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 March 31, 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 April 18, 2014

 
Common Shares (par value $.20 per share)       1,058,605,218 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 March 31, 2014 and 2013

     1   
     

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2014 and 2013

     2   
     

Consolidated Balance Sheets – March 31, 2014 and December 31, 2013

     3   
     

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2014 and 2013

     4   
     

Notes to Consolidated Financial Statements

     5   
  

Item 2.

  

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

     27   
  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     63   
  

Item 4.

  

Controls and Procedures

     63   
Part II.    Other Information   
  

Item 1.

  

Legal Proceedings

     67   
  

Item 1A.

  

Risk Factors

     67   
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     68   
  

Item 5.

  

Other Information

     69   
  

Item 6.

  

Exhibits

     69   
  

Signatures

     70   
  

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 March 31 (Millions, except per share amounts)

       2014     

2013

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 4,646      $             4,438

Net card fees

       674      653

Travel commissions and fees

       423      437

Other commissions and fees

       618      573

Other

       501      537
    

 

 

    

 

Total non-interest revenues

       6,862      6,638
    

 

 

    

 

Interest income

       

Interest on loans

       1,711      1,683

Interest and dividends on investment securities

       46      53

Deposits with banks and other

       19      26
    

 

 

    

 

Total interest income

       1,776      1,762
    

 

 

    

 

Interest expense

       

Deposits

       94      114

Long-term debt and other

       345      405
    

 

 

    

 

Total interest expense

       439      519
    

 

 

    

 

Net interest income

       1,337      1,243
    

 

 

    

 

Total revenues net of interest expense

       8,199      7,881
    

 

 

    

 

Provisions for losses

       

Charge card

       215      154

Card Member loans

       250      243

Other

       20      19
    

 

 

    

 

Total provisions for losses

       485      416
    

 

 

    

 

Total revenues net of interest expense after provisions for losses

       7,714      7,465
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and Card Member services

       2,417      2,330

Salaries and employee benefits

       1,540      1,615

Other, net

       1,549      1,611
    

 

 

    

 

Total expenses

       5,506      5,556
    

 

 

    

 

Pretax income

       2,208      1,909

Income tax provision

       776      629
    

 

 

    

 

Net income

     $ 1,432      $             1,280
    

 

 

    

 

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

       

Basic

     $ 1.34      $               1.15

Diluted

     $ 1.33      $               1.15
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,060      1,099

Diluted

       1,067      1,106

Cash dividends declared per common share

     $ 0.23      $               0.20

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $12 million and $11 million for the three months ended March 31, 2014 and 2013, respectively.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

                                             

 

Three Months Ended March 31 (Millions)

       2014    

2013

Net income

     $ 1,432     $             1,280 

Other comprehensive income (loss):

      

Net unrealized securities gains (losses), net of tax of: 2014, $23; 2013, $(18)

       39     (35)

Foreign currency translation adjustments, net of tax of: 2014, $(23); 2013, $(11)

       (34   (45)

Net unrealized pension and other postretirement benefit gains, net of tax of: 2014, $15; 2013, $21

       27     27 
    

 

 

   

 

Other comprehensive income (loss)

       32     (53)
    

 

 

   

 

Comprehensive income

     $ 1,464     $             1,227 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                             

 

(Millions, except per share data)

      
 
March 31,
2014
  
 
 

December 31,

2013

Assets

      

Cash and cash equivalents

      

Cash and due from banks

     $ 2,493     $            2,212 

Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2014, $241; 2013, $143)

       17,909     16,776 

Short-term investment securities

       338     498 
    

 

 

   

 

Total cash and cash equivalents

       20,740     19,486 

Accounts receivable

      

Card Member receivables (includes gross receivables available to settle obligations of consolidated variable interest entities: 2014, $6,387; 2013, $7,329), less reserves: 2014, $414; 2013, $386

       44,240     43,777 

Other receivables, less reserves: 2014, $66; 2013, $71

       3,134     3,408 

Loans

      

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2014, $28,687; 2013, $31,245), less reserves: 2014, $1,191; 2013, $1,261

       62,825     65,977 

Other loans, less reserves: 2014, $9; 2013, $13

       651     608 

Investment securities

       4,761     5,016 

Premises and equipment, less accumulated depreciation and amortization: 2014, $6,090; 2013, $5,978

       3,893     3,875 

Other assets (includes restricted cash of consolidated variable interest entities: 2014, $698; 2013, $58)

       11,253     11,228 
    

 

 

   

 

Total assets

     $ 151,497     $        153,375 
    

 

 

   

 

Liabilities and Shareholders’ Equity

      

Liabilities

      

Customer deposits

     $ 42,671     $          41,763 

Travelers Cheques and other prepaid products

       3,843     4,240 

Accounts payable

       11,844     10,615 

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

       2,821     5,021 

Long-term debt (includes debt issued by consolidated variable interest entities: 2014, $15,192; 2013, $18,690)

       54,095     55,330 

Other liabilities

       16,246     16,910 
    

 

 

   

 

Total liabilities

       131,520     133,879 
    

 

 

   

 

Contingencies (Note 15)

      

Shareholders’ Equity

      

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,059 million shares as of March 31, 2014 and 1,064 million shares as of December 31, 2013

       212     213 

Additional paid-in capital

       12,337     12,202 

Retained earnings

       8,822     8,507 

Accumulated other comprehensive income (loss)

      

Net unrealized securities gains, net of tax of: 2014, $56; 2013, $33

       102     63 

Foreign currency translation adjustments, net of tax of: 2014, $(549); 2013, $(526)

       (1,124   (1,090)

Net unrealized pension and other postretirement benefit losses, net of tax of: 2014, $(162); 2013, $(177)

       (372   (399)
    

 

 

   

 

Total accumulated other comprehensive loss

       (1,394   (1,426)
    

 

 

   

 

Total shareholders’ equity

       19,977     19,496 
    

 

 

   

 

Total liabilities and shareholders’ equity

     $ 151,497     $        153,375 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                             

 

Three Months Ended March 31 (Millions)

       2014    

2013

Cash Flows from Operating Activities

      

Net income

     $ 1,432     $            1,280 

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

      

Provisions for losses

       485     416 

Depreciation and amortization

       249     245 

Deferred taxes and other

       44     83 

Stock-based compensation

       88     96 

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

      

