American Express Annual Report 2014

Plain-text annual report

A M E R I C A N E X P R E S S C O M P A N Y A N N U A L R E P O R T 2 0 1 4 AMERICAN EXPRESS COMPANY A M E R I C A N E X P R E S S C O M PA N Y 200 Vesey Street, New York, NY 10285 212.640.2000 www.americanexpress.com A N N U A L R E P O R T 2014 FINANCIAL RESULTS (MILLIONS, EXCEPT PER SHARE AMOUNTS, PERCENTAGES AND EMPLOYEES) 2014 2013 % INC/(DEC) Total Revenues Net of Interest Expense $ 34,292 $ 32,974 Net Income $ 5,885 $ 5,359 Return on Average Equity 29.1% 27.8% Total Assets $ 159,103 $ 153,375 Shareholders' Equity $ 20,673 $ 19,496 Diluted Income Attributable to Common Shareholders Cash Dividends Declared per Share $ 5.56 $ 1.01 $ $ 4.88 0.89 Book Value per Share $ 20.21 $ 18.32 Average Common Shares Outstanding for Diluted Earnings per Common Share 1,051 1,089 Common Share Cash Dividends Declared $ 1,055 $ 967 Common Share Repurchases 49 55 Number of Employees 53,500 62,800 4% 10% 4% 6% 14% 13% 10% (4)% 9% (11)% (15)% TOTAL REVENUES NET OF INTEREST EXPENSE (in billions) RETURN ON AVERAGE EQUITY NET INCOME (in billions) 10 11 12 13 14 $27.6 $30.0 $31.6 $33.0 $34.3 10 11 12 13 14 27.5% 27.7% 23.1% 27.8% 29.1% 10 11 12 13 14 $4.1 $4.9 $4.5 $5.4 $5.9 Various forward-looking statements are made in this Annual Report, which generally include the words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “should,” “could,” “would,” “likely,” and similar expressions. Certain factors that may affect these forward-looking statements, including American Express Company’s ability to achieve its goals referred to herein are discussed on page 64. BILLED BUSINESS (in millions) CARDS-IN-FORCE (in millions) 10 11 12 13 14 $ 713 $ 822 $ 888 $ 952 $1,023 1 10 11 12 13 14 91.0 97.4 102.4 107.2 112.2 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014 DEAR SHAREHOLDERS If I were to focus this Annual Report letter solely on 2014, here is what I would say. For a company generally known to produce consistently strong results, American Express delivered again last year. We posted record earnings while investing heavily in opportunities to fuel our growth over the long run. But the story doesn’t begin or end there. 2014 was just one of many strong years of late. Consider the 14 percent annual earnings per share growth that we’ve averaged since 2010. During this time, we also delivered high returns on capital, with an average ROE of 27 percent. This performance has translated into a total five-year shareholder return of 145 percent, which is well above market returns on the whole. We’ve accomplished this through a post-recession economy and various other business challenges. As we entered 2015, however, the near-term picture changed due to a number of factors that we face, including economic headwinds, regulatory developments and changes in co-brand partnerships. In this letter, I want to give you a sense of how we will deal with these challenges. I also want to review the important progress that we made during 2014 and how we are well-positioned to exploit the many growth opportunities in front of us. 2014: Growth and Transformation Let’s start with a small transaction that had big significance. It was Christmas Day at a popular Miami restaurant. After enjoying a meal with her family, a longtime Card Member settled the $157 check with her Blue Cash Card. She didn’t know that her routine charge had just made a piece of American Express history. With that purchase, we passed the $1 trillion mark in annual charge volume for the first time. This milestone reflects years of growth — from the days when the Card was made of paper and held by a select few, to today, when our global network connects millions of consumers, businesses and merchants, and 2 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014is influencing the course of digital commerce. We’ve come a long way, yet, in many respects, I believe we are just scratching the surface of what we can eventually do. The steps we took during 2014 moved us further along in this journey. There were highlights, some disappointments, and no shortage of ongoing challenges, but we made very good progress. In particular, we took steps to make our brand more welcoming and inclusive, and used technology to bring greater convenience and benefits to our existing customers. I’d like to show you how this played out in our numbers and actions. Financial Results American Express earned a record $5.9 billion in net income in 2014, up 10 percent from the prior year. Earnings per share rose 14 percent due to business growth and a strong balance sheet that allowed us to continue to return substantial capital to shareholders through share repurchases. While delivering solid earnings, we also increased spending on business-building investments like marketing and promotion, new product development and Card Member acquisition. Revenues rose by 4 percent, which was below our long-term target of 8 percent. Still, we feel this was a positive result in a challenging environment. Ultimately, higher Card Member spending and borrowing, excellent credit quality, and disciplined expense controls drove our profits. Let’s take a closer look at each of these factors. HIGHER CARD MEMBER SPENDING Spending on our network rose 7 percent, which brought us to a total of $1.02 trillion for the year. Adjusting for changes in foreign currency exchange rates, worldwide billings increased by 9 percent. We experienced broad-based growth in spending among consumers, small businesses and large corporations. This was true despite an economy that, while growing, remained weak in many parts of the world. 3 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014There were many factors behind our higher billings. One, quite simply, is that Card Members spent more on average. Beyond that, we added more Card Members to our franchise and more places for them to spend by expanding our global merchant network. At year-end, total cards-in-force stood at 112.2 million, up by 5 million from the prior year. HIGHER LOANS AND EXCELLENT CREDIT QUALITY Card Member spending continues to drive the economics of our business, but lending is also playing an important role. During 2014, worldwide loans rose by 5 percent to $70.4 billion, even as Card Members paid down outstanding balances at a higher rate. The quality of our credit portfolio, as measured by write-off and past-due rates, remained exceptional. In fact, we led our major competitors in these measures by a wide margin. Looking ahead, we see opportunities to grow our loan portfolio with existing and new customers without significantly changing the overall risk profile of the company. The company continued to support its investment in Serve and worked to help the nearly 70 million Americans who are underserved by the traditional banking system with convenient, low-cost options for managing and saving money. American Express sponsored the documentary “Spent: Looking for Change” to help improve financial inclusion in the U.S. Academy Award®-winning filmmaker Davis Guggenheim is the executive producer of the documentary, which is narrated by Tyler Perry and directed by Derek Doneen. Debuting on YouTube in June, “Spent” follows the lives of four American families wrestling with the costs and inconveniences that come with living outside the traditional financial system. 4 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014TOTAL REVENUES NET OF INTEREST EXPENSE (in billions) RETURN ON AVERAGE EQUITY NET INCOME (in billions) 10 11 12 13 14 $27.6 $30.0 $31.6 $33.0 $34.3 10 11 12 13 14 27.5% 27.7% 23.1% 27.8% 29.1% 10 11 12 13 14 $4.1 $4.9 $4.5 $5.4 $5.9 BILLED BUSINESS (in billions) CARDS-IN-FORCE (in millions) 10 11 12 13 14 $ 713 $ 822 $ 888 $ 952 $1,023 10 11 12 13 14 91.0 97.4 102.4 107.2 112.2 Billed business rose 7 percent to $1.023 trillion on broad-based growth in spending among consumers, small businesses and corporations. Higher spending per card, combined with an expanding Card Member base, drove the increase. DISCIPLINED EXPENSE CONTROLS Controlling costs has been another priority for us. We made good on our commitment to hold expense growth in check in 2014. Total expenses were flat with a year ago and slightly below 2012 levels, despite significant increases in business-building investments. For example, spending on marketing and promotion (up 9 percent), rewards (up 7 percent), and Card Member services (up 7 percent) all reached historically high levels. PUTTING ONE-TIME GAINS TO WORK During the year, we benefited from two significant gains. In the second quarter, we realized a $626 million pre-tax gain from the completion of our Global Business Travel (GBT) joint venture. We formed this 50-50 joint venture to accelerate GBT’s growth, while maintaining its close connections with our commercial card business. Then, in the fourth quarter, we realized a $719 million pre-tax gain from selling our strategic investment in Concur Technologies. 5 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014In both instances, we put most of the proceeds to work rather than letting the money flow directly to the bottom line. We made additional investments in marketing and promotion, made an up-front investment to renew our longtime partnership with Delta Airlines, and recorded two major restructuring charges (in the second and fourth quarters). The two restructuring charges cover a range of actions designed to make American Express more efficient. We are streamlining parts of the organization, focusing our resources on growth areas, and adapting our workforce to changing customer needs. Our aim is to contain operating expenses and, as a result, have more funds available to invest in our future. Adapting to change sometimes means eliminating jobs, and this, unfortunately, is one of those times. We recently announced a substantial number of job cuts across the company. Seeing valued colleagues have their livelihoods disrupted is a part of business that nobody likes. We will do our best to support our colleagues who are affected, whether by reassigning them to other jobs at American Express where possible, or by helping them with their transitions when there are no other alternatives. As we reduce jobs in some areas of the company, we will be adding them in others. For instance, in technologies and risk management, we are bringing in more engineers and data scientists to help us innovate and bring products to market faster. Another example: we are expanding our teams involved in strengthening control and compliance to help ensure that we protect our customers and our brand. It comes down to putting people with the right skills in the right places at the right time. Shareholder Returns I would like to be able to say that our strong earnings, healthy capital position and business-building investments caused our stock to outperform in 2014. However, that didn’t happen. Our total shareholder return of 4 percent trailed the S&P 500 (up 14 percent) and the S&P Financials (up 15 percent). However, as I noted earlier, we have outperformed the market over the longer term, including five-year returns that topped the S&P 500 and S&P Financials. Although we manage the company for the moderate to long term, we obviously have been disappointed with our recent stock performance. 6 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014I assure you that we continue to work hard every day to build value for our shareholders. As part of those efforts, we brought a wide range of creative ideas to life this past year in the form of new and improved products, partnerships and digital innovations around the world. I’d like to highlight a few of them to give you an idea of how our teams continued to push boundaries. AmEx EveryDay: This is on track to be one of our most successful U.S. card launches in recent years. AmEx EveryDay is a no-annual-fee credit card that rewards you for how often you use it, not just how much you spend. Using the card 20 or more times in a billing period earns 20 percent extra rewards points. OptBlue: Making it easier for small businesses to begin accepting American Express cards is a priority, so we launched OptBlue. Fourteen merchant acquiring firms are helping us expand card acceptance by offering a one-stop solution for servicing, terms and pricing. Centurion Lounges: What better way to wait for your flight than by enjoying cuisine from a celebrity chef in beautiful surroundings? We opened two American Express Centurion Lounges — in New York’s LaGuardia Airport and San Francisco International — to rave reviews from Card Members. We now have 14 proprietary airport lounges worldwide, with more openings planned for 2015. The Amex EveryDay Credit Card, launched in March in a new television campaign featuring comedienne Tina Fey, is on track to be one of the company’s most successful U.S. card launches in recent years. 7 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014Network Partnerships: Around the world, we continued to expand our partnerships with banks that issue AmEx-branded cards on our network. We launched new cards in several countries, including those with Banco Santander in Mexico, Barclaycard in the U.K., Wells Fargo and U.S. Bank in the U.S., and multiple partners in China. Charge volume on cards issued by bank partners increased 12 percent for the year. Serve and Bluebird: Nearly 70 million Americans are underserved by the traditional banking system, with many shut out from the financial options most of us take for granted. We are working to help them. American Express Serve and Bluebird offer convenient, low-cost options for managing and saving money. In 2014, we made it easier for people to use Serve prepaid accounts by creating the largest cash reload network in the U.S. We also introduced a suite of new money management tools for both Serve and Bluebird account holders. The customer base for both of these products grew substantially over the past year. Small Business Saturday: A holiday tradition now in its fifth year, Small Business Saturday is bigger than ever. About 88 million U.S. consumers shopped small on the Saturday after Thanksgiving, up 15 percent from the prior year. American Express founded Small Business Saturday to help local, independent business owners in the U.S. increase sales on one of the most important shopping days of the year. Now, it’s an international event, as we work with partners in the U.K., Australia, Canada and other countries to encourage consumers to “shop small” in support of their local businesses. Loyalty Partner: A sophisticated approach to customer loyalty, this business brings together groups of merchants to share a common rewards platform. Consumers who enroll earn PAYBACK points and digital offers when they shop at participating merchants. The largest program of its kind in Europe, India and Mexico, Loyalty Partner now serves about 60 million active points-collecting consumers, up 38 percent from a year ago. It’s Not the Plastic…It’s the Platform Ask most people what business American Express is in, and they’ll probably tell you that we are a card company. Ask me, and I’ll tell you something different. I see us as a platform company. 