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 September 30, 2014

or

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

   

13-4922250

 

(State or other jurisdiction of

incorporation or organization)

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

200 Vesey Street, New York, NY

   

10285

 
(Address of principal executive offices)     (Zip Code)  

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

 
None  

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

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

Yes   X               No             

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

Yes   X              No             

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

 

Large accelerated filer  x

  

Accelerated filer ¨

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

  

Smaller reporting company  ¨                             

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

Yes                  No   X        

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

 

Class

     

Outstanding at October 17, 2014

 
Common Shares (par value $0.20 per share)       1,034,676,513 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 September 30, 2014 and 2013

     1   
     

Consolidated Statements of Income – Nine Months Ended September 30, 2014 and 2013

     2   
     

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2014 and 2013

     3   
     

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

     4   
     

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013

     5   
     

Notes to Consolidated Financial Statements

     6   
  

Item 2.

  

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

     32   
  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     73   
  

Item 4.

  

Controls and Procedures

     73   
Part II.    Other Information   
  

Item 1.

  

Legal Proceedings

     76   
  

Item 1A.

  

Risk Factors

     79   
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     80   
  

Item 5.

  

Other Information

     81   
  

Item 6.

  

Exhibits

     81   
  

Signatures

     82   
  

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 September 30 (Millions, except per share amounts)

       2014      

2013

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 4,915       $             4,659

Net card fees

       680       658

Travel commissions and fees

       104       490

Other commissions and fees

       642       610

Other

       593       601
    

 

 

    

 

Total non-interest revenues

       6,934       7,018
    

 

 

    

 

Interest income

       

Interest on loans

       1,753       1,698

Interest and dividends on investment securities

       45       48

Deposits with banks and other

       17       21
    

 

 

    

 

Total interest income

       1,815       1,767
    

 

 

    

 

Interest expense

       

Deposits

       91       111

Long-term debt and other

       329       373
    

 

 

    

 

Total interest expense

       420       484
    

 

 

    

 

Net interest income

       1,395       1,283
    

 

 

    

 

Total revenues net of interest expense

       8,329       8,301
    

 

 

    

 

Provisions for losses

       

Charge card

       196       159

Card Member loans

       265       248

Other

       27       12
    

 

 

    

 

Total provisions for losses

       488       419
    

 

 

    

 

Total revenues net of interest expense after provisions for losses

       7,841       7,882
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and Card Member services

       2,709       2,643

Salaries and employee benefits

       1,290       1,544

Other, net

       1,596       1,691
    

 

 

    

 

Total expenses

       5,595       5,878
    

 

 

    

 

Pretax income

       2,246       2,004

Income tax provision

       769       638
    

 

 

    

 

Net income

     $ 1,477       $             1,366
    

 

 

    

 

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

       

Basic

     $ 1.41       $               1.26

Diluted

     $ 1.40       $               1.25
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,041       1,074

Diluted

       1,047       1,081

Cash dividends declared per common share

     $ 0.26       $               0.23

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $11 million and $12 million for the three months ended September 30, 2014 and 2013, respectively.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

Nine Months Ended September 30 (Millions, except per share amounts)

       2014      

2013

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 14,506       $           13,826

Net card fees

       2,041       1,958

Travel commissions and fees

       1,027       1,422

Other commissions and fees

       1,884       1,788

Other

       1,679       1,705
    

 

 

    

 

Total non-interest revenues

       21,137       20,699
    

 

 

    

 

Interest income

       

Interest on loans

       5,160       5,003

Interest and dividends on investment securities

       136       153

Deposits with banks and other

       54       67
    

 

 

    

 

Total interest income

       5,350       5,223
    

 

 

    

 

Interest expense

       

Deposits

       276       332

Long-term debt and other

       1,026       1,163
    

 

 

    

 

Total interest expense

       1,302       1,495
    

 

 

    

 

Net interest income

       4,048       3,728
    

 

 

    

 

Total revenues net of interest expense

       25,185       24,427
    

 

 

    

 

Provisions for losses

       

Charge card

       594       474

Card Member loans

       797       825

Other

       71       54
    

 

 

    

 

Total provisions for losses

       1,462       1,353
    

 

 

    

 

Total revenues net of interest expense after provisions for losses

       23,723       23,074
    

 

 

    

 

Expenses

       

Marketing, promotion, rewards and Card Member services

       8,076       7,553

Salaries and employee benefits

       4,488       4,702

Other, net

       4,393       4,911
    

 

 

    

 

Total expenses

       16,957       17,166
    

 

 

    

 

Pretax income

       6,766       5,908

Income tax provision

       2,328       1,857
    

 

 

    

 

Net income

     $ 4,438       $             4,051
    

 

 

    

 

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

       

Basic

     $ 4.19       $               3.69

Diluted

     $ 4.17       $               3.67
    

 

 

    

 

Average common shares outstanding for earnings per common share:

       

Basic

       1,051       1,087

Diluted

       1,057       1,094

Cash dividends declared per common share

     $ 0.75       $               0.66

 

 

  (a)

Represents net income less earnings allocated to participating share awards of $35 million and $36 million for the nine months ended September 30, 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
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Net income

     $              1,477      $              1,366      $              4,438      $             4,051 

Other comprehensive (loss) income:

          

Net unrealized securities (losses) gains, net of tax of: 2014, $(5) and $19; 2013, $(30) and $(120)

       (11     (48     31      (210)

Foreign currency translation adjustments, net of tax of: 2014, $119 and $41; 2013, $(48) and $83

       (167     11        (195   (262)

Net unrealized pension and other postretirement benefit gains, net of tax of: 2014, $9 and $29; 2013, $6 and $37

       7        6        48      60 
    

 

 

   