Other receivables

       297     486 

Other assets

       478     330 

Accounts payable and other liabilities

       607     4,946 

Travelers Cheques and other prepaid products

       (395   (335)
    

 

 

   

 

Net cash provided by operating activities

       3,285     7,547 
    

 

 

   

 

Cash Flows from Investing Activities

      

Sale of investments

       44     80 

Maturity and redemption of investments

       354     187 

Purchase of investments

       (71   (472)

Net decrease in Card Member loans/receivables

       2,072     1,510 

Purchase of premises and equipment, net of sales: 2014, $2; 2013, $4

       (226   (204)

Acquisitions/dispositions, net of cash acquired

       (6   (11)

Net increase in restricted cash

       (610   (1,058)
    

 

 

   

 

Net cash provided by investing activities

       1,557     32 
    

 

 

   

 

Cash Flows from Financing Activities

      

Net increase in customer deposits

       918     1,141 

Net (decrease) increase in short-term borrowings

       (2,245   166 

Issuance of long-term debt

       2,240     598 

Principal payments on long-term debt

       (3,500   (3,001)

Issuance of American Express common shares

       233     275 

Repurchase of American Express common shares

       (961   (787)

Dividends paid

       (246   (222)
    

 

 

   

 

Net cash used in financing activities

       (3,561   (1,830)
    

 

 

   

 

Effect of exchange rate changes on cash and cash equivalents

       (27   (35)
    

 

 

   

 

Net increase in cash and cash equivalents

       1,254     5,714 

Cash and cash equivalents at beginning of period

       19,486     22,250 
    

 

 

   

 

Cash and cash equivalents at end of period

     $ 20,740     $          27,964 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

4


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.

 

2. Divestitures

On March 17, 2014, the Company announced that it signed an agreement to create a joint venture for its Global Business Travel division (GBT). In the proposed transaction, the Company will separate its GBT operations into a dedicated holding structure, which will include certain assets and liabilities that currently comprise GBT, and will maintain an approximate 50 percent ownership stake in a non-consolidated joint venture following the closing. In exchange for an investment of $900 million in the joint venture, an investor group will hold the remaining interest. The closing of the joint venture transaction is subject to the receipt of requisite regulatory approvals and the satisfaction of other customary closing conditions. Assuming these conditions are met, the Company would plan to close the transaction in the second quarter of 2014. The carrying amount of GBT’s assets and liabilities are not material to the Company’s financial position.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 as of March 31, 2014 and December 31, 2013 consisted of:

 

                                             

 

(Millions)

       2014     

2013

U.S. Card Services(a)

     $ 20,726      $           21,842

International Card Services

       7,153      7,771

Global Commercial Services(b)

       16,638      14,391

Global Network & Merchant Services(c)

       137      159
    

 

 

    

 

Card Member receivables(d)

       44,654      44,163

Less: Reserve for losses

       414      386
    

 

 

    

 

Card Member receivables, net

       44,240      43,777
    

 

 

    

 

Other receivables, net(e)

     $ 3,134      $             3,408
    

 

 

    

 

 

 

  (a)

Includes $6.4 billion and $7.3 billion of gross Card Member receivables available to settle obligations of a consolidated variable interest entity (VIE) as of March 31, 2014 and December 31, 2013, respectively.

 

  (b)

Includes $885 million and $836 million due from airlines, of which Delta Air Lines (Delta) comprises $653 million and $628 million as of March 31, 2014 and December 31, 2013, respectively.

 

  (c)

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

 

  (d)

Includes approximately $13.9 billion and $13.8 billion of Card Member receivables outside the U.S. as of March 31, 2014 and December 31, 2013, respectively.

 

  (e)

Other receivables primarily represent amounts related to (i) purchased joint venture receivables, (ii) Global Network Services (GNS) partner banks for items such as royalty and franchise fees, and (iii) certain merchants for billed discount revenue. Other receivables are presented net of reserves for losses of $66 million and $71 million as of March 31, 2014 and December 31, 2013, respectively.

Loans as of March 31, 2014 and December 31, 2013 consisted of:

 

                                             

 

(Millions)

       2014     

2013

U.S. Card Services(a)

     $ 55,801      $           58,395

International Card Services

       8,154      8,790

Global Commercial Services

       61      53
    

 

 

    

 

Card Member loans

       64,016      67,238

Less: Reserve for losses

       1,191      1,261
    

 

 

    

 

Card Member loans, net

       62,825      65,977
    

 

 

    

 

Other loans, net(b)

     $ 651      $                608
    

 

 

    

 

 

 

  (a)

Includes approximately $28.7 billion and $31.2 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of March 31, 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 $9 million and $13 million as of March 31, 2014 and December 31, 2013, respectively.

 

6


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 represents the aging of Card Member loans and receivables as of March 31, 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

     $ 55,193     $ 175     $ 134     $ 299     $    55,801

International Card Services

       8,013       48       30       63     8,154

Card Member Receivables:

            

U.S. Card Services

     $ 20,355     $ 119     $ 84     $ 168     $    20,726

International Card Services(a)

       7,050       34       21       48     7,153

Global Commercial Services

       (b     (b     (b     122     16,638

 

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)

Effective March 31, 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)

Data for periods prior to 90 days past billing are not available due to system constraints. Therefore, such data have 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 Global Commercial Services (GCS) as of March 31, 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 considered as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes.

 

7


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 three months ended March 31:

 

                                                                                                                                               
                                                
       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

       1.7%        1.9%        1.1%        2.0%        2.2%      1.2%

International Card Services(b)

       2.2%        2.7%        1.7%        1.8%        2.3%      1.7%

Card Member Receivables:

              

U.S. Card Services

       1.8%        2.0%        1.8%        2.0%        2.2%      1.9%

International Card Services(b)

       1.9%        2.0%        1.4%        (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)          0.18%      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’s practice is to include uncollectible interest and/or fees as part of its total provision for losses, a net write-off rate including principal, interest and/or fees is also presented.

 

  (b)

For the period ending March 31, 2014, write-offs for certain installment loan products have been reclassified from Card Member receivables to Card Member loans.

 

  (c)

Historically, net loss ratio as a % of charge volume and 90 days past billings as a % of receivables were presented. Effective March 31, 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 monthly 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.

