UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 1-7657
AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)
New York |
13-4922250 |
|||||
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |||||
200 Vesey Street, New York, NY |
10285 |
|||||
(Address of principal executive offices) | (Zip Code) | |||||
Registrants 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 issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at July 18, 2014 |
|||||||
Common Shares (par value $0.20 per share) | 1,046,567,365 shares |
FORM 10-Q
INDEX
Part I. | Financial Information | Page No. | ||||||
Item 1. |
||||||||
Consolidated Statements of Income Three Months Ended June 30, 2014 and 2013 |
1 | |||||||
Consolidated Statements of Income Six Months Ended June 30, 2014 and 2013 |
2 | |||||||
Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2014 and 2013 |
3 | |||||||
Consolidated Balance Sheets June 30, 2014 and December 31, 2013 |
4 | |||||||
Consolidated Statements of Cash Flows Six Months Ended June 30, 2014 and 2013 |
5 | |||||||
6 | ||||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | ||||||
Item 3. |
72 | |||||||
Item 4. |
72 | |||||||
Part II. | Other Information | |||||||
Item 1. |
75 | |||||||
Item 1A. |
77 | |||||||
Item 2. |
79 | |||||||
Item 5. |
80 | |||||||
Item 6. |
80 | |||||||
81 | ||||||||
E-1 |
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| ||||||
Three Months Ended June 30 (Millions, except per share amounts) |
2014 | 2013 | ||||
Revenues |
||||||
Non-interest revenues |
||||||
Discount revenue |
$ | 4,945 | $ 4,729 | |||
Net card fees |
687 | 647 | ||||
Travel commissions and fees |
500 | 495 | ||||
Other commissions and fees |
624 | 605 | ||||
Other |
585 | 567 | ||||
|
|
| ||||
Total non-interest revenues |
7,341 | 7,043 | ||||
|
|
| ||||
Interest income |
||||||
Interest on loans |
1,696 | 1,622 | ||||
Interest and dividends on investment securities |
45 | 52 | ||||
Deposits with banks and other |
18 | 20 | ||||
|
|
| ||||
Total interest income |
1,759 | 1,694 | ||||
|
|
| ||||
Interest expense |
||||||
Deposits |
91 | 107 | ||||
Long-term debt and other |
352 | 385 | ||||
|
|
| ||||
Total interest expense |
443 | 492 | ||||
|
|
| ||||
Net interest income |
1,316 | 1,202 | ||||
|
|
| ||||
Total revenues net of interest expense |
8,657 | 8,245 | ||||
|
|
| ||||
Provisions for losses |
||||||
Charge card |
183 | 161 | ||||
Card Member loans |
282 | 334 | ||||
Other |
24 | 23 | ||||
|
|
| ||||
Total provisions for losses |
489 | 518 | ||||
|
|
| ||||
Total revenues net of interest expense after provisions for losses |
8,168 | 7,727 | ||||
|
|
| ||||
Expenses |
||||||
Marketing, promotion, rewards and Card Member services |
2,950 | 2,580 | ||||
Salaries and employee benefits |
1,658 | 1,543 | ||||
Other, net |
1,248 | 1,609 | ||||
|
|
| ||||
Total expenses |
5,856 | 5,732 | ||||
|
|
| ||||
Pretax income |
2,312 | 1,995 | ||||
Income tax provision |
783 | 590 | ||||
|
|
| ||||
Net income |
$ | 1,529 | $ 1,405 | |||
|
|
| ||||
Earnings per Common Share (Note 13): (a) |
||||||
Basic |
$ | 1.44 | $ 1.28 | |||
Diluted |
$ | 1.43 | $ 1.27 | |||
|
|
| ||||
Average common shares outstanding for earnings per common share: |
||||||
Basic |
1,052 | 1,090 | ||||
Diluted |
1,058 | 1,097 | ||||
Cash dividends declared per common share |
$ | 0.26 | $ 0.23 | |||
|
(a) | Represents net income less earnings allocated to participating share awards of $12 million and $13 million for the three months ended June 30, 2014 and 2013, respectively. |
See Notes to Consolidated Financial Statements.
1
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| ||||||
Six Months Ended June 30 (Millions, except per share amounts) |
2014 | 2013 | ||||
Revenues |
||||||
Non-interest revenues |
||||||
Discount revenue |
$ | 9,591 | $ 9,167 | |||
Net card fees |
1,361 | 1,300 | ||||
Travel commissions and fees |
923 | 932 | ||||
Other commissions and fees |
1,242 | 1,178 | ||||
Other |
1,086 | 1,104 | ||||
|
|
| ||||
Total non-interest revenues |
14,203 | 13,681 | ||||
|
|
| ||||
Interest income |
||||||
Interest on loans |
3,407 | 3,305 | ||||
Interest and dividends on investment securities |
91 | 105 | ||||
Deposits with banks and other |
37 | 46 | ||||
|
|
| ||||
Total interest income |
3,535 | 3,456 | ||||
|
|
| ||||
Interest expense |
||||||
Deposits |
185 | 221 | ||||
Long-term debt and other |
697 | 790 | ||||
|
|
| ||||
Total interest expense |
882 | 1,011 | ||||
|
|
| ||||
Net interest income |
2,653 | 2,445 | ||||
|
|
| ||||
Total revenues net of interest expense |
16,856 | 16,126 | ||||
|
|
| ||||
Provisions for losses |
||||||
Charge card |
398 | 315 | ||||
Card Member loans |
532 | 577 | ||||
Other |
44 | 42 | ||||
|
|
| ||||
Total provisions for losses |
974 | 934 | ||||
|
|
| ||||
Total revenues net of interest expense after provisions for losses |
15,882 | 15,192 | ||||
|
|
| ||||
Expenses |
||||||
Marketing, promotion, rewards and Card Member services |
5,367 | 4,910 | ||||
Salaries and employee benefits |
3,198 | 3,158 | ||||
Other, net |
2,797 | 3,220 | ||||
|
|
| ||||
Total expenses |
11,362 | 11,288 | ||||
|
|
| ||||
Pretax income |
4,520 | 3,904 | ||||
Income tax provision |
1,559 | 1,219 | ||||
|
|
| ||||
Net income |
$ | 2,961 | $ 2,685 | |||
|
|
| ||||
Earnings per Common Share (Note 13): (a) |
||||||
Basic |
$ | 2.78 | $ 2.43 | |||
Diluted |
$ | 2.77 | $ 2.42 | |||
|
|
| ||||
Average common shares outstanding for earnings per common share: |
||||||
Basic |
1,056 | 1,094 | ||||
Diluted |
1,062 | 1,101 | ||||
Cash dividends declared per common share |
$ | 0.49 | $ 0.43 | |||
|
(a) | Represents net income less earnings allocated to participating share awards of $24 million for both the six months ended June 30, 2014 and 2013. |
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Net income |
$ | 1,529 | $ | 1,405 | $ | 2,961 | $ 2,685 | |||||||
Other comprehensive (loss) income: |
||||||||||||||
Net unrealized securities (losses) gains, net of tax of: 2014, $1 and $24; 2013, $(72) and $(90) |
3 | (127 | ) | 42 | (162) | |||||||||
Foreign currency translation adjustments, net of tax of: 2014, $(55) and $(78); 2013, $142 and $131 |
6 | (228 | ) | (28 | ) | (273) | ||||||||
Net unrealized pension and other postretirement benefit |
14 | 27 | 41 | 54 | ||||||||||
|
|
|
|
|
|
| ||||||||
Other comprehensive (loss) income |
23 | (328 | ) | 55 | (381) | |||||||||
|
|
|
|
|
|
| ||||||||
Comprehensive income |
$ | 1,552 | $ | 1,077 | $ | 3,016 | $ 2,304 | |||||||
|
|
|
|
|
|
| ||||||||
|
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| ||||||
(Millions, except per share data) |
|
June 30, 2014 |
|
December 31, 2013 | ||
Assets |
||||||
Cash and cash equivalents |
||||||
Cash and due from banks |
$ | 2,643 | $ 2,212 | |||
Interest bearing deposits in other banks (includes securities purchased under resale agreements: 2014, $297; 2013, $143) |
15,399 | 16,776 | ||||
Short-term investment securities |
388 | 498 | ||||
|
|
| ||||
Total cash and cash equivalents |
18,430 | 19,486 | ||||
Accounts receivable |
||||||
Card Member receivables (includes gross receivables available to settle obligations of consolidated variable interest entities: 2014, $6,497; 2013, $7,329), less reserves: 2014, $413; 2013, $386 |
44,893 | 43,777 | ||||
Other receivables, less reserves: 2014, $59; 2013, $71 |
3,753 | 3,408 | ||||
Loans |
||||||
Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2014, $28,878; 2013, $31,245), less reserves: 2014, $1,170; 2013, $1,261 |
