640-2000 (Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | N/A | N/A |
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 INSTRUCTION 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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☑ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes þ 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 October 28, 2021 |
| Common Stock (par value $0.10 per share) | | 1,504,938 | | Shares |
AMERICAN EXPRESS CREDIT CORPORATION
FORM 10-Q
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Throughout this report the term “Credco” refer to American Express Credit Corporation and its subsidiaries on a consolidated basis, and the term “American Express” refers to American Express Company and its subsidiaries on a consolidated basis, unless stated or the context implies otherwise. The use of the term “partner” in this report does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of American Express’ relationship with any third parties.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Overview
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). Both American Express and TRS are bank holding companies.
Credco is engaged in the business of financing certain 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. Credco relies on intercompany borrowing as a primary source of funding for these activities.
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 “Cautionary Note Regarding Forward-Looking Statements” section.
Business Environment
Management’s discussion of Credco’s results should be read in the context of the wider business environment for American Express. American Express’ results for the third quarter reflect the strong growth momentum that it has seen in its business over the last several quarters. American Express continues to see positive results from the increased investments it has made to drive customer acquisition, engagement and retention. American Express’ network volumes continued to accelerate on a sequential basis and exceeded pre-pandemic levels for the quarter and credit metrics remained around historic lows.
American Express experienced significant adverse impacts during the prior year due to the COVID-19 pandemic and the resulting containment measures such as lockdowns and travel restrictions implemented by local and national authorities. Year-over-year comparisons for the three-month period reflect the pandemic impact on its business in 2020, with less of an impact for the nine-month period due to the pre-pandemic results for the first two months in the prior year. While the economy has continued to improve, there remains uncertainty related to ongoing effects of the pandemic on the global macroeconomic environment.
American Express’ worldwide network volumes for the third quarter increased 29 percent year-over-year and exceeded levels in the third quarter of 2019 (pre-pandemic levels) by 5 percent. U.S. billed business increased 32 percent versus the prior year and exceeded pre-pandemic levels by 9 percent. While international billed business grew 28 percent versus the prior year, it remained 8 percent below pre-pandemic levels, as American Express has historically had a higher mix of travel and entertainment (T&E) spend in its international markets, and it is seeing a slower pace of recovery in T&E spend.
American Express continued to see different paces of recovery for Goods & Services (G&S) and T&E spend. G&S spend, which accounts for the majority of American Express’ volumes, continued to grow sequentially versus the prior quarter and grew on a year-over-year basis, and is now above pre-pandemic levels. T&E spend more than doubled versus the prior year, with continued sequential growth compared to the second quarter, though it remained below pre-pandemic levels. T&E spend represents spend on travel and entertainment, which primarily includes airline, cruise, lodging and dining merchant categories, and G&S spend represents transactions in all other merchant categories.
American Express’ Card Member loans increased 11 percent, which was lower than the growth in billed business due to higher paydown rates driven in part by the continued liquidity and financial strength of its customer base. American Express expects recovery in loan balances and Net interest income to continue to lag the improvement in spend volumes.
1
American Express’ Provisions for credit losses decreased and resulted in a net benefit, primarily due to lower net write-offs and a higher reserve release driven by improved portfolio quality and a strengthening macroeconomic outlook, partially offset by an increase in the outstanding balance of loans and receivables in the current year. Credco’s provisions for credit losses also decreased and resulted in a net benefit. Refer to “Results of Operations” in MD&A and Note 3 to the “Consolidated Financial Statements” for additional information.
See “Cautionary Note Regarding Forward-Looking Statements” for information on legislative and regulatory changes, additional impacts of the COVID-19 pandemic and other matters that could have a material adverse effect on Credco’s results of operations and financial condition.
Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Net income depends largely on the volume of Card Member receivables and Card Member loans purchased, the discount rate used to determine purchase price, interest earned, interest expense, collectability of purchased Card Member receivables and Card Member loans, and income taxes. These discussions should be read in conjunction with the discussion under “Business Environment,” which contains further information on the COVID-19 pandemic and the related impacts on Credco’s results of operations.
Credco’s consolidated net income increased by $235 million to $365 million, as compared to net income of $130 million for the same period in 2020. The year-over-year increase was primarily driven by a decline in provision for credit losses and interest expense, as well as an increase in interest income, partially offset by lower discount revenue earned from Card Member receivables.
Table 1: Total Revenues Summary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | Change |
| (Millions, except percentages) | | 2021 | | | 2020 | | | 2021 vs. 2020 | |
| Discount revenue earned from purchased | | | | | | | | | |
| Card Member receivables and Card Member loans | | $ | 212 | | | $ | 562 | | | $ | (350) | | | (62) | % | |
| Interest income from affiliates and other | | 270 | | | 66 | | | 204 | | | # | |
| Finance revenue | | 47 | | | 63 | | | (16) | | | (25) | | |
| Total revenues | | $ | 529 | | | $ | 691 | | | $ | (162) | | | (23) | % | |
# Denotes a variance of 100 percent or more
Total revenues
Discount revenue decreased due to lower discount rates on Card Member receivables purchased driven by improvements in the credit environment.
Interest income increased, reflecting a higher expectation as to the collectability of collateralized loan arrangements as a result of improvements in the credit environment.
Finance revenue decreased, primarily due to lower average outstanding Card Member loan balances.
Table 2: Total Expenses Summary | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | Change |
| (Millions, except percentages) | | 2021 | | 2020 | | 2021 vs. 2020 |
| Provisions for credit losses | | $ | (9) | | | $ | 264 | | | $ | (273) | | | # |
| Interest expense | | 82 | | | 169 | | | (87) | | | (51) | % |
| Interest expense to affiliates | | 10 | | | 70 | | | (60) | | | (86) |
| Other, net | | 9 | | | (14) | | | 23 | | | # |
| Total expenses | | $ | 92 | | | $ | 489 | | | $ | (397) | | | (81) | % |
# Denotes a variance of 100 percent or more
Total expenses
Provisions for credit losses decreased and resulted in a net benefit due to reserve releases in the current period versus reserve builds in the prior period and lower net write-offs. The reserve releases in the current period were driven by improving macroeconomic outlook, which were partially offset by a reserve build related to an increase in the outstanding balance of receivables. The significant reserve builds in the prior period were due to the deterioration of the global macroeconomic outlook as a result of the COVID-19 pandemic, partially offset by a decrease in the outstanding balance of receivables and loans.
Interest expense decreased, primarily due to scheduled debt maturities and lower interest rates during the period.
Interest expense to affiliates decreased, primarily due to decrease in average debt balances and lower interest rates.
Other, net expenses increased, primarily driven by lower forward point gains.
Table 3: Provisions for Credit Losses Summary | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | Change |
| (Millions, except percentages) | | 2021 | | 2020 | | 2021 vs. 2020 |
| Card Member receivables | | | | | | | |
| Net write-offs | | $ | 39 | | | $ | 160 | | | $ | (121) | | (76) | % |
Reserve (release) build (a) | | (60) | | | 88 | | | (148) | | # |
| Total | | (21) | | | 248 | | | (269) | | # |
| Card Member loans | | | | | | | |
| Net write-offs | | 9 | | | 11 | | | (2) | | (18) | |
Reserve build (a) | | 3 | | | 5 | | | (2) | | (40) | |
| Total | | 12 | | | 16 | | | (4) | | (25) | % |
| Total provisions for credit losses | | $ | (9) | | | $ | 264 | | | $ | (273) | | # |
# Denotes a variance of 100 percent or more
(a)Reserve build (release) represents the portion of the provisions for credit losses for the period, related to increasing or decreasing reserves for credit losses as a result of, among other things, changes in volume, macroeconomic outlook, portfolio composition and credit quality of portfolios. Reserve build represents the amount by which the provision for credit losses exceeds net write-offs, while reserve release represents the amount by which net write-offs exceeds the provision for credit losses.