 

 

   

 

 

   

 

Other comprehensive (loss) income

       (171     (31     (116   (412)
    

 

 

   

 

 

   

 

 

   

 

Comprehensive income

     $ 1,306      $ 1,335      $ 4,322      $             3,639 
    

 

 

   

 

 

   

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                             

 

(Millions, except per share data)

      
 
September 30,
2014
  
  
 

December 31, 2013

Assets

      

Cash and cash equivalents

      

Cash and due from banks

     $ 2,300      $            2,212 

Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2014, $232; 2013, $143)

       18,772      16,776 

Short-term investment securities

       192      498 
    

 

 

   

 

Total cash and cash equivalents

       21,264      19,486 

Accounts receivable

      

Card Member receivables (includes gross receivables available to settle obligations of consolidated variable interest entities: 2014, $6,253; 2013, $7,329), less reserves: 2014, $432; 2013, $386

       44,685      43,777 

Other receivables, less reserves: 2014, $44; 2013, $71

       2,631      3,408 

Loans

      

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2014, $28,310; 2013, $31,245), less reserves: 2014, $1,146; 2013, $1,261

       64,911      65,977 

Other loans, less reserves: 2014, $11; 2013, $13

       855      608 

Investment securities

       4,750      5,016 

Premises and equipment, less accumulated depreciation and amortization: 2014, $6,327; 2013, $5,978

       3,921      3,875 

Other assets (includes restricted cash of consolidated variable interest entities: 2014, $44; 2013, $58)

       10,845      11,228 
    

 

 

   

 

Total assets

     $ 153,862      $        153,375 
    

 

 

   

 

Liabilities and Shareholders’ Equity

      

Liabilities

      

Customer deposits

     $ 42,703      $          41,763 

Travelers Cheques and other prepaid products

       3,539      4,240 

Accounts payable

       11,510      10,615 

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

       3,382      5,021 

Long-term debt (includes debt issued by consolidated variable interest entities: 2014, $15,501; 2013, $18,690)

       55,712      55,330 

Other liabilities

       16,800      16,910 
    

 

 

   

 

Total liabilities

       133,646      133,879 
    

 

 

   

 

Contingencies (Note 15)

      

Shareholders’ Equity

      

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,035 million shares as of September 30, 2014 and 1,064 million shares as of December 31, 2013

       207      213 

Additional paid-in capital

       12,216      12,202 

Retained earnings

       9,335      8,507 

Accumulated other comprehensive income (loss)

      

Net unrealized securities gains, net of tax of: 2014, $52; 2013, $33

       94      63 

Foreign currency translation adjustments, net of tax of: 2014, $(485); 2013, $(526)

       (1,285   (1,090)

Net unrealized pension and other postretirement benefit losses, net of tax of: 2014, $(148); 2013, $(177)

       (351   (399)
    

 

 

   

 

Total accumulated other comprehensive loss

       (1,542   (1,426)
    

 

 

   

 

Total shareholders’ equity

       20,216      19,496 
    

 

 

   

 

Total liabilities and shareholders’ equity

     $ 153,862      $        153,375 
    

 

 

   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                             

 

Nine Months Ended September 30 (Millions)

       2014     

2013

Cash Flows from Operating Activities

      

Net income

     $ 4,438      $              4,051 

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

      

Provisions for losses

       1,462      1,353 

Depreciation and amortization

       764      763 

Deferred taxes and other

       (497   (111)

Stock-based compensation

       210      275 

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

      

Other receivables

       275      (38)

Other assets

       850      1,432 

Accounts payable and other liabilities

       1,793      981 

Travelers Cheques and other prepaid products

       (709   (503)
    

 

 

   

 

Net cash provided by operating activities

       8,586      8,203 
    

 

 

   

 

Cash Flows from Investing Activities

      

Sale of investments

       122      175 

Maturity and redemption of investments

       966      856 

Purchase of investments

       (825   (873)

Net (increase) in Card Member loans/receivables

       (2,349   (791)

Purchase of premises and equipment, net of sales: 2014, $3; 2013, $74

       (854   (635)

Acquisitions/dispositions, net of cash acquired

       (130   (170)

Net increase (decrease) in restricted cash

       90      (29)
    

 

 

   

 

Net cash used in investing activities

       (2,980   (1,467)
    

 

 

   

 

Cash Flows from Financing Activities

      

Net increase in customer deposits

       917      2,303 

Net (decrease) increase in short-term borrowings

       (1,595   51 

Issuance of long-term debt

       11,329      7,887 

Principal payments on long-term debt

       (10,659   (13,492)

Issuance of American Express common shares

       251      552 

Repurchase of American Express common shares

       (3,205   (3,200)

Dividends paid

       (770   (693)
    

 

 

   

 

Net cash used in financing activities

       (3,732   (6,592)
    

 

 

   

 

Effect of exchange rate changes on cash and cash equivalents

       (96   (108)
    

 

 

   

 

Net increase in cash and cash equivalents

       1,778      36 

Cash and cash equivalents at beginning of period

       19,486      22,250 
    

 

 

   

 

Cash and cash equivalents at end of period

     $ 21,264      $            22,286 
    

 

 

   

 

 

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

See Notes to Consolidated Financial Statements

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Effective July 1, 2014, business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). Prior to July 1, 2014, the business travel operations were previously wholly owned. The Company also focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising.

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

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

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

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

Recently Issued Accounting Standards

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2. Divestitures

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

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

The GBT JV operates under the “American Express Global Business Travel” brand, pursuant to a trademark license agreement provided by the Company. The Company has also entered into a transition services agreement and certain other operating agreements with the GBT JV, pursuant to which the Company and the GBT JV provide one another with certain services and that result in related-party receivables and payables. There was no material impact to the Company during the current quarter related to the GBT JV’s results of operations or the related agreements.

