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American Express (NYSE:AXP)

Q2 2010 Earnings Call

July 22, 2010 5:00 pm ET

Executives

Daniel Henry - Chief Financial Officer, Executive Vice President and Member of Operating Committee

Kenneth Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc and Chief Executive Officer of American Express Travel Related Services Company Inc

Ron Stovall - Senior Vice President of Investor Relations

Analysts

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Robert Napoli - Piper Jaffray Companies

Michael Taiano - Sandler O’Neill & Partners

Craig Maurer - Credit Agricole Securities (NYSE:USA) Inc.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Meredith Ann Whitney

John McDonald - Bernstein Research

Donald Fandetti - Citigroup Inc

Kenneth Bruce - BofA Merrill Lynch

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Scott Valentin - FBR Capital Markets & Co.

Bill Carcache - Macquarie Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2010 Earnings Release. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.

Ron Stovall

Thank you, Greg. And welcome to everyone. We appreciate all of you joining us for today's discussion.

As usual, it is my job to remind you of certain legal aspects around the call and tell you that this discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company's financial and other goals, are set forth within today's earnings press release, which was filed in an 8-K report, and in the company's 2009 10-K report, already on file with the Securities and Exchange Commission, in the second quarter 2010 earnings release and earnings supplement on file with the SEC in an 8-K report, as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com.

We have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion.

Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter's earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period, where Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions. While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

With that, let me turn the discussion over to Dan.

Daniel Henry

Thanks, Ron. And let's start on Slide 2. See total earnings are up 13%, but the more appropriate line to look at is managed total revenues, which is down 1%. The reason for that is in '09, revenues did not include interest related to those receivables that had been securitized. If you exclude the ICBC gain that was in '09, revenues are actually up 2%. Income from continuing operations was $1.017 billion. '09 included two one-time items. One was the ICBC gain of $211 million pretax, and we also had re-engineering costs of $182 million pretax. So those more or less offset each other. EPS was $0.84, and that compares to $0.09 in the prior period. But you'll remember that in the second quarter of '09, we had a charge that was about $0.18 related to our repayment of TARP. So the better comparison is $0.27 last year compared to $0.84 this year, up significantly. And ROE increased to 23%.

We go to Slide 3 and we look at Billed business. It increased 16%, or 15% on an FX-adjusted basis. It is now approaching the pre-crisis levels in Billed business that we had back in '08. Cards-in-force are relatively flat with last year. GNS is up 7% and proprietary cards are down slightly. If we look at average Cardmember spending, it increased 20% on an FX-adjusted basis, but if you exclude the card cancellations of 2.7 million cards last year in the second quarter, average Cardmember spend would be up 16%, which is very much in line with the increase in Billed business.

Loans on a managed basis are down 9%, driven primarily by Cardmember behavior as well as our strategy which is changing the mix of receivables, as we are focused on premium lending in co-brand. Those customers tend to be more transactors and have higher pay-down rates. However, loans are down less than competitors and that's because we are having higher growth in spending by our Cardmembers and we have lower write-off rates. Travel is benefiting from a growth in transactions, as well as higher prices in Airline.

If you look at Slide 4, there's more detail on Billed business. The bars represent Billed business each month. The lines represent growth rates for both reported and FX-adjusted. On an FX-adjusted basis, April and May grew 15% and June grew 14%, for the average of 15% in the second quarter. July month-to-date growth is in the double digits and the growth rate is down slightly from June due to a tougher rollover in 2009.

If we move to Slide 5, this is information on network spending. And you can see that transactions are growing 8% and transaction size is higher by 6%. So they're both contributing to spending growth.

If we move to Slide 6, this is growth by segment. And you can see that we had strong growth across all of our segments. The highest growth is in GNS and this is being driven by partners issuing additional cards. Promotional Card also had strong growth, and this is in part due to new signings, as well as higher level of spending from existing clients. International Consumer had growth of 9% on an FX-adjusted basis, and while it's slightly lower than the other segments, this is due in part by the fact that it dropped less in 2009. So we have broad-based growth in spending. We'll have to wait until all the statistics are in, but it would appear that we will gain share in the second quarter.

Moving to Slide 7. Now this is some new disclosure that we thought that you would be interested in. It's spending by region. You can see that JAPA has the highest growth and this is in part driven by new GNS signings in Australia. We also expect that EMEA growth would be slightly below the average, but it's still strong at 11% on an FX-adjusted basis.

If we move to Slide 8, this is spending by product within the U.S. Consumer and Small Business Group. And it represents the spend decline or growth over the past five quarters. And you can see that in the current period, we are having strong growth in both charge and co-brand and this reflects the investment spending in these areas, consistent with our strategy. And we've had more modest growth in proprietary lending. So before I leave spending, let me make a few points. Spending on our network is growing faster than the industry in charge and credit. Spending growth is broad-based across segments and geography. Growth is concentrated in the areas of our strategic focus, charge and co-brand. And growth reflects our strategy of using improvements in credit to invest in the business.