Refer to Note 3 to the “Consolidated Financial Statements” for the range of key variables in the macroeconomic scenarios utilized for the computation of Credco’s reserves for credit losses.
Income taxes
The effective tax rate was 24.6 percent and 43.5 percent for the three months ended September 30, 2021 and 2020, respectively, and 16.5 percent and 35.6 percent for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate for the three month period primarily reflected changes in the level and geographic mix of pretax income. The decrease in the effective tax rate for the nine month period primarily reflected a discrete tax charge of $33 million in the prior period. Refer to Note 7 to the “Consolidated Financial Statements” for additional information.
Card Member receivables and Card Member loans
As of September 30, 2021 and December 31, 2020, Credco owned $13.6 billion and $12.2 billion, respectively, of gross Card Member receivables. Card Member receivables represent amounts due on American Express charge card products and are recorded at the time they are purchased from the seller. Included in Card Member receivables are Credco Receivables Corporation’s (CRC) purchases of participation interests from American Express Receivables Financing Corporation VIII LLC (RFC VIII) in conjunction with TRS’ securitization program. As of September 30, 2021 and December 31, 2020, CRC owned approximately $5.0 billion and $4.2 billion, respectively, of such participation interests.
The net volume of Card Member receivables and Card Member loans purchased during the nine months ended September 30, 2021 and 2020 was approximately $127.3 billion and $111.9 billion, respectively.
As of September 30, 2021 and December 31, 2020, Credco owned gross Card Member loans totaling $474 million and $500 million, respectively. These loans generally represent revolving amounts due on American Express lending card products.
The following table summarizes selected information related to the Card Member receivables portfolio as of September 30:
Table 4: Selected Information Related to Card Member Receivables | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions, except percentages and where indicated) | | | 2021 | | | 2020 | |
Total gross Card Member receivables (a) | | $ | 13,618 | | | $ | 10,987 | | |
Credit loss reserves - Card Member receivables (a) | | $ | 10 | | | $ | 110 | | |
| Credit loss reserves as a % of receivables | | | 0.1 | | % | | 1.0 | | % |
Average life of Card Member receivables (# in days) (b) | | | 26 | | | | 33 | | |
(a)Refer to Notes 2 and 3 to the “Consolidated Financial Statements” for further discussion.
(b)Represents the average life of Card Member receivables owned by Credco, based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month, during the periods indicated, to the volume of Card Member receivables purchased by Credco.
Loans to Affiliates and Other
Credco’s loans to affiliates and other represent interest-bearing borrowings by 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, 2021 and December 31, 2020 were as follows:
Table 5: Loans to Affiliates and Other | | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2021 | | | 2020 |
| American Express Services Europe Limited | | $ | 3,489 | | $ | 2,881 |
| American Express Australia Limited | | | 1,553 | | | 1,745 |
| Amex Global Holdings C.V. | | | 1,430 | | | 1,430 |
| Amex Bank of Canada | | | 1,008 | | | 857 |
| American Express Company (Mexico) S.A. de C.V. | | | 965 | | | 540 |
| American Express International, Inc., Singapore Branch | | | 279 | | | 303 |
| American Express Bank (Mexico) S.A. | | | 266 | | | 257 |
| American Express Saudi Arabia (C) JSC | | | 59 | | | 24 |
| Alpha Card S.C.R.L./C.V.B.A. | | | 52 | | | 25 |
| American Express International (NZ), Inc. | | | 50 | | | 56 |
| American Express Company | | | — | | | 2,772 |
Total (a) | | $ | 9,151 | | $ | 10,890 |
(a)As of both September 30, 2021 and December 31, 2020, approximately $6.4 billion were collateralized by the underlying Card Member receivables and Card Member loans transferred with recourse.
Due from/to Affiliates
As of September 30, 2021 and December 31, 2020, amounts due from affiliates were $2 million and $6 million, respectively. As of September 30, 2021 and December 31, 2020, amounts due to affiliates were $4.8 billion and $4.3 billion, respectively. These amounts relate primarily to timing differences from the purchase of Card Member receivables, net of remittances from TRS and its subsidiaries, as well as from operating activities. As of both September 30, 2021 and December 31, 2020, due to affiliates also includes an amount pertaining to a tax liability related to the Tax Cuts and Jobs Act of 2017.
Cash and Cash Equivalents
Deposits with Affiliates
As of September 30, 2021 and December 31, 2020, the amount of deposits was $230 million and $451 million, respectively, which represents cash deposited with American Express National Bank (AENB).
Restricted Cash with Affiliates
As of September 30, 2021 and December 31, 2020, the amount of interest-bearing restricted cash was $119 million and $120 million, respectively, which represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.
Short-term Debt to Affiliates
Short-term debt to affiliates consists primarily of interest-bearing master notes payable on demand. Components of short-term debt to affiliates as of September 30, 2021 and December 31, 2020 were as follows:
Table 6: Short-term Debt to Affiliates | | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2021 | | | 2020 |
| American Express Travel Related Services Company, Inc. | | $ | 7,073 | | | $ | 7,073 | |
| AE Exposure Management Limited | | | 1,731 | | | | 1,193 | |
| American Express Holdings Netherlands CV | | | 192 | | | | 192 | |
| Accertify, Inc. | | | 141 | | | | 107 | |
| American Express Swiss Holdings GmbH | | | 1 | | | | 4 | |
| Total | | $ | 9,138 | | | $ | 8,569 | |
Long-term Debt to Affiliates
Long-term debt to affiliates consists primarily of master note agreements with original contractual maturity dates of one year or greater and are not payable on demand. Components of long-term debt to affiliates as of September 30, 2021 and December 31, 2020 were as follows:
Table 7: Long-term Debt to Affiliates | | | | | | | | | | | | | | | | | | | | |
| (Millions) | | | 2021 | | | 2020 |
American Express Company (a) | | $ | 967 | | | $ | 454 | |
Amex Funding Management (Europe) Limited (b) | | | 352 | | | | 368 | |
| Total | | $ | 1,319 | | | $ | 822 | |
(a)Amounts payable by November 2023.
(b)Amounts payable by September 2024.
Service Fees to Affiliates
Credco’s affiliates do not explicitly charge Credco a service fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables purchased than would be the case if servicing fees were charged. If a servicing fee had been charged by these affiliates from which Credco purchases receivables, fees to affiliates for servicing receivables would have been approximately $186 million for both the nine months ended September 30, 2021 and 2020. Correspondingly, discount revenue would have increased by approximately the same amounts in these periods.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
Credco’s balance sheet management objectives are to maintain:
•A broad, deep and diverse set of funding sources to finance its assets and meet operating requirements; and
•Liquidity programs that enable Credco to continuously meet expected future financing obligations and business requirements for at least a twelve-month period in the event it is unable to continue to raise new funds under its regular funding programs during a substantial weakening in economic conditions.
Credco is monitoring the changing macroeconomic environment and is managing its balance sheet to reflect evolving circumstances.
Funding Strategy
American Express has in place an enterprise-wide funding policy. The principal funding objective is to maintain broad and well-diversified funding sources to allow American Express, including Credco, to meet its maturing obligations, cost-effectively finance asset growth in its global businesses as well as to maintain a strong liquidity profile. These funding sources include, but are not limited to, unsecured debt, asset securitization, and deposits. For unsecured debt, American Express has been the primary issuer of senior unsecured debt since the second half of 2017, and Credco has been the primary issuer of commercial paper.
As of September 30, 2021, Credco maintained a $3.5 billion syndicated credit facility, with any undrawn portion on this facility serving as a backstop for Credco’s commercial paper issuance.
To simplify American Express’ funding and reporting structure, American Express and TRS established a new $3.5 billion credit facility on October 1, 2021 as co-borrowers and co-obligors. Subsequently on October 5, 2021, TRS established a new commercial paper program. The new credit facility will serve as a backstop for the new TRS commercial paper program. Funding raised through these new arrangements can be deployed to American Express and its subsidiaries, including Credco, through a variety of intercompany funding channels.