 

3. Accounts Receivable and Loans

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

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

 

                                             

 

(Millions)

       2014      

2013

U.S. Card Services (a)

     $ 21,253       $           21,842

International Card Services

       7,273       7,771

Global Commercial Services (b)

       16,440       14,391

Global Network & Merchant Services (c)

       151       159
    

 

 

    

 

Card Member receivables (d)

       45,117       44,163

Less: Reserve for losses

       432       386
    

 

 

    

 

Card Member receivables, net

     $ 44,685       $           43,777
    

 

 

    

 

Other receivables, net (e)

     $ 2,631       $             3,408
    

 

 

    

 

 

 

  (a)

Includes $6.3 billion and $7.3 billion of gross Card Member receivables available to settle obligations of a consolidated variable interest entity (VIE) as of September 30, 2014 and December 31, 2013, respectively.

 

  (b)

Includes $672 million and $836 million due from airlines, of which Delta Air Lines (Delta) comprises $642 million and $628 million as of September 30, 2014 and December 31, 2013, respectively.

 

  (c)

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

 

  (d)

Includes approximately $13.5 billion and $13.8 billion of Card Member receivables outside the U.S. as of September 30, 2014 and December 31, 2013, respectively.

 

  (e)

Other receivables primarily represent amounts related to (i) certain merchants for billed discount revenue and (ii) Global Network Services (GNS) partner banks for items such as royalty and franchise fees. Additionally, for 2013 only, the balance also included purchased GNS joint venture receivables. Other receivables are presented net of reserves for losses of $44 million and $71 million as of September 30, 2014 and December 31, 2013, respectively.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

                                             

 

(Millions)

       2014      

2013

U.S. Card Services (a)

     $ 58,012       $           58,395

International Card Services

       7,999       8,790

Global Commercial Services

       46       53
    

 

 

    

 

Card Member loans

       66,057       67,238

Less: Reserve for losses

       1,146       1,261
    

 

 

    

 

Card Member loans, net

     $ 64,911       $           65,977
    

 

 

    

 

Other loans, net (b)

     $ 855       $                608
    

 

 

    

 

 

 

  (a)

Includes approximately $28.3 billion and $31.2 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of September 30, 2014 and December 31, 2013, respectively.

 

  (b)

Other loans primarily represent loans to merchants and a store card loan portfolio. Other loans are presented net of reserves for losses of $11 million and $13 million as of September 30, 2014 and December 31, 2013, respectively.

Card Member Loans and Card Member Receivables Aging

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

 

                                                                               

 

2014 (Millions)

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

Total

Card Member Loans:

            

U.S. Card Services

     $ 57,447      $ 175      $ 121      $ 269      $    58,012

International Card Services

       7,869        41        29        60      7,999

Card Member Receivables:

            

U.S. Card Services

     $ 20,907      $ 125      $ 74      $ 147      $    21,253

International Card Services (a)

       7,174        30        22        47      7,273

Global Commercial Services

       (b     (b     (b     125      16,440

 

2013 (Millions)

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

Total

Card Member Loans:

            

U.S. Card Services

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

International Card Services

       8,664        43        28        55      8,790

Card Member Receivables:

            

U.S. Card Services

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

International Card Services

       (b     (b     (b     83      7,771

Global Commercial Services

       (b     (b     (b     132      14,391

 

 

  (a)

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

 

  (b)

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

 

8


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Card Member Loans and Receivables

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

 

                                                                                                                       

 

       2014        2013
       Net Write-Off Rate     

 
 
 
 

30 Days
Past Due
as a % of
Total

  
  
  
  

    Net Write-Off Rate     

30 Days Past Due

as a % of Total

 

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

Card Member Loans:

              

U.S. Card Services

       1.6%        1.8%        1.0%        1.9%        2.1%      1.1%

International Card Services (b)

       2.0%        2.4%        1.6%        1.9%        2.3%      1.5%

Card Member Receivables:

              

U.S. Card Services

       1.7%        1.9%        1.6%        1.8%        1.9%      1.7%

International Card Services (b)

       2.0%        2.1%        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 )        0.20   1.1%

Global Commercial Services

       0.09     0.8     0.07   0.8%

 

 

  (a)

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

 

  (b)

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

 

  (c)

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

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

Impaired Card Member Loans and Receivables

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

 

9


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

                                                                                                                       

 

2014 (Millions)

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

Allowance

for TDRs (e)

Card Member Loans:

              

U.S. Card Services

     $ 160      $ 188      $ 309      $ 657      $ 594      $                70

International Card Services

       60                      60        59     

Card Member Receivables:

              

U.S. Card Services

                     44        44        43      32
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 220      $ 188      $ 353      $ 761      $ 696      $              102
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

2013 (Millions)

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

Allowance

for TDRs (e)

Card Member Loans:

              

U.S. Card Services

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

International Card Services

       54        4        5        63        62     

Card Member Receivables:

              

U.S. Card Services

                     50        50        49      38
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

 

  (b)

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

 

  (c)

Total loans and receivables modified as a TDR includes $87 million and $92 million that are non-accrual and $20 million and $26 million that are past due 90 days and still accruing interest as of September 30, 2014 and December 31, 2013, respectively.