65,168 | 65,977 | ||||
Other loans, less reserves: 2014, $10; 2013, $13 |
703 | 608 | ||||
Investment securities |
4,855 | 5,016 | ||||
Premises and equipment, less accumulated depreciation and amortization: 2014, $6,162; 2013, $5,978 |
3,870 | 3,875 | ||||
Other assets (includes restricted cash of consolidated variable interest entities: 2014, $68; 2013, $58) |
10,712 | 11,228 | ||||
|
|
| ||||
Total assets |
$ | 152,384 | $ 153,375 | |||
|
|
| ||||
Liabilities and Shareholders Equity |
||||||
Liabilities |
||||||
Customer deposits |
$ | 42,136 | $ 41,763 | |||
Travelers Cheques and other prepaid products |
3,718 | 4,240 | ||||
Accounts payable |
11,645 | 10,615 | ||||
Short-term borrowings (includes debt issued by consolidated variable interest entities: 2014, nil; 2013, $2,000) |
3,436 | 5,021 | ||||
Long-term debt (includes debt issued by consolidated variable interest entities: 2014, $15,499; 2013, $18,690) |
54,836 | 55,330 | ||||
Other liabilities |
16,400 | 16,910 | ||||
|
|
| ||||
Total liabilities |
132,171 | 133,879 | ||||
|
|
| ||||
Contingencies (Note 15) |
||||||
Shareholders Equity |
||||||
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,046 million shares as of June 30, 2014
and 1,064 million shares as of |
210 | 213 | ||||
Additional paid-in capital |
12,247 | 12,202 | ||||
Retained earnings |
9,127 | 8,507 | ||||
Accumulated other comprehensive income (loss) |
||||||
Net unrealized securities gains, net of tax of: 2014, $57; 2013, $33 |
105 | 63 | ||||
Foreign currency translation adjustments, net of tax of: 2014, $(604); 2013, $(526) |
(1,118 | ) | (1,090) | |||
Net unrealized pension and other postretirement benefit losses, net of tax of: 2014, $(157); 2013, $(177) |
(358 | ) | (399) | |||
|
|
| ||||
Total accumulated other comprehensive loss |
(1,371 | ) | (1,426) | |||
|
|
| ||||
Total shareholders equity |
20,213 | 19,496 | ||||
|
|
| ||||
Total liabilities and shareholders equity |
$ | 152,384 | $ 153,375 | |||
|
|
| ||||
|
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| ||||||
Six Months Ended June 30 (Millions) |
2014 | 2013 | ||||
Cash Flows from Operating Activities |
||||||
Net income |
$ | 2,961 | $ 2,685 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||
Provisions for losses |
974 | 934 | ||||
Depreciation and amortization |
515 | 497 | ||||
Deferred taxes and other |
(397 | ) | (45) | |||
Stock-based compensation |
164 | 197 | ||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
||||||
Other receivables |
(701 | ) | 190 | |||
Other assets |
752 | 964 | ||||
Accounts payable and other liabilities |
1,142 | 5,247 | ||||
Travelers Cheques and other prepaid products |
(525 | ) | (440) | |||
|
|
| ||||
Net cash provided by operating activities |
4,885 | 10,229 | ||||
|
|
| ||||
Cash Flows from Investing Activities |
||||||
Sale of investments |
80 | 131 | ||||
Maturity and redemption of investments |
525 | 601 | ||||
Purchase of investments |
(443 | ) | (606) | |||
Net (increase) in Card Member loans/receivables |
(1,153 | ) | (1,374) | |||
Purchase of premises and equipment, net of sales: 2014, nil; 2013, $7 |
(546 | ) | (475) | |||
Acquisitions/dispositions, net of cash acquired |
(109 | ) | (191) | |||
Net increase (decrease) in restricted cash |
70 | (16) | ||||
|
|
| ||||
Net cash used in investing activities |
(1,576 | ) | (1,930) | |||
|
|
| ||||
Cash Flows from Financing Activities |
||||||
Net increase in customer deposits |
371 | 347 | ||||
Net (decrease) in short-term borrowings |
(1,654 | ) | (219) | |||
Issuance of long-term debt |
5,955 | 3,109 | ||||
Principal payments on long-term debt |
(6,661 | ) | (8,427) | |||
Issuance of American Express common shares |
193 | 501 | ||||
Repurchase of American Express common shares |
(2,091 | ) | (2,142) | |||
Dividends paid |
(489 | ) | (443) | |||
|
|
| ||||
Net cash used in financing activities |
(4,376 | ) | (7,274) | |||
|
|
| ||||
Effect of exchange rate changes on cash and cash equivalents |
11 | (146) | ||||
|
|
| ||||
Net (decrease) increase in cash and cash equivalents |
(1,056 | ) | 879 | |||
Cash and cash equivalents at beginning of period |
19,486 | 22,250 | ||||
|
|
| ||||
Cash and cash equivalents at end of period |
$ | 18,430 | $ 23,129 | |||
|
|
| ||||
|
On June 30, 2014, the Company completed a transaction to establish a non-consolidated joint venture comprising the former Global Business Travel (GBT) operations of the Company. This non-cash transaction is further described within Note 2 to the Consolidated Financial Statements.
See Notes to Consolidated Financial Statements
5
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 Companys principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company also focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The Companys 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 Companys 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 Companys financial position, results of operations or cash flows.
Recently Issued Accounting Standards
Accounting Standards Update No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers was issued on May 28, 2014. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance supersedes most of the current revenue recognition requirements, and will be effective January 1, 2017. The Company is currently evaluating the impact this guidance will have on its financial position, results of operations and cash flows, including the method it will choose for adoption.
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. | Divestitures |
On June 30, 2014, the Company completed the previously announced transaction to establish a non-consolidated joint venture (JV) comprising the former GBT operations of the Company, historically reported within the Global Commercial Services (GCS) segment. The Company retained a 50 percent ownership interest with an estimated fair value of approximately $900 million, which is accounted for as an equity method investment as of June 30, 2014, and reported in other assets. In exchange for a cash contribution of $900 million paid into the JV, an unrelated third-party investor group holds the remaining 50 percent ownership interest. The investor groups cash contribution provides the primary basis for the Companys determination of the estimated fair value of its 50 percent ownership interest.
As a result of the transaction, the Company deconsolidated the GBT net assets and recognized a net gain of approximately $626 million ($409 million after tax), which is reported as a reduction to other expense for the quarter ended June 30, 2014. Prior to the deconsolidation, the carrying amount of GBTs assets and liabilities were not material to the Companys financial position.
The JV will operate under the American Express Global Business Travel brand, pursuant to a trademark license agreement provided by the Company. The Company has also entered into a transition services agreement and certain other operating agreements with the JV, pursuant to which the Company and the JV will provide one another with certain services and that will result in related-party receivables and payables on an ongoing basis.
3. | Accounts Receivable and Loans |
The Companys charge and lending payment card products result in the generation of Card Member receivables and Card Member loans, respectively. For information on the Companys accounts receivable and loans and the related accounting policies, refer to Note 4 on pages 72 76 of the Annual Report.