Concurrent with the establishment of the aforementioned new commercial paper program and credit facility, Credco’s credit facility and commercial paper program were terminated. At the time of termination, there were no outstanding balances on the Credco’s credit facility or commercial paper program. Subsequent to the termination, Credco will rely on intercompany borrowing as its primary source of funding.
Credco’s funding plans can vary due to various risks and uncertainties, such as the disruption of financial markets as well as any regulatory changes or changes in its credit ratings. Many of these risks and uncertainties are beyond Credco’s control.
Table 8: Unsecured Debt Ratings | | | | | | | | | | | | | | | | | | | | |
| Credit Agency | | Short-Term Ratings | | Long-Term Ratings | | Outlook |
| Fitch | | N/A | | A | | Stable |
| Moody’s | | Prime-1 | | A2 | | Stable |
| S&P | | N/A | | A- | | Stable |
These ratings are not a recommendation to buy or hold any of Credco’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
Short-term Funding Programs
Short-term borrowings, such as commercial paper, is defined as debt with an original contractual maturity of twelve months or less. As mentioned above, effective October 5, 2021, Credco has terminated its commercial paper program.
Credco had no commercial paper outstanding as of both September 30, 2021 and December 31, 2020. The average commercial paper outstanding was nil and $0.6 billion for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.
Long-term Debt Programs
Long-term debt is generally defined as any debt with an original contractual maturity greater than twelve months. During the nine months ended September 30, 2021, Credco did not issue any unsecured debt securities.
Credco had the following long-term debt outstanding as of September 30, 2021 and December 31, 2020:
Table 9: Long-Term Debt Outstanding | | | | | | | | | | | | | | | | | | | | |
| (Billions) | | | 2021 | | | 2020 |
Long-term debt outstanding (a) | | $ | 5.2 | | | $ | 7.0 | |
Average long-term debt (b) | | $ | 5.8 | | | $ | 9.1 | |
(a)The outstanding balances include (i) unamortized discount, (ii) the impact of movements in exchange rates on foreign currency denominated debt and (iii) the impact of fair value hedge accounting on certain fixed-rate notes that have been swapped to floating rate through the use of interest rate swaps.
(b)Average long-term debt outstanding during the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.
As of September 30, 2021 and December 31, 2020, Credco had $5.2 billion and $7.0 billion of debt securities outstanding, respectively. Credco may redeem from time-to-time certain debt securities prior to the original contractual maturity dates in accordance with the optional redemption provisions of those debt securities. On October 22, 2021, Credco redeemed $1.2 billion of its 0.625 percent Senior Notes, with an original contractual maturity date of November 22, 2021.
The covenants of debt instruments issued by Credco impose the requirement that Credco maintain a minimum consolidated net worth (as defined in the debt securities indenture) of $50 million, which limits the amount of dividends Credco can pay to TRS, its parent company. During the nine months ended September 30, 2021 and 2020, Credco did not pay any dividends to TRS. When considering the amount of dividends it pays, Credco takes into account the amount of capital required to maintain capital strength, support business growth and meet the expectations of debt investors. To the extent excess capital is available, it may be distributed to TRS, via dividends. There are no significant restrictions on the ability of Credco to obtain funds from its subsidiaries by dividend or loan. As of September 30, 2021 Credco was in compliance with all restrictive covenants contained in its debt agreements.
Liquidity Management
The liquidity objective of American Express and its subsidiaries, including Credco, is to maintain access to a diverse set of on-and off-balance sheet liquidity sources and seek to maintain liquidity sources in amounts sufficient to meet their expected future financial obligations and business requirements for liquidity for a period of at least twelve months in the event they are unable to raise new funds under their regular funding programs during a substantial weakening in economic conditions.
The liquidity management strategy includes a number of elements, including, but not limited to:
•Maintaining diversified funding sources;
•Maintaining unencumbered liquid assets and off-balance sheet liquidity sources;
•Projecting cash inflows and outflows under a variety of economic and market scenarios; and
•Establishing clear objectives for liquidity risk management, including compliance with regulatory requirements.
Credco believes that it currently maintains sufficient liquidity to meet all internal and regulatory liquidity requirements. As of September 30, 2021, Credco had Cash and cash equivalents of approximately $684 million, which primarily represents deposits with AENB and reverse repurchase agreements. In addition to its actual holdings of Cash and cash equivalents, Credco maintains access to additional liquidity, in the form of Cash and cash equivalents held by certain affiliates, through intercompany loan agreements, and access to securitization of Card Member receivables through sales of receivables to TRS for securitization by RFC VIII and American Express Issuance Trust II.
Committed Bank Credit Facility
Credco maintained a U.S. dollar-denominated committed syndicated bank credit facility as of September 30, 2021 of $3.5 billion with a maturity date of October 15, 2022. As of September 30, 2021, no amounts were drawn on this facility. The availability of this facility was subject to compliance with certain covenants that required maintenance of a 1.25 minimum fixed charge coverage ratio (FCCR). FCCR is the ratio of earnings available for fixed charges (interest expenses including interest expense to affiliates) to fixed charges for the applicable period. Earnings available for fixed charges are defined as net income before fixed charges and income tax provision plus, effective the fourth quarter of 2020, certain capital contributions, if any, made by TRS to Credco. As mentioned above, effective October 1, 2021, this facility has been terminated and the FCCR covenant is no longer in effect.
Computations for fixed charge coverage ratio were as follows:
Table 10: Computation in support of fixed charge coverage ratio | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | Nine Months Ended
September 30, 2021 | | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Earnings: | | | | | | | |
| Net income | $ | 365 | | | $ | 201 | | | $ | 418 | | | $ | 387 | |
| Income tax provision | 72 | | | 121 | | | 94 | | | 29 | |
| Interest expense including interest expense to affiliates | 92 | | | 276 | | | 954 | | | 851 | |
Capital contributions from TRS (a) | — | | | — | | | N/A | | N/A |
| Earnings available for fixed charges | $ | 529 | | | $ | 598 | | | $ | 1,466 | | | $ | 1,267 | |
| Fixed charges - Interest expense including interest expense to affiliates | $ | 92 | | | $ | 276 | | | $ | 954 | | | $ | 851 | |
| Fixed charge coverage ratio | 5.75 | | | 2.17 | | | 1.54 | | | 1.49 | |
(a) Effective fourth quarter of 2020, capital contributions from TRS is part of earnings available for fixed charges.