8 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014We own the world’s largest integrated payments platform — a global network connecting millions of consumers, businesses and merchants. It’s a source of powerful data about the purchasing preferences of our customers, and we are using it to bring greater convenience and choice to people’s lives while building business for our merchant partners. We want people to feel that AmEx values them as customers, understands their preferences, and can personalize offerings and services based on their needs, all while protecting their privacy and keeping a sharp lookout for fraud. Every day we are taking steps to build that reality. Take, for example, how we’ve transformed our Membership Rewards program to provide increasingly customized mobile rewards at the point of purchase. Then there’s the launch of AmEx Offers, which uses our knowledge of spending patterns to deliver curated merchant deals. Big Data analysis is also helping us improve servicing, detect and prevent fraud, and offer more relevant products to the right customers. As part of this journey, we are working closely with other platform companies to bring our customers great commerce and lifestyle experiences. American Express has been a leader in this space through American Express has offered its Card Members the ability to use Apple Pay since the service first launched, bringing them an easy, secure and private way to pay. Apple Pay allows American Express Card Members to seamlessly add their eligible card and pay with their mobile device at contactless merchants in stores or directly within participating apps that accept American Express. Card Members who use an eligible American Express Card in Apple Pay get real-time notifications and details for all purchases and seamless connection to the Amex Mobile app for enhanced account monitoring, servicing and access to rewards and offers. 9 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014our early integrations with Foursquare, Facebook, Twitter and TripAdvisor. This year, we launched a new mobile loyalty program with Uber. Our integration with the Uber app lets AmEx Card Members earn double Membership Rewards points or redeem points for rides. In another significant partnership, we joined forces with Apple Pay. Apple has designed a simple, secure, user-friendly payments feature into its latest-generation iPhones. We believe that integrating our capabilities with Apple Pay can help fuel our growth in mobile payments. We are also active in the startup community. Through our AmEx Ventures team, we’ve invested selectively in a range of startups at the intersection of commerce and data science, from mobile rewards platforms to personalized recommendation engines to in-store retail analytics. Whether by swiping a card, clicking a mouse or tapping a mobile phone, how and where you choose to transact is up to you. Our job is to make it secure, easy and rewarding. The Co-Brand Space & Our Diverse Product Set To help us do that, we have the most diversified product set in the payments industry — a broad range of proprietary, co-brand and network products. These products are characterized by strong economic returns that enable us to offer attractive value propositions backed by industry- leading service. From time to time, in situations where we see those economics change for the worse, we need to adjust. That’s pretty much the story behind our highly publicized split with Costco in the U.S., a 16-year relationship set to end on March 31, 2016. It’s not easy to see a longstanding partnership end. But when the numbers no longer add up, it’s the only sensible outcome. We are proud of the value that we created over many years for our Card Members, our shareholders, and for Costco. The product development, marketing and servicing skills we brought to the table all played a critical role in making this a successful portfolio. 10 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014Although we worked aggressively to renew the relationship, we were unable to reach terms that would have made economic sense for our company and for our shareholders. Instead, we are going to focus on opportunities in other parts of our business where we see significant potential for growth and more attractive returns over time. Given this news, I think it’s important for me to further describe how we view the co-brand space in general and how these products fit into our broader growth opportunities. Co-brand partnerships will continue to be important for us, although they represent only a portion of our diversified product set. In fact, more than 70 percent of the purchase volume from the cards we issue takes place on non-co-brand cards. When it comes to co-brands, we’ve always been a disciplined buyer. From the start, we’ve sought relationships that can bring value to both our Card Members and partners, grow our portfolio over time, and earn economic returns that rival opportunities in other parts of our business. Using these criteria, we have built a successful co-brand business. As competition for co-brands has steadily increased over the years, so too has the cost to renew these relationships. We’ve seen this dynamic play out at different times in our industry when multi-year contracts have come up for renewal. This caused us to take a fresh look at our existing co-brand relationships. The company continued to find new ways for Card Members to use their Membership Rewards points by introducing strategic partnerships with Uber and McDonald’s. Eligible U.S. Card Members enrolled in the Membership Rewards program can seamlessly use points in real time for food and beverages at participating McDonald’s restaurants. In addition, American Express donated $1 to Ronald McDonald House Charities each time a Card Member redeemed points. In a first-of-its-kind technology integration into the Uber iOS and Android apps, U.S. Card Members enrolled in the Membership Rewards program can choose to earn 2x points or use points for Uber rides. 11 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014As a result, we decided last year to accelerate contract renewal discussions with several co-brand partners well before they expired. I’m delighted to say that we were able to renew several key co-brand relationships with broad ties to American Express programs — including our longstanding partnerships with Delta, Starwood, and Cathay Pacific. In each case, we feel very good about the value propositions that we will be offering our mutual customers, the economics of these relationships, and our ability to grow the customer base for these products. Our decision to accelerate discussions with co-brand partners provided us with greater clarity about the lineup of programs we would focus on going forward, as well as those that would be ending (Costco U.S., Costco Canada and JetBlue). Knowing this, in turn, gives us more flexibility to pursue emerging opportunities throughout our business. These opportunities include: • Consumer and Small Business Payments – growing profitable spending through our proprietary charge and lending, co-brand and network products. • B2B Payments – increasing our penetration among small, midsize and large corporate clients. • Geographies – expanding our international footprint in mature and developing markets. • Newer Businesses – growing reloadable prepaid products and other alternatives to cash and checks, loyalty coalitions, and marketing services. All of this helps explain the outcome of our negotiations with Costco. It is better to see the relationship end than to renew it under terms that would hinder us for many years to come. Despite the significant impact on our near-term results, we were convinced that it was the right outcome, especially when we have more attractive growth opportunities to fund elsewhere in our business. We intend to invest aggressively in 2015 on a range of business-building initiatives. Spending fewer marketing dollars would help bolster our results for now, however it would also be short-sighted and inconsistent with our approach of managing the business for moderate to long-term growth. 12 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014Department of Justice Lawsuit As I was finishing this letter, another development took place that I want to address. A federal court judge announced his decision in the antitrust lawsuit brought against us by the U.S. Department of Justice. The suit centered on provisions in our merchant contracts designed to prevent discrimination at the point of sale. Unfortunately, the judge ruled against American Express. While this ruling did not yet address what, if any, changes are required in our merchant contracts, it did find that our non-discrimination provisions are prohibited by the Sherman Act. We intend to appeal this decision because we believe it is wrong and will ultimately harm competition in the marketplace. We will continue to stand up for our rights and the rights of our Card Members. Under our contracts, merchants who choose to accept American Express agree to provide welcome acceptance, not discrimination, when a customer presents their card to make purchases. The Justice Department wants to abolish these protections, which they believe hinder competition. If the Justice Department has their way, merchants who sign a contract to accept American Express cards could nevertheless pressure customers to use a different card when it’s time to pay. Rather than settle, we fought this case for several reasons. First, it’s unfair to allow merchants who have agreed to honor our cards to then discriminate against American Express and our Card Members. Second, it’s fundamentally unfair to interfere with a consumer’s right to choose how he or she wants to pay at checkout. Third, we don’t believe there would be any benefit to consumers if the government prevails in this case. Instead, competition would be reduced, which would ultimately harm both consumers and merchants. Let me expand on this last point. Visa and MasterCard account for at least 80 percent of card spending in the U.S. Only a small fraction of Visa and MasterCard holders carry American Express cards. In contrast, most American Express Card Members carry a competing card in their wallet. Because of this marketplace reality, merchants would be able to steer customers toward Visa and MasterCard, while it would be virtually impossible to steer away from them. Such an outcome would only further 13 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014entrench Visa and MasterCard’s dominant position and lead to the commoditization of payments cards. Freedom of choice and fair competition are worth defending. We continue to believe that the Justice Department’s arguments are flawed and that we should prevail upon appeal. This initial ruling is a first step in what we expect will be a lengthy legal process. For now, our non-discrimination provisions remain in effect. Challenges, but Greater Opportunities As I’ve described for you in this note, American Express has turned in strong earnings and made major strides in our digital transformation over the past several years. Thanks to our flexibility and financial strength, we’ve successfully navigated many challenges to grow our business and reward our shareholders. Looking ahead, it’s clear that the degree of difficulty we face won’t ease anytime soon. • The economy is growing again, especially in the U.S., but the pace of growth is weak in many parts of the world. Meanwhile, the strong U.S. dollar poses additional challenges. We simply can’t count on a robust global economy to lift our results. • New regulations, including those designed to limit card fees paid by merchants, are challenging our business in many parts of the world. • The cost to acquire and retain co-brand partnerships is going up. • And, competition in general is intensifying as both traditional players and new entrants want to disrupt the marketplace. On the positive side — and I believe there are many more positives than negatives — we also have tremendous opportunities to grow our business: • We have major, untapped potential to benefit from the ongoing multi- trillion-dollar shift in global payments away from cash and checks. • The convergence of online and offline commerce is opening up new opportunities to connect Card Members and merchants. As this 14 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 2014happens, our closed-loop network and the insights we derive from it provide us with a major advantage. • Millions of people around the world are underserved by today’s financial system, and we can help many of them with products that make our brand more welcoming and inclusive. • Our ability to innovate, combined with our reputation for trust and security, can help us build upon our early leadership in digital commerce. • Through our Big Data expertise and customer knowledge, we can transform risk management, marketing and servicing in ways that will delight our customers. We are realistic about our challenges, inspired by our opportunities, and eager to tackle whatever comes next. The road map we intend to follow is clear: grow our core business, advance our digital transformation, and invest in new opportunities that complement our strengths. American Express is nothing if not resourceful — a trait that we’ve demonstrated throughout the years as we’ve transformed our business through innovation. I have seen us go from what was essentially a one- product, charge card-based model to having an expansive set of hundreds of products that are segmented and tailored to customer needs. We’ve significantly expanded our proprietary consumer business, while also growing corporate and small business billings many times over. With terrific people and a respected brand, we are excited to keep innovating and evolving. Sincerely, Kenneth I. Chenault Chairman & CEO American Express Company February 24, 2015 15 AMERICAN EXPRESS COMPANY | ANNUAL REPORT 20142014 FINANCIAL RESULTS 18 FINANCIAL REVIEW EXECUTIVE OVERVIEW CONSOLIDATED RESULTS OF OPERATIONS BUSINESS SEGMENT RESULTS CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS RISK MANAGEMENT CRITICAL ACCOUNTING ESTIMATES OTHER MATTERS 67 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 69 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 70 CONSOLIDATED FINANCIAL STATEMENTS 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 124 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA 125 COMPARISON OF FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW FINANCIAL REVIEW The financial section of American Express Company’s Annual Report consists of this Financial Review, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. The following discussion is designed to provide perspective and understanding regarding the consolidated financial condition and results of operations. Certain key terms are defined in the “Glossary of Selected Terminology”. When we use the terms “American Express,” “the Company,” “we,” “our” or “us,” we mean American Express Company and its subsidiaries on a consolidated basis, unless we state or the context implies otherwise. EXECUTIVE OVERVIEW BUSINESS INTRODUCTION We are a global services company with four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS). We provide our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. After June 30, 2014, business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). Until June 30, 2014, the business travel operations were wholly owned. Our range of products and services includes: (cid:2) charge and credit card products; (cid:2) expense management products and services; (cid:2) travel-related services; (cid:2) stored-value/prepaid products; (cid:2) network services; (cid:2) merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and (cid:2) fee services, including fraud prevention services and the design of customized customer loyalty and rewards programs. Our products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising. We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment providers. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers’ existing accounts and relationships to create payment or other fee-based solutions. We are transforming our existing businesses and creating new products and services for the digital marketplace as we seek to enhance our customers’ digital experiences and develop platforms for online and mobile commerce. Our products and services generate the following types of revenue for the Company: (cid:2) Discount revenue, our largest revenue source, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services at merchants on our network; (cid:2) Net card fees, which represent revenue earned from annual card membership fees; (cid:2) Travel commissions and fees, which are earned by charging a transaction or management fee to both customers and suppliers for travel- related transactions (business travel commissions and fees included through June 30, 2014); (cid:2) Other commissions and fees, which are earned on foreign exchange conversions, card-related fees and assessments, Loyalty Partner-related fees and other service fees; (cid:2) Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including commissions and signing fees), insurance premiums earned from Card Member travel and other insurance programs, prepaid card-related revenues, revenues related to the GBT JV transition services agreement, earnings from equity method investments (including the GBT JV) and other miscellaneous revenue and fees; and 18 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW (cid:2) Interest on loans, which principally represents interest income earned on outstanding balances. FINANCIAL HIGHLIGHTS For 2014, we reported net income of $5.9 billion and diluted earnings per share of $5.56. This compared to $5.4 billion of net income and $4.88 diluted earnings per share for 2013 and $4.5 billion of net income and $3.89 diluted earnings per share for 2012. 2014 results included: (cid:2) A $719 million ($453 million after-tax) gain on the sale of our investment in Concur Technologies (Concur) in the fourth quarter; (cid:2) A $626 million ($409 million after-tax) gain as a result of the business travel joint venture transaction in the second quarter; (cid:2) $420 million ($277 million after-tax) of net charges for costs related to reengineering initiatives, including $313 million ($206 million after-tax) and $133 million ($90 million after-tax) of restructuring charges in the fourth and second quarter, respectively; and (cid:2) A $109 million ($68 million after-tax) charge related to the renewal of our partnership with Delta Air Lines (Delta) in the fourth quarter. 2013 results included: (cid:2) A $66 million ($41 million after-tax) charge related to a proposed merchant litigation settlement in the fourth quarter. 2012 results included: (cid:2) $461 million ($328 million after-tax) of net charges for costs related to reengineering initiatives, including a $400 million ($287 million after-tax) restructuring charge in the fourth quarter; (cid:2) $342 million ($212 million after-tax) in expense resulting from enhancements to the process that estimates future redemptions of Membership Rewards points by U.S. Card Members; and (cid:2) A tax benefit of $146 million related to the realization of certain foreign tax credits. FINANCIAL TARGETS We seek to achieve three financial targets, on average and over time: (cid:2) Earnings per share (EPS) growth of 12 to 15 percent; (cid:2) Revenues net of interest expense growth of at least 8 percent; and (cid:2) Return on average equity (ROE) of 25 percent or more. If we achieve our EPS and ROE targets, we will seek to return on average and over time approximately 50 percent of the capital we generate to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein. See “Current Business Environment/Outlook” for a discussion of certain factors regarding our ability to achieve our financial targets. FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES Certain of the statements in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section. We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this Annual Report constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. BANK HOLDING COMPANY American Express Company is a bank holding company under the Bank Holding Company Act of 1956 and The Board of Governors of the Federal Reserve (the Federal Reserve) is our primary federal regulator. As such, we are subject to the Federal Reserve’s regulations, policies and minimum capital standards. 19 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW CURRENT BUSINESS ENVIRONMENT/OUTLOOK Our results for 2014 reflect higher spending by our Card Members, growth in average Card Member loans, credit quality indicators at or near historical lows and continued control over operating expenses, while our strong balance sheet allowed us to return a substantial amount of capital to our shareholders. We believe we produced solid earnings given the current economic and competitive environment, but recognize we face a number of increasing challenges in 2015. In 2014, we exceeded $1 trillion in annual Card Member global spend on our network for the first time. Card Member billed business increased 7 percent annually over the prior year, with a modest deceleration of the growth rate in the fourth quarter. Discount revenue increased 4 percent annually over the prior year. Billed business growth outpaced discount revenue growth primarily due to accelerated growth of our GNS business (where we share discount revenue we earn from merchants with our issuing bank partners), certain contract signings and payments made to corporate clients and merchant partners, strong growth in our cash rebate rewards products and changes in the mix of spending by location and industry. These factors as well as competition and pricing regulation (including regulation of competitors’ interchange rates) will likely result in a continuation of this trend over time. Average loans grew 4 percent during 2014, which, along with lower funding costs, led to an 8 percent increase in net interest income. Net write-off rates remained at or near historically low levels, though the overall rate of improvement slowed in 2014. We expect, at some point, net write-off rates will increase from these historic lows, which will result in a growth in provision for losses assuming average loans remain at or above current levels. As previously noted, our 2014 results include net gains from the business travel joint venture transaction in the second quarter ($626 million pretax) and the sale of our investment in Concur in the fourth quarter ($719 million pretax). We used a substantial portion of those gains to make additional investments in business building activities and initiatives designed to improve operating efficiencies. Specifically, marketing, promotion and rewards expenses reflect incremental investments, as well as a charge related to the renewal of our long-term relationship with Delta. We also undertook restructuring actions in the second quarter ($133 million pretax) and fourth quarter ($313 million pretax) designed to make us more efficient, contain operating expenses, and, as a result, better enable us to invest in new and enhanced products and services. Operating expenses for the year decreased 6 percent and adjusted operating expenses, a non-GAAP measure, were flat year over year. Refer to Table 1 for details of adjusted operating expenses. While our business is diversified by product and geography, including a range of consumer and commercial card offerings, a large international business and GNS partners around the world, we face a number of increasing challenges in 2015. Regulation of the payments industry has increased significantly in recent years and various governments around the world have established or are proposing to establish payment system regulatory regimes. In the European Union (EU), proposed regulatory changes in the card payment sector, including the introduction of price regulation, the elimination of honor-all-cards and “anti-steering” rules, and requirements on granting access to our network, among other important changes, will likely negatively impact the discount revenue derived from our business in the EU and could significantly limit our flexibility to compete with the more entrenched bankcard networks. See ‘‘Certain Legislative, Regulatory and Other Developments” for additional information on the legislative and regulatory environment. In addition, global economic growth continues at a modest and mixed pace. Our 2014 results were negatively impacted by the strengthening U.S. dollar, and we currently expect foreign exchange to have an adverse impact in 2015. Our results could be adversely affected by increases in short-term interest rates or the failure of the U.S. Congress to continue the renewal of legislation regarding our active financing income, which could increase our effective tax rate and have an adverse impact on net income in 2015 and beyond. Competition remains extremely intense across the payments industry. Within the co-brand space, we are focusing on those relationships that offer the best value to our Card Members while also providing appropriate returns to our business and shareholders. We recently renewed and extended our relationships with Delta, Starwood and Cathay Pacific. More intense competition has generally increased our cost of renewing and extending co-brand relationships which are an important component of our business model. We will continue to strive for a diverse and balanced portfolio of product categories. 20 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW As announced on February 12, 2015, we sought to renew our co-brand and merchant acceptance agreements with Costco in the United States, a substantial and growing business relationship. We were unable to agree to terms that would have provided attractive returns for our Company and our shareholders compared to alternative investments. U.S. Costco co-brand accounts generated approximately 8 percent of our worldwide billed business for the year ended December 31, 2014. Over 70 percent of the spending on these accounts occurred outside Costco warehouses. As of December 31, 2014, these co-brand accounts were responsible for approximately 20 percent of our worldwide Card Member loans and approximately 10 percent of our total cards-in-force. In addition, 1 percent of our worldwide billed business for the year ended December 31, 2014 came from spending on other American Express cards at Costco warehouses. Our current co-brand and merchant acceptance agreements with Costco are set to expire on March 31, 2016. The term of any sale of the existing Costco U.S. Card Member loan portfolio will depend on a series of decisions and negotiations among Costco, us and the new co-brand card issuers. We intend to make investments to attract Card Members, including those from the Costco co-brand relationship, by offering them attractive products from our suite of proprietary offerings. We will also be making investments in other growth initiatives across our Company that we believe offer more attractive returns over time and position us for continued long-term growth. We believe having greater certainty regarding our existing co-brand relationships gives us more flexibility to invest in growth opportunities in the co-brand space and across our Company to help us drive innovation in the world of payments and commerce. At the same time, we are prepared to re-scale our overall cost base so that it is appropriately sized, which could include a restructuring charge in the future and help us to maintain discipline over operating expenses in 2015 and 2016. The timing and size of any restructuring charge will be dependent on a number of factors, including whether there is a portfolio sale as well as the rate the billed business associated with the Costco U.S. co-brand portfolio declines and how quickly we can grow billed business with other products. The cumulative effect of increased competition and pricing regulation, the strengthening of the U.S. dollar, the expiration of our U.S. Costco co-brand relationship in 2016 and other factors previously discussed leads us to expect earnings per share in 2015 will likely be significantly adversely affected year over year as we manage through these near-term challenges and invest aggressively to prepare for the end of the Costco U.S. relationship. The impact of these challenges in 2016 will depend on factors such as our ability to offer attractive products and services to Card Members, grow other sources of revenue and implement expense control initiatives, although there can be no assurance that these measures will be successful. We are confident in our business model and believe our financial targets remain appropriate over the longer term once our year over year results are not impacted by the loss of Costco or the renewal of our other co-brand partner relationships. On February 19, 2015, a trial court ruled in favor of the U.S. Department of Justice (DOJ) in a case challenging provisions in our card acceptance agreements with merchants that prohibit merchants from discriminating against our card products at the point of sale. See “Certain Legislative, Regulatory and Other Developments” for information on the potential impacts of an adverse decision on our business. TABLE 1: ADJUSTED OPERATING EXPENSES Years Ended December 31, (Millions, except percentages) Salaries and employee benefits Other, net Total reported operating expenses Gain on GBT JV transaction, net of transaction-related costs Global Business Travel (GBT) operating expenses(a) Contribution to the American Express Foundation(b) Restructuring charges(b) Adjusted operating expenses(c) Change 2014 vs. 2013 (6)% $ $ 2014 6,095 6,089 12,184 547 — (40) (446) 2013 6,191 6,796 12,987 — (696) — — $ 12,245 $ 12,291 —% (a) Represents operating expenses of GBT as reported in the third and fourth quarters of 2013. It does not include other GBT-related items, including transaction- related costs and impacts related to a transition service agreement that will phase out over time. (b) To the extent comparable categories of charges were recognized in periods other than the second or fourth quarters of 2014, they have not been excluded. (c) Adjusted operating expense and the related growth rate are non-GAAP measures. Management believes these metrics are useful in evaluating the ongoing performance of the Company. 