Accounts receivable by segment as of June 30, 2014 and December 31, 2013 consisted of:
| ||||||
(Millions) |
2014 | 2013 | ||||
U.S. Card Services (a) |
$ | 21,238 | $ 21,842 | |||
International Card Services |
7,457 | 7,771 | ||||
Global Commercial Services (b) |
16,460 | 14,391 | ||||
Global Network & Merchant Services (c) |
151 | 159 | ||||
|
|
| ||||
Card Member receivables (d) |
45,306 | 44,163 | ||||
Less: Reserve for losses |
413 | 386 | ||||
|
|
| ||||
Card Member receivables, net |
$ | 44,893 | $ 43,777 | |||
|
|
| ||||
Other receivables, net (e) |
$ | 3,753 | $ 3,408 | |||
|
|
| ||||
|
(a) | Includes $6.5 billion and $7.3 billion of gross Card Member receivables available to settle obligations of a consolidated variable interest entity (VIE) as of June 30, 2014 and December 31, 2013, respectively. |
(b) | Includes $669 million and $836 million due from airlines, of which Delta Air Lines (Delta) comprises $637 million and $628 million as of June 30, 2014 and December 31, 2013, respectively. |
(c) | Includes receivables primarily related to the Companys International Currency Card portfolios. |
(d) | Includes approximately $14.0 billion and $13.8 billion of Card Member receivables outside the U.S. as of June 30, 2014 and December 31, 2013, respectively. |
(e) | Other receivables primarily represent amounts related to (i) purchased Global Network Services (GNS) joint venture receivables, (ii) tax receivables, (iii) GNS partner banks for items such as royalty and franchise fees, and (iv) certain merchants for billed discount revenue. Other receivables are presented net of reserves for losses of $59 million and $71 million as of June 30, 2014 and December 31, 2013, respectively. |
7
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loans as of June 30, 2014 and December 31, 2013 consisted of:
| ||||||
(Millions) |
2014 | 2013 | ||||
U.S. Card Services (a) |
$ | 57,727 | $ 58,395 | |||
International Card Services |
8,555 | 8,790 | ||||
Global Commercial Services |
56 | 53 | ||||
|
|
| ||||
Card Member loans |
66,338 | 67,238 | ||||
Less: Reserve for losses |
1,170 | 1,261 | ||||
|
|
| ||||
Card Member loans, net |
$ | 65,168 | $ 65,977 | |||
|
|
| ||||
Other loans, net (b) |
$ | 703 | $ 608 | |||
|
|
| ||||
|
(a) | Includes approximately $28.9 billion and $31.2 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of June 30, 2014 and December 31, 2013, respectively. |
(b) | Other loans primarily represent loans to merchants and a store card loan portfolio. Other loans are presented net of reserves for losses of $10 million and $13 million as of June 30, 2014 and December 31, 2013, respectively. |
Card Member Loans and Card Member Receivables Aging
Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member loans and receivables as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||
2014 (Millions) |
Current | |
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90+ Days Past Due |
|
Total | |||||||
Card Member Loans: |
||||||||||||||||||
U.S. Card Services |
$ | 57,181 | $ | 155 | $ | 116 | $ | 275 | $ 57,727 | |||||||||
International Card Services |
8,415 | 45 | 30 | 65 | 8,555 | |||||||||||||
Card Member Receivables: |
||||||||||||||||||
U.S. Card Services |
$ | 20,915 | $ | 111 | $ | 59 | $ | 153 | $ 21,238 | |||||||||
International Card Services (a) |
7,356 | 32 | 19 | 50 | 7,457 | |||||||||||||
Global Commercial Services |
(b | ) | (b | ) | (b | ) | 119 | 16,460 | ||||||||||
| ||||||||||||||||||
2013 (Millions) |
Current | |
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90+ Days Past Due |
|
Total | |||||||
Card Member Loans: |
||||||||||||||||||
U.S. Card Services |
$ | 57,772 | $ | 183 | $ | 134 | $ | 306 | $ 58,395 | |||||||||
International Card Services |
8,664 | 43 | 28 | 55 | 8,790 | |||||||||||||
Card Member Receivables: |
||||||||||||||||||
U.S. Card Services |
$ | 21,488 | $ | 125 | $ | 69 | $ | 160 | $ 21,842 | |||||||||
International Card Services |
(b | ) | (b | ) | (b | ) | 83 | 7,771 | ||||||||||
Global Commercial Services |
(b | ) | (b | ) | (b | ) | 132 | 14,391 | ||||||||||
|
(a) | Beginning in first quarter 2014, as a result of system enhancements, delinquency data is now available and presented on a prospective basis for the indicated aging categories. Comparable data for prior periods is not available. For risk management purposes, the Company has historically utilized 90 days past billing for the International Card Services (ICS) segment, as described below in (b). |
(b) | Delinquency data for periods other than 90 days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances. For Card Member receivables in GCS as of June 30, 2014 and ICS and GCS as of December 31, 2013, delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Members 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
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Quality Indicators for Card Member Loans and Receivables
The following tables present the key credit quality indicators as of or for the six months ended June 30:
| ||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||
Net Write-Off Rate | |
30 Days Past Due as a % of Total |
|
Net Write-Off Rate | 30 Days Past Due as a % of Total | |||||||||||||||||
|
|
Principal Only (a) |
|
|
Principal, Interest, & Fees (a) |
|
|
Principal Only (a) |
|
|
Principal, Interest, & Fees (a) |
|
||||||||||
Card Member Loans: |
||||||||||||||||||||||
U.S. Card Services |
1.6% | 1.9% | 0.9% | 2.0% | 2.2% | 1.1% | ||||||||||||||||
International Card Services (b) |
2.0% | 2.4% | 1.6% | 1.9% | 2.3% | 1.6% | ||||||||||||||||
Card Member Receivables: |
||||||||||||||||||||||
U.S. Card Services |
1.8% | 2.0% | 1.5% | 2.0% | 2.1% | 1.6% | ||||||||||||||||
International Card Services (b) |
2.0% | 2.2% | 1.3% | (c) | (c) | (c) | ||||||||||||||||
|
2014 | 2013 | |||||||||||||
|
|
Net Loss Ratio as a % of Charge Volume |
|
|
90 Days Past Billing as a % of Receivables |
|
|
Net Loss Ratio as a % of Charge Volume |
|
90 Days Past Billing as a % of Receivables | ||||
Card Member Receivables: |
||||||||||||||
International Card Services |
(c) | (c) | 0.19% | 1.1% | ||||||||||
Global Commercial Services |
0.09% | 0.7% | 0.08% | 0.7% | ||||||||||
|
(a) | The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because the Company considers uncollectible interest and/or fees in estimating its reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented. |
(b) | Beginning in 2014, write-offs for certain installment loan products have been reclassified from Card Member receivables to Card Member loans. Prior period write-offs have not been reclassified. |
(c) | Historically, net loss ratio as a % of charge volume and 90 days past billings as a % of receivables were presented. Beginning in first quarter 2014, as a result of system enhancements, 30 days past due as a % of total, Net write-off rate (principal only) and Net write-off rate (principal and fees) have been presented. |
Refer to Note 5 on pages 77 78 of the Annual Report for additional indicators, including external environmental qualitative factors, management considers in its evaluation process for reserves for losses.
Impaired Card Member Loans and Receivables
Impaired loans and receivables are defined by GAAP as individual larger balance or homogeneous pools of smaller balance loans and receivables for which it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the Card Member agreement. For information on impaired Card Member loans and receivables and the related accounting policies, refer to Note 4 on pages 74 76 of the Annual Report.
9
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides additional information with respect to the Companys impaired Card Member loans, which are not significant for GCS, and Card Member receivables, which are not significant for ICS and GCS, as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||||||
2014 (Millions) |
|
Loans over 90 Days Past Due & Accruing Interest (a) |
|
|
Non- Accrual Loans (b) |
|
|
Loans
& Receivables Modified as a TDR (c) |
|
|
Total Impaired Loans & Receivables |
|
|
Unpaid Principal Balance (d) |
|
Allowance for TDRs (e) | ||||||
Card Member Loans: |
||||||||||||||||||||||
U.S. Card Services |
$ | 171 | $ | 198 | $ | 323 | $ | 692 | $ | 631 | $ 74 | |||||||||||
International Card Services |
65 | | | 65 | 64 | | ||||||||||||||||
Card Member Receivables: |
||||||||||||||||||||||
U.S. Card Services |
| | 44 | 44 | 43 | 32 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total |
$ | 236 | $ | 198 | $ | 367 | $ | 801 | $ | 738 | $ 106 | |||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| ||||||||||||||||||||||
2013 (Millions) |
|
Loans over 90 Days Past Due |
|
|
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 Companys policy is generally to accrue interest through the date of write-off (i.e., at 180 days past due). The Company establishes reserves for interest that the Company believes will not be collected. Amounts presented exclude loans modified as a troubled debt restructuring (TDR). |
(b) | Non-accrual loans not in modification programs include certain Card Member loans placed with outside collection agencies for which the Company has ceased accruing interest. |
(c) | Total loans and receivables modified as a TDR includes $94 million and $92 million that are non-accrual and $23 million and $26 million that are past due 90 days and still accruing interest as of June 30, 2014 and December 31, 2013, respectively. |
(d) | Unpaid principal balance consists of Card Member charges billed and excludes other amounts charged directly by the Company such as interest and fees. |
(e) | Represents the reserve for losses for TDRs, which are evaluated individually for impairment. The Company records a reserve for losses for all impaired loans. Refer to Card Member Loans Evaluated Individually and Collectively for Impairment in Note 4 for further information regarding the reserve for losses on loans over 90 days past due and accruing interest and non-accrual loans, which are evaluated collectively for impairment. |
10
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information with respect to the Companys interest income recognized and average balances of impaired Card Member loans, which are not significant for GCS, and Card Member receivables, which are not significant for ICS and GCS, for the three and six months ended June 30:
| ||||||||||||||
|
Three Months Ended June 30, 2014 |
|
|
Six Months Ended June 30, 2014 | ||||||||||
2014 (Millions) |
|
Interest Income Recognized |
|
|
Average Balance |
|
|
Interest Income Recognized |
|
Average Balance | ||||
Card Member Loans: |
||||||||||||||
U.S. Card Services |
$ | 9 | $ | 715 | $ | 25 | $ 760 | |||||||
International Card Services |
4 | 65 | 8 | 64 | ||||||||||
Card Member Receivables: |
||||||||||||||
U.S. Card Services |
| 47 | | 47 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total |
$ | 13 | $ | 827 | $ | 33 | $ 871 | |||||||
|
|
|
|
|
|
| ||||||||
| ||||||||||||||
|
Three Months Ended June 30, 2013 |
|
|
Six Months Ended June 30, 2013 | ||||||||||
2013 (Millions) |
|
Interest Income Recognized |
|
|
Average Balance |
|
|
Interest Income Recognized |
|
Average Balance | ||||
Card Member Loans: |
||||||||||||||
U.S. Card Services |
$ | 10 | $ | 999 | $ | 22 | $ 1,041 | |||||||
International Card Services |
4 | 69 | 8 | 69 | ||||||||||
Card Member Receivables: |
||||||||||||||
U.S. Card Services |
| 91 | | 100 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total |
$ | 14 | $ | 1,159 | $ | 30 | $ 1,210 | |||||||
|
|
|
|
|
|
| ||||||||
|
11
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Card Member Loans and Receivables Modified as TDRs
The following table provides additional information with respect to the U.S. Card Services (USCS) Card Member loans and receivables modified as TDRs for the three and six months ended June 30. The ICS and GCS Card Member loans and receivables modifications were not significant. For information on TDRs and the related accounting policies, refer to Note 4 on pages 74 76 of the Annual Report.