OTHER MATTERS
Cautionary Note Regarding Forward-Looking Statements
Various statements have been made in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in Credco’s other reports filed with or furnished to the Securities and Exchange Commission (SEC) and in other documents. In addition, from time to time, Credco, through its management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements. Credco cautions you that the risk factors described below as well as those in Credco’s Annual Report on Form 10-K for the year ended December 31, 2020 are not exclusive. There may also be other risks that Credco is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Credco undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from Credco’s forward-looking statements include, but are not limited to, the following:
•American Express’ ability to continue building growth momentum and improve its financial performance, which will depend in part on spending volumes and therefore on economies continuing to re-open, vaccination rates increasing, travel restrictions lifting, consumers continuing to spend online and on G&S, and the general public feeling comfortable traveling, shopping and dining out again; credit performance and reserve levels; identifying attractive investment opportunities to continue building growth momentum, including customer retention and acquisition efforts; its ability to control operating expenses; the effective tax rate remaining consistent with current levels; and its ability to continue its share repurchase program; any of which could be impacted by, among other things, the factors identified in the subsequent paragraphs;
•American Express’ ability to grow volumes, revenues and EPS, which could be impacted by, among other things, uncertainty regarding the continued spread of COVID-19 (including new variants) and the availability, distribution and use of effective treatments and vaccines; a deterioration in global economic and business conditions; consumer and business spending not growing in line with expectations, including G&S spending not continuing to show strong growth and T&E spending not reaching 80 percent of 2019 levels by the fourth quarter of 2021; an inability or unwillingness of Card Members to pay amounts owed to American Express; the termination of government support and relief programs; prolonged measures to contain the spread of COVID-19 (including travel restrictions) or premature easing of such containment measures, both of which could further exacerbate the effects on business activity and American Express’ Card Members, partners and merchants; health concerns associated with the pandemic continuing to affect consumer behavior, spending levels and preferences, and travel patterns and demand even after government restrictions are lifted and economies re-open; American Express’ and Credco’s inability to effectively manage risk in an uncertain environment; market volatility, changes in capital and credit market conditions and the availability and cost of capital; issues impacting brand perceptions and its reputation; the amount and efficacy of investments in share, scale and relevance; an inability of business partners to meet their obligations to American Express and its customers due to slowdowns or disruptions in their businesses, bankruptcy or liquidation, or otherwise; the impact of any future contingencies, including, but not limited to, restructurings, impairments, changes in reserves, legal costs, the imposition of fines or civil money penalties and increases in Card Member reimbursements; and the impact of regulation and litigation, which could affect the profitability of American Express’ business activities, limit its ability to pursue business opportunities, require changes to business practices or alter its relationships with partners, merchants and Card Members;
•future credit performance, the level of future delinquencies and write-off rates and the amount and timing of future credit reserve builds and releases, which will depend in part on changes in consumer behavior that affect loan and receivable balances (such as paydown and revolve rates); macroeconomic factors such as unemployment rates, gross domestic product and the volume of bankruptcies; the performance of accounts as they graduate and exit from financial relief programs; collections capabilities and recoveries of previously written-off loans and receivables; the enrollment in, and effectiveness of, hardship programs and troubled debt restructurings; continued government support for the economy; and governmental actions that provide forms of relief with respect to certain loans and fees, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance;
•the growth rate of receivables and loans outstanding being higher or lower than current expectations, which will depend on the behavior of Card Members and their actual spending, borrowing and paydown patterns; government stimulus, liquidity and financial strength in American Express’ customer base and the availability of forbearance programs; American Express’ ability to effectively manage risk and enhance Card Member value propositions; credit actions, including line size and other adjustments to credit availability; and the effectiveness of its strategies to capture a greater share of existing Card Members’ spending and borrowings, reduce Card Member attrition and attract new customers;
•factors beyond Credco’s control such as continued waves of COVID-19 cases, whether and when populations achieve herd immunity, severe weather conditions, natural disasters, power loss, disruptions in telecommunications, terrorism and other catastrophic events, any of which could significantly affect demand for and spending on American Express cards, delinquency rates, Card Member receivable and Card Member loan balances and other aspects of its business and results of operations or disrupt its global network systems and ability to process transactions;
•credit trends, which will depend in part on the economic environment, including, among other things, the rate of bankruptcies and the unemployment rate, which can affect spending on card products and debt payments by individual and corporate customers;
•the effectiveness of Credco’s risk management policies and procedures, including Credco’s ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, and operational risk;
•fluctuations in foreign currency exchange rates;
•negative changes in Credco’s credit ratings, which could result in decreased liquidity and higher borrowing costs;
•changes in laws or government regulations affecting American Express’ business, including the potential impact of regulations adopted by regulators relating to certain credit and charge card practices;
•the effect of fluctuating interest rates, which could affect Credco’s borrowing costs and have an adverse effect on the market price of notes issued by Credco;
•the impact on American Express’ business of changes in the substantial and increasing worldwide competition in the payments industry;
•the impact on American Express’ business resulting from a failure in or breach of operational or security systems, processes or infrastructure, or those of third parties, including as a result of cyberattacks, which could compromise the confidentiality, integrity, privacy and/or security of data, disrupt operations, reduce the use and acceptance of American Express cards and lead to regulatory scrutiny, litigation, remediation and response costs, and reputational harm;
•the impact on American Express’ business that could result from litigation such as class actions or from government regulation or supervision;
•Credco’s ability to satisfy its liquidity needs and execute on its funding plans, which will depend on, among other things, Credco’s future business growth, the impact of global economic, political and other events on market capacity, Credco’s credit ratings, demand for securities offered by Credco, performance by Credco’s counterparties under its intercompany loan arrangements, and regulatory changes;
•Credco’s tax rate not remaining consistent with current levels, which could be impacted by, among other things, further changes in tax laws and regulation, its geographic mix of income, unfavorable tax audits and other unanticipated tax items;
•American Express’ ability to increase Card Member acquisition activities, provide additional value to Card Members and refresh its premium products, which will be impacted in part by competition, brand perceptions and reputation, and its ability to develop and market value propositions that appeal to Card Members and new customers and offer attractive services and rewards programs, which will depend in part on ongoing investments in Card Member acquisition efforts, addressing changing customer behaviors, new product innovation and development, and enrollment processes, including through digital channels, and infrastructure to support new products, services and benefits;
•American Express’ ability to innovate and strengthen its global network, which will depend in part on its ability to update its systems and platforms, the amount American Express invests in the network and its ability to make funds available for such investments, its ability to execute on its plans in China, and technological developments, including capabilities that allow greater digital integration;
•American Express’ ability to introduce new and expanded digital capabilities, which will depend on its success in evolving its products and processes for the digital environment, developing new features in the Amex app and enhancing its digital channels, building partnerships and executing programs with other companies, effectively utilizing artificial intelligence to address servicing and other customer needs, and supporting the use of its products as a means of payment through online and mobile channels, all of which will be impacted by investment levels, new product innovation and development and infrastructure to support new products, services and benefits; and
•Credco’s funding plan being implemented in a manner inconsistent with current expectations, which will depend on various factors such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities Credco offers, regulatory changes, ability to securitize and sell receivables and loans and the performance of receivables and loans previously sold in securitization transactions.