 

8


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 March 31, 2014 and December 31, 2013 or for the three months ended March 31, 2014 and 2013:

 

                                                                                                                                                       

 

       As of March 31, 2014       

 

For the Three Months Ended

March 31, 2014

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)
 
  
   

 

 

 

Average

Balance of

Impaired

Loans

  

  

  

  

 

Interest

Income

Recognized

Card Member Loans:

                  

U.S. Card Services

     $ 181      $ 220      $ 337      $ 738     $ 687      $ 80     $ 793     $                  16

International Card Services

       62        2               64       64              63     4

Card Member Receivables:

                  

U.S. Card Services

                     49        49       48        36       50    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 243      $ 222      $ 386      $ 851     $ 799      $ 116     $ 906     $                  20
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       As of December 31, 2013       

 

For the Three Months Ended

March 31, 2013

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)

  

  

   

 

 

 

Average

Balance of

Impaired

Loans

  

  

  

  

 

Interest

Income

Recognized

Card Member Loans:

                  

U.S. Card Services

     $ 170      $ 244      $ 373      $ 787     $ 731      $ 84     $ 1,105     $                  12

International Card Services

       54        4        5        63       62              70     4

Card Member Receivables:

                  

U.S. Card Services

                     50        50       49        38       115    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 224      $ 248      $ 428      $ 900     $ 842      $ 122     $ 1,290     $                  16
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (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 $91 million and $92 million that are non-accrual and $27 million and $26 million that are past due 90 days and still accruing interest as of March 31, 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.

 

9


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 during the three months ended March 31. 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

March 31, 2014

 

      
 
 
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        $ 96       14         (c)

Card Member Receivables

       4          47        (c      12
    

 

 

      

 

 

        

Total

       16        $ 143         
    

 

 

      

 

 

        

 

                
                                      
      

 

Three Months Ended

March 31, 2013

 

      
 
 
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

       23        $ 172       13         (c)

Card Member Receivables

       8          104        (c      12
    

 

 

      

 

 

        

Total

       31        $ 276         
    

 

 

      

 

 

        

 

 

  (a)

Represents the outstanding balance immediately prior to modification. For the three months ended March 31, 2014 and 2013, modifications reduced the aggregate principal balance by nil and $4 million, respectively.

 

  (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.

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information for the three months ended March 31, 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.

 

                                                                                                                   

 

       2014       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

       2     $ 20       5     $                      48

Card Member Receivables

       1       7       1     12
    

 

 

   

 

 

   

 

 

   

 

Total

       3     $ 27       6     $                      60
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

 

4. Reserves for Losses

Reserves for losses relating to Card Member loans and receivables represent management’s best estimate of the probable inherent losses 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 three months ended March 31:

 

                                             

 

(Millions)

       2014    

2013

Balance, January 1

     $ 386     $               428 

Provisions(a)

       215     154 

Net write-offs(b)

       (170   (178)

Other(c)

       (17  
    

 

 

   

 

Balance, March 31

     $ 414     $               410 
    

 

 

   

 

 

 

  (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 $92 million and $99 million, including net write-offs from TDRs of $2 million and $14 million, for the three months ended March 31, 2014 and 2013, respectively.

 

  (c)

Effective March 31, 2014, amounts previously reserved for unauthorized transactions of $(7) million have been reclassified to other liabilities on a prospective basis. Also included are foreign currency translation adjustments of nil and $(2) million for the three months ended March 31, 2014 and 2013, respectively and other items of $(10) million and $8 million for the three months ended March 31, 2014 and 2013, respectively.

 

11


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2014 and December 31, 2013:

 

                                             

 

(Millions)

       2014     

2013

Card Member receivables evaluated individually for impairment(a)

     $ 49      $                  50

Related reserves(a)

     $ 36      $                  38

 

Card Member receivables evaluated collectively for impairment

     $ 44,605      $           44,113

Related reserves(b)

     $ 378      $                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.

Changes in Card Member Loans Reserve for Losses

The following table presents changes in the Card Member loans reserve for losses for the three months ended March 31:

 

                                             

 

(Millions)

       2014    

2013

Balance, January 1

     $ 1,261     $            1,471 

Provisions(a)

       250     243 

Net write-offs

      

Principal(b)

       (280   (304)

Interest and fees(b)

       (42   (38)

Other(c)

       2     (5)
    

 

 

   

 

Balance, March 31

     $ 1,191     $            1,367 
    

 

 

   

 

 

 

  (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 $107 million and $114 million, including net write-offs from TDRs of $(2) million and $6 million, for the three months ended March 31, 2014 and 2013, respectively. Recoveries of interest and fees were de minimis.

 

  (c)

Effective March 31, 2014, reserves related to unauthorized transactions of $(6) million are reflected in other liabilities. All periods include foreign currency translation adjustments of $(1) million for both the three months ended March 31, 2014 and 2013, and other items of $9 million and $(4) million for the three months ended March 31, 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 March 31, 2014 and December 31, 2013:

 

                                             

 

(Millions)

       2014     

2013

Card Member loans evaluated individually for impairment(a)

     $ 337      $                378

Related reserves(a)

     $ 80      $                  84

 

Card Member loans evaluated collectively for impairment(b)

     $ 63,679      $           66,860

Related reserves(b)

     $ 1,111      $             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.

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Investment Securities

Investment securities include debt and equity securities classified 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 March 31, 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

     $ 3,957     $ 96     $ (20   $ 4,033     $ 4,060     $ 54     $ (79   $      4,035

U.S. Government agency obligations

       3                   3       3                 3

U.S. Government treasury obligations

       268       4       (1     271       318       3       (1   320

Corporate debt securities

       43       3             46       43       3           46

Mortgage-backed securities(a)

       151       6             157       160       5       (1   164

Equity securities(b)

       17       51             68       29       95           124

Foreign government bonds and obligations

       129       6             135       272       5       (1   276

Other(c)

       50             (2     48       50             (2   48
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 4,618     $ 166     $ (23   $ 4,761     $ 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.