 

  (d)

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

 

  (e)

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

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

                                                                                           

 

       Three Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2014

2014 (Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average

Balance

Card Member Loans:

          

U.S. Card Services

     $ 12      $ 675      $ 37      $               734

International Card Services

       4        63        12      63

Card Member Receivables:

          

U.S. Card Services

              44             47
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 16      $ 782      $ 49      $               844
    

 

 

   

 

 

   

 

 

   

 

 

      
 
Three Months Ended
September 30, 2013
  
  
   

 

Nine Months Ended

September 30, 2013

2013 (Millions)

      
 
 
Interest
Income
Recognized
  
  
  
   
 
Average
Balance
  
  
   
 
 
Interest
Income
Recognized
  
  
  
 

Average

Balance

Card Member Loans:

          

U.S. Card Services

     $ 11      $ 859      $ 34      $               982

International Card Services

       4        66        12      68

Card Member Receivables:

          

U.S. Card Services

              62             89
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 15      $ 987      $ 46      $            1,139
    

 

 

   

 

 

   

 

 

   

 

 

 

11


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Receivables Modified as TDRs

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

 

                                                                                                                                                       

 

      

 

Three Months Ended

September 30, 2014

  

  

   

 

Nine Months Ended

September 30, 2014

 

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

Average Payment

Term Extension (# of Months)

Troubled Debt Restructurings:

                  

Card Member Loans

       11      $ 83        9        (c     35      $ 261        11      (c)

Card Member Receivables

       4        41        (c     12        11        129        (c               12 
    

 

 

   

 

 

       

 

 

   

 

 

     

Total

       15      $ 124            46      $ 390       
    

 

 

   

 

 

       

 

 

   

 

 

     

 

      

 

Three Months Ended

September 30, 2013

  

  

   

 

Nine Months Ended

September 30, 2013

 

      
 

 

Number of
Accounts

(in thousands)

  
  

  

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

Average Payment

Term Extension (# of Months)

Troubled Debt Restructurings:

                  

Card Member Loans

       12      $ 91        10        (c     47      $ 357        11      (c)

Card Member Receivables

       4        49        (c     12        16        204        (c   12 
    

 

 

   

 

 

       

 

 

   

 

 

     

Total

       16      $ 140            63      $ 561       
    

 

 

   

 

 

       

 

 

   

 

 

     

 

 

  (a)

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

 

  (b)

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

 

  (c)

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

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

                                                                                           

 

      

 

Three Months Ended

September 30, 2014

  

  

   

 

Nine Months Ended

September 30, 2014

(Accounts in thousands, Dollars in millions)

      

 

Number of

Accounts

  

  

   

 

 

 

Aggregated

Outstanding

Balances

Upon Default (a)

  

  

  

  

   
 
Number of
Accounts
  
  
 

Aggregated

Outstanding

Balances

Upon Default (a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

Card Member Loans

       2      $ 20        6      $                  60

Card Member Receivables

       1        9        2      27
    

 

 

   

 

 

   

 

 

   

 

Total

       3      $ 29        8      $                  87
    

 

 

   

 

 

   

 

 

   

 

 

      

 

Three Months Ended

September 30, 2013

  

  

   

 

Nine Months Ended

September 30, 2013

(Accounts in thousands, Dollars in millions)

      

 

Number of

Accounts

  

  

   

 

 

 

Aggregated

Outstanding

Balances

Upon Default (a)

  

  

  

  

   

 

Number of

Accounts

  

  

 

Aggregated

Outstanding

Balances

Upon Default (a)

Troubled Debt Restructurings That
Subsequently Defaulted:

          

Card Member Loans

       4      $ 37        15      $                138

Card Member Receivables

       1        8        3      33
    

 

 

   

 

 

   

 

 

   

 

Total

       5      $ 45        18      $                171
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Reserves for Losses

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

Changes in Card Member Receivables Reserve for Losses

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

 

                                             

 

(Millions)

       2014     

2013

Balance, January 1

     $ 386      $               428 

Provisions (a)

       594      474 

Net write-offs (b)

       (527   (507)

Other (c)

       (21  
    

 

 

   

 

Balance, September 30

     $ 432      $               396 
    

 

 

   

 

 

 

  (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 $269 million and $304 million, including net write-offs from TDRs of $14 million and $16 million, for the nine months ended September 30, 2014 and 2013, respectively.

 

  (c)

Beginning in first quarter 2014, reserves for card related fraud losses of $(7) million are reflected in other liabilities. All periods include foreign currency translation adjustments of $(6) million and $(3) million for the nine months ended September 30, 2014 and 2013, respectively, and other items of $(8) million and $4 million for the nine months ended September 30, 2014 and 2013, respectively.

Card Member Receivables Evaluated Individually and Collectively for Impairment

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

 

                                             

 

(Millions)

       2014      

2013

Card Member receivables evaluated individually for impairment (a)

     $ 44       $                  50

Related reserves (a)

     $ 32       $                  38

 

Card Member receivables evaluated collectively for impairment

     $ 45,073       $           44,113

Related reserves (b)

     $ 400       $                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.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in Card Member Loans Reserve for Losses

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

 

                                             

 

(Millions)

       2014     

2013

Balance, January 1

     $ 1,261      $            1,471 

Provisions (a)

       797      825 

Net write-offs

      

Principal (b)

       (786   (888)

Interest and fees (b)

       (124   (113)

Other (c)

       (2   (14)
    

 

 

   

 

Balance, September 30

     $ 1,146      $            1,281 
    

 

 

   

 

 

 

  (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 $324 million and $343 million, including net write-offs from TDRs of $(5) million and $6 million, for the nine months ended September 30, 2014 and 2013, respectively. Recoveries of interest and fees were de minimis.

 

  (c)

Beginning in first quarter 2014, reserves for card related fraud losses of $(6) million are reflected in other liabilities. All periods include foreign currency translation adjustments of $(7) million and $(8) million for the nine months ended September 30, 2014 and 2013, respectively, and other items of $11 million and $(6) million for the nine months ended September 30, 2014 and 2013, respectively.