A further description of these uncertainties and other risks can be found in the 2020 Form 10-K, the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021, and other reports filed with the SEC.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Millions | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | | | | | | | | |
Discount revenue earned from purchased Card Member receivables and
Card Member loans | | $ | 77 | | | $ | 38 | | | $ | 212 | | | $ | 562 | |
| Interest income from affiliates and other | | 88 | | | 19 | | | 270 | | | 66 | |
| Finance revenue | | 14 | | | 19 | | | 47 | | | 63 | |
| Total revenues | | 179 | | | 76 | | | 529 | | | 691 | |
| Expenses | | | | | | | | |
| Provisions for credit losses | | 29 | | | (12) | | | (9) | | | 264 | |
| Interest expense | | 25 | | | 37 | | | 82 | | | 169 | |
| Interest expense to affiliates | | 4 | | | 5 | | | 10 | | | 70 | |
| Other, net | | 3 | | | — | | | 9 | | | (14) | |
| Total expenses | | 61 | | | 30 | | | 92 | | | 489 | |
| Pretax income | | 118 | | | 46 | | | 437 | | | 202 | |
| Income tax provision | | 29 | | | 20 | | | 72 | | | 72 | |
| Net income | | $ | 89 | | | $ | 26 | | | $ | 365 | | | $ | 130 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Millions | | 2021 | | 2020 | | 2021 | | 2020 |
| Net income | | $ | 89 | | | $ | 26 | | | $ | 365 | | | $ | 130 | |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustments, net of tax | | (37) | | | 10 | | | (44) | | | (68) | |
| Other comprehensive income (loss) | | (37) | | | 10 | | | (44) | | | (68) | |
| Comprehensive income | | $ | 52 | | | $ | 36 | | | $ | 321 | | | $ | 62 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | | | | |
| (Millions, except share data) | | September 30,
2021 | | December 31,
2020 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 684 | | | $ | 601 | |
| Card Member receivables, less reserves for credit losses: 2021, $10; 2020, $70 | | 13,608 | | | 12,087 | |
| Card Member loans, less reserves for credit losses: 2021, $23; 2020, $20 | | 451 | | | 480 | |
| Loans to affiliates and other | | 9,151 | | | 10,890 | |
| Due from affiliates | | 2 | | | 6 | |
| Other assets | | 253 | | | 244 | |
| Total assets | | $ | 24,149 | | | $ | 24,308 | |
| Liabilities and Shareholder’s Equity | | | | |
| Liabilities | | | | |
| Short-term debt to affiliates | | $ | 9,138 | | | $ | 8,569 | |
| Long-term debt | | 5,210 | | | 7,037 | |
| Long-term debt to affiliates | | 1,319 | | | 822 | |
| Total debt | | 15,667 | | | 16,428 | |
| Due to affiliates | | 4,847 | | | 4,344 | |
| Accrued interest and other liabilities | | 419 | | | 641 | |
| Total liabilities | | $ | 20,933 | | | $ | 21,413 | |
| Shareholder’s Equity | | | | |
Common stock, $0.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares as of September 30, 2021 and December 31, 2020 | | — | | | — | |
| Additional paid-in capital | | 161 | | | 161 | |
| Retained earnings | | 4,198 | | | 3,833 | |
| Accumulated other comprehensive income (loss) | | | | |
| Foreign currency translation adjustments, net of tax of: 2021, $26; 2020, $5 | | (1,143) | | | (1,099) | |
| Total accumulated other comprehensive income (loss) | | (1,143) | | | (1,099) | |
| Total shareholder’s equity | | 3,216 | | | 2,895 | |
| Total liabilities and shareholder’s equity | | $ | 24,149 | | | $ | 24,308 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
Nine Months Ended September 30 (Millions) | | 2021 | | 2020 |
| Cash Flows from Operating Activities | | | | |
| Net income | | $ | 365 | | | $ | 130 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Provisions for credit losses | | (9) | | | 264 | |
| Amortization of underwriting expense | | 6 | | | 10 | |
| Deferred taxes | | 23 | | | (31) | |
| Changes in operating assets and liabilities: | | | | |
| Interest, taxes and other amounts due to/from affiliates | | 50 | | | (11) | |
| Other operating assets and liabilities | | (294) | | | 428 | |
| Net cash provided by operating activities | | 141 | | | 790 | |
| Cash Flows from Investing Activities | | | | |
Net (increase) decrease in Card Member receivables and Card Member loans (a) | | (1,560) | | | 9,081 | |
Net decrease in loans to affiliates and other (a) | | 1,690 | | | 48 | |
| Net increase in due to/from affiliates | | 479 | | | 1,854 | |
| Net cash provided by investing activities | | 609 | | | 10,983 | |
| Cash Flows from Financing Activities | | | | |
| Net decrease in short-term debt | | — | | | (3,216) | |
| Net increase in short-term debt to affiliates | | 569 | | | 2,344 | |
| Proceeds from long-term debt | | 20 | | | — | |
| Principal payments of long-term debt | | (1,770) | | | (6,600) | |
| Proceeds from long-term debt to affiliates | | 663 | | | 8,006 | |
Principal payments of long-term debt to affiliates (a) | | (150) | | | (11,320) | |
| Net cash used in financing activities | | (668) | | | (10,786) | |
| Effect of foreign currency exchange rates on cash and cash equivalents | | 1 | | | (3) | |
| Net increase in cash and cash equivalents | | 83 | | | 984 | |
| Cash and cash equivalents at beginning of period | | 601 | | | 149 | |
| Cash and cash equivalents at end of period | | $ | 684 | | | $ | 1,133 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents reconciliation | | Sep-21 | | Dec-20 | | Sep-20 | | Dec-19 |
| Cash and cash equivalents per Consolidated Balance Sheets | | $ | 684 | | | $ | 601 | | | $ | 1,133 | | | $ | 149 | |
Restricted cash included in Cash and cash equivalents (b) | | 119 | | | 120 | | | 114 | | | 116 | |
Total cash and cash equivalents excluding restricted cash (c) | | $ | 565 | | | $ | 481 | | | $ | 1,019 | | | $ | 33 | |
| | | | | | | | |
| Supplemental cash flow information | | | | | | 2021 | | 2020 |
| Non-cash Investing activities | | | | | | | | |
Sales of U.S. Corporate Card Member receivables to TRS (a) | | | | | | $ | — | | | $ | 5,493 | |
Lending to American Express Company (a) | | | | | | — | | | (416) | |
| Non-cash Financing activities | | | | | | | | |
Settlement of borrowings with American Express Company (a) | | | | | | $ | — | | | $ | (5,077) | |
(a)During the nine months ended September 30, 2020, American Express Travel Related Services Company, Inc. (TRS) removed U.S. Consumer and Small Business Card Member receivables from the American Express Issuance Trust II (the Charge Trust) and substantially replaced them with U.S. Corporate Card Member receivables. To effect this change, on January 7, 2020, Credco sold $5.2 billion of U.S. Corporate Card Member receivables to TRS. Settlement of this transaction was undertaken through borrowings from American Express Company.
(b)Represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.
(c)Includes deposits with American Express National Bank and as of September 30,2021, also includes reverse repurchase agreements.
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2021 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of June 30, 2021 | | $ | 3,164 | | | $ | — | | | $ | 161 | | | $ | (1,106) | | | $ | 4,109 | |
| Net income | | 89 | | | — | | | — | | | — | | | 89 | |
| Other comprehensive loss | | (37) | | | — | | | — | | | (37) | | | — | |
| Balances as of September 30, 2021 | | $ | 3,216 | | | $ | — | | | $ | 161 | | | $ | (1,143) | | | $ | 4,198 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2021 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of December 31, 2020 | | $ | 2,895 | | | $ | — | | | $ | 161 | | | $ | (1,099) | | | $ | 3,833 | |
| Net income | | 365 | | | — | | | — | | | — | | | 365 | |
| Other comprehensive loss | | (44) | | | — | | | — | | | (44) | | | — | |
| Balances as of September 30, 2021 | | $ | 3,216 | | | $ | — | | | $ | 161 | | | $ | (1,143) | | | $ | 4,198 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2020 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of June 30, 2020 | | $ | 2,732 | | | $ | — | | | $ | 161 | | | $ | (1,165) | | | $ | 3,736 | |
| Net income | | 26 | | | — | | | — | | | — | | | 26 | |
| Other comprehensive income | | 10 | | | — | | | — | | | 10 | | | — | |
| Balances as of September 30, 2020 | | $ | 2,768 | | | $ | — | | | $ | 161 | | | $ | (1,155) | | | $ | 3,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2020 (Millions) | | Total | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Income
(Loss) | | Retained
Earnings |
| Balances as of December 31, 2019 | | $ | 2,587 | | | $ | — | | | $ | 161 | | | $ | (1,087) | | | $ | 3,513 | |
Cumulative effect of change in accounting principle - Reserves for Credit losses (a) | | 119 | | | — | | | — | | | — | | | 119 | |
| Net income | | 130 | | | — | | | — | | | — | | | 130 | |
| Other comprehensive loss | | (68) | | | — | | | | | (68) | | | — | |
| Balances as of September 30, 2020 | | $ | 2,768 | | | $ | — | | | $ | 161 | | | $ | (1,155) | | | $ | 3,762 | |
(a)Represents $140 million, net of tax of $21 million, related to the impact as of January 1, 2020, of adopting the Current Expected Credit Loss (CECL) Methodology for the recognition of credit losses on certain financial instruments.
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Company
American Express Credit Corporation (Credco) is a wholly owned subsidiary of TRS, which is a wholly owned subsidiary of American Express Company (American Express).
Credco is engaged in the business of financing certain 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.
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 and the price at which receivables are sold to Credco be at fair value.