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 March 31, 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

     $ 351     $ (13   $ 115     $ (7   $ 1,320     $ (63   $ 106     $           (16)

Foreign government bonds and obligations

                               208       (1         — 

U.S. Government treasury obligations

       128       (1                 166       (1         — 

Mortgage-backed securities

                               35       (1         — 

Other

       30       (1     17       (1     30       (1     17     (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 509     $ (15   $ 132     $ (8   $ 1,759     $ (67   $ 123     $           (17)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of March 31, 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%

       58     $ 509     $ (15     10     $ 123     $ (7     68     $ 632     $           (22)

Less than 90%

                         1       9       (1     1       9     (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of March 31, 2014

       58     $ 509     $ (15     11     $ 132     $ (8     69     $ 641     $           (23)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

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 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, were $39 million and $36 million, for the three months ended March 31, 2014 and 2013, respectively. There were no gross realized losses for the three months ended March 31, 2014 and 2013.

Contractual maturities of investment securities, excluding equity securities and other securities, as of March 31, 2014 were as follows:

 

                                             

 

(Millions)

       Cost    

Estimated Fair Value

Due within 1 year

     $ 333     $                333

Due after 1 year but within 5 years

       451     459

Due after 5 years but within 10 years

       208     220

Due after 10 years

       3,559     3,633
    

 

 

   

 

Total

     $ 4,551     $             4,645
    

 

 

   

 

 

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.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 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

       697      56

 

    

 

 

    

 

Total

     $ 698      $                  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 certificates, 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 $0.8 billion of subordinated securities issued by the Lending Trust as of March 31, 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 three months ended March 31, 2014 and the year ended December 31, 2013, no such triggering events occurred.

 

7. Customer Deposits

As of March 31, 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

     $ 41,853      $           40,831

Non-interest-bearing (includes Card Member credit balances of:
2014, $298 million; 2013, $340 million)

       317      360

Non-U.S.:

       

Interest-bearing

       110      121

Non-interest-bearing (includes Card Member credit balances of:
2014, $373 million; 2013, $437 million)

       391      451
    

 

 

    

 

Total customer deposits

     $ 42,671      $           41,763
    

 

 

    

 

 

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

                                             

 

(Millions)

       2014     

2013

U.S. retail deposits:

       

Savings accounts – Direct

     $ 26,276      $           24,550

Certificates of deposit:

       

Direct

       402      489

Third-party

       6,325      6,929

Sweep accounts – Third-party

       8,850      8,863

Other retail deposits:

       

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

       147      155

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

       671      777
    

 

 

    

 

Total customer deposits

     $ 42,671      $           41,763
    

 

 

    

 

 

The scheduled maturities of certificates of deposit as of March 31, 2014 were as follows:

 

                                                                    

 

(Millions)

       U.S.        Non-U.S.     

Total

2014

     $ 2,000     $ 3     $             2,003

2015

       1,247       1     1,248

2016

       1,673           1,673

2017

       572           572

2018

       1,042           1,042

After 5 years

       193           193
    

 

 

   

 

 

   

 

Total

     $ 6,727     $ 4     $             6,731
    

 

 

   

 

 

   

 

 

As of March 31, 2014 and December 31, 2013, certificates of deposit in denominations of $100,000 or more were as follows:

 

                                             

 

(Millions)

       2014    

2013

U.S.

     $ 269     $                324

Non-U.S.

       2     2
    

 

 

   

 

Total

     $ 271     $                326
    

 

 

   

 

 

 

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 March 31, 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.

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 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

     $ 412     $ 455     $ 11     $                2 

Total return contract

          

Fair value hedge

             8       2     — 

Foreign exchange contracts

          

Net investment hedges

       62       174       180     116 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives designated as hedging instruments

       474       637       193     118 
    

 

 

   

 

 

   

 

 

   

 

Derivatives not designated as hedging instruments:

          

Foreign exchange contracts, including certain embedded derivatives(a)

       126       64       54     95 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives not designated as hedging instruments

       126       64       54     95 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, gross

       600       701       247     213 
    

 

 

   

 

 

   

 

 

   

 

Cash collateral netting(b)

       (295     (336     (12   — 
    

 

 

   

 

 

   

 

 

   

 

Derivative asset and derivative liability netting(c)

       (54     (36     (54   (36)
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, net(d)

     $ 251     $ 329     $ 181     $            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 $50 million and $26 million as of March 31, 2014 and December 31, 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts 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 March 31, 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.

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 long-term debt obligations to floating-rate obligations at the time of issuance. As of March 31, 2014 and December 31, 2013, the Company hedged $15.9 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 March 31, 2014 and December 31, 2013, the fair value of the equity investment in ICBC was $66 million (107.5 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.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 months ended March 31:

 

                       

 

For the Three Months Ended March 31: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   
 
Net hedge
ineffectiveness
    

Income Statement Line Item

       Amount     

Income Statement Line Item

       Amount     

Derivative

relationship

            2014       2013            2014       2013       2014    

2013

Interest rate contracts

     Other expenses      $ (51   $ (104   Other expenses      $ 51     $ 110     $     $         6

Total return contract

     Other non-interest     revenues        13       4     Other non-interest     revenues        (13     (4        

 

The Company also recognized a net reduction in interest expense on long-term debt of $69 million and $112 million for the three months ended March 31, 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 $(17) million and $(56) million for the three months ended March 31, 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. No ineffectiveness associated with net investment hedges was reclassified from AOCI into income during the three months ended March 31, 2014 and 2013. During the three months ended March 31, 2014 and 2013, the Company reclassified $17 million and nil, respectively, from AOCI to earnings as a component of other expenses.

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 months ended March 31:

 

                                                                    

 

     Pretax gains
            Amount

Description (Millions)

     Income Statement Line Item        2014    

2013

Foreign exchange contracts (a)

     Other non-interest revenues      $     $                  1
     Other expenses        134     171
         

 

 

   

 

Total

          $ 134     $              172
         

 

 

   

 

 

 

  (a)

Foreign exchange contracts include embedded foreign currency derivatives. Gains on these embedded derivatives are included in other expenses.

 

18


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 March 31, 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

     $ 68     $ 68     $     $     $ 124     $ 124     $     $           —

Debt securities and other

       4,693       271       4,422             4,892       320       4,572    

Derivatives(a)

       600             600             701             701    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total assets

       5,361       339       5,022             5,717       444       5,273    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Liabilities:

                  

Derivatives(a)

       247             247             213             213    
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total liabilities

     $ 247     $     $ 247     $     $ 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.