Let me move to Slide 9, and this is Charge Card Billed business and receivable growth. And we see here that Charge Card receivables continue to move in tandem with the growth in Billed business. Charge Card Billed business was 15%, consistent with last quarter.

Moving to Slide 10. We're looking at lending, Billed business and managed loan growth. And here, lending, Billed business and managed loan growth, at this moment, is not closely correlated. It's in part because of actions that we've taken in terms of credit, as well as the change in our strategy to reduce acquisition and proprietary lending and focus more on premium and co-brand. It's also in part by Cardmembers looking to delever.

You can see this if you look at our trust data and look at pay-down rates. Back in June of '09, pay-down was 24.2%. And in June of 2010, it was 28.9%. So we expect the difference in growth rates and spending in loans to continue over the near term.

Let me move to Slide 11. So this is USCS net interest yield. And on the right, you can see that the yield was 9.3% in the second quarter of 2010, compared to 9.7% in the second quarter of '09. This change reflects the implementation of the CARD Act, the pricing actions that we put in place over recent quarters, which were designed to mitigate the impact of the CARD Act, as well as changes in customer behavior.

As we've discussed in prior quarters, the impact from the CARD Act within yield is significant. However, we have worked to mitigate it through repricing activities over recent quarters. Our objective is to migrate back to the historical yield level of 9%. We believe our pricing is appropriate and reflects the necessary revenues for our business. But uncertainty does exist regarding the impact of the look-back or regulatory review required on a go-forward basis.

Staying with the CARD Act, we do not expect the revised late fee rules, which will be implemented in August, to have a material impact. We believe the CARD Act is more significant for us than financial reform due to the nature of our business model, which is not impacted by many aspects of the reform. With regard to financial reform legislation, we support the general principle of financial stability and consumer protection underlying the legislation. However, there clearly are costs associated with it. Many of the aspects will play out over time, giving us the ability to adopt to the changing marketplace.

While other industry participants have discussed details regarding debit pricing risk pursuant to the Durbin amendment, our Charge Card and credit cards are not directly impacted by the potential debit pricing adjustments. With regard to discounting, while merchants have long had the ability to provide discounts for payment of cash and check, the additional ability of merchants to discount price for payments with debit cards versus credit cards creates some additional uncertainty. However, based on our commitment to deliver high-quality customers and services to merchants, we are confident in our ability to adopt to the changing environment.

So let me get back to our second quarter results and move to Slide 12. This is a summary of our revenue performance. So discount revenue is driven by 16% growth in Billed business and is impacted by the higher growth in GNS and increased contra revenue related to co-brand partner investments. Net interest income for 2010 includes all the interest on all loans. 2009 does not include the interest related to those loans that were securitized. On an apples-to-apples basis, 2010 remains the same at $1.188 billion. 2009 would be $1.464 billion, so that would be down about 19% on a managed basis. And that's a result of average loans being down 10% and the yield this year being at 9.3%, compared to 9.7% in '09. Travel commissions and fees are benefiting from greater foreign currency revenues related to higher spending and partly offset by lower delinquency fees. Other revenues, if you were to back out the ICBC gain from last year, last year's number would be 898 and we actually see an increase up to 982 this year. And that's reflected in part by higher GNS partner-related revenues. One last point that I'd make about revenues is that we had 4% growth in revenues sequentially, compared to the first quarter.

So let's move to Slide 13, which is provision for losses. So the provision for Charge Card and lending both are improving dramatically, based on the improved credit performance that we've seen. '09 provision does not include write-offs related to those loans that were securitized. If we included those, the provision would have increased to $2.420 billion, so that would mean a year-over-year improvement of $1.7 billion. Based on the improvement that we saw in credit performance, reserves declined $50 million in Charge Card and $450 million in lending, for a total reserve release of $500 million. As you will see in a few slides, our reserve coverage remains cautious.

Let's move to Slide 14 and expense performance. So you can see that marketing and promotion is up significantly, up to $802 million, compared with $352 million last year. And I'd point out that last year was unusually low, as we were looking to stay profitable in '09. But the $802 million is above historic levels. So this is very consistent with what we've said in the past; as credit improved, we would drop some to the bottom line and the balance we would invest to drive business growth, some of it to help the near term, but we're also investing for the medium-to-long term. If we look at rewards, it is growing in line with the growth in Billed business. Salaries and benefits are lower by 4%. However, if we adjust for the re-engineering charge that we had in '09, it's up 8%, reflecting merit increases, resumption of the 401(k) match program and profit sharing, as well as higher incentive accruals, partly offset by lower levels of employees. The tax provision and tax rate are up, reflecting higher earnings and a $44 million charge related to valuation of certain deferred tax assets.

Moving to Slide 15. This is now our spending levels over the past three years by quarter. Other than the fourth quarter of '07, when we received our initial Visa settlement payment, the second quarter of 2010 is the highest level on the chart; higher than the historic averages that we saw back in the second and third quarter of '07. If we were to compare our spending in the second quarter of 2010 back to that '07 period, within USCS, we see similar levels of spending on acquisition, but with a shift from proprietary lending to charge and co-brand. In ICS, International Consumer, we're seeing generally higher levels of spend across several areas. And within GMS, we're seeing a substantial increase in the investment and perception of coverage.

