AXP » Topics » 7. Fair Value Measurements

This excerpt taken from the AXP 10-K filed Feb 27, 2009.
Fair
Value Measurements
Effective January 1, 2008, the Company partially adopted SFAS No. 157 for its financial assets and liabilities that are accounted for at fair value. Refer to Notes 1 and 17 to the Consolidated
Financial Statements for further details of the Company’s fair value measurements.

CERTAIN LEGISLATIVE, REGULATORY AND OTHER DEVELOPMENTS
face=serif size=2>As a participant in the financial services industry, the Company is subject to a wide array of regulations applicable to its businesses. Recently, the Company became a bank holding company, thereby
resulting in the Federal Reserve Board’s becoming the Company’s primary regulator. As such, the Company is subject to the Federal Reserve Board’s regulations and policies, including its regulatory capital requirements. The Company is
in the process of taking various actions to facilitate its compliance with the Federal Reserve Board’s regulatory framework. In addition, the extreme disruptions in the capital markets since mid-2007 and the resulting instability and failure of
numerous financial institutions, have led to numerous proposals for changes in the financial services industry, including significant additional regulation and the formation of potential “super regulators” that combine the scope and
authority of various existing regulatory bodies. Regulatory changes could lead to business disruptions, impact the scope or profitability of the Company’s business activities, require the Company to change certain of its business practices and
could expose it to additional costs (including increased compliance costs).
     In recent years, there has been a heightened level of regulatory attention on banks and the payments industry
in many countries. Among other recent regulatory developments, in December 2008, federal bank regulators in the United States adopted amendments to the rules regarding Unfair or Deceptive Acts or Practices (UDAP) and Truth in Lending that restrict
certain credit and charge card practices and require expanded disclosures to consumers. Similar legislative initiatives have been proposed. The regulatory amendments, which become effective July 1, 2010, include, among other matters, rules relating
to the imposition by card issuers of interest rate increases on outstanding balances and the allocation of payments in respect of outstanding balances with different interest rates. The Company continues to assess the impact of the amendments on its
business and operations and is evaluating offsetting actions to mitigate their impact. In the event any actions undertaken by the Company to offset the impact of the amendments are not effective, the amendments will likely have a material adverse
effect on the Company’s results of operations.
     The credit and charge card industry also faces continuing scrutiny in connection with the fees merchants are charged to accept cards.
Although investigations into the way bankcard network members collectively set the “interchange” (i.e., the fee paid by the bankcard merchant acquirer to the card issuing bank in “four party” payment networks, like Visa and
MasterCard) had largely been a subject of regulators outside the United States, a bill was introduced in Congress in early 2008 designed to give merchants antitrust immunity to negotiate interchange collectively with Visa and MasterCard. Although
unlike the Visa and MasterCard networks, the American Express network does not collectively set interchange fees, antitrust actions and government regulation of the bankcard networks’ pricing could ultimately affect all
networks.

     The Financial Accounting Standards Board is considering whether to propose amendments that would significantly affect the accounting for off-balance sheet securitization
activities, which could, if ultimately adopted, result in the Company having to consolidate approximately $29 billion of assets and liabilities of the American Express Credit Account Master Trust (the Lending Trust). This consolidation would also
require the Company to

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2008 size=2>FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY

reestablish loss reserves of approximately $1.8 billion, which would reduce the Company’s
regulatory capital ratios at the bank holding company level. The consolidation of the Lending Trust would primarily impact the Company’s Centurion Bank and FSB bank subsidiaries. Any consolidation of the Lending Trust could increase Centurion
Bank’s and FSB’s risk-weighted assets as well as the required capital on their respective balance sheets to satisfy regulatory capital requirements.

CONSOLIDATED CAPITAL RESOURCES
AND LIQUIDITY

The Company’s balance sheet management objectives are to maintain:

  • A solid and
    flexible equity capital profile;
     
  • A broad, deep and diverse set of funding sources to finance its assets and meet operating requirements; and
     
  • face=serif size=2>Liquidity programs that enable the Company to meet its obligations for at least a 12 month period should some or all of its funding sources become
    inaccessible.