 

19


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 March 31, 2014 and December 31, 2013. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of March 31, 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

     $ 21     $ 21     $ 20     $ 1 (a)     $           —

Other financial assets(b)

     $ 49     $ 49     $     $ 49     $           —

Financial assets carried at other than fair value

            

Loans, net

     $ 63     $ 64 (c)    $     $     $           64

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     $ 7     $     $ 7     $           —

Long-term debt

     $ 54     $ 56 (c)    $     $ 56     $           —

 

 

              

 

      
 
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 $6.4 billion and $7.3 billion held by consolidated VIEs as of March 31, 2014 and December 31, 2013, respectively), restricted cash and other miscellaneous assets.

 

  (c)

Includes fair values of loans of $28.5 billion and $31.0 billion, and long-term debt of $15.3 billion and $18.8 billion held by consolidated VIEs as of March 31, 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 three months ended March 31, 2014 and during the year ended December 31, 2013, the Company did not have any material assets that were measured at fair value due to impairment.

 

20


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 which are within the scope of GAAP governing the accounting for guarantees.

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, which has been determined in accordance with GAAP governing fair value measurement. 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 March 31, 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)

     $ 42     $ 44     $ 46     $ 88  

Other(d)

       1       1       74       73  
    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 43     $ 45     $ 120     $ 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.

 

  (b)

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

 

  (c)

Primarily includes Return Protection and Merchant Protection. 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.

 

  (d)

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

 

21


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 months ended March 31 were as follows:

 

                                                                                           

 

 

2014 (Millions), net of tax

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

Balances as of December 31, 2013

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

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized gains

       68              68  

Reclassification for realized (gains) losses into earnings

       (29      1           (28

Net translation of investments in foreign operations

          (18         (18

Net losses related to hedges of investment in foreign operations

          (17         (17

Pension and other postretirement benefit losses

             27        27  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive (loss) income

       39        (34      27        32  
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of March 31, 2014

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

 

 

 

                                                                                           

 

 

2013 (Millions), net of tax

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

Balances as of December 31, 2012

     $ 315      $ (754    $ (488    $ (927
    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized (losses)

       (12            (12

Reclassification for realized (gains) into earnings

       (23            (23

Net translation of investments in foreign operations

          11           11  

Net losses related to hedges of investment in foreign operations

          (56         (56

Pension and other postretirement benefit losses

             27        27  
    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive (loss) income

       (35      (45      27        (53
    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of March 31, 2013

     $ 280      $ (799    $ (461    $ (980

 

 

The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statement of Income for the three months ended March 31, 2014 and 2013:

 

                                            

 

       (Gains) losses recognized in income
         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

       2     — 

Related income tax expense

      

Income tax provision

       (1   — 
      

 

 

   

 

Reclassification of foreign currency translation adjustments

         1     — 
      

 

 

   

 

Total

       $ (28   $        (23)

 

 

22


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 $675 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 $675 million of unrecognized tax benefits, approximately $515 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 $160 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 35.1 percent and 32.9 percent for the three months ended March 31, 2014 and 2013, respectively. The tax rates for both periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

 

13. Earnings Per Common Share (EPS)

The computations of basic and diluted EPS for the three months ended March 31 were as follows:

 

                                             

 

(Millions, except per share amounts)

       2014    

2013

Numerator:

      

Basic and diluted:

      

Net income

     $ 1,432     $            1,280 

Earnings allocated to participating share awards(a)

       (12   (11)
    

 

 

   

 

Net income attributable to common shareholders

     $ 1,420     $            1,269 
    

 

 

   

 

Denominator:(a)

      

Basic: Weighted-average common stock

       1,060     1,099 

Add: Weighted-average stock options(b)

       7    
    

 

 

   

 

Diluted

       1,067     1,106 
    

 

 

   

 

Basic EPS

     $ 1.34     $              1.15 

Diluted EPS

     $ 1.33     $              1.15 

 

 

  (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)

For the three months ended March 31, 2014 and 2013, the dilutive effect of unexercised stock options excludes 0.2 million and 0.9 million of options, respectively, from the computation of EPS because inclusion of the options would have been anti-dilutive.

For the three months ended March 31, 2014 and 2013, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, 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.

 

23


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 for the three months ended March 31:

 

                                             

 

(Millions)

       2014     

2013

Foreign currency conversion fee revenue

     $ 213      $                210

Delinquency fees

       181      164

Loyalty Partner

       91      75

Service fees

       90      82

Other(a)

       43      42
    

 

 

    

 

Total other commissions and fees

     $ 618      $                573
    

 

 

    

 

 

 

  (a)

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

The following is a detail of other revenues for the three months ended March 31:

 

                                             

 

(Millions)

       2014     

2013

Global Network Services partner revenues

     $ 158      $                144

Net gain on investment securities

       39      36

Other(a)

       304      357
    

 

 

    

 

Total other revenues

     $ 501      $                537
    

 

 

    

 

 

 

  (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 for the three months ended March 31:

 

                                             

 

(Millions)

       2014     

2013

Marketing and promotion

     $ 613      $                621

Card Member rewards

       1,582      1,520

Card Member services and other

       222      189
    

 

 

    

 

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

     $ 2,417      $             2,330
    

 

 

    

 

 

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.

The following is a detail of other, net expenses for the three months ended March 31:

 

                                             

 

(Millions)

       2014     

2013

Professional services

     $ 692      $                716

Occupancy and equipment

       462      472

Communications

       93      96

Other(a)

       302      327
    

 

 

    

 

Total other, net

     $ 1,549      $             1,611
    

 

 

    

 

 

 

  (a)

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

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 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 a not-yet-quantified 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 zero to $440 million in excess of any accrued liability related to these matters. 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.