Each monthly period, the discount rates on the purchase of receivables Credco makes from, and interest rates on the loans Credco provides to, TRS and other American Express subsidiaries are determined to ensure that these transactions occur on an arm’s-length basis. The revenue earned by Credco from purchasing Card Member receivables and Card Member loans at a discount is reported as Discount revenue earned from purchased Card Member receivables and Card Member loans on the Consolidated Statements of Income.
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, 2020. If not materially different, certain note disclosures included therein have been omitted from these Consolidated Financial Statements.
The interim Consolidated Financial Statements included in this report have not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim Consolidated Financial Statements, 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.
Other Information
As of September 30, 2021, Credco maintained a $3.5 billion syndicated credit facility, with any undrawn portion serving as a backstop for Credco’s commercial paper issuance. To simplify American Express’ funding and reporting structure, Credco terminated its credit facility and commercial paper program on October 1, 2021 and October 5, 2021, respectively. At the time of termination, there were no outstanding balances on the Credco’s credit facility or commercial paper program.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Card Member Receivables and Card Member Loans
American Express’ charge and lending payment card products result in the generation of Card Member receivables and Card Member loans.
Card Member receivables as of September 30, 2021 and December 31, 2020 consisted of: | | | | | | | | | | | | | | |
| (Millions) | | 2021 | | 2020 |
Global Consumer Services Group (a) | | $ | 2,271 | | | $ | 2,157 | |
| Global Commercial Services | | 11,347 | | | 10,000 | |
Card Member receivables (b) | | 13,618 | | | 12,157 | |
| Less: Reserves for credit losses | | 10 | | | 70 | |
Card Member receivables, net (c) | | $ | 13,608 | | | $ | 12,087 | |
(a)Comprised of International Consumer Services.
(b)Net of deferred discount revenue totaling $19 million as of both September 30, 2021 and December 31, 2020.
(c)Card Member receivables modified in a troubled debt restructuring (TDR) program were immaterial.
Card Member loans as of September 30, 2021 and December 31, 2020 consisted of: | | | | | | | | | | | | | | |
| (Millions) | | 2021 | | 2020 |
Global Consumer Services Group (a) | | $ | 474 | | | $ | 500 | |
| Less: Reserves for credit losses | | 23 | | | 20 | |
Card Member loans, net (b) | | $ | 451 | | | $ | 480 | |
(a)Comprised of International Consumer Services.
(b)Card Member loans modified in a TDR program were immaterial.
Card Member Receivables and Card Member Loans Aging
Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member receivables and Card Member loans as of September 30, 2021 and December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2021 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total |
| Card Member Receivables: | | | | | | | | | | |
| Global Consumer Services Group | | $ | 2,258 | | | $ | 4 | | | $ | 3 | | | $ | 6 | | | $ | 2,271 | |
| Global Commercial Services | | | | | | | | | | |
| Global Small Business Services | | 1,158 | | | 3 | | | 2 | | | 3 | | | 1,166 | |
Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 27 | | | 10,181 | |
| Card Member Loans: | | | | | | | | | | |
| Global Consumer Services Group | | $ | 470 | | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 474 | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2020 (Millions) | | Current | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90+
Days
Past Due | | Total |
| Card Member Receivables: | | | | | | | | | | |
| Global Consumer Services Group | | $ | 2,139 | | | $ | 5 | | | $ | 4 | | | $ | 9 | | | $ | 2,157 | |
| Global Commercial Services | | | | | | | | | | |
| Global Small Business Services | | 1,047 | | | 3 | | | 2 | | | 5 | | | 1,057 | |
Global Corporate Payments (a) | | (b) | | (b) | | (b) | | 32 | | | 8,943 | |
| Card Member Loans: | | | | | | | | | | |
| Global Consumer Services Group | | $ | 493 | | | $ | 2 | | | $ | 1 | | | $ | 4 | | | $ | 500 | |
(a)Global Corporate Payments (GCP) reflects global, large and middle market corporate accounts. Delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if collection procedures are initiated on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes. See also (b).
(b)Delinquency data for periods other than 90+ days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.
Credit Quality Indicators for Card Member Receivables and Card Member Loans
The following tables present the key credit quality indicators as of or for the nine months ended September 30: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total | | Net Write-Off Rate (a) | | 30+ Days Past Due as a % of Total |
| Card Member Receivables: | | | | | | | | |
| Global Consumer Services Group | | 0.73 | % | | 0.57 | % | | 1.62 | % | | 1.10 | % |
| Global Small Business Services | | 1.38 | % | | 0.69 | % | | 2.14 | % | | 1.08 | % |
| Global Corporate Payments | | 0.24 | % | | (b) | | 1.49 | % | | (b) |
| Card Member Loans: | | | | | | | | |
| Global Consumer Services Group | | 2.62 | % | | 0.84 | % | | 2.66 | % | | 1.77 | % |
(a)Represents the amount of Card Member receivables or Card Member loans owned by Credco that are written off, net of recoveries, expressed as a percentage of the average Card Member receivable or Card Member loan balances in each of the periods indicated.
(b)For GCP Card Member receivables, delinquency data is tracked based on days past billing status rather than days past due. Delinquency data for periods other than 90+ days past billing is not available due to system constraints. 90+ Days Past Billing as a % of total is 0.27% and 0.64% as of September 30, 2021 and 2020, respectively.
Refer to Note 3 for additional indicators, including external environmental qualitative factors, American Express considers in its evaluation process for reserves for credit losses.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Reserves for Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and Card Member loans, including those purchased by Credco. Reserves for credit losses represent Credco’s best estimate of the expected credit losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, as of the balance sheet date. The CECL methodology, requires Credco’s management to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period), which is approximately three years, beyond the balance sheet date. American Express makes various judgments combined with historical loss experience to determine a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses. American Express uses a combination of statistically-based models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key models: Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses by immediately reverting to long-term average loss rates.
• PD models are used to estimate the likelihood an account will be written-off.
• EAD models are used to estimate the balance of an account at the time of write-off. This includes balances less expected repayments based on historical payment and revolve behavior, which vary by customer. Due to the nature of revolving loan portfolios, the EAD models are complex and involve assumptions regarding the relationship between future spend and payment behaviors.
• Recovery models are used to estimate amounts that are expected to be received from Card Members after default occurs, typically as a result of collection efforts. Future recoveries are estimated taking into consideration the time of default, time elapsed since default and macroeconomic conditions.
American Express also estimates the likelihood and magnitude of recovery of previously written off accounts considering how long ago the account was written off and future economic conditions. American Express models are developed using historical loss experience covering the economic cycle and consider the impact of account characteristics on expected losses.
Future economic conditions that are incorporated over the R&S Period include multiple macroeconomic scenarios provided to American Express by an independent third party. American Express reviews these economic scenarios and applies judgment to weight them in order to reflect the uncertainty surrounding these scenarios. These macroeconomic scenarios contain certain variables, including unemployment rates and real gross domestic product (GDP), that are significant to American Express’ models.
American Express also evaluates whether to include qualitative reserves to cover losses that are expected but, in its assessment, may not be adequately represented in the quantitative methods or the economic assumptions. American Express considers whether to adjust the quantitative reserves (higher or lower) to address possible limitations within the models or factors not included within the models, such as external conditions, emerging portfolio trends, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due accounts, or American Express’ risk actions.
Lifetime losses for most of Credco’s Card Member receivables and Card Member loans are evaluated at an appropriate level of granularity, including assessment on a pooled basis where financial assets share similar risk characteristics, such as past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credit losses on accrued interest are measured and presented as part of Reserves for credit losses on the Consolidated Balance Sheets and within the Provisions for credit losses in the Consolidated Statements of Income, rather than reversing interest income.
