Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

or

  [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

   

13-4922250

 

(State or other jurisdiction of

incorporation or organization)

    (I.R.S. Employer Identification No.)  

200 Vesey Street, New York, NY

   

10285

 
(Address of principal executive offices)     (Zip Code)  

Registrant’s telephone number, including area code                                  (212) 640-2000        

 
            None  

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X              No             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X              No             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x

  

Accelerated filer  ¨

Non-accelerated filer  ¨    (Do not check if a smaller reporting company)

  

Smaller reporting company  ¨                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                 No   X        

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

     

Outstanding at July 18, 2014

 
Common Shares (par value $0.20 per share)       1,046,567,365 shares  


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.    Financial Information      Page No.   
  

Item 1.

  

Financial Statements

  
     

Consolidated Statements of Income – Three Months Ended June 30, 2014 and 2013

     1   
     

Consolidated Statements of Income – Six Months Ended June 30, 2014 and 2013

     2   
     

Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2014 and 2013

     3   
     

Consolidated Balance Sheets – June 30, 2014 and December 31, 2013

     4   
     

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013

     5   
     

Notes to Consolidated Financial Statements

     6   
  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   
  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     72   
  

Item 4.

  

Controls and Procedures

     72   
Part II.    Other Information   
  

Item 1.

  

Legal Proceedings

     75   
  

Item 1A.

  

Risk Factors

     77   
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     79   
  

Item 5.

  

Other Information

     80   
  

Item 6.

  

Exhibits

     80   
  

Signatures

     81   
  

Exhibit Index

     E-1   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

Three Months Ended June 30 (Millions, except per share amounts)

       2014     

2013

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 4,945      $             4,729

Net card fees

       687      647

Travel commissions and fees

       500      495

Other commissions and fees

       624      605

Other

       585      567
    

 

 

    

 

Total non-interest revenues

       7,341      7,043
    

 

 

    

 

Interest income

       

Interest on loans

       1,696      1,622

Interest and dividends on investment securities

       45      52

Deposits with banks and other

       18      20
    

 

 

    

 

Total interest income

       1,759      1,694
    

 

 

    

 

Interest expense

       

Deposits

       91      107

Long-term debt and other

       352      385
    

 

 

    

 

Total interest expense

       443      492
    

 

 

    

 

Net interest income

       1,316      1,202
    

 

 

    

 

Total revenues net of interest expense

       8,657      8,245
    

 

 

    

 

Provisions for losses

       

Charge card

       183      161

Card Member loans

       282      334

Other

       24      23
    

 

 

    

 

Total provisions for losses

       489      518
    

 

 

    

 

Total revenues net of interest expense after provisions for losses

       8,168      7,727
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and Card Member services

       2,950      2,580

Salaries and employee benefits

       1,658      1,543

Other, net

       1,248      1,609
    

 

 

    

 

Total expenses

       5,856      5,732
    

 

 

    

 

Pretax income

       2,312      1,995

Income tax provision

       783      590
    

 

 

    

 

Net income

     $ 1,529      $             1,405
    

 

 

    

 

Earnings per Common Share (Note 13): (a)

       

Basic

     $ 1.44      $               1.28

Diluted

     $ 1.43      $               1.27
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,052      1,090

Diluted

       1,058      1,097

Cash dividends declared per common share

     $ 0.26      $               0.23

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $12 million and $13 million for the three months ended June 30, 2014 and 2013, respectively.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

Six Months Ended June 30 (Millions, except per share amounts)

     2014     

2013

Revenues

     

Non-interest revenues

     

Discount revenue

   $ 9,591      $             9,167

Net card fees

     1,361      1,300

Travel commissions and fees

     923      932

Other commissions and fees

     1,242      1,178

Other

     1,086      1,104
  

 

 

    

 

Total non-interest revenues

     14,203      13,681
  

 

 

    

 

Interest income

     

Interest on loans

     3,407      3,305

Interest and dividends on investment securities

     91      105

Deposits with banks and other

     37      46
  

 

 

    

 

Total interest income

     3,535      3,456
  

 

 

    

 

Interest expense

     

Deposits

     185      221

Long-term debt and other

     697      790
  

 

 

    

 

Total interest expense

     882      1,011
  

 

 

    

 

Net interest income

     2,653      2,445
  

 

 

    

 

Total revenues net of interest expense

     16,856      16,126
  

 

 

    

 

Provisions for losses

     

Charge card

     398      315

Card Member loans

     532      577

Other

     44      42
  

 

 

    

 

Total provisions for losses

     974      934
  

 

 

    

 

Total revenues net of interest expense after provisions for losses

     15,882      15,192
  

 

 

    

 

Expenses

     

Marketing, promotion, rewards and Card Member services

     5,367      4,910

Salaries and employee benefits

     3,198      3,158

Other, net

     2,797      3,220
  

 

 

    

 

Total expenses

     11,362      11,288
  

 

 

    

 

Pretax income

     4,520      3,904

Income tax provision

     1,559      1,219
  

 

 

    

 

Net income

   $ 2,961      $             2,685
  

 

 

    

 

Earnings per Common Share (Note 13): (a)

     

Basic

   $ 2.78      $               2.43

Diluted

   $ 2.77      $               2.42
  

 

 

    

 

Average common shares outstanding for earnings per common share:

     

Basic

     1,056      1,094

Diluted

     1,062      1,101

Cash dividends declared per common share

   $ 0.49      $               0.43

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $24 million for both the six months ended June 30, 2014 and 2013.

See Notes to Consolidated Financial Statements.

 

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AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

                                           

 

   

 

Three Months Ended

June 30,

  

  

   

 

Six Months Ended

June 30,

(Millions)

    2014       2013       2014    

2013

Net income

  $              1,529     $              1,405     $              2,961     $             2,685 

Other comprehensive (loss) income:

       

Net unrealized securities (losses) gains, net of tax of: 2014, $1 and $24; 2013, $(72) and $(90)

    3       (127     42     (162)

Foreign currency translation adjustments, net of tax of: 2014, $(55) and $(78); 2013, $142 and $131

    6       (228     (28   (273)

Net unrealized pension and other postretirement benefit
gains, net of tax of: 2014, $5 and $20; 2013, $10 and $31

    14       27       41     54 
 

 

 

   

 

 

   

 

 

   

 

Other comprehensive (loss) income

    23       (328     55     (381)
 

 

 

   

 

 

   

 

 

   

 

Comprehensive income

  $ 1,552     $ 1,077     $ 3,016     $             2,304 
 

 

 

   

 

 

   

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                             

 

(Millions, except per share data)

      
 
June 30,
2014
  
 
 

December 31, 2013

Assets

      

Cash and cash equivalents

      

Cash and due from banks

     $ 2,643     $            2,212 

Interest bearing deposits in other banks (includes securities purchased under resale agreements: 2014, $297; 2013, $143)

       15,399     16,776 

Short-term investment securities

       388     498 
    

 

 

   

 

Total cash and cash equivalents

       18,430     19,486 

Accounts receivable

      

Card Member receivables (includes gross receivables available to settle obligations of consolidated variable interest entities: 2014, $6,497; 2013, $7,329), less reserves: 2014, $413; 2013, $386

       44,893     43,777 

Other receivables, less reserves: 2014, $59; 2013, $71

       3,753     3,408 

Loans

      

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2014, $28,878; 2013, $31,245), less reserves: 2014, $1,170; 2013, $1,261

       65,168     65,977 

Other loans, less reserves: 2014, $10; 2013, $13

       703     608 

Investment securities

       4,855     5,016 

Premises and equipment, less accumulated depreciation and amortization: 2014, $6,162; 2013, $5,978

       3,870     3,875 

Other assets (includes restricted cash of consolidated variable interest entities: 2014, $68; 2013, $58)

       10,712     11,228 
    

 

 

   

 

Total assets

     $ 152,384     $        153,375 
    

 

 

   

 

Liabilities and Shareholders’ Equity

      

Liabilities

      

Customer deposits

     $ 42,136     $          41,763 

Travelers Cheques and other prepaid products

       3,718     4,240 

Accounts payable

       11,645     10,615 

Short-term borrowings (includes debt issued by consolidated variable interest entities: 2014, nil; 2013, $2,000)

       3,436     5,021 

Long-term debt (includes debt issued by consolidated variable interest entities: 2014, $15,499; 2013, $18,690)