 

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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 months ended March 31:

 

                                             

 

(Millions)

       2014    

2013

Non-interest revenues:

      

USCS

     $ 3,017     $            2,878 

ICS

       1,157     1,124 

GCS

       1,249     1,220 

GNMS

       1,293     1,234 

Corporate & Other, including adjustments and eliminations(a)

       146     182 
    

 

 

   

 

Total

     $ 6,862     $            6,638 
    

 

 

   

 

Interest income:

      

USCS

     $ 1,423     $            1,386 

ICS

       277     290 

GCS

       4    

GNMS

       10    

Corporate & Other, including adjustments and eliminations(a)

       62     76 
    

 

 

   

 

Total

     $ 1,776     $            1,762 
    

 

 

   

 

Interest expense:

      

USCS

     $ 150     $               182 

ICS

       82     97 

GCS

       59     60 

GNMS

       (62   (62)

Corporate & Other, including adjustments and eliminations(a)

       210     242 
    

 

 

   

 

Total

     $ 439     $               519 
    

 

 

   

 

Total revenues, net of interest expense:

      

USCS

     $ 4,290     $            4,082 

ICS

       1,352     1,317 

GCS

       1,194     1,163 

GNMS

       1,365     1,303 

Corporate & Other, including adjustments and eliminations(a)

       (2   16 
    

 

 

   

 

Total

     $ 8,199     $            7,881 
    

 

 

   

 

Net income (loss):

      

USCS

     $ 876     $               804 

ICS

       159     178 

GCS

       184     191 

GNMS

       443     373 

Corporate & Other, including adjustments and eliminations(a)

       (230   (266)
    

 

 

   

 

Total

     $ 1,432     $            1,280 
    

 

 

   

 

 

 

  (a)

Corporate & Other includes adjustments and eliminations for intersegment activity.

 

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  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Introduction

When we use the terms “American Express”, “the Company”, “we”, “our” or “us”, we mean American Express Company and its subsidiaries on a consolidated basis, unless we state or the context implies otherwise.

We are a global services company with four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS). We provide our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Our range of products and services includes:

 

   

charge and credit card products;

 

   

expense management products and services;

 

   

consumer and business travel services;

 

   

stored-value products such as Travelers Cheques and other prepaid products;

 

   

network services;

 

   

merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and

 

   

fee services, including fraud prevention services and the design of customized customer loyalty and rewards programs.

Our 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, in-house and third-party sales forces and direct response advertising.

We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers’ existing card accounts and bank relationships to create payment or other fee-based solutions. We are transforming our existing businesses and creating new products and services for the digital marketplace as we seek to enhance our customers’ digital experiences and develop platforms for online and mobile commerce. Emerging technologies also provide an opportunity to deliver financial products and services that help new and existing customer segments move and manage their money, which we are pursuing through our Enterprise Growth Group (EGG).

Our products and services generate these types of revenue for the Company:

 

   

Discount revenue, our largest revenue source, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services at merchants on the Company’s network;

 

   

Net card fees, which represent revenue earned for annual card membership fees;

 

   

Travel commissions and fees, which are earned by charging a transaction or management fee to both customers and suppliers for travel-related transactions;

 

   

Other commissions and fees, which are earned on foreign exchange conversions, card-related fees and assessments and other service fees;

 

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Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including royalties and signing fees), insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques, and prepaid card-related revenues and other miscellaneous revenue and fees; and

 

   

Interest on loans, which principally represents interest income earned on outstanding balances.

In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and rewards programs that add new Card Members and promote Card Member loyalty and spending, and provisions for Card Member credit and fraud losses.

Financial Targets

We seek to achieve three financial targets, on average and over time:

 

   

Revenues net of interest expense growth of at least 8 percent;

 

   

Earnings per share (EPS) growth of 12 to 15 percent; and

 

   

Return on average equity (ROE) of 25 percent or more.

If we achieve our EPS and ROE targets, we will seek to return on average and over time approximately 50 percent of the capital we generate to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein.

Forward-Looking Statements and Non-GAAP Measures

Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section. We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this Form 10-Q constitute non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

Bank Holding Company

American Express Company is a bank holding company under the Bank Holding Company Act of 1956 and The Board of Governors of the Federal Reserve (the Federal Reserve) is our primary federal regulator. As such, we are subject to the Federal Reserve’s regulations, policies and minimum capital standards.

Current Business Environment/Outlook

Our results for the first quarter of 2014 reflect increased spending by Card Members, continued low write-off rates and lower operating expenses while our strong balance sheet allowed us to return a substantial amount of capital to our shareholders. Billed business grew 6 percent over the prior year, with higher volumes in the U.S. and internationally. Billed business and revenue growth remained solid but slowed modestly from the fourth quarter of 2013. In addition, the stronger U.S. dollar continued to put downward pressure on our billed business and revenue growth.

Average loans also continued to grow year over year, which, along with lower funding costs, led to an 8 percent increase in net interest income. At the same time, lending write-off rates remained near historically low levels. We expect, at some point, lending write-off rates will increase from such levels.

 

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Total expenses decreased 1 percent over the prior year. While marketing and promotion expenses were relatively flat in the quarter, we anticipate investment levels will increase this year beginning in the second quarter. Operating expenses decreased 4 percent, as compared to the prior year. We would not expect to see similar year-over-year declines in operating expenses for the remaining quarters, although we remain committed to our aim to have operating expenses grow at an annual rate of less than 3 percent in 2014. We have seen a modest increase in our effective tax rate in the quarter primarily because of the changes in the geographic mix of where we generate income. Additionally, we are being impacted by certain tax law changes in 2014 and believe our effective tax rate for the full year 2014 could be closer to the mid-30 percent range.

As discussed below within Certain Legislative, Regulatory and Other Developments, the regulatory environment continues to evolve and has heightened the focus that all financial services firms, including us, must have on controls and processes. The review of products and practices will be a continuing focus of ours, as well as regulators. In addition, regulation of the payments industry has increased significantly in recent years and governments in several countries have established or are proposing to establish payment system regulatory regimes.

Competition remains extremely intense across our businesses. While our business is diversified, including the corporate card business, a large international business and GNS partners around the world, the global economic environment remains challenging. In addition, any impact of potential U.S. income tax law changes or volatility in foreign exchange rates remains uncertain.

We previously announced that we signed an agreement to create a joint venture for our Global Business Travel (GBT) division. In the proposed transaction, we will separate our GBT operations into a dedicated holding structure, which will include certain assets and liabilities that currently comprise GBT, and will have an approximate 50 percent ownership stake in a non-consolidated joint venture following the closing. In exchange for an investment of $900 million in the joint venture, an investor group will hold the remaining interest. The closing of the joint venture transaction is subject to the receipt of requisite regulatory approvals and the satisfaction of other customary closing conditions. Assuming these conditions are met, we would plan to close the transaction in the second quarter of 2014. Upon closing, we expect to recognize a pre-tax gain, which we currently estimate to be between $600 million to $700 million, before transaction costs. We would expect to use a substantial portion of the gain recognized upon a closing of the transaction, net of transaction costs, to invest in growth initiatives and to increase the efficiency of our organization.

