AMERICAN EXPRESS: MANAGEMENT REPORT ON FINANCIAL POSITION AND OPERATING RESULTS (MD&A) (Form 10-Q)

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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, banking 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 (losses) from equity method investments (including the GBT JV),
insurance premiums earned from Card Members, and prepaid card and Travelers
Cheque-related revenue.
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Refer to the "Glossary of Selected Terminology" for the definitions of certain
key terms and related information appearing within this Form 10-Q.
Effective for the first quarter of 2021, we changed the way we describe our
volume metrics. Throughout this Report:
•Where we previously used the term "billed business" to describe our total
volumes, we now use the term "network volumes."
•Where we previously used the term "proprietary billed business" to describe
transaction volumes from cards and other payment products issued by American
Express, we now use the term "billed business."
•Where we previously used the term "GNS billed business" to describe transaction
volumes from cards issued by GNS partners and joint ventures, we now use the
term "processed volumes" and have now included in this category transactions
associated with certain alternative payment solutions that were not previously
reported in our volume metrics.
•Where we previously used the term "Non-T&E-related volume" to describe spend in
merchant categories other than travel and entertainment (T&E)-related merchant
categories, we now use the term "Goods & Services (G&S)-related volume."
We believe that these changes provide better differentiation and descriptors for
the volumes that run across the American Express network. Prior period amounts
have been recast to conform with current period presentation.
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 in the 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.
Bank Holding Company
American Express is a bank holding company under the Bank Holding Company Act of
1956 and The Board of Governors of the Federal Reserve System (the Federal
Reserve) is our primary federal regulator. As such, we are subject to the
Federal Reserve's regulations, policies and minimum capital standards.
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Business Environment
Our results for the third quarter reflect the strong growth momentum that we
have seen in our business over the last several quarters. We continue to see
positive results from the increased investments we have made to drive customer
acquisition, engagement and retention. Network volumes continued to accelerate
on a sequential basis and exceeded pre-pandemic levels for the quarter and
credit metrics remained around historic lows.
The Company 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 our 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.
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. Billed business, which represented 85 percent of our total
network volumes in the third quarter of 2021 and drives most of our financial
results, increased 31 percent and continued to show different paces of recovery
for G&S and T&E spend. G&S spend, which accounts for the majority of our billed
business, continued to grow sequentially versus the prior quarter and grew by 18
percent on a year-over-year basis, and is now 20 percent above pre-pandemic
levels. This growth was primarily driven by ongoing strong performance in online
and card-not-present spending even as offline spending exceeded pre-pandemic
levels. While T&E spend more than doubled versus the prior year, with continued
sequential growth compared to the second quarter, it remained 29 percent below
pre-pandemic levels. The year-over-year and sequential growth was primarily
driven by U.S. consumer Card Members and small and mid-sized enterprise
customers. 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 we have historically had a higher mix of T&E spend in our
international markets, and we are seeing a slower pace of recovery in T&E spend.
Total revenues net of interest expense increased 25 percent year-over-year
reflecting double digit growth in all our non-interest revenue lines. Discount
revenue, our largest revenue line, increased 34 percent year-over-year, driven
primarily by growth in Card Member spending. Other fees and commissions and
Other revenues increased year-over-year, primarily driven by higher
travel-related revenues. Net card fees grew 10 percent year over year, as new
card acquisitions increased, and Card Member retention remained high. Net
interest income grew by 6 percent year-over-year, primarily due to reduced
interest expense on deposits and lower outstanding debt, partially offset by
lower net interest yields driven by higher paydown rates on revolving loan
balances.
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 our customer base. We expect recovery in
loan balances and Net interest income to continue to lag the improvement in
spend volumes. 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. As loan balances begin to rebuild more
meaningfully, we expect delinquencies and loss rates to increase slowly over
time, however we do not expect to see a material increase in write-off rates in
the next few quarters. We are closely monitoring the performance of Card Members
exiting our financial relief programs, though early performance indicators are
strong. We are mindful that the last of the remaining government stimulus and
industry forbearance programs have yet to roll off and we continue to maintain
an appropriately significant level of reserves given the remaining uncertainties
in the medical and macroeconomic environment.
Card Member rewards, Card Member services and business development expenses are
generally correlated to volumes or are variable based on usage, and increased
year-over-year due to growth in spend and higher usage of travel-related
benefits. Additionally, our higher rewards expense versus last year was
partially driven by an increase to our Membership Rewards liability to reflect a
higher mix of redemptions in travel-related categories. We continue to make
strategic investments in marketing, value propositions on our products,
technology, and our colleagues to support our growth momentum. The additional
value on several of our premium products is helping to drive increased Card
Member engagement and retention rates. We expect marketing investments to remain
elevated for the rest of the year while continuing to focus on controlling
operating expenses.
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Our capital position remains solid, with capital ratios well above our objectives and regulatory requirements. We are working to return to our target range of Tier 1 (CET1) risk-based capital ratios of 10-11%. We came back $ 3.6 billion of capital to our shareholders during the quarter and expect to continue repaying excess capital through share repurchases and dividend payments in the coming quarters. We remain optimistic about maintaining the strength of our business, particularly in the we, although we recognize that challenges still exist and that the pace of recovery remains uneven in different parts of the world. We remain committed to executing our investment strategy to create long-term, sustainable growth momentum. See “Certain Legislative, Regulatory and Other Developments” and “Caution Regarding Forward-Looking Statements” for information on legislative and regulatory changes, additional impacts of the COVID-19 pandemic, and other issues that may have an impact. material adverse effect on our results of operations and financial condition.

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                             Results of Operations
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, 2021 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.
Consolidated Results of Operations
Table 1: Summary of Financial Performance

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