       54,836     55,330 

Other liabilities

       16,400     16,910 
    

 

 

   

 

Total liabilities

       132,171     133,879 
    

 

 

   

 

Contingencies (Note 15)

      

Shareholders’ Equity

      

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,046 million shares as of June 30, 2014 and 1,064 million shares as of
December 31, 2013

       210     213 

Additional paid-in capital

       12,247     12,202 

Retained earnings

       9,127     8,507 

Accumulated other comprehensive income (loss)

      

Net unrealized securities gains, net of tax of: 2014, $57; 2013, $33

       105     63 

Foreign currency translation adjustments, net of tax of: 2014, $(604); 2013, $(526)

       (1,118   (1,090)

Net unrealized pension and other postretirement benefit losses, net of tax of: 2014, $(157); 2013, $(177)

       (358   (399)
    

 

 

   

 

Total accumulated other comprehensive loss

       (1,371   (1,426)
    

 

 

   

 

Total shareholders’ equity

       20,213     19,496 
    

 

 

   

 

Total liabilities and shareholders’ equity

     $ 152,384     $        153,375 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                             

 

Six Months Ended June 30 (Millions)

       2014    

2013

Cash Flows from Operating Activities

      

Net income

     $ 2,961     $              2,685 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Provisions for losses

       974     934 

Depreciation and amortization

       515     497 

Deferred taxes and other

       (397 )   (45)

Stock-based compensation

       164     197 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

      

Other receivables

       (701 )   190 

Other assets

       752     964 

Accounts payable and other liabilities

       1,142     5,247 

Travelers Cheques and other prepaid products

       (525 )   (440)
    

 

 

   

 

Net cash provided by operating activities

       4,885      10,229 
    

 

 

   

 

Cash Flows from Investing Activities

      

Sale of investments

       80     131 

Maturity and redemption of investments

       525     601 

Purchase of investments

       (443 )   (606)

Net (increase) in Card Member loans/receivables

       (1,153 )   (1,374)

Purchase of premises and equipment, net of sales: 2014, nil; 2013, $7

       (546 )   (475)

Acquisitions/dispositions, net of cash acquired

       (109 )   (191)

Net increase (decrease) in restricted cash

       70     (16)
    

 

 

   

 

Net cash used in investing activities

       (1,576 )   (1,930)
    

 

 

   

 

Cash Flows from Financing Activities

      

Net increase in customer deposits

       371     347 

Net (decrease) in short-term borrowings

       (1,654 )   (219)

Issuance of long-term debt

       5,955     3,109 

Principal payments on long-term debt

       (6,661 )   (8,427)

Issuance of American Express common shares

       193     501 

Repurchase of American Express common shares

       (2,091 )   (2,142)

Dividends paid

       (489   (443)
    

 

 

   

 

Net cash used in financing activities

       (4,376 )   (7,274)
    

 

 

   

 

Effect of exchange rate changes on cash and cash equivalents

       11      (146)
    

 

 

   

 

Net (decrease) increase in cash and cash equivalents

       (1,056 )   879 

Cash and cash equivalents at beginning of period

       19,486     22,250 
    

 

 

   

 

Cash and cash equivalents at end of period

     $ 18,430     $            23,129 
    

 

 

   

 

 

On June 30, 2014, the Company completed a transaction to establish a non-consolidated joint venture comprising the former Global Business Travel (GBT) operations of the Company. This non-cash transaction is further described within Note 2 to the Consolidated Financial Statements.

See Notes to Consolidated Financial Statements

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company also focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The Company’s 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 direct mail, online applications, targeted direct and third-party sales forces and direct response advertising.

The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements incorporated by reference in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the Annual Report).

The interim consolidated financial information in this report has not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period consolidated financial information, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and the disclosures of contingent assets and liabilities. These accounting estimates reflect the best judgment of management, but actual results could differ.

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. These reclassifications did not have a material impact on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Standards

Accounting Standards Update No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers was issued on May 28, 2014. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance supersedes most of the current revenue recognition requirements, and will be effective January 1, 2017. The Company is currently evaluating the impact this guidance will have on its financial position, results of operations and cash flows, including the method it will choose for adoption.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2. Divestitures

On June 30, 2014, the Company completed the previously announced transaction to establish a non-consolidated joint venture (JV) comprising the former GBT operations of the Company, historically reported within the Global Commercial Services (GCS) segment. The Company retained a 50 percent ownership interest with an estimated fair value of approximately $900 million, which is accounted for as an equity method investment as of June 30, 2014, and reported in other assets. In exchange for a cash contribution of $900 million paid into the JV, an unrelated third-party investor group holds the remaining 50 percent ownership interest. The investor group’s cash contribution provides the primary basis for the Company’s determination of the estimated fair value of its 50 percent ownership interest.

As a result of the transaction, the Company deconsolidated the GBT net assets and recognized a net gain of approximately $626 million ($409 million after tax), which is reported as a reduction to other expense for the quarter ended June 30, 2014. Prior to the deconsolidation, the carrying amount of GBT’s assets and liabilities were not material to the Company’s financial position.

The JV will operate under the American Express Global Business Travel brand, pursuant to a trademark license agreement provided by the Company. The Company has also entered into a transition services agreement and certain other operating agreements with the JV, pursuant to which the Company and the JV will provide one another with certain services and that will result in related-party receivables and payables on an ongoing basis.

 

3. Accounts Receivable and Loans

The Company’s charge and lending payment card products result in the generation of Card Member receivables and Card Member loans, respectively. For information on the Company’s accounts receivable and loans and the related accounting policies, refer to Note 4 on pages 72 – 76 of the Annual Report.

Accounts receivable by segment as of June 30, 2014 and December 31, 2013 consisted of:

 

                                             

 

(Millions)

       2014     

2013

U.S. Card Services (a)

     $ 21,238      $           21,842

International Card Services

       7,457      7,771

Global Commercial Services (b)

       16,460      14,391

Global Network & Merchant Services (c)

       151      159
    

 

 

    

 

Card Member receivables (d)

       45,306      44,163

Less: Reserve for losses

       413      386
    

 

 

    

 

Card Member receivables, net

     $ 44,893      $           43,777
    

 

 

    

 

Other receivables, net (e)

     $ 3,753      $             3,408
    

 

 

    

 

 

 

  (a)

Includes $6.5 billion and $7.3 billion of gross Card Member receivables available to settle obligations of a consolidated variable interest entity (VIE) as of June 30, 2014 and December 31, 2013, respectively.

 

  (b)

Includes $669 million and $836 million due from airlines, of which Delta Air Lines (Delta) comprises $637 million and $628 million as of June 30, 2014 and December 31, 2013, respectively.

 

  (c)

Includes receivables primarily related to the Company’s International Currency Card portfolios.

 

  (d)

Includes approximately $14.0 billion and $13.8 billion of Card Member receivables outside the U.S. as of June 30, 2014 and December 31, 2013, respectively.

 

  (e)

Other receivables primarily represent amounts related to (i) purchased Global Network Services (GNS) joint venture receivables, (ii) tax receivables, (iii) GNS partner banks for items such as royalty and franchise fees, and (iv) certain merchants for billed discount revenue. Other receivables are presented net of reserves for losses of $59 million and $71 million as of June 30, 2014 and December 31, 2013, respectively.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loans as of June 30, 2014 and December 31, 2013 consisted of:

 

                                             

 

(Millions)

       2014     

2013

U.S. Card Services (a)

     $ 57,727      $           58,395

International Card Services

       8,555      8,790

Global Commercial Services

       56      53
    

 

 

    

 

Card Member loans

       66,338      67,238

Less: Reserve for losses

       1,170      1,261
    

 

 

    

 

Card Member loans, net

     $ 65,168      $           65,977
    

 

 

    

 

Other loans, net (b)

     $ 703      $                608
    

 

 

    

 

 

 

  (a)

Includes approximately $28.9 billion and $31.2 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of June 30, 2014 and December 31, 2013, respectively.

 

  (b)

Other loans primarily represent loans to merchants and a store card loan portfolio. Other loans are presented net of reserves for losses of $10 million and $13 million as of June 30, 2014 and December 31, 2013, respectively.