| ||||||||||||||||||||||||||||||
|
Three Months Ended June 30, 2014 |
|
|
Six Months Ended June 30, 2014 | ||||||||||||||||||||||||||
|
Number of Accounts (in thousands) |
|
|
Outstanding Balances (a)(b) ($ in millions) |
|
|
Average Interest Rate Reduction (% Points) |
|
|
Average Payment Term Extension (# of Months) |
|
|
Number of Accounts (in thousands) |
|
|
Outstanding Balances (a)(b) ($ in millions) |
|
|
Average Interest Rate Reduction (% Points) |
|
Average Payment Term Extension (# of Months) | |||||||||
Troubled Debt Restructurings: |
||||||||||||||||||||||||||||||
Card Member Loans |
12 | $ | 82 | 11 | (c | ) | 24 | $ | 178 | 12 | (c) | |||||||||||||||||||
Card Member Receivables |
3 | 41 | (c | ) | 12 | 7 | 88 | (c | ) | 12 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
15 | $ | 123 | 31 | $ | 266 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
|
Three Months Ended June 30, 2013 |
|
|
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||
|
Number of Accounts (in thousands) |
|
|
Outstanding Balances (a) (b) ($ in millions) |
|
|
Average Interest Rate Reduction (% Points) |
|
|
Average Payment Term Extension (# of Months) |
|
|
Number of Accounts (in thousands) |
|
|
Outstanding Balances (a) (b) ($ in millions) |
|
|
Average Interest Rate Reduction (% Points) |
|
Average Payment Term Extension (# of Months) | |||||||||
Troubled Debt Restructurings: |
||||||||||||||||||||||||||||||
Card Member Loans |
12 | $ | 94 | 11 | (c | ) | 35 | $ | 267 | 12 | (c) | |||||||||||||||||||
Card Member Receivables |
4 | 51 | (c | ) | 12 | 12 | 154 | (c | ) | 12 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
16 | $ | 145 | 47 | $ | 421 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
(a) | Represents the outstanding balance immediately prior to modification. Modifications did not reduce the aggregate principal balances except for the six months ended June 30, 2013, where aggregate principal balances were reduced by $4 million. |
(b) | The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables. |
(c) | For Card Member loans, there have been no payment term extensions. The Company does not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing. |
12
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information for the three and six months ended June 30, 2014 and 2013, with respect to the USCS Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification. A Card Member is considered to have been in default from a modification program after one and up to two consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables. The defaulted ICS Card Member loan and receivable modifications were not significant.
| ||||||||||||||
|
Three Months Ended June 30, 2014 |
|
|
Six Months Ended June 30, 2014 | ||||||||||
(Accounts in thousands, Dollars in millions) |
|
Number of Accounts |
|
|
Aggregated Outstanding Balances Upon Default (a) |
|
|
Number of Accounts |
|
Aggregated Outstanding Balances Upon Default (a) | ||||
Troubled Debt Restructurings That |
||||||||||||||
Card Member Loans |
2 | $ | 20 | 4 | $ 40 | |||||||||
Card Member Receivables |
1 | 11 | 2 | 18 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total |
3 | $ | 31 | 6 | $ 58 | |||||||||
|
|
|
|
|
|
| ||||||||
| ||||||||||||||
|
Three Months Ended June 30, 2013 |
|
|
Six Months Ended June 30, 2013 | ||||||||||
(Accounts in thousands, Dollars in millions) |
|
Number of Accounts |
|
|
Aggregated Outstanding Balances Upon Default (a) |
|
|
Number of Accounts |
|
Aggregated Outstanding Balances Upon Default (a) | ||||
Troubled Debt Restructurings That |
||||||||||||||
Card Member Loans |
6 | $ | 53 | 11 | $ 101 | |||||||||
Card Member Receivables |
1 | 13 | 2 | 25 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total |
7 | $ | 66 | 13 | $ 126 | |||||||||
|
|
|
|
|
|
| ||||||||
|
(a) | The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables. |
13
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. | Reserves for Losses |
Reserves for losses relating to Card Member loans and receivables represent managements best estimate of the probable losses inherent in the Companys outstanding portfolio of loans and receivables, as of the balance sheet date. Managements evaluation process requires certain estimates and judgments. For information on the Companys reserves for losses and the related accounting policies, refer to Note 5 on pages 77 78 of the Annual Report.
Changes in Card Member Receivables Reserve for Losses
The following table presents changes in the Card Member receivables reserve for losses for the six months ended June 30:
| ||||||
(Millions) |
2014 | 2013 | ||||
Balance, January 1 |
$ | 386 | $ 428 | |||
Provisions (a) |
398 | 315 | ||||
Net write-offs (b) |
(359 | ) | (358) | |||
Other (c) |
(12 | ) | 1 | |||
|
|
| ||||
Balance, June 30 |
$ | 413 | $ 386 | |||
|
|
| ||||
|
(a) | Provisions for principal (resulting from authorized transactions) and fee reserve components. |
(b) | Consists of principal (resulting from authorized transactions) and fee components, less recoveries of $180 million and $200 million, including net write-offs from TDRs of $8 million and $19 million, for the six months ended June 30, 2014 and 2013, respectively. |
(c) | Beginning in first quarter 2014, reserves for card-related fraud losses of $(7) million are reflected in other liabilities. All periods include foreign currency translation adjustments of nil and $(6) million for the six months ended June 30, 2014 and 2013, respectively, and other items of $(5) million and $7 million for the six months ended June 30, 2014 and 2013, respectively. |
Card Member Receivables Evaluated Individually and Collectively for Impairment
The following table presents Card Member receivables evaluated individually and collectively for impairment and related reserves as of June 30, 2014 and December 31, 2013:
| ||||||
(Millions) |
2014 | 2013 | ||||
Card Member receivables evaluated individually for impairment (a) |
$ | 44 | $ 50 | |||
Related reserves (a) |
$ | 32 | $ 38 | |||
| ||||||
Card Member receivables evaluated collectively for impairment |
$ | 45,262 | $ 44,113 | |||
Related reserves (b) |
$ | 381 | $ 348 | |||
|
(a) | Represents receivables modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 4 on pages 74 76 of the Annual Report for further information. |
(b) | The reserves include the quantitative results of analytical models that are specific to individual pools of receivables and reserves for internal and external qualitative risk factors that apply to receivables that are collectively evaluated for impairment and are not specific to any individual pool of receivables. |
14
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes in Card Member Loans Reserve for Losses
The following table presents changes in the Card Member loans reserve for losses for the six months ended June 30:
| ||||||
(Millions) |
2014 | 2013 | ||||
Balance, January 1 |
$ | 1,261 | $ 1,471 | |||
Provisions (a) |
532 | 577 | ||||
Net write-offs |
||||||
Principal (b) |
(541 | ) | (613) | |||
Interest and fees (b) |
(84 | ) | (77) | |||
Other (c) |
2 | (16) | ||||
|
|
| ||||
Balance, June 30 |
$ | 1,170 | $ 1,342 | |||
|
|
| ||||
|
(a) | Provisions for principal (resulting from authorized transactions), interest and fee reserves components. |
(b) | Consists of principal write-offs (resulting from authorized transactions), less recoveries of $216 million and $230 million, including net write-offs from TDRs of $(2) million and $7 million, for the six months ended June 30, 2014 and 2013, respectively. Recoveries of interest and fees were de minimis. |
(c) | Beginning in first quarter 2014, reserves for card-related fraud losses of $(6) million are reflected in other liabilities. All periods include foreign currency translation adjustments of $(1) million and $(11) million for the six months ended June 30, 2014 and 2013, respectively, and other items of $9 million and $(5) million for the six months ended June 30, 2014 and 2013, respectively. |
Card Member Loans Evaluated Individually and Collectively for Impairment
The following table presents Card Member loans evaluated individually and collectively for impairment and related reserves as of June 30, 2014 and December 31, 2013:
| ||||||
(Millions) |
2014 | 2013 | ||||
Card Member loans evaluated individually for impairment (a) |
$ | 323 | $ 378 | |||
Related reserves (a) |
$ | 74 | $ 84 | |||
| ||||||
Card Member loans evaluated collectively for impairment (b) |
$ | 66,015 | $ 66,860 | |||
Related reserves (b) |
$ | 1,096 | $ 1,177 | |||
|
(a) | Represents loans modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 4 on pages 74 76 of the Annual Report for further information. |
(b) | Represents current loans and loans less than 90 days past due, loans over 90 days past due and accruing interest, and non-accrual loans. The reserves include the quantitative results of analytical models that are specific to individual pools of loans and reserves for internal and external qualitative risk factors that apply to loans that are collectively evaluated for impairment and are not specific to any individual pool of loans. |
15
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 Companys 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 Companys methodology for determining the fair value of investment securities and related accounting policies, refer to Note 3 on pages 68 71 of the Annual Report.