21 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW AMERICAN EXPRESS COMPANY CONSOLIDATED RESULTS OF OPERATIONS Refer to the “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing within this section. TABLE 2: SUMMARY OF FINANCIAL PERFORMANCE Years Ended December 31, (Millions, except percentages and per share amounts) Total revenues net of interest expense Provisions for losses Expenses Net income Earnings per common share – diluted(a) Return on average equity(b) Return on average tangible common equity(c) 2014 2013 2012 $ 34,292 2,044 23,257 5,885 5.56 29.1% 35.9% $ $ 32,974 1,832 23,254 5,359 4.88 27.8% 34.9% $ $ 31,555 1,712 23,392 4,482 3.89 23.1% 29.2% $ $ $ Change 2014 vs. 2013 Change 2013 vs. 2012 1,318 212 3 526 0.68 4 % $ 12 — 10 14 % $ 1,419 120 (138) 877 0.99 4 % 7 (1) 20 25 % (a) Earnings per common share — diluted was reduced by the impact of earnings allocated to participating share awards and other items of $46 million, $47 million and $49 million for the years ended December 31, 2014, 2013 and 2012, respectively. (b) ROE is computed by dividing (i) one-year period net income ($5.9 billion, $5.4 billion and $4.5 billion for 2014, 2013 and 2012, respectively) by (ii) one-year average total shareholders’ equity ($20.3 billion, $19.3 billion and $19.4 billion for 2014, 2013 and 2012, respectively). (c) Return on average tangible common equity, a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity, average goodwill and other intangibles of $3.9 billion, $4.1 billion and $4.2 billion as of December 31, 2014, 2013 and 2012, respectively, and preferred shares of $0.7 billion as of December 31, 2014. We believe return on average tangible common equity is a useful measure of the profitability of our business. TABLE 3: TOTAL REVENUES NET OF INTEREST EXPENSE SUMMARY Years Ended December 31, (Millions, except percentages) Discount revenue Net card fees Travel commissions and fees Other commissions and fees Other Total non-interest revenues Total interest income Total interest expense Net interest income 2014 2013 2012 $ 19,493 2,712 1,118 2,508 2,989 $ 18,695 2,631 1,913 2,414 2,274 $ 17,739 2,506 1,940 2,317 2,425 $ 28,820 27,927 26,927 7,179 1,707 5,472 7,005 1,958 5,047 6,854 2,226 4,628 Change 2014 vs. 2013 Change 2013 vs. 2012 798 81 (795) 94 715 893 174 (251) 425 4 % $ 3 (42) 4 31 3 2 (13) 8 956 125 (27) 97 (151) 1,000 151 (268) 419 Total revenues net of interest expense $ 34,292 $ 32,974 $ 31,555 $ 1,318 4 % $ 1,419 5 % 5 (1) 4 (6) 4 2 (12) 9 4 % TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue increased $798 million or 4 percent in 2014 as compared to 2013, and $956 million or 5 percent in 2013 as compared to 2012. The increase in both years was driven by a 7 percent growth in billed business volumes, partially offset by a decline in the average discount rate, faster growth in GNS billings than in overall Company billings, and increased cash rebate rewards and corporate client incentives. U.S. billed business and billed business outside the U.S. increased 8 percent and 6 percent, respectively, in 2014 as compared to 2013, due to increases in average spending per proprietary basic card and basic cards-in-force. Excluding the impact of changes in foreign exchange rates billed business outside the U.S. increased 10 percent. See Tables 6 and 7 for more detail on billed business performance. The average discount rate was 2.48 percent, 2.51 percent and 2.52 percent for 2014, 2013 and 2012 respectively. Changes in the mix of spending by location and industry, volume-related pricing discounts, strategic investments, certain pricing initiatives, competition, pricing regulation (including regulation of competitors’ interchange rates) and other factors will likely result in continued erosion of the average discount rate over time. Net card fees increased $81 million or 3 percent in 2014 as compared to 2013, and $125 million or 5 percent in 2013 as compared to 2012. The increase in both years was primarily driven by higher average proprietary cards-in-force and higher average card fees in ICS and USCS. Excluding the impact of changes in foreign exchange rates, net card fees increased 5 percent in 2014 compared to 2013 and 8 percent in 2013 compared to 2012.1 1 The foreign currency adjusted information, a non-GAAP measure, assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year period against which such results are being compared). We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates. 22 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Travel commissions and fees decreased $795 million or 42 percent in 2014 as compared to 2013, and $27 million or 1 percent in 2013 as compared to 2012. The decrease in 2014 as compared to 2013 was primarily due to the business travel joint venture transaction, resulting in a lack of comparability between periods. The decrease in 2013 as compared to 2012 was primarily driven by flat business travel sales and a 2 percent decline in U.S. consumer travel sales. Other commissions and fees increased $94 million or 4 percent in 2014 as compared to 2013, and $97 million or 4 percent in 2013 as compared to 2012. The increase in 2014 as compared to 2013 was primarily driven by higher revenue from our Loyalty Partner business and delinquency fees. The increase in 2013 as compared to 2012 was primarily driven by lower Card Member reimbursements and marginally higher delinquency fees and foreign currency conversion revenues, as well as higher revenue from our Loyalty Partner business. Other revenues increased $715 million or 31 percent in 2014 as compared to 2013 and decreased $151 million or 6 percent in 2013 as compared to 2012. The increase in 2014 as compared to 2013 was primarily driven by the $719 million gain on the sale of our investment in Concur, revenues received for transitional services provided to the GBT JV and higher Loyalty Edge revenues, partially offset by the loss of revenue from the publishing business, which was sold in the fourth quarter of 2013. The decrease in 2013 as compared to 2012 was driven by the effect of a benefit in the first half of 2012 due to revised estimates of the liability for uncashed Travelers Cheques in certain international countries. The 2013 decrease also includes the loss of revenue from the publishing business in the fourth quarter of 2013, and higher Card Member reimbursements within other revenues in 2013 as compared to 2012. These decreases were partially offset by an increase in Loyalty Edge revenue from additional client signings and a larger gain on the sale of investment securities in 2013. Interest income increased $174 million or 2 percent in 2014 as compared to 2013, and $151 million or 2 percent in 2013 as compared to 2012. The increase in both years was primarily due to an increase in interest on loans driven by higher average Card Member loans, partially offset by decreases in interest and dividends on investment securities driven by lower average investment securities. Interest expense decreased $251 million or 13 percent in 2014 as compared to 2013, and $268 million or 12 percent in 2013 as compared to 2012. The decrease in both years was primarily driven by a lower cost of funds on debt and customer deposits, partially offset by increases in average customer deposit balances. The decrease in 2013 was also driven by lower average long-term debt balances. TABLE 4: PROVISIONS FOR LOSSES SUMMARY Years Ended December 31, (Millions, except percentages) Charge card Card Member loans Other Total provisions for losses $ 2014 792 1,138 114 $ 2013 648 1,115 69 $ 2012 601 1,030 81 $ $ 2,044 $ 1,832 $ 1,712 $ Change 2014 vs. 2013 Change 2013 vs. 2012 144 23 45 212 22 % $ 2 65 47 85 (12) 12 % $ 120 8 % 8 (15) 7 % PROVISIONS FOR LOSSES Charge card provision for losses increased $144 million or 22 percent in 2014 as compared to 2013, and $47 million or 8 percent in 2013 as compared to 2012. The increase in 2014 was primarily due to a slower reserve rate improvement in 2014 versus 2013, higher corporate card write-offs and the effects of changes in other loss reserve assumptions resulting in a reserve build versus a reserve release in 2013. The 2013 increase was driven by higher average Card Member receivable balances resulting in higher net write-offs, partially offset by a higher reserve release in 2013 than 2012. Card Member loans provision for losses increased $23 million or 2 percent in 2014 as compared to 2013, and $85 million or 8 percent in 2013 as compared to 2012. The increase in 2014 was driven by higher average Card Member loans, a slower improvement in the reserve rate and the effects of changes in other loss reserve assumptions resulting in a lower reserve release as compared to 2013, partially offset by the benefit of lower net write-offs due to improved credit performance. The 2013 increase was primarily driven by lower reserve releases as compared to 2012, partially offset by the benefit of lower net write-offs in 2013 due to improved credit performance. Other provision for losses increased $45 million or 65 percent in 2014 as compared to 2013, and decreased $12 million or 15 percent in 2013 as compared to 2012. The increase in 2014 was due, in part, to a merchant-related charge in the fourth quarter of 2014. 23 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 5: EXPENSES SUMMARY Years Ended December 31, (Millions, except percentages) Marketing and promotion Card Member rewards Card Member services and other Total marketing, promotion, rewards and Card Member services and other Salaries and employee benefits Other, net Total expenses $ $ 2014 3,320 6,931 822 11,073 6,095 6,089 $ 2013 3,043 6,457 767 10,267 6,191 6,796 $ 2012 2,890 6,282 772 9,944 6,597 6,851 Change 2014 vs. 2013 Change 2013 vs. 2012 277 474 55 806 (96) (707) 9 % $ 7 7 8 (2) (10) 153 175 (5) 323 (406) (55) (138) 5 % 3 (1) 3 (6) (1) (1) % $ 23,257 $ 23,254 $ 23,392 $ 3 — % $ EXPENSES Marketing and promotion expenses increased $277 million or 9 percent in 2014 as compared to 2013, and $153 million or 5 percent in 2013 as compared to 2012. The increase in 2014 as compared to 2013 was primarily driven by the reinvestment of a portion of the gains from the business travel joint venture transaction and the sale of our investment in Concur in growth initiatives. The 2013 increase as compared to 2012 was driven by higher spend on Card Member acquisition marketing. Card Member rewards expenses increased $474 million or 7 percent in 2014 as compared to 2013, and $175 million or 3 percent in 2013 as compared to 2012. The increase in 2014 as compared to 2013 was primarily due to higher Membership Rewards expense of $263 million, driven by a $266 million increase related to new points earned, in line with higher spending volumes, and a higher weighted average cost (WAC) per point assumption, including the impact of the $109 million charge related to the Delta partnership renewal in the fourth quarter of 2014; these increases were offset by slower average growth in the Ultimate Redemption Rate (URR). Co-brand rewards expense increased $211 million, primarily driven by higher spending volumes. The 2013 increase in Card Member rewards expenses was driven by higher co-brand rewards expenses of $283 million, primarily relating to higher spending volumes, partially offset by a decrease in Membership Rewards expenses of $108 million. The decrease in Membership Rewards expenses was primarily driven by a $208 million decrease related to the liability for points earned but not yet redeemed, including the impact of a 2012 charge related to enhancements made to the U.S. URR estimation process of $342 million, partially offset by a net increase in expenses related to slower average declines in the WAC per point assumption and slower average growth in the URR as compared to 2012. The $208 million decrease was partially offset by an increase in expense related to new points earned of $100 million. The Membership Rewards URR for current program participants was 95 percent (rounded up) at December 31, 2014, an increase from 94 percent (rounded down) at December 31, 2013 and 94 percent (rounded up) at December 31, 2012. The increases in the URR were driven by greater engagement in our Membership Rewards program. Card Member services expenses increased $55 million or 7 percent in 2014 compared to 2013 and decreased $5 million or 1 percent in 2013 as compared to 2012. The increase in 2014 as compared to 2013 was primarily driven by increased engagement levels and use of certain Card Member benefits, as well as recently opened American Express-branded airport lounges. Salaries and employee benefits expenses decreased $96 million or 2 percent in 2014 as compared to 2013, and $406 million or 6 percent in 2013 as compared to 2012. The decrease in 2014 as compared to 2013 was primarily due to the business travel joint venture transaction, resulting in a lack of comparability between periods. This decrease was partially offset by restructuring charges in the second and fourth quarters of 2014. The decrease in 2013 as compared to 2012 was primarily driven by a restructuring charge in the fourth quarter of 2012. Other expenses decreased $707 million or 10 percent in 2014 as compared to 2013, and $55 million or 1 percent in 2013 as compared to 2012. The decrease in 2014 as compared to 2013 was primarily driven by the business travel joint venture transaction, which resulted in a gain in the second quarter of 2014 and a lack of comparability between periods beginning in the third quarter of 2014, and the proposed merchant litigation settlement in 2013. The decrease was also due to lower professional services and occupancy and equipment expenses in 2014. These benefits were partially offset by higher fraud expense and non-income tax items in 2014, as well as the American Express Foundation contribution in the second quarter of 2014. The 2013 decrease was driven by higher Card Member reimbursements and investment impairments in 2012, partially offset by higher professional services expenses, driven by increased investments in technology development and other investments in the business, as well as higher occupancy and equipment expenses, primarily driven by higher data processing expenses as well as the proposed merchant litigation settlement in the fourth quarter of 2013. 