Card Member Loans Evaluated Individually and Collectively for Impairment

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

 

                                             

 

(Millions)

       2014      

2013

Card Member loans evaluated individually for impairment (a)

     $ 309       $                378

Related reserves (a)

     $ 70       $                  84

 

Card Member loans evaluated collectively for impairment (b)

     $ 65,748       $           66,860

Related reserves (b)

     $ 1,076       $             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.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Investment Securities

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

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

 

                                                                                                                               

 

       2014        2013

Description of Securities (Millions)

       Cost       
 
 
Gross
Unrealized
Gains
  
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
   
 

 

Estimated
Fair

Value

  
  

  

    Cost       
 
 
Gross
Unrealized
Gains
  
  
  
   
 
 
Gross
Unrealized
Losses
  
  
  
 

Estimated Fair

Value

State and municipal obligations

     $ 3,628      $ 130      $ (3   $ 3,755      $ 4,060      $ 54      $ (79   $         4,035

U.S. Government agency obligations

       3                      3        3                    3

U.S. Government treasury obligations

       346        4        (1     349        318        3        (1   320

Corporate debt securities

       39        3               42        43        3             46

Mortgage-backed securities (a)

       137        7               144        160        5        (1   164

Equity securities (b)

              1               1        29        95             124

Foreign government bonds and obligations

       399        8               407        272        5        (1   276

Other (c)

       50               (1     49        50               (2   48
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 4,602      $ 153      $ (5   $ 4,750      $ 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) as of December 31, 2013.

 

  (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 September 30, 2014 and December 31, 2013:

 

                                                                                                                               

 

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

Description of Securities (Millions)

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

Gross Unrealized Losses

State and municipal obligations

     $      $      $ 72      $ (3   $ 1,320      $ (63   $ 106      $           (16)

Foreign government bonds and obligations

                                   208        (1          — 

U.S. Government treasury obligations

       127        (1                   166        (1          — 

Mortgage-backed securities

                                   35        (1          — 

Other

                     32        (1     30        (1     17      (1)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 127      $ (1   $ 104      $ (4   $ 1,759      $ (67   $ 123      $           (17)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

16


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 September 30, 2014 and December 31, 2013:

 

                                                                                                                                               

 

       Less than 12 months        12 months or more        Total

Ratio of Fair Value to Amortized Cost (Dollars in millions)

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

Gross Unrealized Losses

2014:

                    

90%–100%

       6      $ 127      $ (1     17      $ 104      $ (4     23      $ 231      $             (5)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of September 30, 2014

       6      $ 127      $ (1     17      $ 104      $ (4     23      $ 231      $(5)
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

2013:

                    

90%–100%

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

Less than 90%

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total as of December 31, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

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

Supplemental Information

Gross realized gains on the sales of investment securities, included in Other revenues for the three and nine months ended September 30, 2014 were $20 million and $100 million, respectively. Gross realized gains on the sale of investment securities, included in Other revenues for the three and nine months ended September 30, 2013 were, $37 million and $102 million, respectively. There were no realized losses for the three and nine months ended September 30, 2014 and 2013.

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

 

                                             

 

(Millions)

       Cost     

Estimated Fair Value

Due within 1 year

     $ 579       $                580

Due after 1 year but within 5 years

       435       442

Due after 5 years but within 10 years

       235       251

Due after 10 years

       3,303       3,427
    

 

 

    

 

Total

     $ 4,552       $             4,700
    

 

 

    

 

 

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.

 

17


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 September 30, 2014 and December 31, 2013, included in Other assets on the Company’s Consolidated Balance Sheets:

 

                                             

 

(Millions)

       2014      

2013

Charge Trust

     $ 1       $                  2

Lending Trust

       43       56
    

 

 

    

 

Total

     $ 44       $                58
    

 

 

    

 

 

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

American Express Travel Related Services Company, Inc. (TRS), which is a consolidated subsidiary of the Company, is the primary beneficiary of both the trusts. Excluding its consolidated subsidiaries, TRS owns approximately $1.0 billion of subordinated securities issued by the Lending Trust as of September 30, 2014.

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

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Customer Deposits

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

 

                                             

 

(Millions)

       2014      

2013

U.S.:

       

Interest bearing

     $ 41,883       $           40,831

Non-interest bearing (includes Card Member credit balances of: 2014,$304; 2013,$340)

       336       360

Non-U.S.:

       

Interest bearing

       108       121

Non-interest bearing (includes Card Member credit balances of: 2014,$361; 2013,$437)

       376       451
    

 

 

    

 

Total customer deposits

     $ 42,703       $           41,763
    

 

 

    

 

 

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

 

                                             

 

(Millions)

       2014      

2013

U.S. retail deposits:

       

Savings accounts – Direct

     $ 26,248       $           24,550

Certificates of deposit:

       

Direct

       355       489

Third-party

       6,371       6,929

Sweep accounts – Third-party

       8,909       8,863

Other retail deposits:

       

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

       155       155

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

       665       777
    

 

 

    

 

Total customer deposits

     $ 42,703       $           41,763
    

 

 

    

 

 

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

 

                                                                    

 

(Millions)

       U.S.        Non-U.S.     

Total

2014

     $ 1,073      $ 3      $             1,076

2015

       1,259        4      1,263

2016

       1,684             1,684

2017

       937             937

2018

       1,089             1,089

After 5 years

       684             684
    

 

 

   

 

 

   

 

Total

     $ 6,726      $ 7      $             6,733
    

 

 

   

 

 

   

 

 

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

 

                                             

 

(Millions)

       2014      

2013

U.S.

     $ 115       $                148

Non-U.S.