The following is a summary of investment securities as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||
Description of Securities (Millions) |
Cost | |
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
Cost | |
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
Estimated Fair Value | ||||||||||||
State and municipal obligations |
$ | 3,814 | $ | 125 | $ | (4 | ) | $ | 3,935 | $ | 4,060 | $ | 54 | $ | (79 | ) | $ 4,035 | |||||||||||||
U.S. Government agency obligations |
3 | | | 3 | 3 | | | 3 | ||||||||||||||||||||||
U.S. Government treasury obligations |
346 | 4 | | 350 | 318 | 3 | (1 | ) | 320 | |||||||||||||||||||||
Corporate debt securities |
44 | 2 | | 46 | 43 | 3 | | 46 | ||||||||||||||||||||||
Mortgage-backed securities (a) |
144 | 7 | | 151 | 160 | 5 | (1 | ) | 164 | |||||||||||||||||||||
Equity securities (b) |
6 | 18 | | 24 | 29 | 95 | | 124 | ||||||||||||||||||||||
Foreign government bonds and obligations |
288 | 9 | | 297 | 272 | 5 | (1 | ) | 276 | |||||||||||||||||||||
Other (c) |
50 | | (1 | ) | 49 | 50 | | (2 | ) | 48 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
$ | 4,695 | $ | 165 | $ | (5 | ) | $ | 4,855 | $ | 4,935 | $ | 165 | $ | (84 | ) | $ 5,016 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
(a) | Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. |
(b) | Primarily represents the Companys investment in the Industrial and Commercial Bank of China (ICBC). |
(c) | Other comprises investments in various mutual funds. |
16
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about the Companys investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Less than 12 months | 12 months or more | |||||||||||||||||||||||||||
Description of Securities (Millions) |
|
Estimated Fair Value |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
Gross Unrealized Losses | ||||||||
State and municipal obligations |
$ | | $ | | $ | 83 | $ | (4 | ) | $ | 1,320 | $ | (63 | ) | $ | 106 | $ (16) | |||||||||||||
Foreign government bonds and obligations |
| | | | 208 | (1 | ) | | | |||||||||||||||||||||
U.S. Government treasury obligations |
| | | | 166 | (1 | ) | | | |||||||||||||||||||||
Mortgage-backed securities |
| | | | 35 | (1 | ) | | | |||||||||||||||||||||
Other |
| | 33 | (1 | ) | 30 | (1 | ) | 17 | (1) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
$ | | $ | | $ | 116 | $ | (5 | ) | $ | 1,759 | $ | (67 | ) | $ | 123 | $ (17) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||
Ratio of Fair Value to Amortized Cost (Dollars in millions) |
|
Number of Securities |
|
|
Estimated Fair Value |
|
|
Gross Unrealized Losses |
|
|
Number of Securities |
|
|
Estimated Fair Value |
|
|
Gross Unrealized Losses |
|
|
Number of Securities |
|
|
Estimated Fair Value |
|
Gross Unrealized Losses | |||||||||
2014: |
||||||||||||||||||||||||||||||||||
90%100% |
| $ | | $ | | 19 | $ | 116 | $ | (5 | ) | 19 | $ | 116 | $ (5) | |||||||||||||||||||
Less than 90% |
| | | | | | | | | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total as of June 30, 2014 |
| $ | | $ | | 19 | $ | 116 | $ | (5 | ) | 19 | $ | 116 | $ (5) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
2013: |
||||||||||||||||||||||||||||||||||
90%100% |
228 | $ | 1,665 | $ | (53 | ) | 6 | $ | 24 | $ | (2 | ) | 234 | $ | 1,689 | $ (55) | ||||||||||||||||||
Less than 90% |
13 | 94 | (14 | ) | 5 | 99 | (15 | ) | 18 | 193 | (29) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total as of December 31, 2013 |
241 | $ | 1,759 | $ | (67 | ) | 11 | $ | 123 | $ | (17 | ) | 252 | $ | 1,882 | $ (84) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
The gross unrealized losses are attributed to overall wider credit spreads for state and municipal securities, wider credit spreads for specific issuers, adverse changes in market benchmark interest rates, or a combination thereof, all as compared to those prevailing when the investment securities were acquired.
Overall, for the investment securities in gross unrealized loss positions (i) the Company does not currently intend to sell the investment securities, (ii) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (iii) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the periods presented.
Supplemental Information
Gross realized gains on the sales of investment securities, included in other non-interest revenues for the three and six months ended June 30, 2014 were $41 million and $80 million, respectively. Gross realized gains on the sale of investment securities, included in other non-interest revenues for the three and six months ended June 30, 2013 were, $29 million and $65 million, respectively. There were no realized losses for the three and six months ended June 30, 2014 and 2013.
17
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contractual maturities of investment securities, excluding equity securities and other securities, as of June 30, 2014 were as follows:
| ||||||
(Millions) |
Cost | Estimated Fair Value | ||||
Due within 1 year |
$ | 426 | $ 426 | |||
Due after 1 year but within 5 years |
521 | 529 | ||||
Due after 5 years but within 10 years |
210 | 225 | ||||
Due after 10 years |
3,482 | 3,602 | ||||
|
|
| ||||
Total |
$ | 4,639 | $ 4,782 | |||
|
|
| ||||
|
The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because the issuers have the right to call or prepay certain obligations.
6. | Asset Securitizations |
The Company periodically securitizes Card Member receivables and loans arising from its card business through the transfer of those assets to securitization trusts. The trusts then issue securities to third-party investors, collateralized by the transferred assets. For information on the Companys asset securitizations and related accounting policies, refer to Note 7 on page 80 of the Annual Report.
The following table provides information on the restricted cash held by the American Express Issuance Trust II (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust) as of June 30, 2014 and December 31, 2013, included in other assets on the Companys Consolidated Balance Sheets:
| ||||||
(Millions) |
2014 | 2013 | ||||
Charge Trust |
$ | 1 | $ 2 | |||
Lending Trust |
67 | 56 | ||||
|
|
| ||||
Total |
$ | 68 | $ 58 | |||
|
|
| ||||
|
These amounts relate to collections of Card Member receivables and loans to be used by the trusts to fund future expenses and obligations, including interest paid on investor securities, credit losses and upcoming debt maturities.
American Express Travel Related Services Company, Inc. (TRS), which is a consolidated subsidiary of the Company, is the primary beneficiary of both the trusts. Excluding its consolidated subsidiaries, TRS owns approximately $0.9 billion of subordinated securities issued by the Lending Trust as of June 30, 2014.
Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each trust could result in payment of trust expenses, establishment of reserve funds, or in a worst-case scenario, early amortization of investor securities. During the six months ended June 30, 2014 and the year ended December 31, 2013, no such triggering events occurred.
18
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | Customer Deposits |
As of June 30, 2014 and December 31, 2013, customer deposits were categorized as interest bearing or non-interest bearing, as follows:
| ||||||
(Millions) |
2014 | 2013 | ||||
U.S.: |
||||||
Interest bearing |
$ | 41,295 | $ 40,831 | |||
Non-interest bearing (includes Card Member credit balances of: 2014, $306; 2013, $340) |
336 | 360 | ||||
Non-U.S.: |
||||||
Interest bearing |
108 | 121 | ||||
Non-interest bearing (includes Card Member credit balances of: 2014, $381; 2013, $437) |
397 | 451 | ||||
|
|
| ||||
Total customer deposits |
$ | 42,136 | $ 41,763 | |||
|
|
| ||||
|
Customer deposits by deposit type as of June 30, 2014 and December 31, 2013 were as follows:
| ||||||
(Millions) |
2014 | 2013 | ||||
U.S. retail deposits: |
||||||
Savings accounts Direct |
$ | 26,107 | $ 24,550 | |||
Certificates of deposit: |
||||||
Direct |
382 | 489 | ||||
Third-party |
5,907 | 6,929 | ||||
Sweep accounts Third-party |
8,899 | 8,863 | ||||
Other retail deposits: |
||||||
Non-U.S. deposits and U.S. non-interest bearing deposits |
154 | 155 | ||||
Card Member credit balances U.S. and non-U.S. |
687 | 777 | ||||
|
|
| ||||
Total customer deposits |
$ | 42,136 | $ 41,763 | |||
|
|
| ||||
|
The scheduled maturities of certificates of deposit as of June 30, 2014 were as follows:
| ||||||||||
(Millions) |
U.S. | Non-U.S. | Total | |||||||
2014 |
$ | 1,539 | $ | 3 | $ 1,542 | |||||
2015 |
1,257 | 1 | 1,258 | |||||||
2016 |
1,680 | | 1,680 | |||||||
2017 |
575 | | 575 | |||||||
2018 |
1,043 | | 1,043 | |||||||
After 5 years |
195 | | 195 | |||||||
|
|
|
|
| ||||||
Total |
$ | 6,289 | $ | 4 | $ 6,293 | |||||
|
|
|
|
| ||||||
|
As of June 30, 2014 and December 31, 2013, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:
| ||||||
(Millions) |
2014 | 2013 | ||||
U.S. |
$ | 129 | $ 148 | |||
Non-U.S. |
1 | | ||||
|
|
| ||||
Total |
$ | 130 | $ 148 | |||
|
|
| ||||
|
19
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 Companys market risk management. The Company does not engage in derivatives for trading purposes. For information on the Companys derivative instruments and the related accounting policies, refer to Note 12 on pages 87 90 of the Annual Report.