Card Member receivable and Card Member loan balances are written off when American Express considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due for pay in full or revolving loans. Card Member receivables and Card Member loans in bankruptcy or owed by deceased individuals are generally written off upon notification.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reflects the range of macroeconomic scenario key variables used in conjunction with other inputs, to calculate reserves for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Unemployment Rate | | U.S. GDP Growth (Contraction) (a) | |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2021 | | December 31, 2020 | |
| Third quarter of 2021 | | 5% | | 7% - 11% | | 8% | | 3% - (3)% | |
| Fourth quarter of 2021 | | 5% - 7% | | 7% - 11% | | 6% - (4)% | | 6% - (2)% | |
| Fourth quarter of 2022 | | 4% - 9% | | 6% - 12% | | 2% -1% | | 4% - 3% | |
| Fourth quarter of 2023 | | 3% - 7% | | 4% - 10% | | 4% - 3% | | 5% - 3% | |
(a)Real GDP quarter over quarter percentage change seasonally adjusted to annualized rates.
Changes in Card Member Receivables Reserve for Credit Losses
Card Member receivables reserve for credit losses increased for the three months ended September 30, 2021, driven by higher delinquencies in the GCP portfolio and an increase in the outstanding balance of receivables, partially offset by improved macroeconomic outlook.
Card Member receivables reserve for credit losses decreased for the nine months ended September 30, 2021, driven by improved macroeconomic outlook, partially offset by an increase in the outstanding balance of receivables.
Card Member receivables reserve for credit losses decreased for the three months ended September 30, 2020, primarily driven by improved credit performance. Card Member receivables reserve for credit losses increased for the nine months ended September 30, 2020, primarily driven by deterioration of the global macroeconomic outlook as a result of the COVID-19 pandemic, partially offset by a decline in the outstanding balance of receivables.
The following table presents changes in the Card Member receivables reserve for credit losses for the three and nine months ended September 30: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| Beginning Balance | | $ | (4) | | | $ | 184 | | | $ | 70 | | | $ | 15 | | |
Provisions (a) | | 25 | | | (16) | | | (21) | | | 248 | | |
Net write-offs (b) | | (11) | | | (59) | | | (39) | | | (160) | | |
Other adjustments (c) | | — | | | 1 | | | — | | | 7 | | |
| Ending Balance | | $ | 10 | | | $ | 110 | | | $ | 10 | | | $ | 110 | | |
(a)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(b)Net of recoveries of $14 million and $21 million for the three months ended September 30, 2021 and 2020, respectively and $52 million and $59 million for the nine months ended September 30, 2021 and 2020, respectively.
(c)For the nine months ended September 30, 2020 primarily includes reserve adjustments related to the removal of U.S. Consumer and Small Business Card Member receivables of $7.2 billion from the Charge Trust. For all the years presented, also includes foreign currency translation adjustments.
Changes in Card Member Loans Reserve for Credit Losses
Card Member loans reserve for credit losses marginally increased for the three and nine months ended September 30, 2021.
Card Member loans reserve for credit losses remained flat for the three months ended September 30, 2020.
Card Member loans reserve for credit losses increased for the nine months ended September 30, 2020, primarily driven by deterioration of the global macroeconomic outlook as a result of the COVID-19 pandemic, and changes in portfolio mix, partially offset by a decline in the outstanding balance of loans.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in the Card Member loans reserve for credit losses for the three and nine months ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| Beginning Balance | | $ | 21 | | | $ | 23 | | | $ | 20 | | | $ | 17 | | |
Provisions (a) | | 4 | | | 4 | | | 12 | | | 16 | | |
Net write-offs (b) | | (2) | | | (5) | | | (9) | | | (11) | | |
| Ending Balance | | $ | 23 | | | $ | 22 | | | $ | 23 | | | $ | 22 | | |
(a)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(b)Net of recoveries of $1.1 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively and $2.6 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Derivatives and Hedging Activities
Credco uses derivative financial instruments 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.
A majority of Credco’s derivative assets and liabilities as of September 30, 2021 and December 31, 2020 are subject to master netting agreements with its derivative counterparties. Accordingly, where appropriate, Credco has elected to present derivative assets and liabilities with the same counterparty on a net basis in the Consolidated Balance Sheets.
In relation to Credco’s credit risk, certain of Credco’s bilateral derivative agreements include provisions that allow Credco’s counterparties to terminate the agreement in the event of a downgrade of Credco’s debt credit rating below investment grade and settle the outstanding net liability position. As of September 30, 2021, these derivatives were not in a material net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties and its own credit risk as of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Assets | | Other Liabilities | |
| | Fair Value | | Fair Value | |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| Derivatives designated as hedging instruments: | | | | | | | | | |
Fair value hedges - Interest rate contracts (a) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
| Net investment hedges - Foreign exchange contracts | | 34 | | | 1 | | | 8 | | | 195 | | |
| Total derivatives designated as hedging instruments | | 34 | | | 1 | | | 8 | | | 195 | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | |
| Foreign exchange contracts | | 44 | | | 48 | | | 37 | | | 89 | | |
| Total derivatives, gross | | 78 | | | 49 | | | 45 | | | 284 | | |
Derivative asset and derivative liability netting (b) | | (22) | | | (15) | | | (22) | | | (15) | | |
| Total derivatives, net | | $ | 56 | | | $ | 34 | | | $ | 23 | | | $ | 269 | | |
(a)For Credco’s centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.
(b)Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparties under an enforceable master netting arrangement.
Credco posted $3 million and $12 million as of September 30, 2021 and December 31, 2020, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets in Credco’s Consolidated Balance Sheets and are not netted against the derivative balances.
Fair Value Hedges
Credco is exposed to interest rate risk associated with its fixed-rate debt obligations. At the time of issuance, certain fixed-rate long-term debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. Credco had $1.8 billion and $3.5 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of September 30, 2021 and December 31, 2020, respectively.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gains and losses recognized in Interest expense in the Consolidated Statements of Income associated with the fair value hedges of Credco’s fixed-rate long-term debt for the three and nine months ended September 30: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains (losses) | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| Fixed-rate long-term debt | | $ | 8 | | | $ | 12 | | | $ | 28 | | | $ | (54) | | |
| Derivatives designated as hedging instruments | | (7) | | | (15) | | | (29) | | | 57 | | |
| Total | | $ | 1 | | | $ | (3) | | | $ | (1) | | | $ | 3 | | |
The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $1.8 billion and $3.5 billion as of September 30, 2021 and December 31, 2020, respectively, including the cumulative amount of fair value hedging adjustments of $11 million and $40 million for the respective periods.
Credco recognized net decreases of $7 million and $15 million in Interest expense on Long-term debt for the three months ended September 30, 2021 and 2020, respectively, and net decreases of $29 million and $27 million for the nine months ended September 30, 2021 and 2020, respectively, primarily related to the net settlements (including interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.
Net Investment Hedges
Credco primarily designates foreign currency derivatives as net investment hedges to reduce its exposure to changes in currency exchange rates on its investments in non-U.S. subsidiaries. Credco had notional amounts of approximately $3.6 billion and $2.9 billion of foreign currency derivatives designated as net investment hedges as of September 30, 2021 and December 31, 2020, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was a gain of $88 million and a loss of $59 million for the three months ended September 30, 2021 and 2020, respectively, and gains of $67 million and $71 million for the nine months ended September 30, 2021 and 2020, respectively.
Derivatives Not Designated as Hedges
The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. Credco had notional amounts of approximately $8.3 billion and $6.7 billion as of September 30, 2021 and December 31, 2020, respectively. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in a net loss of $2 million and a net gain of $1 million for the three months ended September 30, 2021 and 2020, respectively, and a net loss of $4 million and a net gain of $17 million for the nine months ended September 30, 2021 and 2020, respectively, that are recognized in Other, net expenses in the Consolidated Statements of Income.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Fair Values
Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes Credco’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s fair value hierarchy as Level 2, as of September 30, 2021 and December 31, 2020: | | | | | | | | | | | | | | | | | |
| (Millions) | | 2021 | | 2020 | |
| Assets: | | | | | |
Derivatives, gross (a) | | $ | 78 | | | $ | 49 | | |
| Total Assets | | 78 | | | 49 | | |
| Liabilities: | | | | | |
Derivatives, gross (a) | | 45 | | | 284 | | |
| Total Liabilities | | $ | 45 | | | $ | 284 | | |
(a)Refer to Note 4 for the fair values of derivative assets and liabilities, on a further disaggregated basis.