 

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American Express Company

Consolidated Results of Operations

Refer to the “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing within this section.

Table 1: Summary of Financial Performance

 

           

 

      
 
Three Months Ended
March 31,
  
  
    Change

(Millions, except percentages and per share amounts)

       2014       2013       2014 vs. 2013

Total revenues net of interest expense

     $ 8,199     $ 7,881     $ 318        4%

Provisions for losses

       485       416       69      17   

Expenses

       5,506       5,556       (50     (1)  

Net income

       1,432       1,280       152      12   

Earnings per common share — diluted(a)

     $ 1.33     $ 1.15     $ 0.18      16%

Return on average equity(b)

       28.1     23.0    

Return on average tangible common equity(c)

       35.4     29.3    

 

 

  (a)

Earnings per common share— diluted was reduced by the impact of earnings allocated to participating share awards and other items of $12 million and $11 million for three months ended March 31, 2014 and 2013, respectively.

 

  (b)

ROE is computed by dividing (i) one-year period net income ($5.5 billion and $4.5 billion for March 31, 2014 and 2013, respectively) by (ii) one-year average total shareholders’ equity ($19.4 billion for both March 31, 2014 and 2013).

 

  (c)

Return on average tangible common equity, a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity, average goodwill and other intangibles of $4.0 billion and $4.2 billion as of March 31, 2014 and 2013, respectively. We believe return on average tangible common equity is a useful measure of the profitability of our business.

Table 2: Total Revenue Net of Interest Expense Summary

 

           

 

      
 
Three Months Ended
March 31,
  
  
    Change

(Millions, except percentages, per share amounts and ratio data)

       2014       2013       2014 vs. 2013

Discount revenue

     $ 4,646     $ 4,438     $ 208        5%

Net card fees

       674       653       21        3   

Travel commissions and fees

       423       437       (14     (3)  

Other commissions and fees

       618       573       45        8   

Other

       501       537       (36     (7)  
    

 

 

   

 

 

   

 

 

   

Total non-interest revenues

       6,862       6,638       224        3   
    

 

 

   

 

 

   

 

 

   

Total interest income

       1,776       1,762       14        1   

Total interest expense

       439       519       (80   (15)  
    

 

 

   

 

 

   

 

 

   

Net interest income

       1,337       1,243       94        8   
    

 

 

   

 

 

   

 

 

   

Total revenues net of interest expense

     $ 8,199     $ 7,881     $ 318        4%

 

Total Revenues Net of Interest Expense

Discount revenue for the three months ended March 31, 2014 increased $208 million or 5 percent, as compared to the same period in the prior year. The increase reflects a 6 percent growth in billed business in the US and outside the US, which was partially offset by higher cash rebate rewards. Excluding the impact of changes in foreign exchange rates billed business outside the U.S. increased 10 percent.1 See Tables 5 and 6 for more detail on billed business performance. The average discount rate was 2.52 percent for both the three months ended March 31, 2014 and 2013. As indicated in prior quarters, changes in the mix of spending by location and industry, volume–related pricing discounts, strategic investments, certain pricing initiatives and other factors will likely result in erosions of the average discount rate over time.

Net card fees increased $21 million or 3 percent for the three months ended March 31, 2014, as compared to the same period in the prior year, reflecting higher average proprietary cards-in-force primarily in USCS and ICS.

 

  1

The foreign currency adjusted information, a non-GAAP measure, assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year period against which such results are being compared). We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

 

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Travel commissions and fees decreased $14 million or 3 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. Worldwide travel sales were flat, while US consumer travel sales declined 7 percent largely due to the sale of our wholesale tour operator business in the prior year.

Other commissions and fees increased $45 million or 8 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase was primarily due to higher revenue from our Loyalty Partner business and delinquency fees.

Other revenue decreased $36 million or 7 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. The decrease reflects the loss of revenue from the divested publishing business, partially offset by higher Loyalty Edge revenue and a larger gain on the sale of investment securities.

Interest income increased $14 million or 1 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase reflects higher interest on loans, driven by growth in average Card Member loans, partially offset by decreases in interest and dividends on investment securities, driven by lower average investment securities.

Interest expense decreased $80 million or 15 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. The decrease reflects lower interest on deposits, as a result of lower funding costs, partially offset by increases in average customer deposit balances. The decrease also reflects lower funding costs on long-term debt and lower average long-term debt balances.

Table 3: Provisions for Losses Summary

 

           

 

      
 
Three Months Ended
March 31,
  
  
    Change

(Millions, except percentages)

       2014       2013       2014 vs. 2013

Charge card

     $ 215     $ 154     $ 61     40%

Card Member loans

       250       243       7    

Other

       20       19       1    
    

 

 

   

 

 

   

 

 

   

Total provisions for losses

     $ 485     $ 416     $ 69     17%

 

Provisions for Losses

Provisions for losses for the three months ended March 31, 2014, increased $69 million or 17 percent, as compared to the same period in the prior year. Charge card provision for losses increased $61 million or 40 percent, driven by higher average Card Member receivable balances resulting in higher net write-offs and reserve builds for the three months ended March 31, 2014, as compared to reserve releases for the same period in the prior year. Card Member loans provision for losses also increased, driven by lower reserve releases for the three months ended March 31, 2014, as compared to the same period in the prior year, partially offset by the benefit of lower net write-offs.

Table 4: Expenses Summary

 

           

 

      
 
Three Months Ended
March 31,
  
  
    Change

(Millions, except percentages)

       2014       2013       2014 vs. 2013

Marketing and promotion

     $ 613     $ 621     $ (8     (1)%

Card Member rewards

       1,582       1,520       62       4   

Card Member services and other

       222       189       33     17   
    

 

 

   

 

 

   

 

 

   

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

       2,417       2,330       87       4   
    

 

 

   

 

 

   

 

 

   

Salaries and employee benefits

       1,540       1,615       (75     (5)   

Other, net

       1,549       1,611       (62     (4)   
    

 

 

   

 

 

   

 

 

   

Total expenses

     $ 5,506     $ 5,556     $ (50     (1)%

 

 

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Expenses

Marketing and promotion expense decreased $8 million or 1 percent for the three months ended March 31, 2014 as compared to the same period in the prior year.