24 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW INCOME TAXES The effective tax rate was 34.5 percent in 2014 compared to 32.1 percent in 2013 and 30.5 percent in 2012. The tax rates for 2014 and 2013 included expenses of $40 million and benefits of $150 million, respectively, related to the resolution of certain prior years’ items. The tax rate for 2012 included benefits of $146 million related to the realization of certain foreign tax credits. The tax rates in all years reflect the level of pretax income in relation to recurring permanent tax benefits and variances in the geographic mix of business. TABLE 6: SELECTED STATISTICAL INFORMATION Years Ended December 31, Card billed business: (billions) United States Outside the United States Total Total cards-in-force: (millions) United States Outside the United States Total Basic cards-in-force: (millions) United States Outside the United States Total 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 $ $ 688.1 334.7 1,022.8 $ $ 637.0 315.4 952.4 $ $ 54.9 57.3 112.2 42.6 47.0 89.6 53.1 54.1 107.2 41.1 44.0 85.1 590.7 297.7 888.4 52.0 50.4 102.4 40.3 40.5 80.8 8% 6 7 3 6 5 4 7 5 3 — 2% 8% 6 7 2 7 5 2 9 5 4 3 2% Average discount rate Average basic Card Member spending (dollars)(a) Average fee per card (dollars)(a) Average fee per card adjusted (dollars)(a) 2.48% 2.51% 2.52% $ $ 16,884 40 45 $ $ 16,334 40 44 $ $ 15,720 39 43 (a) Average basic Card Member spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The adjusted average fee per card, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $306 million, $262 million and $257 million for the years ended December 31, 2014, 2013 and 2012, respectively. We present adjusted average fee per card because we believe this metric presents a useful indicator of card fee pricing across a range of its proprietary card products. 25 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 7: SELECTED STATISTICAL INFORMATION Worldwide(b) Billed business Proprietary billed business GNS billed business(c) Airline-related volume (9% of worldwide billed business for both 2014 and 2013) United States(b) Billed business Proprietary consumer card billed business(d) Proprietary small business billed business(d) Proprietary corporate services billed business(e) T&E-related volume (26% of U.S. billed business for both 2014 and 2013) Non-T&E-related volume (74% of U.S. billed business for both 2014 and 2013) Airline-related volume (8% of U.S. billed business for both 2014 and 2013) Outside the United States(b) Billed business Japan, Asia Pacific & Australia (JAPA) billed business Latin America & Canada (LACC) billed business Europe, the Middle East & Africa (EMEA) billed business Proprietary consumer and small business billed business(f) JAPA billed business LACC billed business EMEA billed business Proprietary corporate services billed business(e) 2014 2013 Percentage Increase (Decrease) Assuming No Changes in Foreign Exchange Rates(a) Percentage Increase (Decrease) Percentage Increase (Decrease) Assuming No Changes in Foreign Exchange Rates(a) Percentage Increase (Decrease) 7 % 7 12 5 8 7 10 8 6 9 3 6 10 (1) 7 2 — (5) 9 3 % 9% 7 15 6 10 14 8 7 6 6 2 8 6% 7% 6 12 3 8 7 11 8 6 9 4 6 6 6 7 2 (4) 4 7 2% 8% 7 16 3 10 13 11 6 6 6 7 6 3% (a) The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current year apply to the corresponding year-earlier period against which such results are being compared). We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates. (b) Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data. (c) Included in the GNMS segment. (d) Included in the USCS segment. (e) Included in the GCS segment. Included in the ICS segment. (f) 26 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 8: SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, (Millions, except percentages and where indicated) 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 Worldwide Card Member receivables Total receivables (billions) Loss reserves: Beginning balance Provisions(a) Net write-offs(b) Other(c) Ending balance % of receivables Net write-off rate – principal only – USCS/ICS(e) Net write-off rate – principal and fees – USCS/ICS(e) 30 days past due as a % of total – USCS/ICS Net loss ratio as a % of charge volume – GCS 90 days past billing as a % of total – GCS Worldwide Card Member loans Total loans (billions) Loss reserves: Beginning balance Provisions(a) Net write-offs – principal only(b) Net write-offs – interest and fees(b) Other(c) Ending balance Ending reserves – principal only Ending reserves – interest and fees % of loans % of past due Average loans (billions) Net write-off rate – principal only(e) Net write-off rate – principal, interest and fees(e) 30 days past due as a % of total Net interest income divided by average loans(f) Net interest yield on Card Member loans(f) # Denotes a variance greater than 100 percent. $ 44.9 $ 44.2 $ 42.8 386 792 (683) (30) 428 648 (669) (21) $ 465 $ 386 $ 1.0 % 1.7 % 1.9 % 1.6 % 0.09 % 0.8 % 0.9 % (d) (d) (d) 0.08 % 0.9 % 438 601 (640) 29 428 1.0 % (d) (d) (d) 0.06 % 0.8 % 2 % (10) 22 2 43 20 % 3 % (2) 8 5 # (10) % $ 70.4 $ 67.2 $ 65.2 5 % 3 % $ $ $ $ 1,261 1,138 (1,023) (164) (11) 1,201 1,149 52 1.7 % 167 % $ $ $ 66.0 $ 1.5 % 1.8 % 1.0 % 8.3 % 9.3 % 1,471 1,115 (1,141) (150) (34) 1,261 1,212 49 1.9 % 169 % 63.3 1.8 % 2.0 % 1.1 % 8.0 % 9.3 % $ $ $ $ 1,874 1,030 (1,280) (157) 4 1,471 1,423 48 2.3 % 182 % 61.5 2.1 % 2.3 % 1.2 % 7.5 % 9.1 % (14) 2 (10) 9 (68) (5) (5) 6 (22) 8 (11) (4) # (14) (15) 2 4 % 3 % (a) Provisions for principal (resulting from authorized transactions), interest and/or fees on Card Member loans and principal (resulting from authorized transactions) and fee reserve components on Card Member receivables. (b) Write-offs, less recoveries. (c) Card Member receivables includes a reclassification of card-related fraud losses of $(7) million to other liabilities in 2014; foreign currency translation adjustments of $(15) million, $(4) million and $2 million for the years ended December 31, 2014, 2013 and 2012, respectively; a reclassification of Card Member bankruptcy reserves of $18 million from other liabilities to credit reserves in 2012; and other adjustments of $(8) million, $(17) million and $9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Card Member loans includes a reclassification of card-related fraud losses of $(6) million to other liabilities in 2014; foreign currency translation adjustments of $(17) million, $(12) million and $7 million for the years ended December 31, 2014, 2013 and 2012, respectively; a reclassification of Card Member bankruptcy reserves of $4 million from other liabilities to credit reserves in 2012; and other adjustments of $12 million and $(22) million and $(7) million for the years ended December 31, 2014, 2013 and 2012, respectively. (d) Historically, net loss ratio as a % of charge volume and 90 days past billing as a % of receivables were presented for ICS. Beginning in the 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. (e) We present 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 our practice is to include uncollectible interest and/or fees as part of our total provision for losses, a net write-off rate including principal, interest and/ or fees is also presented. (f) Refer to Table 9 for the calculation of net interest yield on Card Member loans, a non-GAAP measure, net interest income divided by average loans, a GAAP measure, and our rationale for presenting net interest yield on Card Member loans. 27 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 9: NET INTEREST YIELD ON CARD MEMBER LOANS Years Ended December 31, (Millions, except percentages and where indicated) Net interest income Exclude: Interest expense not attributable to the Company’s Card Member loan portfolio Interest income not attributable to the Company’s Card Member loan portfolio Adjusted net interest income(a) Average loans (billions) Exclude certain non-traditional Card Member loans and other fees (billions) Adjusted average loans (billions)(a) Net interest income divided by average loans Net interest yield on Card Member loans(a) 2014 2013 2012 $ 5,472 $ 5,047 $ 4,628 $ $ $ 1,019 (359) 6,132 66.0 (0.2) 65.8 8.3 % 9.3 % $ $ $ 1,181 (361) 1,366 (401) 5,867 $ 5,593 $ $ 63.3 (0.3) 63.0 8.0 % 9.3 % 61.5 (0.2) 61.3 7.5 % 9.1 % (a) Adjusted average loans, adjusted net interest income and net interest yield on Card Member loans are non-GAAP measures. We believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio. 28 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW BUSINESS SEGMENT RESULTS OVERVIEW We consider a combination of factors when evaluating the composition of our reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily U.S. versus non-U.S.) and regulatory considerations. Refer to Note 25 of the Consolidated Financial Statements for additional discussion of the products and services by segment. Results of the business segments essentially treat each segment as a stand-alone business. The management reporting process that derives these results allocates revenue and expense using various methodologies as described below. Refer to the “Glossary of Selected Terminology” for the definitions of certain key terms and related information appearing in this section. TOTAL REVENUES NET OF INTEREST EXPENSE We allocate discount revenue and certain other revenues among segments using a transfer pricing methodology. Within the USCS, ICS and GCS segments, discount revenue generally reflects the issuer component of the overall discount revenue generated by each segment’s Card Members; within the GNMS segment, discount revenue generally reflects the network and acquirer component of the overall discount revenue. Net card fees and travel commissions and fees are directly attributable to the segment in which they are reported. Interest and fees on loans and certain investment income is directly attributable to the segment in which it is reported. Interest expense represents an allocated funding cost based on a combination of segment funding requirements and internal funding rates. PROVISIONS FOR LOSSES The provisions for losses are directly attributable to the segment in which they are reported. EXPENSES Marketing and promotion expenses are included in each segment based on actual expenses incurred, with the exception of brand advertising, which is primarily reflected in the GNMS and USCS segments. Rewards and Card Member services expenses are included in each segment based on actual expenses incurred within each segment. Salaries and employee benefits and other operating expenses reflect expenses such as professional services, occupancy and equipment and communications incurred directly within each segment. In addition, expenses related to support services, such as technology costs, are allocated to each segment primarily based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated from Corporate & Other to the other segments based on a mix of each segment’s direct consumption of services and relative level of pretax income. CAPITAL Each business segment is allocated capital based on established business model operating requirements, risk measures and regulatory capital requirements. Business model operating requirements reflect capital needed to support operations and specific balance sheet items. The risk measures reflect considerations for credit, market and operational risk. INCOME TAXES An income tax provision (benefit) is allocated to each business segment based on the effective tax rates applicable to various businesses that comprise the segment. 29 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW U.S. CARD SERVICES SEGMENT TABLE 10: USCS SELECTED INCOME STATEMENT DATA Years Ended December 31, (Millions, except percentages) Revenues 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 Discount revenue, net card fees and other $ 12,732 $ 12,123 $ 11,469 $ 609 5 % $ Interest income Interest expense Net interest income Total revenues net of interest expense Provisions for losses Total revenues net of interest expense after provisions for losses Expenses Marketing, promotion, rewards, Card Member services and other Salaries and employee benefits and other operating expenses Total expenses Pretax segment income Income tax provision Segment income Effective tax rate 5,786 604 5,182 17,914 1,396 16,518 7,301 4,117 11,418 5,100 1,900 5,565 693 4,872 16,995 1,250 15,745 6,825 3,926 10,751 4,994 1,801 5,342 765 4,577 16,046 1,253 14,793 6,552 4,172 10,724 4,069 1,477 $ 3,200 $ 3,193 $ 2,592 $ 37.3% 36.1% 36.3% 221 (89) 4 (13) 310 919 146 773 476 191 667 106 99 7 6 5 12 5 7 5 6 2 5 — % $ 654 223 (72) 295 949 (3) 952 273 (246) 27 925 324 601 6 % 4 (9) 6 6 — 6 4 (6) — 23 22 23 % USCS issues a wide range of card products and services to consumers and small businesses in the U.S., and provides consumer travel services to Card Members and other consumers. TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue, net card fees and other revenues increased $609 million or 5 percent in 2014 as compared to 2013, primarily driven by higher discount revenue, due to billed business growth, partially offset by a decrease in the average discount rate and higher cash rebate rewards. Billed business increased 8 percent in 2014 as compared to 2013, primarily driven by a 4 percent increase in average spending per proprietary basic card and 4 percent higher cards-in-force. Interest income increased $221 million or 4 percent in 2014 as compared to 2013, primarily driven by higher average Card Member loans, partially offset by higher Card Member reimbursements. Interest expense decreased $89 million or 13 percent in 2014 as compared to 2013, due to lower funding costs. Total revenues net of interest expense increased $949 million or 6 percent in 2013 as compared to 2012, primarily driven by higher discount revenue, due to 8 percent growth in billed business and increased net interest income. PROVISIONS FOR LOSSES Provisions for losses increased $146 million or 12 percent in 2014 as compared to 2013, primarily due to higher average Card Member loans, a slower improvement in the reserve rate, and the effects of changes in other loss reserve assumptions resulting in a lower reserve release in 2014, partially offset by the benefit of lower net write-offs for Card Member loans due to improved credit performance. Provisions for losses decreased $3 million in 2013 as compared to 2012. Refer to Table 11 for the lending and charge card write-off rates for 2014, 2013 and 2012. EXPENSES Marketing, promotion, rewards and Card Member services and other expenses increased $476 million or 7 percent in 2014 as compared to 2013, primarily driven by a $397 million or 8 percent increase in Card Member rewards expenses. The increase in rewards costs was driven by higher co-brand rewards expenses of $203 million, primarily relating to higher spending volumes, and an increase in Membership Rewards expense of $194 million. The increase in Membership Rewards expense was primarily due to higher new points earned and a higher WAC per point assumption, including the impact of a $96 million charge related to the Delta partnership renewal in the fourth quarter of 2014. Salaries and employee benefits and other operating expenses increased $191 million or 5 percent in 2014, as compared to 2013, primarily driven by higher card-related fraud losses, a change in the estimated value of certain investments in our Community Reinvestment Act portfolio and higher restructuring charges compared to 2013. 