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
The following table summarizes the estimated fair values of Credco’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of September 30, 2021 and December 31, 2020. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of September 30, 2021 and December 31, 2020 and require Credco’s judgment. These figures may not be indicative of future fair values, nor can the fair value of Credco be estimated by aggregating the amounts presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Value | | Corresponding Fair Value Amount |
2021 (Billions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | | | | |
| Financial assets for which carrying values | | | | | | | | | | |
| equal or approximate fair value | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 0.7 | | | $ | 0.7 | | | $ | 0.4 | | | $ | 0.3 | | | $ | — | |
Other financial assets (b) | | 13.6 | | | 13.6 | | | — | | | 13.6 | | | — | |
| Financial assets carried at other than fair value | | | | | | | | | | |
| Card Member loans, less reserves for credit losses | | 0.5 | | | 0.5 | | | — | | | — | | | 0.5 | |
| Loans to affiliates and other | | 9.2 | | | 9.2 | | | — | | | 2.8 | | | 6.4 | |
| Financial Liabilities: | | | | | | | | | | |
| Financial liabilities for which carrying values equal | | | | | | | | | | |
| or approximate fair value | | 13.6 | | | 13.6 | | | — | | | 13.6 | | | —�� | |
| Financial liabilities carried at other than fair value | | | | | | | | | | |
| Long-term debt | | 5.2 | | | 5.5 | | | — | | | 5.5 | | | — | |
| Long-term debt to affiliates | | $ | 1.3 | | | $ | 1.3 | | | $ | — | | | $ | 1.3 | | | $ | — | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Value | | Corresponding Fair Value Amount |
2020 (Billions) | | | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets: | | | | | | | | | | |
| Financial assets for which carrying values | | | | | | | | |
| equal or approximate fair value | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | — | | | $ | — | |
Other financial assets (b) | | 12.1 | | | 12.1 | | | — | | | 12.1 | | | — | |
| Financial assets carried at other than fair value | | | | | | | | | | |
| Card Member loans, less reserves for credit losses | | 0.5 | | | 0.5 | | | — | | | — | | | 0.5 | |
| Loans to affiliates and other | | 10.9 | | | 11.1 | | | — | | | 5.0 | | | 6.1 | |
| Financial Liabilities: | | | | | | | | | | |
| Financial liabilities for which carrying values equal | | | | | | | | | | |
| or approximate fair value | | 12.6 | | | 12.6 | | | — | | | 12.6 | | | — | |
| Financial liabilities carried at other than fair value | | | | | | | | | | |
| Long-term debt | | 7.0 | | | 7.4 | | | — | | | 7.4 | | | — | |
| Long-term debt to affiliates | | $ | 0.8 | | | $ | 0.8 | | | $ | — | | | $ | 0.8 | | | $ | — | |
(a)Level 1 fair value amounts reflect interest-bearing deposits and interest-bearing restricted cash. Level 2 primarily includes reverse repurchase agreements.
(b)Level 2 fair value amounts primarily reflect Card Member receivables.
Nonrecurring Fair Value Measurements
During the nine months ended September 30, 2021 and the year ended December 31, 2020, Credco did not have any assets that were measured at fair value due to impairment on a nonrecurring basis.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Changes in Accumulated Other Comprehensive Income (Loss)
AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in Foreign Currency Translation Adjustments for the three and nine months ended September 30, 2021 and 2020 were as follows:
| | | | | | | | |
Three Months Ended September 30, 2021 (Millions), net of tax | | Foreign Currency
Translation Adjustment Gains (Losses) |
| Balances as of June 30, 2021 | | $ | (1,106) | |
| Net translation on investments in foreign operations | | (125) | |
| Net hedges of investments in foreign operations | | 88 | |
| Net change in accumulated other comprehensive income (loss) | | (37) | |
| Balances as of September 30, 2021 | | $ | (1,143) | |
| | | | | | | | |
Nine Months Ended September 30, 2021 (Millions), net of tax | | Foreign Currency
Translation Adjustment Gains (Losses) |
| Balances as of December 31, 2020 | | $ | (1,099) | |
| Net translation on investments in foreign operations | | (111) | |
| Net hedges of investments in foreign operations | | 67 | |
| Net change in accumulated other comprehensive income (loss) | | (44) | |
| Balances as of September 30, 2021 | | $ | (1,143) | |
| | | | | | | | |
Three Months Ended September 30, 2020 (Millions), net of tax | | Foreign Currency
Translation Adjustment Gains (Losses) |
| Balances as of June 30, 2020 | | $ | (1,165) | |
| Net translation on investments in foreign operations | | 69 | |
| Net hedges of investments in foreign operations | | (59) | |
| Net change in accumulated other comprehensive income (loss) | | 10 | |
| Balances as of September 30, 2020 | | $ | (1,155) | |
| | | | | | | | |
Nine Months Ended September 30, 2020 (Millions), net of tax | | Foreign Currency
Translation Adjustment Gains (Losses) |
| Balances as of December 31, 2019 | | $ | (1,087) | |
| Net translation on investments in foreign operations | | (139) | |
| Net hedges of investments in foreign operations | | 71 | |
| Net change in accumulated other comprehensive income (loss) | | (68) | |
| Balances as of September 30, 2020 | | $ | (1,155) | |
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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tax expense (benefit) | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| (Millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| Net translation on investments in foreign operations | | $ | — | | | $ | (1) | | | $ | — | | | $ | 19 | | |
| Net hedges of investments in foreign operations | | 27 | | | (19) | | | 21 | | | 22 | | |
| Total tax impact | | $ | 27 | | | $ | (20) | | | $ | 21 | | | $ | 41 | | |
No amounts were reclassified out of AOCI into the Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020.
7. 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 24.6 percent and 43.5 percent for the three months ended September 30, 2021 and 2020, respectively, and 16.5 percent and 35.6 percent for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the effective tax rate for the three month period primarily reflected changes in the level and geographic mix of pretax income. The decrease in the effective tax rate for the nine month period primarily reflected a discrete tax charge of $33 million in the prior period.
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.
Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. Credco is currently under examination by the IRS for the 2017 and 2018 tax years.
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 deductibility of certain expenses or losses and 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.
ITEM 4. CONTROLS AND PROCEDURES
Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective 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 the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a discussion of Credco’s risk factors, see Part I, Item 1A. “Risk Factors” of Credco’s Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 Form 10-K). The risks and uncertainties that Credco faces are not limited to those set forth in the 2020 Form 10-K. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect its business, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment and stimulus measures, continued outbreaks and new variants, and the related impacts to economic and operating conditions.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report: | | | | | | | | | | | | | | |
| Exhibit No. | | Description | | How Filed |
| | | | | | | | | | | | | | |
| 31.1 | | | | Electronically filed herewith. |
| 31.2 | | | | Electronically filed herewith. |
| 32.1 | | | | Electronically filed herewith. |
| 32.2 | | | | Electronically filed herewith. |
| 101.INS | | XBRL Instance Document -The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Electronically filed herewith. |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Electronically filed herewith. |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Electronically filed herewith. |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Electronically filed herewith. |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Electronically filed herewith. |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | Electronically filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION
(Registrant) | | | | | | | | | | | |
| | | |
| Date: October 28, 2021 | | By | /s/ David L. Yowan |
| | | David L. Yowan |
| | | Chief Executive Officer |
| | | |
| | | |
| | | |
| Date: October 28, 2021 | | By | /s/ David L. Fabricant |
| | | David L Fabricant |
| | | Chief Accounting Officer |
| | | |
| | | |