       2      
    

 

 

    

 

Total

     $ 117       $                148
    

 

 

    

 

 

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Derivatives and Hedging Activities

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

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

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

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

 

                                                                                           

 

      
 
Other Assets
Fair Value
  
  
   

 

Other Liabilities

Fair Value

(Millions)

       2014        2013        2014     

2013

Derivatives designated as hedging instruments:

          

Interest rate contracts

          

Fair value hedges

     $ 309      $ 455      $ 27      $                   2 

Total return contract

          

Fair value hedge

              8             — 

Foreign exchange contracts

          

Net investment hedges

       384        174        57      116 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives designated as hedging instruments

       693        637        84      118 

Derivatives not designated as hedging instruments:

          

Foreign exchange contracts, including certain embedded derivatives (a)

       129        64        162      95 
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, gross

       822        701        246      213 

Less: Cash collateral netting (b)

       (125     (336     (27   — 

Derivative asset and derivative liability netting (c)

       (126 )      (36     (126 )    (36)
    

 

 

   

 

 

   

 

 

   

 

Total derivatives, net (d)

     $ 571      $ 329      $ 93      $               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 received noncash collateral from a counterparty in the form of security interest in U.S. Treasury securities with a fair value of $111 million and nil as of September 30, 2014 and December 31, 2013, respectively, none of which was sold or repledged. Such noncash collateral economically reduces the Company’s risk exposure to $460 million as of September 30, 2014, but does not reduce the net exposure on the Company’s Consolidated Balance Sheets. Additionally, the Company posted $97 million and $26 million as of September 30, 2014 and December 31, 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within other receivables on the Company’s Consolidated Balance Sheets and are not netted against the derivative balances.

 

  (c)

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

 

  (d)

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

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

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Derivative Financial Instruments that Qualify for Hedge Accounting

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

Fair Value Hedges

Interest Rate Contracts

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of September 30, 2014 and December 31, 2013, the Company hedged $18.2 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedged its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company used a total return contract (TRC) to transfer this exposure to its derivative counterparty. On July 18, 2014, the Company sold its remaining 34.3 million shares in ICBC and terminated the TRC. As of December 31, 2013, the fair value of the equity investment in ICBC was $122 million (180.7 million shares). Prior to termination, to the extent the hedge was effective, the gain or loss on the TRC offset the gain or loss on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item resulted in hedge ineffectiveness and was recognized in Other expenses in the Consolidated Statements of Income.

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

 

                                                                                               

 

For the Three Months Ended September 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   
 
Net hedge
ineffectiveness

Derivative

relationship

    

Income Statement Line Item

       Amount     

Income Statement Line Item

      
Amount
  
 
            2014        2013             2014        2013        2014     

2013

Interest rate contracts

    

Other expenses

     $ (109   $ (11  

Other expenses

     $ 112      $ 5      $ 3      $     (6)

Total return contract

    

Other non-interest revenues

              (21  

Other non-interest revenues

              21            

 

 

                                                                                               

 

For the Nine Months Ended September 30: (Millions)

    

Gains (losses) recognized in income

    

Derivative contract

  

 

Hedged item

  

   

 

Net hedge

ineffectiveness

Derivative

relationship

    

Income Statement Line Item

       Amount     

Income Statement Line Item

       Amount     
            2014        2013             2014        2013        2014     

2013

Interest rate contracts

    

Other expenses

     $ (170   $ (305  

Other expenses

     $ 176      $ 295      $ 6      $     (10)

Total return contract

    

Other non-interest revenues

       11        (10  

Other non-interest revenues

       (11     10            

 

The Company also recognized a net reduction in interest expense on long-term debt of $74 million and $76 million for the three months ended September 30, 2014 and 2013, respectively, and $217 million and $280 million for the nine months ended September 30, 2014 and 2013, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was $246 million and $(123) million for the three months ended September 30, 2014 and 2013, respectively, and was $113 million and $160 million for the nine months ended September 30, 2014 and 2013, respectively. Any ineffective portion of the gain or (loss) on net investment hedges is recognized in other expenses during the period of change. During the three months ended

 

21


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

September 30, 2014 and 2013, the Company reclassified $(1) million and nil, respectively, and $9 million and nil for the nine months ended September 30, 2014 and 2013, respectively, from AOCI to earnings as a component of other expenses. No ineffectiveness associated with net investment hedges was reclassified from AOCI into income during the three and nine months ended September 30, 2014 and 2013.

Derivatives Not Designated as Hedges

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

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

 

                                                                                                                  

 

     Pretax gains
       
 
For the Three Months Ended
September 30,
  
  
      
 
For the Nine Months Ended
September 30,
       
Amount
  
       Amount

Description (Millions)

  

Income Statement Line Item

     2014           2013           2014     

2013

Interest rate contracts

  

Other expenses

   $         $ 1         $      $                    1

Foreign exchange contracts (a)

  

Other expenses

     2           25           84      108
  

Cost of Card Member services

                         4     
     

 

 

      

 

 

      

 

 

   

 

Total

      $ 2         $ 26         $ 88      $                109
     

 

 

      

 

 

      

 

 

   

 

 

 

  (a)

Foreign exchange contracts include forwards and embedded foreign currency derivatives.

 

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 September 30, 2014 and December 31, 2013:

 

                                                                                                                               

 

       2014        2013

(Millions)

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

Level 3

Assets:

                  

Investment securities: (a)

                  

Equity securities

     $ 1      $ 1      $      $      $ 124      $ 124      $      $           —

Debt securities and other

       4,749        349        4,400               4,892        320        4,572     

Derivatives (a)

       822               822               701               701     
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total assets

       5,572        350        5,222               5,717        444        5,273     
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Liabilities:

                  

Derivatives (a)

       246               246               213               213     
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total liabilities

     $ 246      $      $ 246      $      $ 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.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

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 September 30, 2014 and December 31, 2013. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of September 30, 2014 and December 31, 2013, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be reliably estimated by aggregating the amounts presented.