As discussed over the prior quarters, the high level of investment spending reflects the provision benefit as credit is improving. As you can see from the chart, we have the ability to adjust investment levels. As these provision benefits lessen over time, we have the flexibility to move investment spending back towards historic levels.

I'll now move to Slide 16, which is information in terms of our operating expense. As we said to you, you should not look solely at marketing and promotion to judge our investment spending. Operating expense on average grew 8%. Within operating expense, you can see that support functions, which are organizations such as finance and other staff groups, and global services, are growing at a rate below the average. Collection expense is growing at a slower rate as credit improves. Above the dotted line, expense growth is growing faster than the average and there were some administrative costs, such as costs to comply with the new bank holding company and Basel II regulations, but the majority of the higher growth relates to expenses driving revenue growth such as sales force, network initiatives and partner investments.

Moving to Slide 17, this is the USCS Charge Card write-off and past-due rates. And you can see that these metrics are improving and really, the reason that provision is lower. And you can see that the write-off rate and 30 days past-due continued to improve here.

If we move to Slide 18, this is International Consumer and Global Commercial Card. And again, here, you can see the net loss rate in the 90 day past-due billing ratio continues to perform very well. I'll remind you in the first quarter of 2010, that dark blue section in Q1 2010 was driven by a methodology change to do write-offs at 180 days, instead of the prior practice of 360.

Moving to Slide 19, Charge Card reserve coverage. As you can see from this slide, while credit improves, reserve coverage remains cautious across all segments. The International Consumer and Global Commercial Services 90 day past billings coverage increased in 2010 as we changed reserve methods to be based on a lost-to-bill business ratio. And that was discussed with you last quarter.

If we move to Slide 20, which is the managed lending net write-off rate, you can see that the write-off rate continues to improve in the U.S. and globally. Our metrics are performing substantially better than the industry and they're benefiting from the fact that we moved earlier and more decisively. And it also reflects the high quality of our Cardmember base. Our write-off rate is now down to 6%, and while this is still above historic averages, it represents a significant improvement from the second quarter of 2009.

Next, we're looking at the lending 30-day past due. And again, here we're seeing good improvement both in the U.S. and globally. Delinquency dollars are at $1.6 billion this quarter, compared to $2.7 billion in the second quarter of '09. Again, a significant improvement.

If we look at Slide 22, here we're looking at roll rate information, which provides insight into why our write-off rates are improving and what might happen in the future. The write-off rate in the current month are a function of the current-to-30 day past-due roll rates five months prior. So the write-off rate in the second quarter relates to the green triangles in the upper left-hand chart. That's the chart on the current-to-30-day past-due. And they were lower than the prior three triangles. Therefore, second quarter write-offs were lower than the first quarter, and this is also dependent on the 30-day past-due-to-write-off rate, bankruptcies and recoveries remaining constant.

You can see that the next three triangles after the green triangles are down slightly. I remind you that we are in uncertain economic times and that the third quarter write-off rate will also depend on the 30-day past-due-to-write-off percentage, bankruptcies and recoveries.

Now the increase we saw sequentially in bankruptcies, the right-hand chart, in the second quarter is in line with the growth in bankruptcies in the industry.

Moving to Slide 23. So this is reserve activity in the second quarter of last year and this year. The left side of '09 doesn't include reserve activity for those receivables that were securitized in '09. In '09, we billed $200 million of credit reserves, based on the fact that credit metrics were deteriorating. And we released $500 million of lending reserves in the second quarter of 2010, as credit continues to improve. The blue box in the top right provides information with respect to the write-off split between securitized and non-securitized loans. So if you were to compare the $1.1 billion of write-offs in the second quarter of '09, it would compare to the $600 million in the second quarter of '10. So while we released reserves, we believe we have an appropriate level of reserve coverage.

Now we can see that on the next slide, Slide 24. So we've seen credit metrics are improving and we've reduced lending reserves by $450 million in the quarter, based on the inherent risk in the portfolio. But we continue to be cautious in setting credit reserves, as the economic environment remains uneven, housing is stalled and unemployment remains stubbornly high. Our reserve coverage reflects the uncertainty that we see in the environment.

Moving to Slide 25, our capital ratios remain above well-capitalized. Our Tier 1 common ratio of 10.7% is strong relative to other U.S. financial institutions. Now as we know, new rules will be written in the near future regarding capital and capital requirements, will be higher than they have been historically. But as you can see from the slide, our capital position today appears to provide a good foundation for those future requirements.

Moving to Slide 26, this is our liquidity. We continue to hold excess cash and readily-marketable securities to meet the next 12 months of funding maturities. So we're holding $25 billion and maturities are $20 billion.

Moving to Slide 27, you can see retail deposits increased by $300 million in the second quarter. We didn't need to grow deposits in the quarter to meet funding needs. We did reduce brokered CDs [Certificate of Deposit] by about $1 billion and continue to grow Personal Savings; both CDs and High-Yield Savings balances.