Card Member rewards expense increased $62 million or 4 percent for the three months ended March 31, 2014, as compared to the same period in the prior year. The increase reflects higher co-brand rewards expense of $29 million, primarily relating to higher spending volumes and an increase in Membership Rewards expense of $33 million. The current year increase in Membership Rewards expense is primarily due to a $49 million increase relating to higher new points earned, partially offset by a $16 million decrease related to Membership Rewards points earned by Card Members but not redeemed. This decrease is driven by slower growth in the Ultimate Redemption Rate (URR) as compared to the same period in the prior year.

The Membership Rewards URR for current program participants was 94 percent (rounded down) at March 31, 2014, an increase from 94 percent (rounded up) at March 31, 2013. The increase in the URR reflects greater engagement in our Membership Rewards program.

Card Member services and other expense increased $33 million or 17 percent for the three months ended March 31, 2014, as compared to the same period in the prior year, reflecting increased engagement levels and usage of certain Card Member benefits.

Salaries and employee benefits expense decreased $75 million or 5 percent for the three months ended March 31, 2014, as compared to the same period in the prior year, driven by lower payroll expense, primarily attributable to previously announced restructuring initiatives, as well as the sale of the publishing business.

Other expenses for the three months ended March 31, 2014 decreased $62 million or 4 percent, as compared to the same period in the prior year, primarily reflecting a benefit from enhancements to the estimation process for potential losses from non-delivery of goods and services by merchants for Card Member purchases and higher legal fees in the prior year, partially offset by deal related costs associated with the planned Business Travel joint venture in 2014.

Income Taxes

The effective tax rate was 35.1 percent and 32.9 percent for the three months ended March 31, 2014, and 2013, respectively. The tax rates for both periods primarily reflect the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. Additionally, in 2014 the tax rate was impacted by certain changes in tax laws, including the delay in the renewal of the active financing exemption and the loss of the research and development tax credit. By comparison, in the same period in 2013, the tax rate was impacted by an additional benefit from active financing due to the legislation being renewed in January 2013.

 

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Table 5: Selected Statistical Information

 

                                               

 

Three Months Ended March 31,

       2014       2013    

Change 2014 vs. 2013

Card billed business: (billions)

        

United States

     $ 159.2     $ 150.0     6%

Outside the United States

       78.9       74.5     6   
    

 

 

   

 

 

   

Total

     $ 238.1     $ 224.5     6   
    

 

 

   

 

 

   

Total cards-in-force: (millions)

        

United States

       53.5       52.1     3   

Outside the United States

       54.7       51.1     7   
    

 

 

   

 

 

   

Total

       108.2       103.2     5   
    

 

 

   

 

 

   

Basic cards-in-force: (millions)

        

United States

       41.5       40.5     2   

Outside the United States

       44.6       41.1     9   
    

 

 

   

 

 

   

Total

       86.1       81.6     6   
    

 

 

   

 

 

   

Average discount rate

       2.52     2.52  

Average basic Card Member spending (dollars)(a)

     $ 3,991     $ 3,905     2   

Average fee per card (dollars)(a)

     $ 40     $ 40     —     

Average fee per card adjusted (dollars)(a)

     $ 45     $ 44     2%

 

 

  (a)

Average basic Card Member spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The adjusted average fee per card, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $73 million and $65 million for the three months ended March 31, 2014 and 2013, respectively. We present adjusted average fee per card because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products.

 

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Table 6: Selected Statistical Information

 

     

 

       2014

 

      
 
 
Percentage
Increase
(Decrease)
  
  
  
 

Percentage Increase Assuming No Changes in Foreign Exchange Rates (a)

Worldwide(b)

      

Billed business

       6   7%

Proprietary billed business

       5     6    

GNS billed business(c)

       10     15    

Airline-related volume (10% of worldwide billed business)

       4     5    

United States(b)

      

Billed business

       6    

Proprietary consumer card billed business(d)

       6    

Proprietary small business billed business(d)

       8    

Proprietary corporate services billed business(e)

       7    

T&E-related volume (27% of U.S. billed business)

       5    

Non-T&E-related volume (73% of U.S. billed business)

       6    

Airline-related volume (9% of U.S. billed business)

       3    

Outside the United States(b)

      

Billed business

       6     10    

Japan, Asia Pacific & Australia (JAPA) billed business

       7     15    

Latin America & Canada (LACC) billed business

       (1   10    

Europe, the Middle East & Africa (EMEA) billed business

       11     7    

Proprietary consumer and small business billed business(f)

       2     6    

JAPA billed business

       (3   7    

LACC billed business

       (4   6    

EMEA billed business

       13     7    

Proprietary corporate services billed business(e)

       5   8%

 

 

  (a)

The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the three months ended March 31, 2014 apply to the corresponding year-earlier period against which such results are being compared). We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

 

  (b)

Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data.

 

  (c)

Included in the GNMS segment.

 

  (d)

Included in the USCS segment.

 

  (e)

Included in the GCS segment.

 

  (f)

Included in the ICS segment.

 

34


Table of Contents

Table 7: Selected Statistical Information

 

                                                                    

 

As of or for the Three Months Ended March 31,

(Millions, except percentages and where indicated)

       2014       2013    

Change

Worldwide Card Member receivables

        

Total receivables (billions)

     $ 44.7     $ 43.4     3%  

Loss reserves:

        

Beginning balance

       386       428     (10)    

Provisions(a)

       215       154     40     

Net write-offs(b)

       (170     (178   (4)    

Other(c)

       (17     6     #     
    

 

 

   

 

 

   

Ending balance

     $ 414     $ 410     1%  
    

 

 

   

 

 

   

% of receivables

       0.9     0.9  

Net write-off rate — principal — USCS/ICS(e)

       1.8     (d  

Net write-off rate — principal and fees — USCS/ICS(e)

       2.0     (d  

30 days past due as a % of total — USCS/ICS

       1.7     (d  

Net loss ratio as a % of charge volume — GCS

       0.09     0.08    

90 days past billing as a % of total — GCS

       0.7     0.7    

Worldwide Card Member loans

        

Total loans (billions)

     $ 64.0     $ 62.3     3%  

Loss reserves:

        

Beginning balance

       1,261       1,471     (14)    

Provisions(a)

       250       243     3     

Net write-offs — principal(b)

       (280     (304   (8)    

Net write-offs — interest and fees(b)

       (42     (38   11     

Other