Card Member Loans and Card Member Receivables Aging

Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member loans and receivables as of June 30, 2014 and December 31, 2013:

 

                                                                               

 

2014 (Millions)

       Current       
 
 
 
30-59
Days
Past
Due
  
  
  
  
   
 
 
 
60-89
Days
Past
Due
  
  
  
  
   
 
 
 
90+
Days
Past
Due
  
  
  
  
 

Total

Card Member Loans:

            

U.S. Card Services

     $ 57,181     $ 155     $ 116     $ 275     $    57,727

International Card Services

       8,415       45       30       65     8,555

Card Member Receivables:

            

U.S. Card Services

     $ 20,915     $ 111     $ 59     $ 153     $    21,238

International Card Services (a)

       7,356       32       19       50     7,457

Global Commercial Services

       (b     (b     (b     119     16,460

 

2013 (Millions)

       Current       
 
 
 
30-59
Days
Past
Due
  
  
  
  
   
 
 
 
60-89
Days
Past
Due
  
  
  
  
   
 
 
 
90+
Days
Past
Due
  
  
  
  
 

Total

Card Member Loans:

            

U.S. Card Services

     $ 57,772     $ 183     $ 134     $ 306     $    58,395

International Card Services

       8,664       43       28       55     8,790

Card Member Receivables:

            

U.S. Card Services

     $ 21,488     $ 125     $ 69     $ 160     $    21,842

International Card Services

       (b     (b     (b     83     7,771

Global Commercial Services

       (b     (b     (b     132     14,391

 

 

  (a)

Beginning in first quarter 2014, as a result of system enhancements, delinquency data is now available and presented on a prospective basis for the indicated aging categories. Comparable data for prior periods is not available. For risk management purposes, the Company has historically utilized 90 days past billing for the International Card Services (ICS) segment, as described below in (b).

 

  (b)

Delinquency data for periods other than 90 days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances. For Card Member receivables in GCS as of June 30, 2014 and ICS and GCS as of December 31, 2013, delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes.

 

8


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Card Member Loans and Receivables

The following tables present the key credit quality indicators as of or for the six months ended June 30:

 

                                                                                                                                               

 

       2014       2013
       Net Write-Off Rate       
 
 
 
30 Days
Past Due
as a % of
Total
  
  
  
  
    Net Write-Off Rate     

30 Days Past Due as a % of Total

 

      
 
Principal
Only
 (a)
  
  
   
 
 
Principal,
Interest, &
Fees
 (a)
  
  
  
     
 
Principal
Only
 (a)
  
  
   
 
 
Principal,
Interest, &
Fees
 (a)
  
  
  
 

Card Member Loans:

              

U.S. Card Services

       1.6%        1.9%        0.9%        2.0%        2.2%      1.1%

International Card Services (b)

       2.0%        2.4%        1.6%        1.9%        2.3%      1.6%

Card Member Receivables:

              

U.S. Card Services

       1.8%        2.0%        1.5%        2.0%        2.1%      1.6%

International Card Services (b)

       2.0%        2.2%        1.3%        (c)          (c)        (c)  

 

                                                                                               
       2014       2013

 

      
 
 
 
 
Net Loss
Ratio as
a % of
Charge
Volume
  
  
  
  
  
   
 
 
 
90 Days
Past Billing
as a % of
Receivables
  
  
  
  
   
 
 
 
 
Net Loss
Ratio as
a % of
Charge
Volume
  
  
  
  
  
 

90 Days Past Billing as a % of Receivables

Card Member Receivables:

          

International Card Services

       (c)          (c)          0.19%      1.1%

Global Commercial Services

       0.09%        0.7%        0.08%      0.7%

 

 

  (a)

The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because the Company considers uncollectible interest and/or fees in estimating its reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented.

 

  (b)

Beginning in 2014, write-offs for certain installment loan products have been reclassified from Card Member receivables to Card Member loans. Prior period write-offs have not been reclassified.

 

  (c)

Historically, net loss ratio as a % of charge volume and 90 days past billings as a % of receivables were presented. Beginning in first quarter 2014, as a result of system enhancements, 30 days past due as a % of total, Net write-off rate (principal only) and Net write-off rate (principal and fees) have been presented.

Refer to Note 5 on pages 77 – 78 of the Annual Report for additional indicators, including external environmental qualitative factors, management considers in its evaluation process for reserves for losses.

Impaired Card Member Loans and Receivables

Impaired loans and receivables are defined by GAAP as individual larger balance or homogeneous pools of smaller balance loans and receivables for which it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the Card Member agreement. For information on impaired Card Member loans and receivables and the related accounting policies, refer to Note 4 on pages 74 – 76 of the Annual Report.

 

9


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides additional information with respect to the Company’s impaired Card Member loans, which are not significant for GCS, and Card Member receivables, which are not significant for ICS and GCS, as of June 30, 2014 and December 31, 2013:

 

                 

 

2014 (Millions)

      
 
 
 
 
Loans over
90 Days
Past Due
& Accruing
Interest
 (a)
  
  
  
  
  
   
 
 
Non-
Accrual
Loans
 (b)
  
  
  
   
 
 
 
Loans &
Receivables
Modified
as a TDR
 (c)
  
  
  
  
   
 
 
 
Total
Impaired
Loans &
Receivables
  
  
  
  
   
 
 
Unpaid
Principal
Balance
 (d)
  
  
  
 

Allowance

for  TDRs (e)

Card Member Loans:

              

U.S. Card Services

     $ 171      $ 198      $ 323      $ 692     $ 631      $              74

International Card Services

       65                      65       64     

Card Member Receivables:

              

U.S. Card Services

                     44        44       43      32
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 236      $ 198      $ 367      $ 801     $ 738      $            106
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

2013 (Millions)

      
 

 
 
 

Loans over
90 Days

Past Due
& Accruing
Interest
 (a)

  
  

  
  
  

   
 
 
Non-
Accrual
Loans
 (b)
  
  
  
   
 
 
 
Loans &
Receivables
Modified
as a TDR
 (c)
  
  
  
  
   
 
 
 
Total
Impaired
Loans &
Receivables
  
  
  
  
   
 
 
Unpaid
Principal
Balance
 (d)
  
  
  
 

Allowance

for TDRs (e)

Card Member Loans:

              

U.S. Card Services

     $ 170      $ 244      $ 373      $ 787     $ 731      $              84

International Card Services

       54        4        5        63       62     

Card Member Receivables:

              

U.S. Card Services

                     50        50       49      38
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 224      $ 248      $ 428      $ 900     $ 842      $            122
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The Company’s policy is generally to accrue interest through the date of write-off (i.e., at 180 days past due). The Company establishes reserves for interest that the Company believes will not be collected. Amounts presented exclude loans modified as a troubled debt restructuring (TDR).

 

  (b)

Non-accrual loans not in modification programs include certain Card Member loans placed with outside collection agencies for which the Company has ceased accruing interest.

 

  (c)

Total loans and receivables modified as a TDR includes $94 million and $92 million that are non-accrual and $23 million and $26 million that are past due 90 days and still accruing interest as of June 30, 2014 and December 31, 2013, respectively.

 

  (d)

Unpaid principal balance consists of Card Member charges billed and excludes other amounts charged directly by the Company such as interest and fees.

 

  (e)

Represents the reserve for losses for TDRs, which are evaluated individually for impairment. The Company records a reserve for losses for all impaired loans. Refer to Card Member Loans Evaluated Individually and Collectively for Impairment in Note 4 for further information regarding the reserve for losses on loans over 90 days past due and accruing interest and non-accrual loans, which are evaluated collectively for impairment.

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information with respect to the Company’s interest income recognized and average balances of impaired Card Member loans, which are not significant for GCS, and Card Member receivables, which are not significant for ICS and GCS, for the three and six months ended June 30:

 

                                                                                           

 

      

 

Three Months Ended

June 30, 2014

  

  

   

 

Six Months Ended

June 30, 2014

2014 (Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average

Balance

Card Member Loans:

          

U.S. Card Services

     $ 9     $ 715     $ 25     $               760

International Card Services

       4       65       8     64

Card Member Receivables:

          

U.S. Card Services

             47            47
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 13     $ 827     $ 33     $               871
    

 

 

   

 

 

   

 

 

   

 

 

      

 

Three Months Ended

June 30, 2013

  

  

   

 

Six Months Ended

June 30, 2013

2013 (Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average

Balance

Card Member Loans:

          

U.S. Card Services

     $ 10     $ 999     $ 22     $            1,041

International Card Services

       4       69       8     69

Card Member Receivables:

          

U.S. Card Services

             91            100
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 14     $ 1,159     $ 30     $            1,210
    

 

 

   

 

 

   

 

 

   

 

 

 

11


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the U.S. Card Services (USCS) Card Member loans and receivables modified as TDRs for the three and six months ended June 30. The ICS and GCS Card Member loans and receivables modifications were not significant. For information on TDRs and the related accounting policies, refer to Note 4 on pages 74 – 76 of the Annual Report.

