AMERICAN EXPRESS COMPANY Business Introduction We are a globally integrated payments company that provides our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are credit and charge card products, along with travel and lifestyle related services, offered to consumers and businesses around the world. Our range of products and services includes: •Credit card, charge card and other payment and financing products •Merchant acquisition and processing, servicing and settlement, and point-of-sale marketing and information products and services for merchants •Network services •Other fee services, including fraud prevention services and the design and operation of customer loyalty programs •Expense management products and services •Travel and lifestyle services Our various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including mobile and online applications, affiliate marketing, customer referral programs, third-party vendors and business partners, direct mail, telephone, in-house sales teams, and direct response advertising. Business travel-related services are offered through our non-consolidated joint venture,American Express Global Business Travel (the GBT JV). We compete in the global payments industry with card networks, issuers and acquirers, paper-based transactions (e.g., cash and checks), bank transfer models (e.g., wire transfers and Automated Clearing House (ACH)), as well as evolving and growing alternative payment and financing providers. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies, business models and customer relationships to create payment or financing solutions. The following types of revenue are generated from our various products and services: •Discount revenue, our largest revenue source, primarily represents the amount we earn on transactions occurring at merchants that have entered into a card acceptance agreement with us, or a Global Network Services (GNS) partner or other third-party merchant acquirer, for facilitating transactions between the merchants and Card Members; •Interest on loans, principally represents interest income earned on outstanding balances; •Net card fees, represent revenue earned from annual card membership fees, which vary based on the type of card and the number of cards for each account; •Other fees and commissions, primarily represent Card Member delinquency fees, foreign currency conversion fees charged to Card Members, loyalty coalition-related fees, service fees earned from merchants, travel commissions and fees, and Membership Rewards program fees; and •Other revenue, primarily represents revenues arising from contracts with partners of our GNS business (including commissions and signing fees less issuer rate payments), cross-border Card Member spending, ancillary merchant-related fees, earnings from equity method investments (including the GBT JV), insurance premiums earned from Card Members, and prepaid card and Travelers Cheque-related revenue. Forward-Looking Statements and Non-GAAP Measures Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the "Cautionary Note Regarding Forward-Looking Statements" section. We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States of America (GAAP). However, certain information included within this Form 10-Q constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. 1
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Bank Holding Company American Express is a bank holding company under the Bank Holding Company Act of 1956 andThe Board of Governors of theFederal Reserve System (theFederal Reserve ) is our primary federal regulator. As such, we are subject to theFederal Reserve's regulations, policies and minimum capital standards. Business Environment Businesses and economies around the globe continue to be significantly affected by the COVID-19 pandemic. There continues to be a high degree of uncertainty in terms of the direction of the pandemic and its impact on the economy, how governments will react to changes in the environment, including possible future stimulus programs (or the failure to implement such programs), and developments in political and social conditions. Throughout the quarter, our colleague base has continued to successfully operate in a mostly remote working environment. To support our customers and merchants, we continued to offer financial and other assistance, add product benefits to reflect today's environment, and provide the high level of customer service they expect and rely on. We continued to see lower voluntary attrition rates on our proprietary products as compared to the last year. In addition, our Card Members are recognizing our commitment to service excellence, ranking us number one in the J.D. PowerU.S. Credit Card Satisfaction Study for the tenth time. We also continued to work with our strategic partners on initiatives to support our communities and launched our largest ever Shop Small campaign, which included a commitment of over$200 million to help support small merchants. Reflective of the broader economy and spending trends in our customer segments, our billed business for the quarter was down 19 percent (20 percent on an FX adjusted basis) as compared to the prior year.1 Since mid-April, we have seen steady improvement in our overall billed business. Proprietary billed business, which accounted for 86 percent of our total billings in the third quarter and drives most of our financial results, showed different recovery trends for non-T&E and T&E spend. Non-T&E spend, which has historically accounted for a large portion of our billed business, recovered to pre-pandemic levels, growing 1 percent as compared to the prior year. T&E spend continued to be down 69 percent year-over-year, though we saw a modest improvement during the quarter primarily driven by proprietary consumer T&E spend. To the extent we continue to see significant year-over-year declines in billed business, our future results will be materially impacted. Revenues net of interest expense decreased 20 percent as compared to the prior year, which was an improvement from year-over-year decline in the second quarter, consistent with the trend in billings. Discount revenue, our largest revenue line, decreased 24 percent, which was a larger contraction than the decline in billed business for the quarter due to a decrease in the average discount rate. The average