CAPITAL STRATEGY
The Company’s objective is to retain sufficient levels of capital generated through
earnings and other sources to maintain a solid equity capital base and to provide flexibility to satisfy future business growth. The Company believes capital allocated to growing businesses with a return on risk-adjusted equity in excess of its
costs will generate shareholder value.
     The level and composition of the Company’s equity capital are determined in large part by the Company’s internal assessment of its
portfolios, consolidated rating agency and regulatory capital requirements, and are also influenced by subsidiary capital requirements for the consolidated entity, the business environment, and by conditions in the debt funding markets. The Company,
as a bank holding company, is subject to regulatory requirements administered by the U.S. federal banking agencies. The Federal Reserve Board
has established specific capital
adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items. The Company was not subject to these guidelines prior to becoming a bank holding company. In addition, Centurion Bank and FSB are
subject to regulatory capital requirements of the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision, respectively.
     The following table presents the
risk-based capital ratios and leverage ratio for the Company and its significant banking subsidiaries at December 31, 2008:































































































































    Well-   
    Capitalized 2008  
        Ratio         Actual  
Risk-Based Capital      
     Tier 1  6.0 %  
          American Express Company    9.7 %
          Centurion Bank    12.3 %
          FSB(a)    12.7 %
     Total  10.0 %  
          American Express Company    11.1 %
          Centurion Bank    13.7 %
          FSB(a)    14.0 %
Tier 1 Leverage  5.0 %  
          American Express Company    8.5 %
          Centurion Bank    13.2 %
          FSB(a)        12.2 %






(a)   Subsequent to December 31, 2008, the Company infused $500 million of additional capital into FSB.

The Company was not previously required to
calculate risk-based capital ratios or a leverage ratio. The methodology of calculating these ratios may be refined over time.
     The Company’s Tier 1 Risk-based, Total Risk-based,
and Tier 1 Leverage ratios would have been approximately 13.1 percent, 14.6 percent and 11.5 percent, respectively, had the $3.39 billion of proceeds from the U.S. Department of Treasury Capital Purchase Program (CPP)

This excerpt taken from the AXP 10-Q filed Oct 31, 2008.

7.              Fair Value Measurements

 

Effective January 1, 2008, the Company partially adopted SFAS No. 157 for its financial assets and liabilities that are accounted for at fair value.  Effective September 30, 2008, the Company adopted FSP FAS 157-3, a clarification of the principles contained within SFAS No. 157.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The Company’s partial adoption of SFAS No. 157 did not result in significant changes to the valuation techniques it had previously used to measure the fair value of its financial assets and liabilities.  Therefore, the primary impact to the Company upon its partial adoption of SFAS No. 157 was expanding its fair value measurement disclosures.

 

SFAS No. 157 established a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:

 

·                 Unadjusted Quoted Prices - The fair value of an asset or liability is based on unadjusted quoted prices, in active markets for identical assets or liabilities.  An example would be a marketable equity security that is actively traded on the New York Stock Exchange.  (Level 1)

 

·                  Pricing Models with Significant Observable Inputs - The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction.  Examples of such instruments would include (i) a quoted price for an actively traded equity investment that is adjusted for a contractual trading restriction, or (ii) the fair value derived from a trade of an identical or similar security in an inactive market.  (Level 2)

 

·                  Pricing Models with Significant Unobservable Inputs - The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument.  Therefore, these assumptions are unobservable in either an active or inactive market.  An example would be the retained subordinated interest in a securitization trust. (Level 3)

 

16



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the Company’s financial instruments carried at fair value at September 30, 2008, by caption on the Consolidated Balance Sheet and by SFAS No. 157 fair value hierarchy level (as described previously).

 

This excerpt taken from the AXP 10-Q filed Jul 31, 2008.