30 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Total expenses increased $27 million in 2013 as compared to 2012 primarily driven by higher marketing and promotion expenses and rewards costs. The increase in Card Member rewards was driven by higher co-brand rewards expenses, substantially offset by the impact of a $317 million expense in 2012 related to enhancements to the U.S. URR estimation process. These increases were largely offset by lower Card Member reimbursement costs in 2013 and the impact of the restructuring charge in the fourth quarter of 2012. INCOME TAXES The tax rate in all periods includes the benefits from the resolution of certain prior years’ tax items and the relationship of recurring permanent tax benefits to varying levels of pretax income. TABLE 11: USCS SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, (Millions, except percentages and where indicated) Card billed business (billions) Total cards-in-force Basic cards-in-force Average basic Card Member spending (dollars)* U.S. Consumer Travel: Travel sales Travel commissions and fees/sales Total segment assets (billions) Segment capital Return on average segment capital(a) Return on average tangible segment capital(a) Card Member receivables: Total receivables (billions) Net write-off rate – principal only(b) Net write-off rate – principal and fees(b) 30 days past due as a % of total Card Member loans: Total loans (billions) Net write-off rate – principal only(b) Net write-off rate – principal, interest and fees(b) 30 days past due as a % of total Calculation of Net Interest Yield on Card Member Loans: Net interest income Exclude: Interest expense not attributable to the Company’s Card Member loan portfolio Interest income not attributable to the Company’s Card Member loan portfolio Adjusted net interest income(c) Average loans (billions) Exclude certain non-traditional Card Member loans and other fees (billions) Adjusted average loans (billions)(c) Net interest income divided by average loans Net interest yield on Card Member loans(c) * Proprietary cards only. $ $ $ $ $ $ 2014 542.0 45.6 34.0 16,294 3,774 7.2 % 113.2 10,433 32.5 % 33.6 % $ $ $ $ $ 2013 501.0 43.7 32.5 15,689 3,967 7.1 % 103.5 9,269 35.6 % 37.0 % $ $ $ $ $ 22.5 $ 21.8 $ 1.6 % 1.8 % 1.7 % 1.7 % 1.9 % 1.6 % 2012 462.3 42.2 31.3 14,986 4,042 7.6 % 98.3 8,714 28.8 % 30.1 % 21.1 1.9 % 2.1 % 1.8 % Change 2014 vs. 2013 Change 2013 vs. 2012 8 % 4 5 4 (5) 9 13 3 8 % 4 4 5 (2) 5 6 3 $ 62.6 $ 58.4 $ 56.0 7 % 4 % 1.5 % 1.7 % 1.0 % 1.8 % 2.0 % 1.1 % 2.1 % 2.3 % 1.2 % $ 5,182 $ 4,872 $ 4,577 $ $ $ 157 (12) 5,327 57.8 — 57.8 $ $ $ 183 (9) 5,046 54.7 — 54.7 $ $ $ 204 (9) 4,772 52.8 — 52.8 9.0 % 9.2 % 8.9 % 9.2 % 8.7 % 9.0 % (a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($3.2 billion, $3.2 billion and $2.6 billion for 2014, 2013 and 2012, respectively) by (ii) one-year average segment capital ($9.8 billion for 2014, and $9.0 billion for both 2013 and 2012). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation of average tangible segment capital, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $319 million, $334 million and $379 million as of December 31, 2014, 2013 and 2012, respectively. We believe return on average tangible segment capital is a useful measure of the profitability of our business. (b) Refer to Table 8 footnote (e). (c) Adjusted net interest income, adjusted average loans and net interest yield on Card Member loans are non-GAAP measures. Refer to “Glossary of Selected Terminology” for the definitions of these terms. We believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio. 31 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW INTERNATIONAL CARD SERVICES SEGMENT TABLE 12: ICS SELECTED INCOME STATEMENT DATA Years Ended December 31, (Millions, except percentages) Revenues 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 Discount revenue, net card fees and other $ 4,737 $ 4,644 $ 4,561 $ Interest income Interest expense Net interest income Total revenues net of interest expense Provisions for losses Total revenues net of interest expense after provisions for losses Expenses Marketing, promotion, rewards, Card Member services and other Salaries and employee benefits and other operating expenses Total expenses Pretax segment income Income tax provision Segment income Effective tax rate # Denotes a variance greater than 100 percent 1,085 330 755 5,492 370 5,122 2,160 2,513 4,673 449 38 1,118 361 757 5,401 388 5,013 2,013 2,357 4,370 643 12 $ 411 $ 631 $ 1,147 402 745 5,306 279 5,027 1,927 2,441 4,368 659 25 634 $ 8.5% 1.9% 3.8% 93 (33) (31) (2) 91 (18) 109 147 156 303 (194) 26 (220) 2 % $ (3) (9) — 2 (5) 2 7 7 7 (30) # (35) % $ 83 (29) (41) 12 95 109 (14) 86 (84) 2 (16) (13) (3) 2 % (3) (10) 2 2 39 — 4 (3) — (2) (52) — % ICS issues proprietary consumer and small business cards outside the U.S. and operates a coalition loyalty business in various countries. TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue, net card fees and other revenues increased $93 million or 2 percent in 2014 as compared to 2013, and increased 6 percent excluding the impact of foreign exchange rates.2 The increase was primarily driven by higher Loyalty Partner-related fees, higher discount revenue and an increase in net card fees. Billed business increased 2 percent in 2014 as compared to 2013, and 6 percent excluding the impact of foreign exchange rates. Refer to Table 7 for additional information on billed business by region. Interest income decreased $33 million or 3 percent in 2014 as compared to 2013, and increased 2 percent excluding the impact of foreign exchange rates.2 Interest expense decreased $31 million or 9 percent in 2014 as compared to 2013, and decreased 2 percent excluding the impact of foreign exchange rates,2 primarily due to lower funding costs. Total revenues net of interest expense increased $95 million or 2 percent in 2013 as compared to 2012, primarily driven by higher net card fees, Loyalty Partner-related fees and foreign exchange conversion fee revenue. PROVISIONS FOR LOSSES Provisions for losses decreased $18 million or 5 percent in 2014, as compared to 2013, and decreased 1 percent excluding the impact of foreign exchange rates,2 primarily driven by a lower provision for charge cards. Provisions for losses increased $109 million or 39 percent in 2013 as compared to 2012, primarily driven by a higher provision for both charge cards and Card Member loans. The increase in charge card provision was driven by higher average receivables resulting in higher net write-offs and a reserve build in 2013. The increase in Card Member loans provision was driven by a lower reserve release compared to 2012, partially offset by lower net write-offs. Refer to Table 13 for the lending and charge write-off rates for 2014, 2013 and 2012. 2 Refer to footnote 1 on page 22 relating to changes in foreign exchange rate. 32 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW EXPENSES Marketing, promotion, rewards and Card Member services and other expenses increased $147 million or 7 percent in 2014 as compared to 2013, and increased 11 percent excluding the impact of foreign exchange rates.3 The increase was primarily driven by higher marketing and promotion expenses, as a result of the reinvestment of a significant portion of the gains from the business travel joint venture transaction and the sale of our investment in Concur in growth initiatives, and higher Loyalty Partner expenses. Salaries and employee benefits and other operating expenses increased $156 million or 7 percent in 2014 as compared to 2013, primarily driven by restructuring charges in 2014. Total expenses increased $2 million in 2013 as compared to 2012, primarily driven by a charge related to a change in the Membership Rewards URR estimation process for certain international countries in 2013, substantially offset by the restructuring charge in the fourth quarter of 2012. INCOME TAXES The effective tax rate in all periods reflects the recurring permanent tax benefit related to the segment’s ongoing funding activities outside the U.S., which is allocated to ICS under the Company’s internal tax allocation process. The effective tax rate for 2013 also reflects the allocated share of tax benefits related to the resolution of certain prior years’ items and the effective tax rate for 2012 reflects the allocated share of tax benefits related to the realization of certain foreign tax credits. In addition, the effective tax rate in each of the periods reflects the impact of recurring permanent tax benefits on varying levels of pretax income. 3 Refer to footnote 1 on page 22 relating to changes in foreign exchange rate. 33 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 13: ICS SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, (Millions, except percentages and where indicated) Card billed business (billions) Total cards-in-force Basic cards-in-force Average basic Card Member spending (dollars)* International Consumer Travel: Travel sales Travel commissions and fees/sales Total segment assets (billions) Segment capital Return on average segment capital(a) Return on average tangible segment capital(a) Card Member receivables: Total receivables (billions) Net write-off rate – principal only(c) Net write-off rate – principal and fees(c) 30 days past due as a % of total 90 days past billing as a % of total Net loss ratio (as a % of charge volume) Card Member loans: Total loans (billions) Net write-off rate – principal only(c) Net write-off rate – principal, interest and fees(c) 30 days past due as a % of total Calculation of Net Interest Yield on Card Member Loans: Net interest income Exclude: Interest expense not attributable to the Company’s Card Member loan portfolio Interest income not attributable to the Company’s Card Member loan portfolio Adjusted net interest income(d) Average loans (billions) Exclude certain non-traditional Card Member loans and other fees (billions) Adjusted average loans (billions)(d) Net interest income divided by average loans Net interest yield on Card Member loans(d) * Proprietary cards only. Change 2014 vs. 2013 Change 2013 vs. 2012 2 % — 3 (1) — (1) (6) (1) 2 % 1 1 2 3 (2) 9 — (13)% (4)% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2014 133.8 15.7 11.0 12,297 1,422 6.8 % 30.7 2,948 13.6 % 24.6 % 7.7 1.9 % 2.1 % 1.3 % (b) (b) $ $ $ $ $ $ 2013 131.7 15.7 10.7 12,429 1,420 6.9 % 31.1 3,132 20.9 % 38.8 % 7.8 (b) (b) (b) 1.1 % 0.20 % $ 7.7 2.0 % 2.4 % 1.6 % $ 8.8 1.9 % 2.3 % 1.4 % 2012 128.9 15.6 10.6 12,221 1,372 7.2 % 31.8 2,875 21.8 % 43.0 % 7.8 (b) (b) (b) 0.9 % 0.16 % 9.2 1.9 % 2.4 % 1.5 % 755 $ 757 $ 745 89 (39) 805 8.2 (0.2) 8.0 $ $ $ 93 (29) 821 8.5 (0.2) 8.3 $ $ $ 102 (25) 822 8.7 (0.2) 8.5 9.2 % 10.0 % 8.9 % 9.9 % 8.5 % 9.6 % (a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($411 million, $631 million and $634 million for 2014, 2013 and 2012, respectively) by (ii) one-year average segment capital ($3.0 billion for both 2014 and 2013 and $2.9 billion for 2012). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation of average tangible segment capital, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $1.4 billion at December 31, 2014, 2013 and 2012. We believe return on average tangible segment capital is a useful measure of the profitability of our business. (b) Historically, due to system constraints, net loss ratio as a % of charge volume and 90 days past billing as a % of receivables were presented. Beginning in the first quarter of 2014, as a result of system enhancements, net write-off rate — principal only, net write-off rate — principal and fees and 30 days past due as a % of total are presented. (c) Refer to Table 8 footnote (e). (d) Adjusted net interest income, adjusted average loans and net interest yield on Card Member loans are non-GAAP measures. We believe adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio. 34 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW GLOBAL COMMERCIAL SERVICES SEGMENT TABLE 14: GCS SELECTED INCOME STATEMENT DATA Years Ended December 31, (Millions, except percentages) Revenues 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 Discount revenue, net card fees and other $ 5,173 $ 5,085 $ 4,995 $ Interest income Interest expense Net interest expense Total revenues net of interest expense Provisions for losses Total revenues net of interest expense after provisions for losses Expenses Marketing, promotion, rewards, Card Member services and other Salaries and employee benefits and other operating expenses Total expenses Pretax segment income Income tax provision Segment income Effective tax rate # Denotes a variance greater than 100 percent 13 245 11 257 (232) (246) 15 240 (225) 4,948 180 4,768 682 1,678 2,360 2,408 865 4,853 129 4,724 604 2,876 3,480 1,244 384 88 2 (5) (7) 95 51 44 78 (1,198) (1,120) 1,164 481 683 $ 4,749 106 4,643 579 3,104 3,683 960 316 644 2 % $ 15 (2) (3) 2 40 1 13 (42) (32) 94 # 79 % $ 90 2 (12) (14) 104 23 81 25 (228) (203) 284 68 216 2 % 18 (5) (6) 2 22 2 4 (7) (6) 30 22 34 % $ 1,543 $ 860 $ 35.9 % 30.9 % 32.9 % GCS offers global corporate payment services to large and mid-sized companies. Our business travel operations, which had been included in GCS, were deconsolidated effective June 30, 2014 in connection with the business travel joint venture transaction, discussed previously; therefore, there is a lack of comparability against periods prior to the deconsolidation. Our proportional share of the GBT JV’s net income is now reported within other revenues. TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue, net card fees, and other revenues increased $88 million or 2 percent in 2014 as compared to 2013. The increase was primarily due to the gain on the sale of our investment in Concur and higher discount revenue due to an increased level of Card Member spending, partially offset by the impact of the business travel joint venture transaction, resulting in a lack of comparability between periods. Billed business increased 6 percent in 2014 as compared to 2013, primarily driven by a 7 percent increase in average spending per proprietary basic card. Billed business volume increased 8 percent within the U.S. and increased 3 percent outside the U.S. in 2014. Net interest expense decreased $7 million or 3 percent in 2014 as compared to 2013, primarily driven by a lower cost of funds. Total revenues net of interest expense increased $104 million or 2 percent in 2013 as compared to 2012, primarily due to higher discount revenue from an increased level of Card Member spending. PROVISIONS FOR LOSSES Provisions for losses increased $51 million or 40 percent in 2014 as compared to 2013, primarily driven by a higher provision for charge cards. The increase in charge card provisions was primarily due to higher average Card Member receivables resulting in higher corporate card net write-offs. Provisions for losses increased $23 million or 22 percent in 2013 as compared to 2012, primarily driven by higher average Card Member receivables resulting in higher net write-offs, partially offset by a lower reserve build compared to 2012. Refer to Table 15 for the charge card net loss ratio as a percentage of charge volume. EXPENSES Marketing, promotion, rewards, Card Member services and other expenses increased $78 million or 13 percent in 2014 as compared to 2013, primarily driven by higher Card Member rewards and marketing and promotion expenses. The increase in rewards costs was primarily driven by higher spending volumes and includes the impact of a $13 million charge related to the Delta partnership renewal in the fourth quarter of 2014. The increase in marketing and promotion expenses was driven by the reinvestment of a significant portion of the gains from the business travel joint venture transaction and the sale of our investment in Concur in growth initiatives. 