So with that, let me conclude with a few final comments. Results for the quarter reflect both general improvement in the economic environment versus last year, and our shift to a more offensive investment posture. Spending growth was relatively strong across our business segments due to both higher absolute spending levels and the weak volumes last year amidst a global economic slowdown. In fact, on an FX-adjusted basis, this was the strongest second quarter in terms of dollars spent.

We also continue to see a sharp divergence between customer spending and borrowing levels. Some of it is due to our strategies and risk-related actions, and some reflects changes in consumer behavior. The net effect of these trends is a lower risk profile for the company, as charge and co-brand spending are a key driver of our volumes and receivable trends.

While these offsetting influences, strong billings growth and lower loan balances challenge overall revenue growth, improving credit trends and well-controlled operating expense have provided the ability to invest in the business at a significant level, while also generating strong earnings. Some of these investments are intended to drive metrics in the near term, but others are allocated towards investments focused on the medium-to-long term success of the company.

Challenges clearly remain as global economic indicators have weakened somewhat, and sentiment seems to show less strength than most would've expected a few months ago. In the U.S. and many other key markets, job creation remains weak, consumer confidence is volatile, consumer behavior is uncertain and regulatory and legislative initiatives will change aspects of the business going forward. While these factors have us approaching investment and expense commitments with caution, our strong competitive position is yielding high quality results. Spending on our network has been increasing well above the industry average and our credit performance was the best among major card issuers. This indicates to us our decisive and effective credit actions are achieving improved credit performance without stifling spending by credit-worthy Cardmembers. This gives us confidence that our investments and differentiated business model are appropriately positioned to manage through our challenges, capitalize on opportunities in front of us and continue to win in the marketplace. Thanks for listening and we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we turn to the line of Craig Maurer with CLSA.

Craig Maurer - Credit Agricole Securities (USA) Inc.

I wanted to ask you a question about the level of secular shift. How much is that still contributing, in your opinion, to your results right now versus true economic growth or rebound in spending?

Daniel Henry

So to answer your question, I think that increased penetration into cash and checks, I think, will continue to occur over time. I think that will benefit both credit and charge segments. And it also will, over time, give yield to alternative payments, which is something that we are very focused on. So I think we're going to benefit both from our traditional business, our core business, as well as some of the areas that we are becoming more focused on. So I think it’ll be gradual, but I think there’ll continue to be a benefit from that.

Craig Maurer - Credit Agricole Securities (USA) Inc.

Regarding the marketing spend, like you said, it’s at fourth quarter of seven levels. How should we be thinking about that going forward? Should we be modeling sort of as long as we expect material reserve release, that the marketing spend will continue to see a big reinvestment?

Daniel Henry

Yes, so I think that, as we said, when credit improves, both write-off rates dropping and having the ability to release reserves, that we were going to take a portion of that and invest in the business and to really help grow both in the near term and the long term. And I think you've seen that we have the ability to increase investments and take them down as appropriate. So I would say we'll continue to use benefits from credit to invest in the business, although I think over the long haul, we’ll probably return to levels more similar to what you saw back in the '07 timeframe.

Craig Maurer - Credit Agricole Securities (USA) Inc.

So $800 million seems like a high watermark on a per quarter basis?

Daniel Henry

I'd say based on the spending levels that we have today, I would agree with that. As revenues and Billed business grow, we will over time need to take investment spending to higher levels than we saw in '07, but since spending is back probably at the '07, '08 levels, I would think about marketing at those levels being investments at the level that we saw in '07.

Operator

Next we turn to the line of Michael Taiano with Sandler O'Neill.

Michael Taiano - Sandler O’Neill & Partners

Thanks for the color on the spending by region. I was just curious, though, are you seeing any differential? I know in the past few quarters you said spending has been pretty broad-based. Could you maybe give us some color though on the different types of categories? Are you seeing greater strength in things like discretionary spending, high-end retail, versus the more nondiscretionary items at this stage yet?

Daniel Henry

I think it’s in the charts. It's broad-based in terms of segment. It's broad-based in terms of geography. I think you can see that commercial card is very strong. So we're seeing strong growth in T&E by corporations and middle market. I think we're also seeing strong growth in other travel areas, such as Airline, which is both having higher transactions and higher price per ticket, which is partly some of their pricing, but also seems to be people moving back up into the front of the plane as well. So I think all those things are helping in terms of spend. And those things are the types of things our customers, who have great levels of discretionary spending and who spend at higher ticket items, you'd expect to see.

Michael Taiano - Sandler O’Neill & Partners

Just an unrelated question. I just want to hit on the Durbin amendment. And I know in your comments it doesn't seem to suggest that you don't expect significant impact there, but could it actually help you from the standpoint of if banks now have to charge for debit usage, from that standpoint, maybe customers or less-end [ph] clients use debit, and more clients use credit? And then secondly, does it make your Charge Card product more attractive to potential bank issuers to just maybe recoup some of the lost revenues that they may be losing on debit?