discount rate decrease was driven by a shift in spend mix to non-T&E categories, although the erosion in the third quarter was less than the second quarter due to the modest improvement in T&E spend. We continued to see decreases in Other fees and commissions and Other revenues, primarily due to declines in travel-related revenues. Card fee revenues continued to show strong year-over-year growth, as such revenues are slower to react to economic shifts since they are recognized over a twelve-month period and Card Member retention remained high; however, net card fee growth has decelerated as we slowed new card acquisitions over the last two quarters while managing through the peak of uncertainty during this crisis. Net interest income declined by 15 percent year-over-year, primarily driven by lower average loans and lower benchmark interest rates, partially offset by higher net yield. As a result of the spend-centric nature of our business model, Card Member loans and receivables declined 17 percent and 28 percent year-over-year, respectively, due to lower billed business volumes. Provisions for credit losses decreased, primarily due to a modest reserve release and lower net write-offs. The reserve release reflected improved credit performance and lower loan volumes, partially offset by a more cautious view of the global macroeconomic outlook due to continuing high levels of uncertainty regarding the pace of a recovery in the economy. 1The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation intoU.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current period apply to the corresponding prior year period against which such results are being compared). 2
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The balance in our longer-term financial relief programs, which are reported as troubled debt restructurings, grew to approximately$3.1 billion of loans and receivables as ofSeptember 30, 2020 . See Note 2 to the "Consolidated Financial Statements" for further information on troubled debt restructurings. In addition, as ofSeptember 30, 2020 , we had$1.2 billion of delinquent loans and receivables, including relevant financial relief program balances, which represented a sequential improvement in delinquencies compared to the second quarter. Our short-term Customer Pandemic Relief programs are no longer widely available, with negligible balances remaining in the programs as ofSeptember 30, 2020 . Card Member rewards, Card Member services and business development expenses are generally correlated to billings or are variable based on usage and were lower this quarter due to the decline in billing volumes and lower usage of travel-related benefits. During the quarter, we remained focused on controlling operating expenses, while increasing marketing investments in initiatives to support our customers, such as enhancements that we made to value propositions for many of our card products and our largest ever Shop Small campaign. Looking ahead, we are beginning to place greater emphasis on selectively investing for the long term, including through marketing and operating expenses. Throughout the year, our liquidity levels remained high, and we also continued to display a strong capital position with capital ratios that are well above our targets and regulatory requirements. These robust capital and liquidity levels provide us with significant flexibility to maintain the strength of our balance sheet through this uncertain period. We also intend to maintain our quarterly dividend for the fourth quarter in line with prior quarters, subject to approval by the Board of Directors. Although the external environment remains uncertain in the near term, we are confident in how we are managing the company for the long term. The investments we are making set a foundation to rebuild our growth momentum and return to pre-pandemic levels of earnings and financial performance. See "Certain Legislative, Regulatory and Other Developments" and "Risk Factors" for information on additional impacts of the COVID-19 pandemic and related containment efforts as well as other matters that could have a material adverse effect on our results of operations and financial condition. 3
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CRITICAL ACCOUNTING ESTIMATES Please see the "Critical Accounting Estimates" section of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for a full description of all of our critical accounting estimates. The critical accounting estimate related to Reserves for Card Member Credit Losses presented below has been updated to reflect the adoption of the Current Expected Credit Loss (CECL) methodology. Reserves for Card Member Credit Losses Reserves for Card Member credit losses represent our best estimate of the expected credit losses in our outstanding portfolio of Card Member loans and receivables as of the balance sheet date. The CECL methodology, which became effectiveJanuary 1, 2020 , requires us to estimate lifetime expected credit losses by incorporating historical loss experience and current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date.
In estimating expected credit losses, we use a combination of statistically based models and analysis of the results produced by these models. These quantitative and qualitative components entail a significant amount of judgment. The primary areas of judgment used in measuring the quantitative components of our reserves relate to the determination of the appropriate R&S Period, the modeling of the probability of and exposure at default, and the methodology to incorporate current and future economic conditions. We use these models and assumptions, combined with historical loss experience, to calculate the reserve rates that are applied to the outstanding loan or receivable balances to produce our reserves for expected credit losses. Beyond the R&S Period, we estimate expected credit losses using our historical loss experience. The qualitative component is intended to capture expected losses that may not have been fully captured in the quantitative component. Through an established governance structure, we consider certain external and internal factors, including emerging portfolio characteristics and trends, which consequentially may increase or decrease the reserves for credit losses on Card Member loans and receivables.