In relation to the Companys 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 Companys derivative counterparties as of June 30, 2014 and December 31, 2013, the Company does not have derivative positions that warrant credit valuation adjustments.
The Companys 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 Companys methodology for determining the fair value of derivatives.
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2014 and December 31, 2013:
| ||||||||||||||
|
Other Assets Fair Value |
|
|
Other Liabilities Fair Value | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||
Interest rate contracts |
||||||||||||||
Fair value hedges |
$ | 393 | $ | 455 | $ | 1 | $ 2 | |||||||
Total return contract |
||||||||||||||
Fair value hedge |
1 | 8 | | | ||||||||||
Foreign exchange contracts |
||||||||||||||
Net investment hedges |
39 | 174 | 148 | 116 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total derivatives designated as hedging instruments |
433 | 637 | 149 | 118 | ||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||
Foreign exchange contracts, including certain embedded derivatives (a) |
69 | 64 | 72 | 95 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total derivatives, gross |
502 | 701 | 221 | 213 | ||||||||||
Less: Cash collateral netting (b) |
(279 | ) | (336 | ) | (1 | ) | | |||||||
Derivative asset and derivative liability netting (c) |
(46 | ) | (36 | ) | (46 | ) | (36) | |||||||
|
|
|
|
|
|
| ||||||||
Total derivatives, net (d) |
$ | 177 | $ | 329 | $ | 174 | $ 177 | |||||||
|
|
|
|
|
|
| ||||||||
|
(a) | Includes foreign currency derivatives embedded in certain operating agreements. |
(b) | Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. Additionally, the Company posted $66 million and $26 million as of June 30, 2014 and December 31, 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within other receivables on the Companys 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 Companys Consolidated Balance Sheets. |
A majority of the Companys derivative assets and liabilities as of June 30, 2014 and December 31, 2013 are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Companys Consolidated Balance Sheets.
20
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Financial Instruments that Qualify for Hedge Accounting
Refer to Note 12 on pages 89 90 of the Annual Report for information on derivatives that qualify for hedge accounting.
Fair Value Hedges
Interest Rate Contracts
The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of June 30, 2014 and December 31, 2013, the Company hedged $17.6 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.
Total Return Contract
The Company hedges its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company uses a total return contract (TRC) to transfer this exposure to its derivative counterparty. As of June 30, 2014 and December 31, 2013, the fair value of the equity investment in ICBC was $21.7 million (34.3 million shares) and $122 million (180.7 million shares), respectively. To the extent the hedge is effective, the gain or loss on the TRC offsets the loss or gain on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item results in hedge ineffectiveness and is recognized in other expenses in the Consolidated Statements of Income.
On July 18, 2014, the Company sold its remaining 34.3 million shares in ICBC and terminated the TRC.
The following table summarizes the impact on the Consolidated Statements of Income associated with the Companys hedges of its fixed-rate long-term debt and its investment in ICBC for the three and six months ended June 30:
| ||||||||||||||||||||||||||
For the Three Months Ended June 30: (Millions) | ||||||||||||||||||||||||||
Gains (losses) recognized in income | ||||||||||||||||||||||||||
Derivative contract |
|
Hedged item |
|
|
Net hedge ineffectiveness | |||||||||||||||||||||
Derivative relationship |
Income Statement Line Item |
Amount | Income Statement Line Item |
Amount | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||
Interest rate contracts |
Other expenses |
$ | (10 | ) | $ | (190 | ) | Other expenses |
$ | 14 | $ | 180 | $ | 4 | $ (10) | |||||||||||
Total return contract |
Other non-interest revenues |
(1 | ) | 27 | Other non-interest revenues |
1 | (27 | ) | | | ||||||||||||||||
|
| ||||||||||||||||||||||||||
For the Six Months Ended June 30: (Millions) | ||||||||||||||||||||||||||
Gains (losses) recognized in income | ||||||||||||||||||||||||||
Derivative contract |
|
Hedged item |
|
|
Net hedge ineffectiveness | |||||||||||||||||||||
Derivative relationship |
Income Statement Line Item |
Amount | Income Statement Line Item |
Amount | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||
Interest rate contracts |
Other expenses |
$ | (60 | ) | $ | (293 | ) | Other expenses |
$ | 64 | $ | 289 | $ | 4 | $ (4) | |||||||||||
Total return contract |
Other non-interest revenues |
11 | 31 | Other non-interest revenues |
(11 | ) | (31 | ) | | | ||||||||||||||||
|
The Company also recognized a net reduction in interest expense on long-term debt of $74 million and $91 million for the three months ended June 30, 2014 and 2013, respectively, and $143 million and $203 million for the six months ended June 30, 2014 and 2013, respectively, primarily related to the net settlements (interest accruals) on the Companys interest rate derivatives designated as fair value hedges.
Net Investment Hedges
The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment was $(116) million and $339 million for the three months ended June 30, 2014 and 2013, respectively, and was $(133) million and $283 million for the six months ended June 30, 2014 and 2013, respectively. Any ineffective portion of the gain or (loss) on net investment hedges is recognized in other expenses during the period of change. During the three months ended June 30, 2014 and 2013, the Company reclassified $(7) million and nil, respectively, and $(9) million and nil for the six months ended June 30, 2014 and 2013, respectively, from AOCI to earnings as a component of other expenses. No ineffectiveness associated with net investment hedges was reclassified from AOCI into income during the three and six months ended June 30, 2014 and 2013.
21
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivatives Not Designated as Hedges
For information on derivatives not designated as hedges, refer to Note 12 on page 90 of the Annual Report.
The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the Consolidated Statements of Income for the three and six months ended June 30:
| ||||||||
For the Three Months Ended June 30: |
Pretax gains | |||||||
Amount | ||||||||
Description (Millions) |
Income Statement Line Item |
2014 | 2013 | |||||
Interest rate contracts |
Other expenses | $ | | $ 1 | ||||
Foreign exchange contracts (a) |
Other expenses | (50 | ) | (89) | ||||
Cost of Card Member services | 2 | | ||||||
|
|
| ||||||
Total |
$ | (48 | ) | $ (88) | ||||
|
|
| ||||||
| ||||||||
| ||||||||
For the Six Months Ended June 30: |
Pretax gains | |||||||
Amount | ||||||||
Description (Millions) |
Income Statement Line Item |
2014 | 2013 | |||||
Foreign exchange contracts (a) |
Other expenses | $ | 83 | $ 82 | ||||
Cost of Card Member services |
3 | | ||||||
|
|
| ||||||
Total |
$ | 86 | $ 82 | |||||
|
|
| ||||||
|
(a) | Foreign exchange contracts include embedded foreign currency derivatives. |
22
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. | Fair Values |
Financial Assets and Financial Liabilities Carried at Fair Value
For information about the Companys 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 Companys derivative financial instruments.
The following table summarizes the Companys financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAPs valuation hierarchy, as of June 30, 2014 and December 31, 2013:
| ||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||
(Millions) |
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||
Investment securities: (a) |
||||||||||||||||||||||||||||||
Equity securities |
$ | 24 | $ | 24 | $ | | $ | | $ | 124 | $ | 124 | $ | | $ | |||||||||||||||
Debt securities and other |
4,831 | 350 | 4,481 | | 4,892 | 320 | 4,572 | | ||||||||||||||||||||||
Derivatives (a) |
502 | | 502 | | 701 | | 701 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total assets |
5,357 | 374 | 4,983 | | 5,717 | 444 | 5,273 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Derivatives (a) |
221 | | 221 | | 213 | | 213 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total liabilities |
$ | 221 | $ | | $ | 221 | $ | | $ | 213 | $ | | $ | 213 | $ | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
(a) | Refer to Note 5 for the fair values of investment securities and to Note 8 for the fair values of derivative assets and liabilities, on a further disaggregated basis. |
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
For information about the valuation techniques used in the measurement of financial assets and financial liabilities carried at other than fair value, refer to Note 3 on pages 70 71 of the Annual Report.