 

                                                                                                                                                       

 

      

 

Three Months Ended

June 30, 2014

  

  

   

 

Six Months Ended

June 30, 2014

      
 

 

Number of
Accounts

(in thousands)

  
  

  

   
 
 
Outstanding
Balances  (a)(b)
($ in millions)
  
  
  
   
 
 
 
Average
Interest Rate
Reduction
(% Points)
  
  
  
  
   
 
 
 
 
Average
Payment
Term
Extension
(# of Months)
  
  
  
  
  
   
 

 

Number of
Accounts

(in thousands)

  
  

  

   
 
 
Outstanding
Balances  (a)(b)
($ in millions)
  
  
  
   
 
 
 
Average
Interest Rate
Reduction
(% Points)
  
  
  
  
 

Average

Payment

Term

Extension

(# of Months)

Troubled Debt Restructurings:

                  

Card Member Loans

       12     $ 82       11        (c     24     $ 178       12      (c)

Card Member Receivables

       3       41        (c     12       7       88        (c               12 
    

 

 

   

 

 

       

 

 

   

 

 

     

Total

       15     $ 123           31     $ 266      
    

 

 

   

 

 

       

 

 

   

 

 

     

 

      

 

Three Months Ended

June 30, 2013

  

  

   

 

Six Months Ended

June 30, 2013

      
 

 

Number of
Accounts

(in thousands)

  
  

  

   
 
 
Outstanding
Balances (a)  (b)
($ in millions)
  
  
  
   
 
 
 
Average
Interest Rate
Reduction
(% Points)
  
  
  
  
   
 
 
 

 

Average
Payment
Term
Extension

(# of Months)

  
  
  
  

  

   
 

 

Number of
Accounts

(in thousands)

  
  

  

   
 
 
Outstanding
Balances (a)  (b)
($ in millions)
  
  
  
   
 
 
 
Average
Interest Rate
Reduction
(% Points)
  
  
  
  
 

Average

Payment

Term

Extension

(# of Months)

Troubled Debt Restructurings:

                  

Card Member Loans

       12     $ 94       11        (c     35     $ 267       12      (c)

Card Member Receivables

       4       51        (c     12       12       154        (c   12 
    

 

 

   

 

 

       

 

 

   

 

 

     

Total

       16     $ 145           47     $ 421      
    

 

 

   

 

 

       

 

 

   

 

 

     

 

 

  (a)

Represents the outstanding balance immediately prior to modification. Modifications did not reduce the aggregate principal balances except for the six months ended June 30, 2013, where aggregate principal balances were reduced by $4 million.

 

  (b)

The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables.

 

  (c)

For Card Member loans, there have been no payment term extensions. The Company does not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing.

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information for the three and six months ended June 30, 2014 and 2013, with respect to the USCS Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification. A Card Member is considered to have been in default from a modification program after one and up to two consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables. The defaulted ICS Card Member loan and receivable modifications were not significant.

 

                                                                                           

 

      
 
Three Months Ended
June 30, 2014
  
  
   

 

Six Months Ended

June 30, 2014

(Accounts in thousands, Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 
 
Aggregated
Outstanding
Balances
Upon Default
 (a)
  
  
  
  
   
 
Number of
Accounts
  
  
 

Aggregated

Outstanding

Balances

Upon Default (a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

Card Member Loans

       2     $ 20       4     $                  40

Card Member Receivables

       1       11       2     18
    

 

 

   

 

 

   

 

 

   

 

Total

       3     $ 31       6     $                  58
    

 

 

   

 

 

   

 

 

   

 

 

      

 

Three Months Ended

June 30, 2013

  

  

   

 

Six Months Ended

June 30, 2013

(Accounts in thousands, Dollars in millions)

      
 
Number of
Accounts
  
  
   
 
 

 

Aggregated
Outstanding
Balances

Upon Default (a)

  
  
  

  

   
 
Number of
Accounts
  
  
 

Aggregated

Outstanding

Balances

Upon Default (a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

Card Member Loans

       6     $ 53       11     $                101

Card Member Receivables

       1       13       2     25
    

 

 

   

 

 

   

 

 

   

 

Total

       7     $ 66       13     $                126
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables.

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Reserves for Losses

Reserves for losses relating to Card Member loans and receivables represent management’s best estimate of the probable losses inherent in the Company’s outstanding portfolio of loans and receivables, as of the balance sheet date. Management’s evaluation process requires certain estimates and judgments. For information on the Company’s reserves for losses and the related accounting policies, refer to Note 5 on pages 77 – 78 of the Annual Report.

Changes in Card Member Receivables Reserve for Losses

The following table presents changes in the Card Member receivables reserve for losses for the six months ended June 30:

 

                                             

 

(Millions)

       2014    

2013

Balance, January 1

     $ 386     $               428 

Provisions (a)

       398     315 

Net write-offs (b)

       (359   (358)

Other (c)

       (12  
    

 

 

   

 

Balance, June 30

     $ 413     $               386 
    

 

 

   

 

 

 

  (a)

Provisions for principal (resulting from authorized transactions) and fee reserve components.

 

  (b)

Consists of principal (resulting from authorized transactions) and fee components, less recoveries of $180 million and $200 million, including net write-offs from TDRs of $8 million and $19 million, for the six months ended June 30, 2014 and 2013, respectively.

 

  (c)

Beginning in first quarter 2014, reserves for card-related fraud losses of $(7) million are reflected in other liabilities. All periods include foreign currency translation adjustments of nil and $(6) million for the six months ended June 30, 2014 and 2013, respectively, and other items of $(5) million and $7 million for the six months ended June 30, 2014 and 2013, respectively.

Card Member Receivables Evaluated Individually and Collectively for Impairment

The following table presents Card Member receivables evaluated individually and collectively for impairment and related reserves as of June 30, 2014 and December 31, 2013:

 

                                             

 

(Millions)

       2014     

2013

Card Member receivables evaluated individually for impairment (a)

     $ 44      $                  50

Related reserves (a)

     $ 32      $                  38

 

Card Member receivables evaluated collectively for impairment

     $ 45,262      $           44,113

Related reserves (b)

     $ 381      $                348

 

 

  (a)

Represents receivables modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 4 on pages 74 – 76 of the Annual Report for further information.

 

  (b)

The reserves include the quantitative results of analytical models that are specific to individual pools of receivables and reserves for internal and external qualitative risk factors that apply to receivables that are collectively evaluated for impairment and are not specific to any individual pool of receivables.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in Card Member Loans Reserve for Losses

The following table presents changes in the Card Member loans reserve for losses for the six months ended June 30:

 

                                             

 

(Millions)

       2014    

2013

Balance, January 1

     $ 1,261     $            1,471 

Provisions (a)

       532     577 

Net write-offs

      

Principal (b)

       (541   (613)

Interest and fees (b)

       (84   (77)

Other (c)

       2     (16)
    

 

 

   

 

Balance, June 30

     $ 1,170     $            1,342 
    

 

 

   

 

 

 

  (a)

Provisions for principal (resulting from authorized transactions), interest and fee reserves components.

 

  (b)

Consists of principal write-offs (resulting from authorized transactions), less recoveries of $216 million and $230 million, including net write-offs from TDRs of $(2) million and $7 million, for the six months ended June 30, 2014 and 2013, respectively. Recoveries of interest and fees were de minimis.

 

  (c)

Beginning in first quarter 2014, reserves for card-related fraud losses of $(6) million are reflected in other liabilities. All periods include foreign currency translation adjustments of $(1) million and $(11) million for the six months ended June 30, 2014 and 2013, respectively, and other items of $9 million and $(5) million for the six months ended June 30, 2014 and 2013, respectively.