 

                                                                               

 

      

 

Carrying

Value

  

  

    Corresponding Fair Value Amount

2014 (Billions)

         Total        Level 1        Level 2     

Level 3

Financial Assets:

            

Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

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

Other financial assets (b)

     $ 48      $ 48      $      $ 48      $           —

Financial assets carried at other than fair value

            

Loans, net

     $ 66      $ 66  (c)    $      $      $           66

Financial Liabilities:

            

Financial liabilities for which carrying values equal or approximate fair value

     $ 60      $ 60      $      $ 60      $           —

Financial liabilities carried at other than fair value

            

Certificates of deposit (d)

     $ 7      $ 7      $      $ 7      $           —

Long-term debt

     $ 56      $ 58  (c)    $      $ 58      $           —

 

 

      

 

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 $6.2 billion and $7.3 billion held by consolidated VIEs as of September 30, 2014 and December 31, 2013, respectively), restricted cash and other miscellaneous assets.

 

  (c)

Includes fair values of loans of $28.1 billion and $31.0 billion, and long-term debt of $15.6 billion and $18.8 billion held by consolidated VIEs as of September 30, 2014 and December 31, 2013, respectively.

 

  (d)

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

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 nine months ended September 30, 2014 and during the year ended December 31, 2013, the Company did not have any material impaired assets that were required to be measured at fair value.

 

10. Guarantees

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

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

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

 

                                                                                           

 

      
 
 
 
Maximum potential
undiscounted future
payments 
(a)
(Billions)
  
  
  
  
   
 
Related liability (b)
(Millions)

Type of Guarantee

       2014        2013        2014     

2013

Card and travel operations (c)

     $ 44      $ 44      $ 43      $                  88

Other (d)

       1        1        71      73
    

 

 

   

 

 

   

 

 

   

 

Total

     $ 45      $ 45      $ 114      $                161
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

 

  (b)

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

 

  (c)

Primarily includes Return Protection and Merchant Protection.

 

  (d)

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

 

24


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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. Changes In Accumulated Other Comprehensive (Loss) Income

AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component of AOCI for the three and nine months ended September 30, 2014 and 2013 were as follows:

 

                                                                                           

 

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

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

 
 
 
 

Net Unrealized
Pension and

Other
Postretirement
Benefit (Losses)
Gains

  
 

  
  
  
  

  

Accumulated

Other

Comprehensive

(Loss) Income

Balances as of June 30, 2014

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

 

 

    

 

 

    

 

 

    

 

Net unrealized gains

       2                      

Increase (decrease) due to amounts reclassified into earnings

       (13      1               (12)

Net translation (loss) of investments in foreign operations

               (414            (414)

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

               246               246

Pension and other postretirement benefit gains

                       7      
    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive (loss) income

       (11      (167      7       (171)
    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2014

     $ 94       $ (1,285    $ (351    $                 (1,542)
    

 

 

    

 

 

    

 

 

    

 

 

 

                                                                                           

 

For the Nine Months Ended September 30, 2014 (Millions), net of tax

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

 
 
 
 

Net Unrealized
Pension and

Other
Postretirement
Benefit (Losses)
Gains

  
 

  
  
  
  

  

Accumulated

Other

Comprehensive

(Loss) Income

Balances as of December 31, 2013

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

 

 

    

 

 

    

 

 

    

 

Net unrealized gains

       102                       102 

Increase (decrease) due to amounts reclassified into earnings

       (71      5               (66)

Net translation (loss) of investments in foreign operations

               (313            (313)

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

               113               113 

Pension and other postretirement benefit gains

                       48       48 
    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive income (loss)

       31         (195      48       (116)
    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2014

     $ 94       $ (1,285    $ (351    $                 (1,542)
    

 

 

    

 

 

    

 

 

    

 

 

 

                                                                                           

 

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

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

 
 
 
 

Net Unrealized
Pension and

Other
Postretirement
Benefit (Losses)
Gains

  
 

  
  
  
  

  

Accumulated

Other

Comprehensive

(Loss) Income

Balances as of June 30, 2013

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

 

 

    

 

 

    

 

 

    

 

Net unrealized (losses)

       (25                    (25)

Increase (decrease) due to amounts reclassified into earnings

       (23                    (23)

Net translation gain of investments in foreign operations

               134               134 

Net gains related to hedges of investment in foreign operations

               (123            (123)

Pension and other postretirement benefit gains

                       6      
    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive (loss) income

       (48      11         6       (31)
    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2013

     $ 105       $ (1,016    $ (428    $                 (1,339)
    

 

 

    

 

 

    

 

 

    

 

 

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

                                                                                           

 

For the Nine Months Ended September 30, 2013 (Millions), net of tax

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

Accumulated Other Comprehensive (Loss) Income

Balances as of December 31, 2012

     $ 315       $ (754    $ (488    $                  (927)
    

 

 

    

 

 

    

 

 

    

 

Net unrealized (losses)

       (141                    (141)

Increase (decrease) due to amounts reclassified into earnings

       (69                    (69)

Net translation (loss) of investments in foreign operations

               (422            (422)

Net gains related to hedges of investment in foreign operations

               160               160 

Pension and other postretirement benefit gains

                       60       60 
    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive (loss) income

       (210      (262      60       (412)
    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2013

     $ 105       $ (1,016    $ (428    $               (1,339)
    

 

 

    

 

 

    

 

 

    

 

 

The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statements of Income for the three and nine months ended September 30, 2014:

 

                                                                                                                  

 