23
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table discloses the estimated fair value for the Companys financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of June 30, 2014 and December 31, 2013. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2014 and December 31, 2013, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be reliably estimated by aggregating the amounts presented.
| ||||||||||||||||||
|
Carrying Value |
|
Corresponding Fair Value Amount | |||||||||||||||
2014 (Billions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
Financial Assets: |
||||||||||||||||||
Financial assets for which carrying values equal or approximate fair value |
||||||||||||||||||
Cash and cash equivalents |
$ | 18 | $ | 18 | $ | 17 | $ | 1 | (a) | $ | ||||||||
Other financial assets (b) |
$ | 49 | $ | 49 | $ | | $ | 49 | $ | |||||||||
Financial assets carried at other than fair value |
||||||||||||||||||
Loans, net |
$ | 66 | $ | 66 | (c) | $ | | $ | | $ 66 | ||||||||
Financial Liabilities: |
||||||||||||||||||
Financial liabilities for which carrying values equal or approximate fair value |
$ | 60 | $ | 60 | $ | | $ | 60 | $ | |||||||||
Financial liabilities carried at other than fair value |
||||||||||||||||||
Certificates of deposit (d) |
$ | 6 | $ | 6 | $ | | $ | 6 | $ | |||||||||
Long-term debt |
$ | 55 | $ | 57 | (c) | $ | | $ | 57 | $ | ||||||||
| ||||||||||||||||||
| ||||||||||||||||||
|
Carrying Value |
|
Corresponding Fair Value Amount | |||||||||||||||
2013 (Billions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
Financial Assets: |
||||||||||||||||||
Financial assets for which carrying values equal or approximate fair value |
||||||||||||||||||
Cash and cash equivalents |
$ | 19 | $ | 19 | $ | 17 | $ | 2 | (a) | $ | ||||||||
Other financial assets (b) |
$ | 48 | $ | 48 | $ | | $ | 48 | $ | |||||||||
Financial assets carried at other than fair value |
||||||||||||||||||
Loans, net |
$ | 67 | $ | 67 | (c) | $ | | $ | | $ 67 | ||||||||
Financial Liabilities: |
||||||||||||||||||
Financial liabilities for which carrying values equal or approximate fair value |
$ | 60 | $ | 60 | $ | | $ | 60 | $ | |||||||||
Financial liabilities carried at other than fair value |
||||||||||||||||||
Certificates of deposit (d) |
$ | 7 | $ | 8 | $ | | $ | 8 | $ | |||||||||
Long-term debt |
$ | 55 | $ | 58 | (c) | $ | | $ | 58 | $ | ||||||||
|
(a) | Reflects time deposits. |
(b) | Includes accounts receivable (including fair values of Card Member receivables of $6.5 billion and $7.3 billion held by consolidated VIEs as of June 30, 2014 and December 31, 2013, respectively), restricted cash and other miscellaneous assets. |
(c) | Includes fair values of loans of $28.7 billion and $31.0 billion, and long-term debt of $15.6 billion and $18.8 billion held by consolidated VIEs as of June 30, 2014 and December 31, 2013, respectively. |
(d) | Presented as a component of customer deposits on the Consolidated Balance Sheets. |
Nonrecurring Fair Value Measurements
The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the six months ended June 30, 2014 and during the year ended December 31, 2013, the Company did not have any material impaired assets that were required to be measured at fair value.
24
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. | Guarantees |
The Company provides Card Member protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business.
In relation to its maximum potential undiscounted future payments as shown in the table that follows, to date the Company has not experienced any significant losses related to guarantees. The Companys initial recognition of guarantees is at fair value. In addition, the Company establishes reserves when a loss is probable and the amount can be reasonably estimated.
The following table provides information related to such guarantees as of June 30, 2014 and December 31, 2013:
| ||||||||||||||
|
Maximum potential undiscounted future payments (a) (Billions) |
|
|
Related liability (b) (Millions) | ||||||||||
Type of Guarantee |
2014 | 2013 | 2014 | 2013 | ||||||||||
Card and travel operations (c) |
$ | 44 | $ | 44 | $ | 45 | $ 88 | |||||||
Other (d) |
1 | 1 | 80 | 73 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total |
$ | 45 | $ | 45 | $ | 125 | $ 161 | |||||||
|
|
|
|
|
|
| ||||||||
|
(a) | Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The maximum potential undiscounted future payments for Merchant Protection are measured using managements best estimate of maximum exposure based on all eligible claims in relation to annual billed business volumes. |
(b) | Included in other liabilities on the Companys Consolidated Balance Sheets. |
(c) | Primarily includes Return Protection and Merchant Protection. |
(d) | Primarily includes guarantees related to the Companys business dispositions and real estate. |
25
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. | Changes In Accumulated Other Comprehensive (Loss) Income |
AOCI is a balance sheet item in the Shareholders Equity section of the Companys Consolidated Balance Sheets. It is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component of AOCI for the three and six months ended June 30, 2014 and 2013 were as follows:
|
||||||||||||||||
For the Three Months Ended June 30, 2014 (Millions), net of tax |
|
Net Unrealized Gains (Losses) on Investment Securities |
|
|
Foreign Currency Translation Adjustments |
|
|
Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains |
|
|
Accumulated Other Comprehensive (Loss) Income |
| ||||
Balances as of March 31, 2014 |
$ | 102 | $ | (1,124 | ) | $ | (372 | ) | $ | (1,394 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net unrealized gains |
32 | 32 | ||||||||||||||
Reclassification for realized (gains) losses into earnings |
(29 | ) | 3 | (26 | ) | |||||||||||
Net translation gain of investments in foreign operations |
119 | 119 | ||||||||||||||
Net (losses) related to hedges of investment in foreign operations |
(116 | ) | (116 | ) | ||||||||||||
Pension and other postretirement benefit gains |
14 | 14 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net change in accumulated other comprehensive income |
3 | 6 | 14 | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2014 |
$ | 105 | $ | (1,118 | ) | $ | (358 | ) | $ | (1,371 | ) | |||||
|
|
||||||||||||||||
For the Six Months Ended June 30, 2014 (Millions), net of tax |
|
Net Unrealized Gains (Losses) on Investment Securities |
|
|
Foreign Currency Translation Adjustments |
|
|
Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains |
|
|
Accumulated Other Comprehensive (Loss) Income |
| ||||
Balances as of December 31, 2013 |
$ | 63 | $ | (1,090 | ) | $ | (399 | ) | $ | (1,426 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net unrealized gains |
100 | 100 | ||||||||||||||
Reclassification for realized (gains) losses into earnings |
(58 | ) | 4 | (54 | ) | |||||||||||
Net translation gain of investments in foreign operations |
101 | 101 | ||||||||||||||
Net (losses) related to hedges of investment in foreign operations |
(133 | ) | (133 | ) | ||||||||||||
Pension and other postretirement benefit gains |
41 | 41 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net change in accumulated other comprehensive income (loss) |
42 | (28 | ) | 41 | 55 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2014 |
$ | 105 | $ | (1,118 | ) | $ | (358 | ) | $ | (1,371 | ) | |||||
|
|
||||||||||||||||
For the Three Months Ended June 30, 2013 (Millions), net of tax |
|
Net Unrealized Gains (Losses) on Investment Securities |
|
|
Foreign Currency Translation Adjustments |
|
|
Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains |
|
|
Accumulated Other Comprehensive (Loss) Income |
| ||||
Balances as of March 31, 2013 |
$ | 280 | $ | (799 | ) | $ | (461 | ) | $ | (980 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net unrealized (losses) |
(104 | ) | (104 | ) | ||||||||||||
Reclassification for realized (gains) into earnings |
(23 | ) | (23 | ) | ||||||||||||
Net translation (loss) of investments in foreign operations |
(567 | ) | (567 | ) | ||||||||||||
Net gains related to hedges of investment in foreign operations |
339 | 339 | ||||||||||||||
Pension and other postretirement benefit gains |
27 | 27 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net change in accumulated other comprehensive (loss) income |
(127 | ) | (228 | ) | 27 | (328 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2013 |
$ | 153 | $ | (1,027 | ) | $ | (434 | ) | $ | (1,308 | ) | |||||
|
26
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
||||||||||||||||
For the Six Months Ended June 30, 2013 (Millions), net of tax |
|
Net Unrealized Gains (Losses) on Investment Securities |
|
|
Foreign Currency Translation Adjustments |
|
|
Net Unrealized Pension and Other Postretirement Benefit (Losses) Gains |
|
|
Accumulated Other Comprehensive (Loss) Income |
| ||||
Balances as of December 31, 2012 |
$ | 315 | $ | (754 | ) | $ | (488 | ) | $ | (927 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net unrealized (losses) |
(116 | ) | (116 | ) | ||||||||||||
Reclassification for realized (gains) into earnings |
(46 | ) | (46 | ) | ||||||||||||
Net translation (loss) of investments in foreign operations |
(556 | ) | (556 | ) | ||||||||||||
Net gains related to hedges of investment in foreign operations |
283 | 283 | ||||||||||||||
Pension and other postretirement benefit gains |
54 | 54 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net change in accumulated other comprehensive (loss) income |
(162 | ) | (273 | ) | 54 | (381 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2013 |
$ | 153 | $ | (1,027 | ) | $ | (434 | ) | $ | (1,308 | ) | |||||
|
The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statement of Income for the three and six months ended June 30, 2014 and 2013:
| ||||||||||
(Gains) losses recognized in income | ||||||||||
For the three months ended June 30 |
2014 | 2013 | ||||||||
Description (Millions) |
Income Statement Line Item | Amount | Amount | |||||||
Available-for-sale securities |
||||||||||
Net gain in AOCI reclassifications for previously unrealized net gains on investment securities |
Other non-interest revenues |
$ | (45 | ) | $ (36) | |||||
Related income tax expense |
Income tax provision |
16 | 13 | |||||||
|
|
| ||||||||
Reclassification to net income related to available-for-sale securities |
(29 | ) | (23) | |||||||
|
|
| ||||||||
Foreign currency translation adjustments |
||||||||||
Reclassification of realized losses on translation adjustments and related hedges |
Other expenses |
6 | | |||||||
Related income tax expense |
Income tax provision |
(3 | ) | | ||||||
|
|
| ||||||||
Reclassification of foreign currency translation adjustments |
3 | | ||||||||
|
|
| ||||||||
Total |
$ | (26 | ) | $ (23) | ||||||
|
| ||||||||||
(Gains) losses recognized in income | ||||||||||
For the six months ended June 30 |
2014 | 2013 | ||||||||
Description (Millions) |
Income Statement Line Item | Amount | Amount | |||||||
Available-for-sale securities |
||||||||||
Net gain in AOCI reclassifications for previously unrealized net gains on investment securities |
Other non-interest revenues |
$ | (90 | ) | $ (72) | |||||
Related income tax expense |
Income tax provision |
32 | 26 | |||||||
|
|
| ||||||||
Reclassification to net income related to available-for-sale securities |
(58 | ) | (46) | |||||||
|
|
| ||||||||
Foreign currency translation adjustments |
. | |||||||||
Reclassification of realized losses on translation adjustments and related hedges |
Other expenses |
8 | | |||||||
Related income tax expense |
Income tax provision |
(4 | ) | | ||||||
|
|
| ||||||||
Reclassification of foreign currency translation adjustments |
4 | | ||||||||
|
|
| ||||||||
Total |
$ | (54 | ) | $ (46) | ||||||
|
27
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. | Income Taxes |
The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Companys federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2011.