Card Member Loans Evaluated Individually and Collectively for Impairment

The following table presents Card Member loans evaluated individually and collectively for impairment and related reserves as of June 30, 2014 and December 31, 2013:

 

                                             

 

(Millions)

       2014     

2013

Card Member loans evaluated individually for impairment (a)

     $ 323      $                378

Related reserves (a)

     $ 74      $                  84

 

Card Member loans evaluated collectively for impairment (b)

     $ 66,015      $           66,860

Related reserves (b)

     $ 1,096      $             1,177

 

 

  (a)

Represents loans modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 4 on pages 74 – 76 of the Annual Report for further information.

 

  (b)

Represents current loans and loans less than 90 days past due, loans over 90 days past due and accruing interest, and non-accrual loans. The reserves include the quantitative results of analytical models that are specific to individual pools of loans and reserves for internal and external qualitative risk factors that apply to loans that are collectively evaluated for impairment and are not specific to any individual pool of loans.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Investment Securities

Investment securities include debt and equity securities that the Company classifies as available for sale. The Company’s investment securities, principally debt securities, are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in Accumulated Other Comprehensive Income (AOCI), net of income taxes. Realized gains and losses are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. For information on the Company’s methodology for determining the fair value of investment securities and related accounting policies, refer to Note 3 on pages 68 – 71 of the Annual Report.

The following is a summary of investment securities as of June 30, 2014 and December 31, 2013:

 

                                                                                                                               

 

       2014       2013

Description of Securities (Millions)

       Cost       
 
 
Gross
Unrealized
Gains
  
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 

 

Estimated
Fair

Value

  
  

  

    Cost       
 
 
Gross
Unrealized
Gains
  
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
 

Estimated Fair

Value

State and municipal obligations

     $ 3,814     $ 125     $ (4   $ 3,935     $ 4,060     $ 54     $ (79   $         4,035

U.S. Government agency obligations

       3                   3       3                 3

U.S. Government treasury obligations

       346       4             350       318       3       (1   320

Corporate debt securities

       44       2             46       43       3           46

Mortgage-backed securities (a)

       144       7             151       160       5       (1   164

Equity securities (b)

       6       18             24       29       95           124

Foreign government bonds and obligations

       288       9             297       272       5       (1   276

Other (c)

       50             (1     49       50             (2   48
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 4,695     $ 165     $ (5   $ 4,855     $ 4,935     $ 165     $ (84   $         5,016
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

 

  (b)

Primarily represents the Company’s investment in the Industrial and Commercial Bank of China (ICBC).

 

  (c)

Other comprises investments in various mutual funds.

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information about the Company’s investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2014 and December 31, 2013:

 

                                                                                                                               

 

       2014       2013
       Less than 12 months        12 months or more        Less than 12 months        12 months or more

Description of Securities (Millions)

      
 
Estimated
Fair Value
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 
Estimated
Fair Value
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 
Estimated
Fair Value
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 
Estimated
Fair Value
  
  
 

Gross Unrealized Losses

State and municipal obligations

     $     $     $ 83     $ (4   $ 1,320     $ (63   $ 106     $           (16)

Foreign government bonds and obligations

                               208       (1         — 

U.S. Government treasury obligations

                               166       (1         — 

Mortgage-backed securities

                               35       (1         — 

Other

                   33       (1     30       (1     17     (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $     $     $ 116     $ (5   $ 1,759     $ (67   $ 123     $           (17)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of June 30, 2014 and December 31, 2013:

 

                                                                                                                                               

 

       Less than 12 months        12 months or more        Total

Ratio of Fair Value to

Amortized Cost (Dollars in millions)

      
 
Number of
Securities
  
  
   
 
Estimated
Fair Value
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 
Number of
Securities
  
  
   
 
Estimated
Fair Value
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 
Number of
Securities
  
  
   
 
Estimated
Fair Value
  
  
 

Gross Unrealized Losses

2014:

                    

90%–100%

           $     $       19     $ 116     $ (5     19     $ 116     $             (5)

Less than 90%

                                                     — 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of June 30, 2014

           $     $       19     $ 116     $ (5     19     $ 116     $             (5)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

2013:

                    

90%–100%

       228     $ 1,665     $ (53     6     $ 24     $ (2     234     $ 1,689     $           (55)

Less than 90%

       13       94       (14     5       99       (15     18       193     (29)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of December 31, 2013

       241     $ 1,759     $ (67     11     $ 123     $ (17     252     $ 1,882     $           (84)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

The gross unrealized losses are attributed to overall wider credit spreads for state and municipal securities, wider credit spreads for specific issuers, adverse changes in market benchmark interest rates, or a combination thereof, all as compared to those prevailing when the investment securities were acquired.

Overall, for the investment securities in gross unrealized loss positions (i) the Company does not currently intend to sell the investment securities, (ii) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (iii) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the periods presented.

Supplemental Information

Gross realized gains on the sales of investment securities, included in other non-interest revenues for the three and six months ended June 30, 2014 were $41 million and $80 million, respectively. Gross realized gains on the sale of investment securities, included in other non-interest revenues for the three and six months ended June 30, 2013 were, $29 million and $65 million, respectively. There were no realized losses for the three and six months ended June 30, 2014 and 2013.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Contractual maturities of investment securities, excluding equity securities and other securities, as of June 30, 2014 were as follows:

 

                                             

 

(Millions)

       Cost     

Estimated

Fair Value

Due within 1 year

     $ 426      $                426

Due after 1 year but within 5 years

       521      529

Due after 5 years but within 10 years

       210      225

Due after 10 years

       3,482      3,602
    

 

 

    

 

Total

     $ 4,639      $             4,782
    

 

 

    

 

 

The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because the issuers have the right to call or prepay certain obligations.

 

6. Asset Securitizations

The Company periodically securitizes Card Member receivables and loans arising from its card business through the transfer of those assets to securitization trusts. The trusts then issue securities to third-party investors, collateralized by the transferred assets. For information on the Company’s asset securitizations and related accounting policies, refer to Note 7 on page 80 of the Annual Report.

The following table provides information on the restricted cash held by the American Express Issuance Trust II (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust) as of June 30, 2014 and December 31, 2013, included in other assets on the Company’s Consolidated Balance Sheets:

 

                                             

 

(Millions)

       2014     

2013

Charge Trust

     $ 1      $                  2

Lending Trust

       67      56
    

 

 

    

 

Total

     $ 68      $                58
    

 

 

    

 

 

These amounts relate to collections of Card Member receivables and loans to be used by the trusts to fund future expenses and obligations, including interest paid on investor securities, credit losses and upcoming debt maturities.

American Express Travel Related Services Company, Inc. (TRS), which is a consolidated subsidiary of the Company, is the primary beneficiary of both the trusts. Excluding its consolidated subsidiaries, TRS owns approximately $0.9 billion of subordinated securities issued by the Lending Trust as of June 30, 2014.

Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each trust could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor securities. During the six months ended June 30, 2014 and the year ended December 31, 2013, no such triggering events occurred.

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Customer Deposits

As of June 30, 2014 and December 31, 2013, customer deposits were categorized as interest bearing or non-interest bearing, as follows:

 

                                             

 

(Millions)

       2014     

2013

U.S.:

       

Interest bearing

     $ 41,295      $           40,831

Non-interest bearing (includes Card Member credit balances of: 2014, $306; 2013, $340)

       336      360

Non-U.S.:

       

Interest bearing

       108      121

Non-interest bearing (includes Card Member credit balances of: 2014, $381; 2013, $437)

       397      451
    

 

 

    

 

Total customer deposits

     $ 42,136      $           41,763
    

 

 

    

 

 

Customer deposits by deposit type as of June 30, 2014 and December 31, 2013 were as follows:

 

                                             

 

(Millions)

       2014     

2013

U.S. retail deposits:

       

Savings accounts – Direct

     $ 26,107      $           24,550

Certificates of deposit:

       

Direct

       382      489

Third-party

       5,907      6,929

Sweep accounts – Third-party

       8,899      8,863

Other retail deposits:

       

Non-U.S. deposits and U.S. non-interest bearing deposits

       154      155

Card Member credit balances — U.S. and non-U.S.