35 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Salaries and employee benefits and other operating expenses decreased $1.2 billion or 42 percent in 2014 as compared to 2013, primarily due to the impact of the global business travel joint venture transaction, resulting in a lack of comparability between periods, and the gain associated with the transaction in the second quarter of 2014, partially offset by transaction-related costs and restructuring charges. Total expenses decreased $203 million or 6 percent in 2013 as compared to 2012, primarily driven by higher restructuring costs in 2012. INCOME TAXES The effective tax rate for 2013 reflects the reversal of a valuation allowance related to deferred tax assets associated with certain of the Company’s non-U.S. business travel operations, as well as the allocated share of tax benefits related to the resolution of certain prior years’ tax items. The effective tax rate for 2012 reflects the allocated share of tax benefits related to the realization of certain foreign tax credits. The effective tax rate for 2012 also reflects the impact of a valuation allowance primarily related to restructuring charges associated with certain non-U.S. travel operations. TABLE 15: GCS SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, (Millions, except percentages and where indicated) Card billed business (billions) Total cards-in-force Basic cards-in-force Average basic Card Member spending (dollars)* Total segment assets (billions) Segment capital Return on average segment capital(a) Return on average tangible segment capital(a) Card Member receivables: Total receivables (billions) 90 days past billing as a % of total Net loss ratio (as a % of charge volume) * Proprietary cards only. $ $ $ $ $ 2014 186.7 6.9 6.9 26,706 18.5 3,782 40.9% 74.4% 14.6 0.8% 0.09% $ $ $ $ $ 2013 175.4 7.1 7.1 24,924 19.2 3,688 23.6% 45.8% 14.4 0.9% 0.08% $ $ $ $ $ 2012 166.4 7.0 7.0 23,737 18.9 3,625 17.6% 35.1% 13.7 0.8% 0.06% Change 2014 vs. 2013 Change 2013 vs. 2012 6 % (3) (3) 7 (4) 3 5 % 1 1 5 2 2 1 % 5 % (a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($1.5 billion, $860 million and $644 million for 2014, 2013 and 2012, respectively) by (ii) one-year average segment capital ($3.8 billion for 2014 and $3.6 billion for each 2013 and 2012). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation of average tangible segment capital, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $1.7 billion at December 31, 2014 and $1.8 billion at both December 31, 2013 and 2012. We believe return on average tangible segment capital is a useful measure of the profitability of our business. 36 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW GLOBAL NETWORK & MERCHANT SERVICES SEGMENT TABLE 16: GNMS SELECTED INCOME STATEMENT DATA Years Ended December 31, (Millions, except percentages) Revenues 2014 2013 2012 Change 2014 vs. 2013 Change 2013 vs. 2012 Discount revenue, net card fees and other $ 5,426 $ 5,229 $ 5,005 $ 197 4 % $ 224 4 % Interest income Interest expense Net interest income Total revenues net of interest expense Provisions for losses Total revenues net of interest expense after provisions for losses Expenses Marketing, promotion, rewards, Card Member services and other Salaries and employee benefits and other operating expenses Total expenses Pretax segment income Income tax provision Segment income Effective tax rate 52 (269) 321 5,747 93 5,654 819 2,215 3,034 2,620 960 32 (252) 284 5,513 67 5,446 704 2,273 2,977 2,469 894 23 (243) 266 5,271 73 5,198 744 2,235 2,979 2,219 776 $ 1,660 $ 1,575 $ 1,443 $ 36.6% 36.2% 35.0% 20 (17) 37 234 26 208 115 (58) 57 151 66 85 63 7 13 4 39 4 16 (3) 2 6 7 5 % $ 9 (9) 18 242 (6) 248 (40) 38 (2) 250 118 132 39 4 7 5 (8) 5 (5) 2 — 11 15 9 % GNMS operates a global payments network that processes and settles proprietary and non-proprietary card transactions. GNMS acquires merchants and provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the Company’s global closed-loop network. It enters into partnership agreements with third-party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network. TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue, net card fees and other revenues increased $197 million or 4 percent in 2014 as compared to 2013. The increase was primarily driven by higher merchant-related revenues, driven by a 7 percent increase in global card billed business. Net interest income increased $37 million or 13 percent in 2014 as compared to 2013, and increased 21 percent excluding the impact of foreign exchange rates.4 The increase was primarily driven by increased revenues on our merchant loans. The interest expense credit relates to internal transfer pricing and funding rates, which resulted in a net benefit for GNMS due to its merchant payables. Total revenues net of interest expense increased $242 million or 5 percent in 2013 as compared to 2012 primarily due to higher discount revenue and net interest income. PROVISIONS FOR LOSSES Provisions for losses increased $26 million or 39 percent in 2014 as compared to 2013, primarily driven by a merchant-related charge in the fourth quarter. Provisions for losses decreased $6 million or 8 percent in 2013 as compared to 2012. EXPENSES Marketing, promotion, rewards, Card Member services and other expenses increased $115 million or 16 percent in 2014 as compared to 2013, primarily driven by the reinvestment of a significant portion of the gain from the business travel joint venture transaction in growth initiatives. Salaries and employee benefits and other operating expenses decreased $58 million or 3 percent in 2014 as compared to 2013, primarily driven by the proposed merchant litigation settlement in the prior year. Total expenses decreased $2 million in 2013 as compared to 2012, primarily driven by lower marketing and promotion, professional services and salary and employee benefit expenses, substantially offset by the proposed merchant litigation settlement in 2013. 4 Refer to footnote 1 on page 22 relating to changes in foreign exchange rate. 37 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 17: GNMS SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, (Millions, except percentages and where indicated) Global worldwide card billed business (billions) Total segment assets (billions) Segment capital Return on average segment capital(a) Return on average tangible segment capital(a) Global Network Services: Card billed business (billions) Total cards-in-force $ $ $ $ 2014 1,022.8 18.1 1,970 84.0% 92.9% 160.7 44.0 $ $ $ $ 2013 952.4 17.1 1,952 76.8% 84.9% 144.1 40.7 $ $ $ $ 2012 888.4 16.5 2,048 68.6% 75.9% 128.8 37.6 Change 2014 vs. 2013 Change 2013 vs. 2012 7 % 6 1 12 8 % 7 % 4 (5) 12 8 % (a) Return on average segment capital is calculated by dividing (i) one-year period segment income ($1.7 billion, $1.6 billion and $1.4 billion for 2014, 2013 and 2012, respectively) by (ii) one-year average segment capital ($2.0 billion for 2014 and $2.1 billion for both 2013 and 2012). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation of average tangible segment capital, a non-GAAP measure, excludes from average segment capital average goodwill and other intangibles of $189 million, $195 million and $203 million as of December 31, 2014, 2013 and 2012, respectively. We believe return on average tangible segment capital is a useful measure of the profitability of our business. CORPORATE & OTHER Corporate functions and certain other businesses, including our Enterprise Growth Group and other operations, are included in Corporate & Other. Corporate & Other net expense increased to $929 million in 2014, as compared to $900 million and $831 million in 2013 and 2012, respectively. The increase in net expense in 2014 was due to higher restructuring charges, a charitable contribution to the American Express Foundation combined with incremental investments in growth initiatives, partially offset by lower salary and benefits expense. The increase in net after-tax expense for 2013 was primarily due to favorable effects in 2012 of revised estimates of the liability for uncashed Travelers Cheques in certain international countries, as well as higher tax expenses in 2013, partially offset by the impact of restructuring costs in 2012. Results for all periods disclosed also included net interest expense related to maintaining the liquidity pool discussed in “Consolidated Capital Resources and Liquidity – Liquidity Management”, as well as interest expense related to other corporate indebtedness. 38 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY Our balance sheet management objectives are to maintain: (cid:2) A solid and flexible equity capital profile; (cid:2) A broad, deep and diverse set of funding sources to finance our assets and meet operating requirements; and (cid:2) Liquidity programs that enable us to continuously meet expected future financing obligations and business requirements for at least a 12- month period, even in the event we are unable to continue to raise new funds under our traditional funding programs during a substantial weakening in economic conditions. CAPITAL STRATEGY Our objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to support future business growth. We believe capital allocated to growing businesses with a return on risk-adjusted equity in excess of our costs will generate shareholder value. The level and composition of our consolidated capital position are determined through our internal capital adequacy assessment process, which takes into account our business activities, as well as marketplace conditions and requirements or expectations of credit rating agencies, regulators and shareholders, among others. Our consolidated capital position is also influenced by subsidiary capital requirements. As a bank holding company, we are also subject to regulatory requirements administered by the U.S. federal banking agencies. The Federal Reserve has established specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. As a Basel III Advanced Approaches institution, we reported our capital ratios using Basel III capital definitions, inclusive of transition provisions, and Basel I risk-weighted assets. Beginning in 2015, we will report our capital ratios using the Basel III capital definitions, inclusive of transition provisions, and the Basel III Standardized Approach for calculating risk-weighted assets. The Basel III standards will be fully phased-in by January 1, 2019. We have also adopted Basel III in certain non-U.S. jurisdictions. We also report capital adequacy standards on a parallel basis to regulators under Basel requirements for a Basel III Advanced Approaches institution. The parallel period will continue until we receive regulatory approval to exit parallel reporting and subsequently begin publicly reporting our capital ratios using both Basel III Standardized and Advanced Approaches. The following table presents our regulatory risk-based capital ratios and leverage ratios and those of our significant bank subsidiaries, as well as additional ratios widely utilized in the marketplace, as of December 31, 2014. 39 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 18: REGULATORY RISK-BASED CAPITAL AND LEVERAGE RATIOS Risk-Based Capital Common Equity Tier 1 American Express Company American Express Centurion Bank American Express Bank, FSB Tier 1 American Express Company American Express Centurion Bank American Express Bank, FSB Total American Express Company American Express Centurion Bank American Express Bank, FSB Tier 1 Leverage American Express Company American Express Centurion Bank American Express Bank, FSB Common Equity to Risk-Weighted Assets American Express Company Tangible Common Equity to Risk-Weighted Assets(b) American Express Company Basel III Standards 2014(a) Ratios as of December 31, 2014 4.0% 5.5 8.0 4.0% 13.1% 18.8 14.2 13.6 18.8 14.2 15.6 20.1 16.0 11.8 18.7 15.1 15.0 12.0% (a) Transitional Basel III minimum and conservation buffer as defined by the Federal Reserve for calendar year 2014 for Advanced Approaches institutions. (b) Refer to page 41 for a discussion of tangible common equity, a non-GAAP measure. The transition provisions for 2014 under Basel III cause our reported capital ratios to be higher than they would have been under the prior regulatory standards, known as Basel I. Specifically, the Common Equity Tier 1 risk-based capital and Tier 1 risk-based capital ratios would have been approximately 45 and 40 basis points lower, respectively, under Basel I. The largest contributor to the difference is the way intangible assets are being treated and ultimately transitioned in over a 5-year period under Basel III. We seek to maintain capital levels and ratios in excess of the minimum regulatory requirements and finance such capital in a cost efficient manner; failure to maintain minimum capital levels could affect our status as a financial holding company and cause the respective regulatory agencies to take actions that could limit our business operations. Our primary source of equity capital has been the generation of net income. Historically, capital generated through net income and other sources, such as the exercise of stock options by employees, has exceeded the annual growth in our capital requirements. To the extent capital has exceeded business, regulatory and rating agency requirements, we have historically returned excess capital to shareholders through our regular common share dividend and share repurchase program. We maintain certain flexibility to shift capital across our businesses as appropriate. For example, we may infuse additional capital into subsidiaries to maintain capital at targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts can affect the capital profile and liquidity levels at the American Express parent company level. We do not currently intend or foresee a need to shift capital from non-U.S. subsidiaries with permanently reinvested earnings to a U.S. parent company. The following provides definitions for our regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance: Risk-Weighted Assets — Assets are weighted for risk according to a formula used by the Federal Reserve to conform to capital adequacy guidelines. On- and off-balance sheet items are weighted for risk, with off-balance sheet items converted to balance sheet equivalents, using risk conversion factors, before being allocated a risk-adjusted weight. The off-balance sheet items comprise a minimal part of the overall calculation. Risk-weighted assets under Basel I as of December 31, 2014 were $133.3 billion. 