Daniel Henry

Yes. So as you indicate, many of our competitors are going to be hit by the change in debit pricing that will take place. What's going to actually happen in the marketplace when you think about what the pricing for debit is going to be, what merchants may or may not do in terms of discounting to move customers from credit to debit will have to play out over time. And you can paint some scenarios where there would be a greater impact to us as people move from credit to debit. But there are other scenarios that could actually go the other direction as we see how both customers react, if banks have to change their pricing on those debit products to actually put fees on the products possibly, whether customers would actually move from debit to credit, where there isn’t a fee. So I think there's a lot of scenarios out there and we're actually going to just have to wait and see how that plays out over time.

Operator

And we have a question from the line of Meredith Whitney with Meredith Whitney Advisory Group.

Meredith Ann Whitney

Just wondering about the repeal of Rule 436(g) that happened yesterday. I'm just wondering how that affected your securitization funding going forward?

Daniel Henry

So this has to do with the rating agencies. And I think there’s actually something that just came out recently that's indicating that the SEC is going to weigh that for another six month period to see how it plays out. So I think it's not going to be an immediate issue through the next six months. Presumably, they'll work out some solution between now and then. But I would point out that we fund in a very diverse set of areas. We fund in the unsecured market, even if the traditional ABS market wasn't open because they couldn't resolve this, the 144 area within ABS where we could do funding, and we can do funding in deposits. So we have a wide breadth of funding available to us. So my sense is that we're not concerned about that. In all likelihood, that dispute will be resolved, but even if it wasn't, we see a wide variety of places for us to fund our business very effectively.

Operator

We have a question from the line of Ken Bruce with Bank of America Merrill Lynch.

Kenneth Bruce - BofA Merrill Lynch

My first question is that it appears that spending trends were holding firm throughout all three months in the quarter. Can you give us an early indication as to what you're seeing in July and if there's any particular indication that some of the pull-back that we've seen in the capital markets, if that’s translating into consumer and commercial behavior at all?

Daniel Henry

Yes. So I think month-to-date July, we're seeing double-digit growth. It's down slightly from where we were in June, but that's really driven by the fact that it's a more difficult rollover compared to '09, in July compared to June. So it's still remaining strong.

Kenneth Bruce - BofA Merrill Lynch

And any indication that there's been a change in behavior just based on what's going on either in Europe or just some of the weakness we've seen in the U.S.?

Daniel Henry

What I'd say is despite the fact that there’s a huge amount of uncertainty in the marketplace, really, over the last four or five months, as you can see from our numbers, spending by our customers has been really very good. It's very broad-based. And the spending has performed better than the other networks and the other large card issuers. So we're very pleased by the results that we're seeing.

Kenneth Bruce - BofA Merrill Lynch

You're hearing a lot of the competition is focused on the premium end of the market. I'm interested if you're seeing any action specifically that they are taking and what the response is by American Express, and if you think that some of the increased investment activity in service is going to be required in order to, in essence, keep your share of the premium market?

Daniel Henry

So I think our competitors, probably over the past decade, have been very interested in the space that we operate. That's probably heightened by some of the legislation, which makes the economics at the lower end of the lending spectrum less attractive. And if we were not very diligent, then we would probably lose share, but we have been very diligent. We're very focused on the competition. We're very focused on continuing to improve the value proposition to our customers in terms of the rewards we provide, in terms of the service that we provide. I think everybody is well aware that for the past three years, we've been the number one service company in this industry and we continue to invest in that. So we are aware of the competition, but we continue to be confident in our ability to win in the marketplace.

Operator

And next, we turn to the line of John McDonald with Sanford Bernstein.

John McDonald - Bernstein Research

I was wondering if you could clarify the comment on the net interest yield in USCS? I thought you said that you thought you'd get back to 9% over time, is that right? Versus 9.3% in the second quarter?

Daniel Henry

Yes. If you go back on that chart, I guess Chart 19 -- Chart 11, sorry -- you can see back on the left-hand side that we would generally have a yield of about 9%. In anticipation of the CARD Act, we put pricing changes in place which increased that. I think it peaked at about 10%. And the pricing changes we put in were really intended to mitigate the impact of the CARD Act. So if that all played out the way we intended, we migrate back towards about 9%. So one caveat I put to that is that we have this look-back in the regulation. We think the pricing changes we made are appropriate for our business model, but there is uncertainty in terms of when that look-back takes place and is reviewed by the Fed.

John McDonald - Bernstein Research

Just to be clear, what would drive it down from 9.3% in the same quarter down to 9%? Is that still phasing in of CARD Act?

Kenneth Chenault

I think it's still the phasing in of CARD Act. It's customer behaviors as well, which is part of this. So I think it's all the factors that we think will impact us as we go over the balance of the year.

John McDonald - Bernstein Research

The Visa and MasterCard settlement payments that you're getting, can you just remind us how long those last? And do they stay down or do they stay straight line at the same level until they go away?

Daniel Henry

So they continue at the level they are through, I think, it’s the second quarter of 2011. And then I guess it's the MasterCard that ends, and the Visa continues until later in, I think, the fourth quarter of 2011.