       687      777
    

 

 

    

 

Total customer deposits

     $ 42,136      $           41,763
    

 

 

    

 

 

The scheduled maturities of certificates of deposit as of June 30, 2014 were as follows:

 

                                                                    

 

(Millions)

       U.S.        Non-U.S.     

Total

2014

     $ 1,539     $ 3     $             1,542

2015

       1,257       1     1,258

2016

       1,680           1,680

2017

       575           575

2018

       1,043           1,043

After 5 years

       195           195
    

 

 

   

 

 

   

 

Total

     $ 6,289     $ 4     $             6,293
    

 

 

   

 

 

   

 

 

As of June 30, 2014 and December 31, 2013, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:

 

                                             

 

(Millions)

       2014     

2013

U.S.

     $ 129      $                148

Non-U.S.

       1     
    

 

 

    

 

Total

     $ 130      $                148
    

 

 

    

 

 

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. Derivatives derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity index or price. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not engage in derivatives for trading purposes. For information on the Company’s derivative instruments and the related accounting policies, refer to Note 12 on pages 87 – 90 of the Annual Report.

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of June 30, 2014 and December 31, 2013, the Company does not have derivative positions that warrant credit valuation adjustments.

The Company’s derivatives are carried at fair value on the Consolidated Balance Sheets. Refer to Note 3 on pages 68 – 71 of the Annual Report for a description of the Company’s methodology for determining the fair value of derivatives.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2014 and December 31, 2013:

 

                                                                                           

 

      
 
Other Assets
Fair Value
  
  
   

 

Other Liabilities

Fair Value

(Millions)

       2014       2013       2014    

2013

Derivatives designated as hedging instruments:

          

Interest rate contracts

          

Fair value hedges

     $ 393     $ 455     $ 1     $                   2 

Total return contract

          

Fair value hedge

       1       8           — 

Foreign exchange contracts

          

Net investment hedges

       39       174       148     116 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives designated as hedging instruments

       433       637       149     118 

Derivatives not designated as hedging instruments:

          

Foreign exchange contracts, including certain embedded derivatives (a)

       69       64       72     95 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, gross

       502       701       221     213 

Less: Cash collateral netting (b)

       (279     (336     (1   — 

Derivative asset and derivative liability netting (c)

       (46 )      (36     (46 )    (36)
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, net (d)

     $ 177     $ 329     $ 174     $               177 
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Includes foreign currency derivatives embedded in certain operating agreements.

 

  (b)

Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. Additionally, the Company posted $66 million and $26 million as of June 30, 2014 and December 31, 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within other receivables on the Company’s Consolidated Balance Sheets and are not netted against the derivative balances.

 

  (c)

Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.

 

  (d)

The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within other assets and other liabilities on the Company’s Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of June 30, 2014 and December 31, 2013 are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Company’s Consolidated Balance Sheets.

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Derivative Financial Instruments that Qualify for Hedge Accounting

Refer to Note 12 on pages 89 – 90 of the Annual Report for information on derivatives that qualify for hedge accounting.

Fair Value Hedges

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of June 30, 2014 and December 31, 2013, the Company hedged $17.6 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedges its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company uses a total return contract (TRC) to transfer this exposure to its derivative counterparty. As of June 30, 2014 and December 31, 2013, the fair value of the equity investment in ICBC was $21.7 million (34.3 million shares) and $122 million (180.7 million shares), respectively. To the extent the hedge is effective, the gain or loss on the TRC offsets the loss or gain on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item results in hedge ineffectiveness and is recognized in other expenses in the Consolidated Statements of Income.

On July 18, 2014, the Company sold its remaining 34.3 million shares in ICBC and terminated the TRC.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s hedges of its fixed-rate long-term debt and its investment in ICBC for the three and six months ended June 30:

 

                                                                                               

 

For the Three Months Ended June 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   

 

Net hedge

ineffectiveness

Derivative relationship

    

Income Statement

Line Item

       Amount     

Income Statement

Line Item

       Amount     
            2014        2013             2014        2013        2014     

2013

Interest rate contracts

    

Other expenses

     $ (10   $ (190  

Other expenses

     $ 14      $ 180      $ 4      $     (10)

Total return contract

    

Other non-interest revenues

       (1     27     

Other non-interest revenues

       1        (27         

 

 

                                                                                               

 

For the Six Months Ended June 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   

 

Net hedge

ineffectiveness

Derivative relationship

    

Income Statement

Line Item

       Amount     

Income Statement

Line Item

       Amount     
            2014        2013             2014        2013        2014     

2013

Interest rate contracts

    

Other expenses

     $ (60   $ (293  

Other expenses

     $ 64      $ 289      $ 4      $     (4)

Total return contract

    

Other non-interest revenues

       11        31     

Other non-interest revenues

       (11     (31         

 

The Company also recognized a net reduction in interest expense on long-term debt of $74 million and $91 million for the three months ended June 30, 2014 and 2013, respectively, and $143 million and $203 million for the six months ended June 30, 2014 and 2013, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was $(116) million and $339 million for the three months ended June 30, 2014 and 2013, respectively, and was $(133) million and $283 million for the six months ended June 30, 2014 and 2013, respectively. Any ineffective portion of the gain or (loss) on net investment hedges is recognized in other expenses during the period of change. During the three months ended June 30, 2014 and 2013, the Company reclassified $(7) million and nil, respectively, and $(9) million and nil for the six months ended June 30, 2014 and 2013, respectively, from AOCI to earnings as a component of other expenses. No ineffectiveness associated with net investment hedges was reclassified from AOCI into income during the three and six months ended June 30, 2014 and 2013.

 

21


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Derivatives Not Designated as Hedges

For information on derivatives not designated as hedges, refer to Note 12 on page 90 of the Annual Report.

The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated Statements of Income for the three and six months ended June 30:

 

                                                                    

 

For the Three Months Ended June 30:

    

Pretax gains

            Amount

Description (Millions)

    

Income Statement Line Item

       2014    

2013

Interest rate contracts

     Other expenses      $     $                     1 

Foreign exchange contracts (a)

     Other expenses        (50   (89)
     Cost of Card Member services                                 2     — 
         

 

 

   

 

Total

          $ (48   $                  (88)
         

 

 

   

 

 

           

 

For the Six Months Ended June 30:

    

Pretax gains

            Amount

Description (Millions)

    

Income Statement Line Item

       2014    

2013

Foreign exchange contracts (a)

     Other expenses      $ 83     $                    82
    

Cost of Card Member services

       3    
         

 

 

   

 

Total

          $ 86     $                    82
         

 

 

   

 

 

 

  (a)

Foreign exchange contracts include embedded foreign currency derivatives.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Fair Values

Financial Assets and Financial Liabilities Carried at Fair Value

For information about the Company’s valuation techniques for financial assets and financial liabilities measured at fair value and the fair value hierarchy, refer to Note 3 on pages 68 – 70 of the Annual Report. Refer to Note 12 on pages 87 – 90 of the Annual Report for additional information about the fair value of the Company’s derivative financial instruments.

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy, as of June 30, 2014 and December 31, 2013:

 

                                                                                                                               

 

       2014       2013

(Millions)

       Total        Level 1        Level 2        Level 3        Total        Level 1        Level 2     

Level 3

Assets:

                  

Investment securities: (a)

                  

Equity securities

     $ 24     $ 24     $     $     $ 124     $ 124     $     $           —

Debt securities and other

       4,831       350       4,481             4,892       320       4,572    

Derivatives (a)

       502             502             701             701    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total assets

       5,357       374       4,983             5,717       444       5,273    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Liabilities:

                  

Derivatives (a)

       221             221             213             213    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total liabilities

     $ 221     $     $ 221     $     $ 213     $     $ 213     $           —
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Refer to Note 5 for the fair values of investment securities and to Note 8 for the fair values of derivative assets and liabilities, on a further disaggregated basis.

Financial Assets and Financial Liabilities Carried at Other Than Fair Value

For information about the valuation techniques used in the measurement of financial assets and financial liabilities carried at other than fair value, refer to Note 3 on pages 70 – 71 of the Annual Report.

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table discloses the estimated fair value for the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of June 30, 2014 and December 31, 2013. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2014 and December 31, 2013, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be reliably estimated by aggregating the amounts presented.

