American Express 2009 Annual Report Download - page 121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
As of December 31, 2009, the Company’s most significant
concentration of credit risk was with individuals, including
cardmember receivables and loans. These amounts are
generally advanced on an unsecured basis. However, the
Company reviews each potential customer’s credit application
and evaluates the applicant’s financial history and ability and
willingness to repay. The Company also considers credit
performance by customer tenure, industry, and geographic
location in managing credit exposure. The following table
details the Company’s cardmember loans and receivables
exposure (including unused lines-of-credit on cardmember
loans) in the United States and International, as of
December 31:
(Billions, except percentages) 2009 2008
On-balance sheet:
United States $47 $56
International 20 19
On-balance sheet(a) $67 $75
Unused lines-of-credit-individuals:
United States $181 $211
International 41 42
Total $222 $253
(a) Represents cardmember loans to individuals as well as receivables
from individuals and corporate institutions as discussed in
footnotes (a) and (d) from the previous table.
EXPOSURE TO AIRLINE INDUSTRY
The Company has multiple co-brand relationships and
rewards partners, of which airlines are one of the most
important and valuable. The Company’s largest airline
co-brand is Delta Air Lines (Delta) and this relationship
includes exclusive co-brand credit card partnerships and
other arrangements, including Membership Rewards,
merchant acceptance and travel. American Express’ Delta
SkyMiles Credit Card co-brand portfolio accounts for
approximately 5 percent of the Company’s worldwide billed
business and less than 15 percent of worldwide cardmember
lending receivables. Refer to Note 8 to the Consolidated
Financial Statements for further discussion of prepaid miles
acquired from Delta.
Over the last couple of years, there were a significant
number of airline bankruptcies and liquidations, driven in
part by volatile fuel costs and weakening economies around
the world. Historically, the Company has not experienced
significant revenue declines when a particular airline scales
back or ceases operations due to a bankruptcy or other
financial challenges because volumes generated by that airline
are typically shifted to other participants in the industry that
accept the Company’s card products. The Company’s
exposure to business and credit risk in the airline industry is
primarily through business arrangements where the Company
has remitted payment to the airline for a cardmember
purchase of tickets that have not yet been used or “flown”.
The Company mitigates this risk by delaying payment to the
airlines with deteriorating financial situations, thereby
increasing cash withheld to protect the Company in the event
the airline is liquidated. To date, the Company has not
experienced significant losses from airlines that have ceased
operations.
NOTE 23
REGULATORY MATTERS AND
CAPITAL ADEQUACY
The Company is regulated by the Federal Reserve and is
subject to the Federal Reserve’s requirements for risk-based
capital and leverage ratios. The Company’s two U.S. Bank
operating subsidiaries, Centurion Bank and FSB (collectively,
the “Banks”), are subject to similar regulatory capital
requirements of the FDIC and the Office of Thrift Supervision
(OTS).
The Federal Reserve’s guidelines for capital adequacy
define two categories of risk-based capital: Tier 1 and Tier 2
capital (as defined in the regulations). Under the risk-based
capital guidelines of the Federal Reserve, the Company is
required to maintain minimum ratios of Tier 1 and Total
(Tier 1 plus Tier 2) capital to risk weighted assets, as well as a
minimum leverage ratio (Tier 1 capital to average adjusted
on-balance sheet assets).
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional, discretionary
actions by regulators, that, if undertaken, could have a direct
material effect on the Company’s and the Banks’ financial
statements.
As of December 31, 2009 and 2008, the Company and its
Banks were well-capitalized and met all capital requirements
to which each was subject. Management is not aware of any
events subsequent to December 31, 2009 that would
materially, adversely affect the Company’s and the Banks’
2009 capital ratios, including the impact of the adoption of
changes in GAAP governing the accounting for transfers of
financial assets effective January 1, 2010, as discussed in Note
1. While the adoption of these new accounting standards is
expected to result in a reduction of the Company’s capital
ratios, such ratios are expected to be above applicable well-
capitalized levels.
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