John McDonald - Bernstein Research

At the same level?

Daniel Henry

Yes. All of it, yes. Each of the payments from each of the networks are constant quarter-by-quarter, assuming our spend is achieved so the payments are contingent on spend. But we’re highly confident that we'll hit those targets.

Operator

And next, we turn to the line of Chris Brendler with Stifel Nicolaus.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

I wondered if you could give us any color commentary on the marketing spend. $800 million of marketing spend is a big number. And obviously, you're benefiting on the spending side, but that's maybe more just a bounce-off of the bottom, and some of your higher spending customers increased their discretionary spend and the like. Is there any alternate in your results that you can point to that gives us any sense of the effectiveness of your marketing? I was looking at -- account growth still seems pretty muted. Is there anything else beneath the surface that you could point to? And also, a similar topic on the Charge Card business where I know you’ve been spending a lot of money.

Daniel Henry

So you're right. We have been focused on charge and co-brand, but we've also increased our investment levels compared to historical levels internationally because we see that as an area of growth. We also have increased spending within our merchant business on perceptions of coverage, because often, customers don't perceive that we have the coverage that we actually do. So we want to make sure that we're communicating that clearly. The investments we make, even the ones that get short-term benefit like card acquisition, we actually make those investments because of the lifetime economics that we have from the customers that we acquire. So we're getting benefit now, but we'll get it in the long term. Now in terms of your comment on cards-in-force, I just say that to the extent we acquire charge cards and co-brand, where customers spend at a higher level, it's more expensive to acquire those cards. So we wouldn't expect to have the kind of card growth that we had when we were acquiring large numbers of proprietary lending customers. I'd also say that we're going to give you more detail on this at the Financial Community Meeting that takes place in the first week in August. But just getting back to where we're spending the $900 million, I think you're going to see the benefit of that in the long term, but you're also seeing the benefit of that in our billings numbers. So we do think that the higher volumes that we're achieving compared to last year, and the higher volumes that we're achieving compared to the other networks, are due in part to the higher level of investments that we’ve really made over the last several quarters.

John McDonald - Bernstein Research

One quick follow-up just on the Durbin amendment and the ramifications. Have there been instances where discounting has become more prevalent in other geographies, and how did you deal with that? And also, any sense on your part for the appetite for credit interchange legislation?

Daniel Henry

The one we can look to is Australia. Certainly, surcharging there took place and differential surcharging took place, and it had an impact in terms of the very early days of that. But over time, it has really moderated, and I think we've demonstrated in Australia our ability to adopt to the marketplace. And our business in Australia continues to be strong. And in fact, I think we've actually taken share there on our network compared to the others. So I think we have a business model that's adoptable to the environment that we face, and we have confidence that we’ll be able to do that in the United States as well. In terms of credit interchange, there's been no discussion of that at the moment. On the other hand, anything is possible, but it's not on the radar screen at the moment. I think they have several hundred rooms to write already, so maybe they'll undertake getting that done before they head off in another direction. But we'll have to wait and see.

Operator

And next, we turn to the line of Bob Napoli with Piper Jaffray.

Robert Napoli - Piper Jaffray Companies

Tax rate was awful high this quarter and you only had a $44 million charge in that number. If you look back before the downturn, you guys were in the mid-20s with an effective tax rate for many years. Is there anything -- are you assuming that you're going to have a higher tax rate? And if so, why and where do you expect to be?

Daniel Henry

Yes. So I think if I was looking at a historical tax rate, I think about it more in the low 30s. I think that's where we've been historically. Also, in this quarter, aside from the one item that I mentioned, also our income in the second quarter was higher than the first. So that causes the rate to increase, and we really have to cover the increase related to the first quarter that we didn't have in the rate then. So that's part of the impact as well. So you have to factor that in at the same time. But I would think about a normalized rate in the low 30s.

Robert Napoli - Piper Jaffray Companies

In the low 30s? Because it was in the mid-20s from 2003 through 2008, 2007?

Daniel Henry

So I don't have that data in front of me, but if you have a quarter without unusual items or settlements, I'd put it more in the low 30s.

Robert Napoli - Piper Jaffray Companies

The Revolution Money, the hire you made yesterday in your alternative payments investments, first of all, can you give us a feel for what the P&L of Revolution Money looks like today and what your investment spend plans are?

Daniel Henry

So Revolution Money we think is a great capability. It's something that we are looking at in terms of building out those capabilities. So we're investing in that during the current period. As we go forward, Dan Shulman will be very involved in the direction of Revolution Money and exactly what our strategies will be. I would view that as an investment certainly over the near term, but we think it's something that has potential and could be important to us as alternative payments evolve. So I think once Dan's in place and has a chance to look at it, I'm sure that's something that he'll be in a position to discuss with each of you in more detail.

Operator

And we have a question from the line of Bill Carcache with Macquarie Capital.

Bill Carcache - Macquarie Research

Dan, can you give us a sense of what the percentage of your loan balance is now that consists of customers who are in the Care Program or similar programs, and just how that's been trending?