 

                                                                               

 

      
 
Carrying
Value
  
  
    Corresponding Fair Value Amount

2014 (Billions)

         Total        Level 1        Level 2     

Level 3

Financial Assets:

            

Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

     $ 18         $ 18     $ 17         $ 1  (a)     $           —

Other financial assets (b)

     $ 49     $ 49     $     $ 49     $           —

Financial assets carried at other than fair value

            

Loans, net

     $ 66     $ 66  (c)    $     $     $           66

Financial Liabilities:

            

Financial liabilities for which carrying values equal or approximate fair value

     $ 60     $ 60     $     $ 60     $           —

Financial liabilities carried at other than fair value

            

Certificates of deposit (d)

     $ 6     $ 6     $     $ 6     $           —

Long-term debt

     $ 55     $ 57  (c)    $     $ 57     $           —

 

            

 

      
 
Carrying
Value
  
  
    Corresponding Fair Value Amount

2013 (Billions)

         Total        Level 1        Level 2     

Level 3

Financial Assets:

            

Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

     $ 19     $ 19     $ 17     $ 2  (a)     $           —

Other financial assets (b)

     $ 48     $ 48     $     $ 48     $           —

Financial assets carried at other than fair value

            

Loans, net

     $ 67     $ 67  (c)    $     $     $           67

Financial Liabilities:

            

Financial liabilities for which carrying values equal or approximate fair value

     $ 60     $ 60     $     $ 60     $           —

Financial liabilities carried at other than fair value

            

Certificates of deposit (d)

     $ 7     $ 8     $     $ 8     $           —

Long-term debt

     $ 55     $ 58  (c)    $     $ 58     $           —

 

 

  (a)

Reflects time deposits.

 

  (b)

Includes accounts receivable (including fair values of Card Member receivables of $6.5 billion and $7.3 billion held by consolidated VIEs as of June 30, 2014 and December 31, 2013, respectively), restricted cash and other miscellaneous assets.

 

  (c)

Includes fair values of loans of $28.7 billion and $31.0 billion, and long-term debt of $15.6 billion and $18.8 billion held by consolidated VIEs as of June 30, 2014 and December 31, 2013, respectively.

 

  (d)

Presented as a component of customer deposits on the Consolidated Balance Sheets.

Nonrecurring Fair Value Measurements

The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the six months ended June 30, 2014 and during the year ended December 31, 2013, the Company did not have any material impaired assets that were required to be measured at fair value.

 

24


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10. Guarantees

The Company provides Card Member protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business.

In relation to its maximum potential undiscounted future payments as shown in the table that follows, to date the Company has not experienced any significant losses related to guarantees. The Company’s initial recognition of guarantees is at fair value. In addition, the Company establishes reserves when a loss is probable and the amount can be reasonably estimated.

The following table provides information related to such guarantees as of June 30, 2014 and December 31, 2013:

 

                                                                                           

 

      
 
 
 
Maximum potential
undiscounted future
payments
 (a)
(Billions)
  
  
  
  
   

 

Related liability (b)

(Millions)

Type of Guarantee

       2014       2013       2014    

2013

Card and travel operations (c)

     $ 44     $ 44     $ 45     $                  88

Other  (d)

       1       1       80     73
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 45     $ 45     $ 125     $                161
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The maximum potential undiscounted future payments for Merchant Protection are measured using management’s best estimate of maximum exposure based on all eligible claims in relation to annual billed business volumes.

 

  (b)

Included in other liabilities on the Company’s Consolidated Balance Sheets.

 

  (c)

Primarily includes Return Protection and Merchant Protection.

 

  (d)

Primarily includes guarantees related to the Company’s business dispositions and real estate.

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. Changes In Accumulated Other Comprehensive (Loss) Income

AOCI is a balance sheet item in the Shareholders’ Equity section of the Company’s Consolidated Balance Sheets. It is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component of AOCI for the three and six months ended June 30, 2014 and 2013 were as follows:

 

                                                                                           

 

 

For the Three Months Ended June 30, 2014 (Millions), net of tax

      
 
 
 
Net Unrealized
Gains (Losses)
on Investment
Securities
  
  
  
  
    
 
 
Foreign Currency
Translation
Adjustments
  
  
  
    
 
 
 

 

Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)

Gains

  
  
  
  

  

    
 
 
 
Accumulated
Other
Comprehensive
(Loss) Income
  
  
  
  

Balances as of March 31, 2014

     $ 102      $ (1,124    $ (372    $ (1,394
    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized gains

       32              32  

Reclassification for realized (gains) losses into earnings

       (29      3           (26

Net translation gain of investments in foreign operations

          119           119  

Net (losses) related to hedges of investment in foreign operations

          (116         (116

Pension and other postretirement benefit gains

             14        14  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive income

       3        6        14        23  
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of June 30, 2014

     $ 105      $ (1,118    $ (358    $ (1,371

 

 

 

                                                                                           

 

 

For the Six Months Ended June 30, 2014 (Millions), net of tax

      
 
 
 
Net Unrealized
Gains (Losses)
on Investment
Securities
  
  
  
  
    
 
 
Foreign Currency
Translation
Adjustments
  
  
  
    
 
 
 
 
Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)
Gains
  
  
  
  
  
    
 
 
 
Accumulated
Other
Comprehensive
(Loss) Income
  
  
  
  

Balances as of December 31, 2013

     $ 63      $ (1,090    $ (399    $ (1,426
    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized gains

       100              100  

Reclassification for realized (gains) losses into earnings

       (58      4           (54

Net translation gain of investments in foreign operations

          101           101  

Net (losses) related to hedges of investment in foreign operations

          (133         (133

Pension and other postretirement benefit gains

             41        41  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive income (loss)

       42        (28      41        55  
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of June 30, 2014

     $ 105      $ (1,118    $ (358    $ (1,371

 

 

 

                                                                                           

 

 

For the Three Months Ended June 30, 2013 (Millions), net of tax

      
 
 
 
Net Unrealized
Gains (Losses)
on Investment
Securities
  
  
  
  
    
 
 
Foreign Currency
Translation
Adjustments
  
  
  
    
 
 
 
 
Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)
Gains
  
  
  
  
  
    
 
 
 
Accumulated
Other
Comprehensive
(Loss) Income
  
  
  
  

Balances as of March 31, 2013

     $ 280      $ (799    $ (461    $ (980
    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized (losses)

       (104            (104

Reclassification for realized (gains) into earnings

       (23            (23

Net translation (loss) of investments in foreign operations

          (567         (567

Net gains related to hedges of investment in foreign operations

          339           339  

Pension and other postretirement benefit gains

             27        27  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive (loss) income

       (127      (228      27        (328
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of June 30, 2013

     $ 153      $ (1,027    $ (434    $ (1,308

 

 

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

                                                                                           

 

 

For the Six Months Ended June 30, 2013 (Millions), net of tax

      
 
 
 
Net Unrealized
Gains (Losses)
on Investment
Securities
  
  
  
  
    
 
 
Foreign Currency
Translation
Adjustments
  
  
  
    
 
 
 

 

Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)

Gains

  
  
  
  

  

    
 
 
 
Accumulated
Other
Comprehensive
(Loss) Income
  
  
  
  

Balances as of December 31, 2012

     $ 315      $ (754    $ (488    $ (927
    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized (losses)

       (116            (116

Reclassification for realized (gains) into earnings

       (46            (46

Net translation (loss) of investments in foreign operations

          (556         (556

Net gains related to hedges of investment in foreign operations

          283           283  

Pension and other postretirement benefit gains

             54        54  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive (loss) income

       (162      (273      54        (381
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of June 30, 2013

     $ 153      $ (1,027    $ (434    $ (1,308

 

 

The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statement of Income for the three and six months ended June 30, 2014 and 2013:

 

        

 

       (Gains) losses recognized in income

For the three months ended June 30

         2014    

2013

Description (Millions)

       Income Statement Line Item        Amount     

Amount

Available-for-sale securities

        

Net gain in AOCI reclassifications for previously unrealized net gains on investment securities

      

Other non-interest revenues

     $ (45   $        (36)

Related income tax expense

      

Income tax provision

       16     13 
      

 

 

   

 

Reclassification to net income related to available-for-sale securities

         (29   (23)
      

 

 

   

 

Foreign currency translation adjustments

        

Reclassification of realized losses on translation adjustments and related hedges

      

Other expenses

       6     — 

Related income tax expense

      

Income tax provision

       (3   — 
      

 

 

   

 

Reclassification of foreign currency translation adjustments

         3     — 
      

 

 

   

 

Total

       $ (26   $        (23)

 

 

        

 

       (Gains) losses recognized in income

For the six months ended June 30

         2014    

2013

Description (Millions)

       Income Statement Line Item        Amount     

Amount

Available-for-sale securities

        

Net gain in AOCI reclassifications for previously unrealized net gains on investment securities

      

Other non-interest revenues

     $ (90   $        (72)

Related income tax expense

      

Income tax provision

       32     26 
      

 

 

   

 

Reclassification to net income related to available-for-sale securities

         (58   (46)
      

 

 

   

 

Foreign currency translation adjustments

         .