Fair Value Measurements

 

Effective January 1, 2008, the Company partially adopted SFAS No. 157 for its financial assets and liabilities that are accounted for at fair value.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The Company’s partial adoption of SFAS No. 157 did not result in significant changes to the valuation techniques it had previously used to measure the fair value of its financial assets and liabilities.  Therefore, the primary impact to the Company upon its partial adoption of SFAS No. 157 was expanding its fair value measurement disclosures.

 

SFAS No. 157 established a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:

 

·      Unadjusted Quoted Prices - The fair value of an asset or liability is based on unadjusted quoted prices, in active markets for identical assets or liabilities. An example would be a marketable equity security that is actively traded on the New York Stock Exchange.  (Level 1)

 

·      Pricing Models with Significant Observable Inputs - The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction.  Examples of such instruments would include (i) a quoted price for an actively traded equity investment that is adjusted for a contractual trading restriction, or (ii) the fair value derived from a trade of an identical or similar security in an inactive market.  (Level 2)

 

·      Pricing Models with Significant Unobservable Inputs - The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument.  Therefore, these assumptions are unobservable in either an active or inactive market.  An example would be the retained interest in a securitization trust. (Level 3)

 

The Company does not anticipate any significant impact on its operations, liquidity or capital resources as a result of a change in fair value of these instruments.

 

At June 30, 2008, the fair value of the Company’s financial instruments categorized as Level 3 were its A-rated and BBB-rated retained subordinated interests, certain asset-backed securities and its interest-only strip of $986 million, $23 million and $136 million, respectively.  These financial instruments represent less than 1 percent of the Company’s total assets and less than 8 percent of the Company’s assets measured at fair value. The Company believes the fair values of these financial instruments would approximate the amount received if the Company had sold these instruments in the open market on the measurement date. See Note 7 of the Company’s Consolidated Financial Statements for further details regarding its fair value measurements.

 

39



This excerpt taken from the AXP 10-Q filed May 2, 2008.

Fair Value Measurements

 

Effective January 1, 2008, the Company partially adopted SFAS No. 157 for its financial assets and liabilities that are accounted for at fair value.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The Company’s partial adoption of SFAS No. 157 did not result in significant changes to the valuation techniques it had previously used to measure the fair value of its financial assets and liabilities.  Therefore, the primary impact to the Company upon its partial adoption of SFAS No. 157 was expanding its fair value measurement disclosures.

 

SFAS No. 157 established a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:

 

·                  Unadjusted Quoted Prices - The fair value of an asset or liability is based on unadjusted quoted prices, in active markets for identical assets or liabilities.  An example would be a marketable equity security that is actively traded on the New York Stock Exchange.  (Level 1)

 

·                  Pricing Models with Significant Observable Inputs - The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction.  Examples of such instruments would include (i) a quoted price for an actively traded equity investment that is adjusted for a contractual trading restriction, or (ii) the fair value derived from a trade of an identical or similar security in an inactive market.  (Level 2)

 

·                  Pricing Models with Significant Unobservable Inputs - The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument.  Therefore, these assumptions are unobservable in either an active or inactive market.  An example would be the retained interest in a securitization trust. (Level 3)

 

Based on the percentage of financial instruments categorized as Level 3 within the fair value hierarchy described below, the Company does not anticipate any significant impact on its operations, liquidity or capital resources as a result of a change in fair value of these instruments.

 

As of March 31, 2008, the fair value of the Company’s financial instruments categorized as Level 3 were its A-rated and BBB-rated retained subordinated interests and its interest-only strip of $534 million and $257 million, respectively.  These financial instruments represent less than 0.6 percent of the Company’s total assets and less than 5.4 percent of the Company’s total assets measured at fair value.  The Company believes the fair values of these financial instruments would approximate their settlement values if the Company had sold these instruments in the open market on the measurement date. See Note 4 of the Company’s Consolidated Financial Statements for further details regarding its fair value measurements.

 

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