Daniel Henry

Yes. So we haven't disclosed that information. The number of balances in the Care Program are relatively low and have been relatively consistent, I would say, over the past couple of quarters.

Bill Carcache - Macquarie Research

But is it fair to assume that we've seen some meaningful improvement in credit, both in terms of the net charge-off rates coming down and delinquency improvement? Is it fair to conclude that some of that improvement has been driven by a reduction in the number of Care Program participants? Basically, have they contributed to those improved credit results?

Daniel Henry

I think the answer to that question is that has to be true, but I would say it's relatively minor, the impact. I think the vast majority of the improvement is a combination of the actions we've taken on the broad portfolio, as well as the fact that our customer base is of high quality. We acted early and decisively and we have a high-quality customer base, and that's really the primary reasons that we're seeing improvement in credit metrics across the board.

Bill Carcache - Macquarie Research

And on another topic. We know about your presence in the gift card space, but can you talk more broadly about your interest in Prepaid, particularly in light of the favorable treatment that Prepaid's getting under the new legislation? It's really not something that I've heard you talk much about before. If you could just speak to that?

Daniel Henry

So Prepaid is a relatively small business within the total company. It is an area that we are focused on. It is a company that we've had really pretty substantial growth in. It's an area that we'll continue to focus on in terms of investment. So we're playing in that space. And as I say, we've had good growth. But on a relative basis, it's a small part of the company.

Bill Carcache - Macquarie Research

On the Consumer Financial Production Bureau, is there any way you can give us a sense -- I know these are early days, but how do you expect your daily actions as a business to change as a result of the creation of the CFPB? And what level of interaction are you anticipating having with it?

Daniel Henry

I guess what I'd say is it's way too early to tell. The agency hasn't been created yet. And we'll have to wait and see exactly what rules they put in place, and then we will participate in that. But it's way too early to have any sense of what impact it could potentially have on the company.

Operator

And next, we turn to the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Looking at your Slide 24, it seems like the month coverage increased in the second quarter in the reserve, which seems kind of counterintuitive to the fact that credit's improving. I was wondering how we should think about it going forward. That's my first question. And then the second one is on the marketing. I was wondering if you guys have looked back in time and observed how long $1 of marketing spend translates to the top line benefit. Is there any info on that you could share, or maybe that's something you'll address at the FCM? But I'm just trying to figure out when we get the results from the second quarter spend.

Daniel Henry

The reserve coverage, or how we set reserves, is really based on a model based on historical information. We also set specific reserves against certain categories where we think it's appropriate. And then we also have a factor that relates to the environment. And our reserve coverage is cautious because of the uncertainty that exists in the environment. Whether you look at unemployment, which is stubbornly high, if you look at consumer confidence, you'll look at where housing is, it's just very uneven. And for that reason, we are remaining cautious as we said, on reserves. If you turn then to your second question about marketing, certain types of marketing, such as card acquisition, we have models that can predict very accurately when we bring in customers, what kind of spending we're going to get and when we're going to get it. And we constantly update those models based on recent activities. Other types of investments, if you go to the other end of the spectrum and you look at Revolution Money, we’re investing in a platform and developing capabilities. When we'll see the revenue from that will probably be some period of time in the future before it has a meaningful impact on our business. So we're really investing across a spectrum where we get some pretty immediate impact, a couple of months, and we see revenue in the top line, and others where it takes a longer period of time. And we believe it's very important to have investments that really go across the spectrum from short term to medium term to long term. So really, it depends on the investment. And then there are certain types of investments where it isn't as crystal-clear. So if you look at certain loyalty programs, we know in aggregate we get good returns on the aggregate loyalty programs we have. If you try to isolate that to one particular, it gets a little more difficult. If you look at marketing and advertising, clearly it’s something we want to be in the marketplace with. But again, measuring that on a precise basis isn’t as easy. So in some investments, you can see exactly when it's going to come; in others, it takes a longer period of time. So there's no formula I can give you to say, “For this dollars of marketing, this is the revenues that you should expect two quarters from now.”

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Is that the component that went up this quarter, meaning the uncertainty component, which is why your reserve coverage went up? Or is it something else?

Daniel Henry

I don't want to talk about each particular component. But certainly, the uncertainty that we see in the marketplace did not decrease in the second quarter compared to the first quarter.

Operator

Next, we turn to the line of Don Fandetti with Citigroup.

Donald Fandetti - Citigroup Inc

In the press release, there was a notation of potential acquisition. So I was just curious if you could put some parameters around that? Are we talking about fault on [ph] smaller acquisitions? And also, would they be more investment-related, like Rev Money, or could you actually do some accretive acquisitions?

Daniel Henry

So I think that we are certainly open to acquisitions that will enable us to further our strategies. Certainly in the area of new fee revenues or alternative payments may be spaces where that could be very helpful to us. Some may be more in the line of Revolution Money, where we have the broad capabilities first, but others could be of the nature that will, in the very near term, drive earnings and revenues for the company. So I think it could fall into either of those two categories. And as we've said, we're very open to doing that to the extent that it can help us further some of our strategic initiatives.