Reclassification of realized losses on translation adjustments and related hedges

      

Other expenses

       8     — 

Related income tax expense

      

Income tax provision

       (4   — 
      

 

 

   

 

Reclassification of foreign currency translation adjustments

         4     — 
      

 

 

   

 

Total

       $ (54   $        (46)

 

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Income Taxes

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2011.

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $697 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $697 million of unrecognized tax benefits, approximately $538 million relates to amounts that if recognized would be recorded to shareholders’ equity and would not impact the effective tax rate. With respect to the remaining $159 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years’ items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).

The effective tax rate was 33.9 percent and 34.5 percent for the three and six months ended June 30, 2014, respectively. The effective tax rate was 29.6 percent and 31.2 percent for the three and six months ended June 30, 2013, respectively. The tax rate for the three and six months ended June 30, 2013 reflects the resolution of certain prior years’ tax items.

The tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13. Earnings Per Common Share (EPS)

The computations of basic and diluted EPS were as follows:

 

           

 

 
      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,
  
  

(Millions, except per share amounts)

       2014       2013       2014       2013  

Numerator:

          

Basic and diluted:

          

Net income

     $ 1,529     $ 1,405     $ 2,961     $ 2,685  

Earnings allocated to participating share awards (a)

       (12     (13     (24     (24
    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

     $ 1,517     $ 1,392     $ 2,937     $ 2,661  
    

 

 

   

 

 

   

 

 

   

 

 

 

Denominator: (a)

          

Basic: Weighted-average common stock

       1,052       1,090       1,056       1,094  

Add: Weighted-average stock options (b)

       6       7       6       7  
    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       1,058       1,097       1,062       1,101  
    

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS

     $ 1.44     $ 1.28     $ 2.78     $ 2.43  

Diluted EPS

     $ 1.43     $ 1.27     $ 2.77     $ 2.42  

 

 

 

  (a)

The Company’s unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator.

 

  (b)

The dilutive effect of unexercised stock options excludes 0.2 million of options from the computation of EPS for all periods because inclusion of the options would have been anti-dilutive.

For the three and six months ended June 30, 2014 and 2013, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, and maturing in 2036, which resulted in no impact to EPS. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Non-Interest Revenue and Expense Detail

The following is a detail of other commissions and fees:

 

                                                                                           

 

      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,

(Millions)

       2014       2013       2014    

2013

Foreign currency conversion fee revenue

     $ 227     $ 222     $ 440     $                432

Delinquency fees

       174       167       355     331

Loyalty Partner-related fees

       95       72       186     147

Service fees

       90       94       180     176

Other  (a)

       38       50       81     92
    

 

 

   

 

 

   

 

 

   

 

Total other commissions and fees

     $ 624     $ 605     $ 1,242     $             1,178
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Other primarily includes fee revenue from fees related to Membership Rewards programs.

The following is a detail of other revenues:

 

                                                                                           

 

      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,

(Millions)

       2014       2013       2014    

2013

Global Network Services partner revenues

     $ 181     $ 151     $ 339     $                295

Net realized gains and losses on investment securities

       41       29       80     65

Other  (a)

       363       387       667     744
    

 

 

   

 

 

   

 

 

   

 

Total other revenues

     $ 585     $ 567     $ 1,086     $             1,104
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Other includes revenues arising from foreign exchange gains on cross-border Card Member spending, merchant-related fees, insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques-related revenues, and other miscellaneous revenue and fees.

The following is a detail of marketing, promotion, rewards, Card Member services and other:

 

                                                                                           

 

      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,

(Millions)

       2014       2013       2014    

2013

Marketing and promotion

     $ 985     $ 786     $ 1,598     $             1,407

Card Member rewards

       1,773       1,601       3,355     3,121

Card Member services and other

       192       193       414     382
    

 

 

   

 

 

   

 

 

   

 

Total marketing, promotion, rewards, Card Member services and other

     $ 2,950     $ 2,580     $ 5,367     $             4,910
    

 

 

   

 

 

   

 

 

   

 

 

Marketing and promotion expense includes advertising costs, which are expensed in the year in which the advertising first takes place. Card Member rewards expense includes the costs of rewards programs, including Membership Rewards and co-brand arrangements. Card Member services expense includes protection plans and complimentary services provided to Card Members.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a detail of other, net expenses:

 

                                                                                           

 

      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,

(Millions)

       2014       2013       2014    

2013

Professional services

     $ 817     $ 763     $ 1,509     $            1,479

Occupancy and equipment

       467       460       929     932

Card-related fraud losses

       102       75       186     156

Communications

       101       92       194     188

Gain on business travel joint venture transaction

       (626            (626  

Other  (a)

       387       219       605     465
    

 

 

   

 

 

   

 

 

   

 

Total other, net

     $ 1,248     $ 1,609     $ 2,797     $            3,220
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

Other expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations (other than for the business travel joint venture transaction), litigation, certain internal and regulatory review-related reimbursements and insurance costs or settlements, investment impairments and certain Loyalty Partner-related expenses.

 

15. Contingencies

The Company and its subsidiaries are involved in a number of legal proceedings concerning matters arising out of the conduct of their respective business activities and are periodically subject to governmental and regulatory examinations, information gathering requests, subpoenas, inquiries and investigations (collectively, governmental examinations). As of June 30, 2014, the Company and various of its subsidiaries were named as a defendant or were otherwise involved in numerous legal proceedings and governmental examinations in various jurisdictions, both in and outside the U.S. The Company discloses its material legal proceedings and governmental examinations under Item 1. “Legal Proceedings” in Part II. “Other Information”, and under “Legal Proceedings” in the Annual Report (collectively, Legal Proceedings).

The Company has recorded liabilities for certain of its outstanding legal proceedings and governmental examinations. A liability is accrued when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. There may be instances in which an exposure to loss exceeds the accrued liability. The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the liability that has been previously accrued or a revision to the disclosed estimated range of possible losses, as applicable.

The Company’s legal proceedings range from cases brought by a single plaintiff to class actions with millions of putative class members. These legal proceedings, as well as governmental examinations, involve various lines of business of the Company and a variety of claims (including, but not limited to, common law tort, contract, antitrust and consumer protection claims), some of which present novel factual allegations and/or unique legal theories. While some matters pending against the Company specify the damages claimed by the plaintiff, many seek an unspecified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company are stated, the claimed amount may be exaggerated and/or unsupported. As a result, some matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss.

Other matters have progressed sufficiently through discovery and/or development of important factual information and legal issues so that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed or referred to in Legal Proceedings where a loss is reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a range of possible loss, the current estimated range is $0 to $360 million in excess of any accrued liability related to these matters.

 

31


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

This aggregate range represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimated range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time and actual results may vary significantly from current estimates.

Based on its current knowledge, and taking into consideration its litigation-related liabilities, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s earnings for that period.

 

32


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Reportable Operating Segments

The Company is a leading global payments and travel company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICS, GCS and Global Network Merchant Services (GNMS). Corporate functions and auxiliary businesses, including the Company’s Enterprise Growth Group, as well as other Company operations are included in Corporate & Other.

The following table presents certain selected financial information for the three and six months ended June 30:

 

                                                                                           

 

      
 
Three Months Ended
June 30,
  
  
   
 
Six Months Ended
June 30,

(Millions)

       2014       2013       2014    

2013

Non-interest revenues:

          

USCS

     $ 3,222     $ 3,063     $ 6,239     $            5,941 

ICS

       1,208       1,130       2,365     2,254 

GCS

       1,332       1,290       2,581     2,510 

GNMS

       1,366       1,313     &n