         (Gains) losses recognized in income
        
 
For the Three Months Ended
September 30,
  
  
   
 
For the Nine Months Ended
September 30,
     Income Statement Line Item    
Amount
  
    Amount

Description (Millions)

         2014        2013        2014     

2013

Available-for-sale securities

            

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

    

Other non-interest revenues

  $ (21   $ (36   $ (111   $                  (109)

Related income tax expense

    

Income tax provision

    8        13        40      40 

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

         (13     (23     (71   (69)
      

 

 

   

 

 

   

 

 

   

 

Foreign currency translation adjustments

            

Reclassification of realized losses on translation adjustments and related hedges

    

Other expenses

                  8     

Related income tax expense

    

Income tax provision

    1               (3  
      

 

 

   

 

 

   

 

 

   

 

Reclassification of foreign currency translation adjustments

         1               5     
      

 

 

   

 

 

   

 

 

   

 

Total

  $ (12 )    $ (23   $ (66 )    $                    (69)
      

 

 

   

 

 

   

 

 

   

 

 

 

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 $686 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 $686 million of unrecognized tax benefits, approximately $529 million relates to amounts that if recognized would be recorded to shareholders’ equity and would not impact the Company’s results of operations or the effective tax rate.

 

26


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The effective tax rate was 34.2 percent and 34.4 percent for the three and nine months ended September 30, 2014, respectively. The effective tax rate was 31.8 percent and 31.4 percent for the three and nine months ended September 30, 2013, respectively. The tax rate for the three and nine months ended September 30, 2013 reflects the resolution of certain prior years’ tax items as well as the reversal of a valuation allowance related to deferred tax assets within the business travel organization.

The tax rates for all 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 were as follows:

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions, except per share amounts)

       2014        2013        2014     

2013

Numerator:

          

Basic and diluted:

          

Net income

     $ 1,477      $ 1,366      $ 4,438      $            4,051

Earnings allocated to participating share awards (a)

       (11     (12     (35   (36)
    

 

 

   

 

 

   

 

 

   

 

Net income attributable to common shareholders

     $ 1,466      $ 1,354      $ 4,403      $            4,015
    

 

 

   

 

 

   

 

 

   

 

Denominator: (a)

          

Basic: Weighted-average common stock

       1,041        1,074        1,051      1,087

Add: Weighted-average stock options (b)

       6        7        6      7
    

 

 

   

 

 

   

 

 

   

 

Diluted

       1,047        1,081        1,057      1,094
    

 

 

   

 

 

   

 

 

   

 

Basic EPS

     $ 1.41      $ 1.26      $ 4.19      $              3.69

Diluted EPS

     $ 1.40      $ 1.25      $ 4.17      $              3.67

 

 

  (a)

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

 

  (b)

The dilutive effect of unexercised stock options excludes 0.2 million and 0.1 million of options from the computation of EPS for the three months ended September 30, 2014 and 2013, respectively, and 0.2 million options for both the nine months ended September 30, 2014 and 2013 because inclusion of the options would have been anti-dilutive.

For the three and nine months ended September 30, 2014 and 2013, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, and maturing in 2036. 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.

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Non-Interest Revenue and Expense Detail

The following is a detail of Other commissions and fees:

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Foreign currency conversion fee revenue

     $ 225      $ 223      $ 665      $                655

Delinquency fees

       184        172        539      503

Loyalty Partner-related fees

       100        74        286      221

Service fees

       94        97        274      273

Other (a)

       39        44        120      136
    

 

 

   

 

 

   

 

 

   

 

Total Other commissions and fees

     $ 642      $ 610      $ 1,884      $             1,788
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

The following is a detail of Other revenues:

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Global Network Services partner revenues

     $ 173      $ 171      $ 513      $               466

Net realized gains and losses on investment securities

       20        37        100      102

Other (a)

       400        393        1,066      1,137
    

 

 

   

 

 

   

 

 

   

 

Total Other revenues

     $ 593      $ 601      $ 1,679      $            1,705
    

 

 

   

 

 

   

 

 

   

 

 

 

  (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, revenues related to the GBT JV transition services agreement, earnings from equity method investments and other miscellaneous revenue and fees.

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

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Marketing and promotion

     $ 809      $ 827      $ 2,407      $             2,234

Card Member rewards

       1,695        1,619        5,050      4,740

Card Member services and other

       205        197        619      579
    

 

 

   

 

 

   

 

 

   

 

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

     $ 2,709      $ 2,643      $ 8,076      $             7,553
    

 

 

   

 

 

   

 

 

   

 

 

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.

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a detail of Other, net expenses:

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Professional services

     $ 731      $ 793      $ 2,240      $                2,272

Occupancy and equipment

       432        462        1,361      1,394

Card-related fraud losses

       96        73        282      229

Communications

       91        94        285      282

Gain on business travel joint venture transaction

       (15            (641  

Other (a)

       261        269        866      734
    

 

 

   

 

 

   

 

 

   

 

Total Other, net

     $ 1,596      $ 1,691      $ 4,393      $                4,911
    

 

 

   

 

 

   

 

 

   

 

 

 

  (a)

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

 

15. Contingencies

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

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

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

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 $350 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.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Reportable Operating Segments

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

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

 

                                                                                           

 

      
 
Three Months Ended
September 30,
  
  
   
 
Nine Months Ended
September 30,

(Millions)

       2014        2013        2014     

2013

Non-interest revenues:

          

USCS

     $ 3,214      $ 3,050      $ 9,453      $            8,991

ICS

       1,206        1,161        3,571      3,415

GCS

       957        1,277        3,538      3,787

GNMS

       1,368        1,309        4,027      3,856

Corporate & Other, including adjustments and eliminations (a)

       189    &nbs