Donald Fandetti - Citigroup Inc

And would you be in a position to repurchase stock or is that down the road?

Daniel Henry

So at the moment, that's not on the top of our agenda. But as you can see, our Tier 1 common capital ratio is strong at 10.7. It's something that we'll think about over the moderate term, but also will require a conversation, I think, with our regulators. So that's something we'll think about, but it's not in our agenda in the very near term.

Operator

Next, we turn to the line of Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co.

On the bankruptcy trend line, you mentioned that the increase of bankruptcies has been below what peers have seen. Is it still trending below your projections? I think that had been the case for the past two quarters, that the actual level of bankruptcy filings were lower than you were projecting?

Daniel Henry

So I look at bankruptcies -- if you look at last quarter, and you can see on the chart that they dropped down. I think the industry was relatively stable in growth last quarter, but the increase that we saw in the second quarter compared to the first quarter was very much in line with industry trends. So you could see on Slide 22 that it was pretty stable for several quarters at around 70. Dropped down last quarter, as I said, to 65. In the industry, last quarter, growth was kind of stable. So we had performed a little bit better. But the increase that you see in the second quarter growth is very much in line with what the industry growth was.

Scott Valentin - FBR Capital Markets & Co.

And that's in line with, I guess, what your projections would be?

Daniel Henry

So the impact to the bottom line is not only dependent on the filings but the actual size of the filings; what’s the average balance in there. And also many of the filings that we received, we've already written off the account. So whether the mix is changing, and what the percentage of accounts already written off will also have a factor. So it's the filings combined with the average size, and what percent have already been written off really dictates what eventually falls through the P&L.

Scott Valentin - FBR Capital Markets & Co.

Within the marketing reward spend, was there any URR adjustments in there, the assumption behind redemption rates?

Daniel Henry

There's always changes that are moderate, but there was nothing of note in the URR in this quarter.

Scott Valentin - FBR Capital Markets & Co.

I know you talked about, I think, in the past conference call, revisiting targets in terms of ROE and some of the growth rates. Is that something that's going to be on hold until the regulators come out with more clarity on capital, or is that something you maybe plan to address at the Community Investor Day?

Daniel Henry

Yes. So we will address that at the Financial Community Meeting. We're not going to know exactly where they'll set them, but we'll make an assumption, and then based on that assumption, we'll set some new guidelines for ROE.

Operator

And next, we turn to the line of John Stilmar with SunTrust.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Just real quick question, and I hate to go back to the concept of marketing, but dovetailing on Sanjay's question, when you answered it, you clearly articulated a difference between investing in the short term versus investing in the long term. Can you compare this past quarter and the first quarter's investment in long term versus short term, or sort of mail-oriented volume, compared to where you might have been in pre-recession levels?

Daniel Henry

So certainly last year, when marketing was way down, we were focused on the near term. And now that we have the ability to invest more broadly, we'd be more inclined to have a greater percentage, clearly in the moderate to long term. If I contrasted to '07, I would say we probably have more investments in this quarter that are focused on the medium to long term than you would’ve had back in '07 when the investment models were up [ph].

John Stilmar - SunTrust Robinson Humphrey Capital Markets

And then in the U.S. Card segment itself, the rebound in average cardholder spending, how much of that rebound do you think is led by virtue of the fact that, I'm guessing, that the mix of revenue is much more skewed towards your affinity in co-branded relationships now than it was prior to the recession? So is it possible for us to see that average spend per customer going higher because of the mix today versus before? Or pretty much as your portfolio, now we're back at pre-recession levels, should we start to think about that level, what kind of smoothing out and then the growth coming from organic account growth?

Daniel Henry

So I think to the extent we execute against our strategy of focusing on charge and co-brand, those customers tend to spend at a higher level. So it should be a positive effect on revenues over time. In this quarter, I think it's a combination of that shift in strategy as well as just customer behavior, where they've gone from a point where they pulled back on their spending last year; they're bringing their spending levels back up. So I think both those factors were important in terms of the increases that we saw in the second quarter. So let's just have one last question.

Operator

And our final question comes from the line of Craig Maurer with CLSA.

Craig Maurer - Credit Agricole Securities (USA) Inc.

I just wanted to get your thoughts on how you think of unemployment as it applies to spending? Meaning, Discover made a comment a month ago, or maybe a little longer, that it's best to think of that base of unemployed Americans, whether it’s callous to say or not, as not impactful on the business at this point, and to take them out of your future thought process. So I just wanted to get your take on that?

Ron Stovall

So I don't really know the basis of their observation, but certainly, over time, it's important for us to have job creation. Job creation, I think, is a very important thing that drives spend. It probably also impacts consumer confidence, which is an important part of what drives GDP, which is important to our business. So I don't know the intricacies of what part of unemployment is affecting our business, but over the long term, we need a healthy economy. We need the unemployment rate to come back down. And we need job creation to have greater certainty in the economy and have economic growth.

Ron Stovall

All right, thanks everybody for joining the call. And have a good evening.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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