The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $697 million principally as a result of potential resolutions of prior years tax items with various taxing authorities. The prior years tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $697 million of unrecognized tax benefits, approximately $538 million relates to amounts that if recognized would be recorded to shareholders equity and would not impact the effective tax rate. With respect to the remaining $159 million, it is not possible to quantify the impact that the decrease could have on the effective tax rate and net income due to the inherent complexities and the number of tax years open for examination in multiple jurisdictions. Resolution of the prior years items that comprise this remaining amount could have an impact on the effective tax rate and on net income, either favorably (principally as a result of settlements that are less than the liability for unrecognized tax benefits) or unfavorably (if such settlements exceed the liability for unrecognized tax benefits).
The effective tax rate was 33.9 percent and 34.5 percent for the three and six months ended June 30, 2014, respectively. The effective tax rate was 29.6 percent and 31.2 percent for the three and six months ended June 30, 2013, respectively. The tax rate for the three and six months ended June 30, 2013 reflects the resolution of certain prior years tax items.
The tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.
28
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. | Earnings Per Common Share (EPS) |
The computations of basic and diluted EPS were as follows:
|
||||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
| |||||||||||
(Millions, except per share amounts) |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Numerator: |
||||||||||||||||
Basic and diluted: |
||||||||||||||||
Net income |
$ | 1,529 | $ | 1,405 | $ | 2,961 | $ | 2,685 | ||||||||
Earnings allocated to participating share awards (a) |
(12 | ) | (13 | ) | (24 | ) | (24 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to common shareholders |
$ | 1,517 | $ | 1,392 | $ | 2,937 | $ | 2,661 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: (a) |
||||||||||||||||
Basic: Weighted-average common stock |
1,052 | 1,090 | 1,056 | 1,094 | ||||||||||||
Add: Weighted-average stock options (b) |
6 | 7 | 6 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
1,058 | 1,097 | 1,062 | 1,101 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic EPS |
$ | 1.44 | $ | 1.28 | $ | 2.78 | $ | 2.43 | ||||||||
Diluted EPS |
$ | 1.43 | $ | 1.27 | $ | 2.77 | $ | 2.42 | ||||||||
|
(a) | The Companys unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator. |
(b) | The dilutive effect of unexercised stock options excludes 0.2 million of options from the computation of EPS for all periods because inclusion of the options would have been anti-dilutive. |
For the three and six months ended June 30, 2014 and 2013, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, and maturing in 2036, which resulted in no impact to EPS. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.
29
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. | Non-Interest Revenue and Expense Detail |
The following is a detail of other commissions and fees:
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Foreign currency conversion fee revenue |
$ | 227 | $ | 222 | $ | 440 | $ 432 | |||||||
Delinquency fees |
174 | 167 | 355 | 331 | ||||||||||
Loyalty Partner-related fees |
95 | 72 | 186 | 147 | ||||||||||
Service fees |
90 | 94 | 180 | 176 | ||||||||||
Other (a) |
38 | 50 | 81 | 92 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total other commissions and fees |
$ | 624 | $ | 605 | $ | 1,242 | $ 1,178 | |||||||
|
|
|
|
|
|
| ||||||||
|
(a) | Other primarily includes fee revenue from fees related to Membership Rewards programs. |
The following is a detail of other revenues:
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Global Network Services partner revenues |
$ | 181 | $ | 151 | $ | 339 | $ 295 | |||||||
Net realized gains and losses on investment securities |
41 | 29 | 80 | 65 | ||||||||||
Other (a) |
363 | 387 | 667 | 744 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total other revenues |
$ | 585 | $ | 567 | $ | 1,086 | $ 1,104 | |||||||
|
|
|
|
|
|
| ||||||||
|
(a) | Other includes revenues arising from foreign exchange gains on cross-border Card Member spending, merchant-related fees, insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques-related revenues, and other miscellaneous revenue and fees. |
The following is a detail of marketing, promotion, rewards, Card Member services and other:
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Marketing and promotion |
$ | 985 | $ | 786 | $ | 1,598 | $ 1,407 | |||||||
Card Member rewards |
1,773 | 1,601 | 3,355 | 3,121 | ||||||||||
Card Member services and other |
192 | 193 | 414 | 382 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total marketing, promotion, rewards, Card Member services and other |
$ | 2,950 | $ | 2,580 | $ | 5,367 | $ 4,910 | |||||||
|
|
|
|
|
|
| ||||||||
|
Marketing and promotion expense includes advertising costs, which are expensed in the year in which the advertising first takes place. Card Member rewards expense includes the costs of rewards programs, including Membership Rewards and co-brand arrangements. Card Member services expense includes protection plans and complimentary services provided to Card Members.
30
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a detail of other, net expenses:
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Professional services |
$ | 817 | $ | 763 | $ | 1,509 | $ 1,479 | |||||||
Occupancy and equipment |
467 | 460 | 929 | 932 | ||||||||||
Card-related fraud losses |
102 | 75 | 186 | 156 | ||||||||||
Communications |
101 | 92 | 194 | 188 | ||||||||||
Gain on business travel joint venture transaction |
(626 | ) | | (626 | ) | | ||||||||
Other (a) |
387 | 219 | 605 | 465 | ||||||||||
|
|
|
|
|
|
| ||||||||
Total other, net |
$ | 1,248 | $ | 1,609 | $ | 2,797 | $ 3,220 | |||||||
|
|
|
|
|
|
| ||||||||
|
(a) | Other expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations (other than for the business travel joint venture transaction), litigation, certain internal and regulatory review-related reimbursements and insurance costs or settlements, investment impairments and certain Loyalty Partner-related expenses. |
15. | Contingencies |
The Company and its subsidiaries are involved in a number of legal proceedings concerning matters arising out of the conduct of their respective business activities and are periodically subject to governmental and regulatory examinations, information gathering requests, subpoenas, inquiries and investigations (collectively, governmental examinations). As of June 30, 2014, the Company and various of its subsidiaries were named as a defendant or were otherwise involved in numerous legal proceedings and governmental examinations in various jurisdictions, both in and outside the U.S. The Company discloses its material legal proceedings and governmental examinations under Item 1. Legal Proceedings in Part II. Other Information, and under Legal Proceedings in the Annual Report (collectively, Legal Proceedings).
The Company has recorded liabilities for certain of its outstanding legal proceedings and governmental examinations. A liability is accrued when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. There may be instances in which an exposure to loss exceeds the accrued liability. The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the liability that has been previously accrued or a revision to the disclosed estimated range of possible losses, as applicable.
The Companys legal proceedings range from cases brought by a single plaintiff to class actions with millions of putative class members. These legal proceedings, as well as governmental examinations, involve various lines of business of the Company and a variety of claims (including, but not limited to, common law tort, contract, antitrust and consumer protection claims), some of which present novel factual allegations and/or unique legal theories. While some matters pending against the Company specify the damages claimed by the plaintiff, many seek an unspecified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company are stated, the claimed amount may be exaggerated and/or unsupported. As a result, some matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss.
Other matters have progressed sufficiently through discovery and/or development of important factual information and legal issues so that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed or referred to in Legal Proceedings where a loss is reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a range of possible loss, the current estimated range is $0 to $360 million in excess of any accrued liability related to these matters.
31
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
This aggregate range represents managements 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 Companys 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 Companys 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 Companys operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Companys earnings for that period.
32
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. | Reportable Operating Segments |
The Company is a leading global payments and travel company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICS, GCS and Global Network Merchant Services (GNMS). Corporate functions and auxiliary businesses, including the Companys Enterprise Growth Group, as well as other Company operations are included in Corporate & Other.
The following table presents certain selected financial information for the three and six months ended June 30:
| ||||||||||||||
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, | ||||||||||
(Millions) |
2014 | 2013 | 2014 | 2013 | ||||||||||
Non-interest revenues: |
||||||||||||||
USCS |
$ | 3,222 | $ | 3,063 | $ | 6,239 | $ 5,941 | |||||||
ICS |
1,208 | 1,130 | 2,365 | 2,254 | ||||||||||
GCS |
1,332 | 1,290 | 2,581 | 2,510 | ||||||||||
GNMS |
1,366 | 1,313 | < |