The R&S Period, which is approximately 3 years, represents the maximum time-period beyond the balance sheet date over which we can reasonably estimate expected credit losses, using all available portfolio information, current economic conditions and forecasts of future economic conditions. Card Member loan products do not have a contractual term and balances can revolve if minimum required payments are made, causing some balances to remain outstanding beyond the R&S Period. Card Member receivable products are contractually required to be paid in full; therefore, we have assumed the balances will be either paid or written-off within the R&S Period.
Within the R&S Period, our models use past loss experience and current and future economic conditions to estimate the probability of default, exposure at default and expected recoveries to estimate net losses at default. A significant area of judgment relates to how we apply future Card Member payments to the reporting period balances when determining the exposure at default. The nature of revolving loan products inherently includes a relationship between future payments and spend behavior, which creates complexity in the application of how future payments are either partially or entirely attributable to the existing balance at the end of the reporting period. Using historical customer behavior and other factors, we have assumed that future payments are first allocated to interest and fees associated with the reporting period balance and future spend. We then allocate a portion of the payment to the estimated higher minimum payment amount due because of any future spend. Any remaining portion of the future payment would then be allocated to the remaining balance.
CECL requires that the R&S Period include an assumption about current and future economic conditions. We incorporate multiple macroeconomic scenarios obtained from an independent third party. The estimated credit losses calculated from each macroeconomic scenario are reviewed by management and are weighted to reflect management's judgment about uncertainty around the scenarios. These macroeconomic scenarios contain certain variables, including unemployment rates and real gross domestic product (GDP), that are significant to our models.
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Macroeconomic Sensitivity To demonstrate the sensitivity of estimated credit losses to the macroeconomic scenarios, we compared our modeled estimate under a baseline scenario to our modeled estimate under a pessimistic downside scenario. For every 10 percentage points change in weighting from the baseline scenario to the pessimistic downside scenario, the estimated credit losses increased by approximately$240 million . The modeled estimates under these scenarios were influenced by the duration, severity and timing of changes in economic variables within each scenario and these macroeconomic scenarios, under different conditions or using different assumptions, could result in significantly different estimated credit losses. It is difficult to estimate how potential changes in specific factors might affect the estimated credit losses, and current results may not be indicative of the potential future impact of macroeconomic forecast changes. In addition, this sensitivity analysis relates only to the modeled credit loss estimates under two scenarios without considering management's judgment on the relative weighting for those and other scenarios, including the weight that has been placed on downside scenarios at the balance sheet date, or any potential changes in other adjustments to the quantitative calculation or the impact of management judgment for qualitative factors, which may have a positive or negative effect on the results. Thus, the results of this sensitivity analysis are hypothetical and are not intended to estimate or reflect our expectations of any changes in the overall reserves for credit losses due to changes in the macroeconomic environment. The following table reflects the range of key variables in the macroeconomic scenarios utilized for the computation of Reserves for credit losses: September 30, 2020 June 30, 2020U.S. Unemployment Rate Third quarter of 2020 10% - 11% 8% - 10% Fourth quarter of 2020 10% - 12% 9% - 11% Fourth quarter of 2021 8% - 13% 9% - 11%U.S. GDP Growth (Contraction) (a) Third quarter of 2020 23% - 8% 16% - 10% Fourth quarter of 2020 3% - (6%) 0.6% - (4%) Fourth quarter of 2021 6% - 3% 8% - 7% (a)Real GDP quarter over quarter percentage change seasonally adjusted to annualized rates. Refer to the "Business Environment" and Table 3 in MD&A and Note 1 and Note 3 to the "Consolidated Financial Statements" for a further description of the impact of CECL, both at implementation and for the three and nine months endedSeptember 30, 2020 . The process of estimating these reserves requires a high degree of judgment. To the extent our expected credit loss models are not indicative of future performance, actual losses could differ significantly from our judgments and expectations, resulting in either higher or lower future provisions for credit losses in any period. 5
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Results of Operations
Refer to the "Glossary of Selected Terminology" for the definitions of certain
key terms and related information appearing within this section.
The discussions in both the "Consolidated Results of Operations" and "Business
Segment Results of Operations" provide commentary on the variances for the three
and nine months ended September 30, 2020 compared to the same periods in the
prior year, as presented in the accompanying tables. 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
our results.
As a result of the adoption of CECL on January 1, 2020 , there is a lack of
comparability in both the reserves and provisions for credit losses for the
periods presented. Results for reporting periods beginning after January 1, 2020
are presented using the CECL methodology, while comparative information
continues to be reported in accordance with the incurred loss methodology in
effect for prior periods. Refer to Note 3 to the "Consolidated Financial
Statements" for further information.
Consolidated Results of Operations
Table 1: Summary of Financial Performance
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