40 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Common Equity Tier 1 Risk-Based Capital Ratio — The Common Equity Tier 1 risk-based capital ratio is calculated as Common Equity Tier 1 capital, divided by risk-weighted assets. Common Equity Tier 1 is the sum of common shareholders’ equity, adjusted for ineligible goodwill and intangible assets, certain deferred tax assets, as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities and derivatives, and net unrealized pension and other postretirement benefit losses, all net of tax and subject to transition provision. Common Equity Tier 1 capital as of December 31, 2014 was $17.5 billion. Tier 1 Risk-Based Capital Ratio — The Tier 1 capital ratio is calculated as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the sum of Common Equity Tier 1 capital, our perpetual preferred stock and third-party non-controlling interests in consolidated subsidiaries. Tier 1 capital as of December 31, 2014 was $18.2 billion. Total Risk-Based Capital Ratio — The total risk-based capital ratio is calculated as the sum of Tier 1 capital and Tier 2 capital, divided by risk-weighted assets. Tier 2 capital is the sum of the allowance for receivable and loan losses (limited to 1.25 percent of risk-weighted assets) a portion of the unrealized gains on equity securities, $600 million of subordinated notes issued in the fourth quarter of 2014 and a $750 million subordinated hybrid security. The $750 million subordinated hybrid security does not meet the requirements of Tier 2 capital under Basel III, and is being transitioned out of capital (the total amount included in Tier 2 capital as of December 31, 2014 was $375 million). Hence, the total amount of subordinated debt included in Tier 2 capital as of December 31, 2014 was $975 million. Tier 2 capital as of December 31, 2014 was $2.6 billion. See “Fully Phased-in Basel III” section. Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by our average total consolidated assets for the most recent quarter. Average total consolidated assets as of December 31, 2014 were $154.7 billion. The following provides a definition for Tangible Common Equity to Risk-Weighted Assets ratio, which is widely used in the marketplace, although it may be calculated differently by different companies: Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios — Common equity equals our shareholders’ equity of $20.7 billion as of December 31, 2014, less preferred shares of $0.7 billion. Tangible common equity, a non-GAAP measure, equals common equity less goodwill and other intangibles of $3.9 billion as of December 31, 2014. We believe presenting the ratio of tangible common equity to risk-weighted assets is a useful measure of evaluating the strength of our capital position. FULLY PHASED-IN BASEL III Basel III, when fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital than prior requirements, with a greater emphasis on common equity. We estimate that had Basel III been fully phased-in during the twelve months ended December 31, 2014, our reported Common Equity Tier 1 risk-based capital and Tier 1 risk-based capital ratios would have been 12.2 percent and 12.8 percent, respectively, and our reported Tier 1 leverage ratio would have been 11.1 percent. As of December 31, 2014, had the Basel III rules been fully phased-in, our supplementary leverage ratio would be 9.4 percent.5 These ratios are calculated using the Standardized Approach for determining risk-weighted assets. As noted previously, we are currently taking steps toward Basel III Advanced Approaches implementation in the U.S. The Basel capital standards establish minimum requirements for the Tier 1 risk-based capital ratios that are 1.5 percent higher than the minimum requirements for Common Equity Tier 1 risk-based capital ratios. This difference between Tier 1 capital, which includes common equity and qualifying preferred securities, and Common Equity Tier 1 is also present in the minimum capital requirements within Comprehensive Capital Analysis and Review (CCAR), beginning with the 2014 plan submissions. We received no-objection to issue preferred stock in our 2014 CCAR submission. Accordingly, we issued $750 million of preferred shares in the fourth quarter of 2014. We also anticipate a further issuance of preferred shares in the first quarter of 2015, subject to market conditions. The preferred shares issuance helps to finance a portion of the Tier 1 capital requirements in excess of common equity requirements. Our $750 million subordinated hybrid security, which was previously fully included in Tier 2 capital (but not in Tier 1 capital), does not meet the requirements of Tier 2 capital under Basel III. The phase-out of this subordinated hybrid security from Tier 2 capital began in the first quarter of 2014, which affects our total risk-based capital ratio. As previously mentioned, we issued $600 million of subordinated debt in the fourth quarter of 2014, which qualifies as Tier 2 capital under Basel rules. Our total risk-based capital ratio is expected to remain well in excess of the required minimum. 5 The Fully Phased-in Basel III capital ratios are non-GAAP measures. We believe the presentation of the capital ratios is helpful to investors by showing the impact of future regulatory capital standards on our capital ratios. 41 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW The following provides definitions for Fully Phased-in Basel III capital ratios as defined by the Basel III rules using the Standardized Approach. All calculations are non-GAAP measures. Fully Phased-in Basel III Common Equity Tier 1 Risk-Based Capital Ratio – The Fully Phased-in Basel III Common Equity Tier 1 risk-based capital ratio is calculated as Common Equity Tier 1 under Fully Phased-in Basel III rules divided by risk-weighted assets under Fully Phased- in Basel III rules. Fully Phased-in Basel III Tier 1 Risk-Based Capital Ratio – The Fully Phased-in Basel III Tier 1 risk-based capital ratio is calculated as Tier 1 capital under Fully Phased-in Basel III rules divided by risk-weighted assets under Fully Phased-in Basel III rules. The following table presents a comparison of our Common Equity Tier 1 and Tier 1 risk-based capital under Transitional Basel III rules to our estimated Common Equity Tier 1 and Tier 1 risk-based capital under Fully Phased-in Basel III rules as of December 31, 2014. TABLE 19: TRANSITIONAL BASEL III VERSUS FULLY PHASED-IN BASEL III (Billions) Risk-Based Capital under Transitional Basel III Adjustments related to: AOCI Transition provisions for intangible assets Deferred tax assets Other CET1 $ 17.5 $ (0.3) (0.7) (0.1) — Estimated Common Equity Tier 1 (CET1) and Tier 1 Risk-Based Capital under Fully Phased-in Basel III $ 16.4 $ Tier 1 18.2 (0.3) (0.7) (0.1) 0.1 17.2 Fully Phased-in Basel III Risk-Weighted Assets – The Fully Phased-in Basel III risk-weighted assets reflect our Basel I risk-weighted assets, adjusted under Fully Phased-in Basel III rules. This includes incremental risk weighting applied to deferred tax assets and significant investments in unconsolidated financial institutions, as well as exposures to past due accounts, equities and sovereigns. The Fully Phased-in Basel III risk-weighted assets as of December 31, 2014 were estimated to be $134.3 billion. Fully Phased-in Basel III Tier 1 Leverage Ratio – The Fully Phased-in Basel III Tier 1 leverage ratio is calculated by dividing Fully Phased-in Basel III Tier 1 capital by our average total consolidated assets. Basel III Supplementary Leverage Ratio – The supplementary leverage ratio under Fully Phased-in Basel III rules is calculated by dividing Fully Phased-in Basel III Tier 1 capital by our total assets for supplementary leverage capital purposes under Basel III. Total assets for supplementary leverage capital purposes reflect total consolidated assets with adjustments for Tier 1 capital deductions, off-balance sheet derivatives, undrawn unconditionally cancellable commitments and other off-balance sheet liabilities. Total assets for supplementary leverage capital purposes as of December 31, 2014 were estimated to be $183.1 billion. SHARE REPURCHASES AND DIVIDENDS We have a share repurchase program to return excess capital to shareholders. The share repurchases reduce shares outstanding and offset, in whole or part, the issuance of new shares as part of employee compensation plans. During the year ended December 31, 2014, we returned $5.4 billion to our shareholders in the form of dividends ($1.0 billion) and share repurchases ($4.4 billion). We repurchased 49 million common shares at an average price of $89.60 in 2014. These dividend and share repurchase amounts represent approximately 86.1 percent of total capital generated during the year. This distribution percentage for 2014 is significantly greater than the on average and over time target to distribute approximately 50 percent of the capital to shareholders as dividends or through the repurchases of common stock. The 2014 percentage results from the strength of our capital ratios and the amount of capital we generate from net income and through employee stock plans in relation to the amount of capital required to support our organic business growth and acquisitions. On January 5, 2015, we submitted our comprehensive capital plan to the Federal Reserve. The capital plan includes an analysis of performance and capital availability under certain adverse economic assumptions. The capital plan was submitted to the Federal Reserve pursuant to its guidance on dividends and capital distributions. We expect a response from the Federal Reserve by March 11, 2015. In the first quarter of 2015, we expect to execute share repurchases up to $1.0 billion pursuant to our capital plan that received no objections from the Federal Reserve in March 2014. The actual number of shares that will be repurchased will be based on market conditions and employee plan activities. 42 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW FUNDING STRATEGY Our principal funding objective is to maintain broad and well-diversified funding sources to allow us to meet our maturing obligations, cost- effectively finance current and future asset growth in our global businesses as well as to maintain a strong liquidity profile. The diversity of funding sources by type of instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions in any one type of instrument, maturity or investor. The mix of our funding in any period will seek to achieve cost efficiency consistent with both maintaining diversified sources and achieving our liquidity objectives. Our funding strategy and activities are integrated into our asset-liability management activities. We have in place a funding policy covering American Express Company and all of our subsidiaries. Our proprietary card businesses are the primary asset-generating businesses, with significant assets in both domestic and international Card Member receivable and lending activities. Our financing needs are in large part a consequence of our proprietary card-issuing businesses and the maintenance of a liquidity position to support all of our business activities, such as merchant payments. We generally pay merchants for card transactions prior to reimbursement by Card Members and therefore fund the merchant payments during the period Card Member loans and receivables are outstanding. We also have additional financing needs associated with general corporate purposes, including acquisition activities. FUNDING PROGRAMS AND ACTIVITIES The Company meets its funding needs through a variety of sources, including direct and third-party distributed deposits and debt instruments, such as senior unsecured debentures, asset securitizations, borrowings through secured borrowing facilities and long-term committed bank borrowing facilities in certain non-U.S. regions. The Company had the following consolidated debt and customer deposits outstanding as of December 31: TABLE 20: SUMMARY OF CONSOLIDATED DEBT AND CUSTOMER DEPOSITS (Billions) Short-term borrowings Long-term debt Total debt Customer deposits Total debt and customer deposits $ 2014 3.5 58.0 61.5 44.2 105.7 $ $ $ 2013 5.0 55.3 60.3 41.8 102.1 Management does not currently expect to make any significant changes to our funding programs in order to satisfy Basel III’s liquidity coverage ratio standard based upon its current understanding of the requirements, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the requirements and as the interpretation of the requirements evolve over time. Our funding plan for the full year 2015 includes, among other sources, approximately $3 billion to $9 billion of unsecured term debt issuance and $3 billion to $9 billion of secured term debt issuance. Our funding plans are subject to various risks and uncertainties, such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities offered by us, regulatory changes, ability to securitize and sell receivables, and the performance of receivables previously sold in securitization transactions. Many of these risks and uncertainties are beyond our control. Our equity capital and funding strategies are designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies: Moody’s Investor Services (Moody’s), Standard & Poor’s (S&P), Fitch Ratings (Fitch) and Dominion Bond Rating Services (DBRS). Such ratings help support our access to cost-effective unsecured funding as part of our overall funding strategy. Our asset-backed securitization (ABS) activities are rated separately. 43 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW TABLE 21: UNSECURED DEBT RATINGS Credit Agency DBRS Fitch Moody’s Moody’s S&P S&P Entity Rated All rated entities All rated entities TRS and rated operating subsidiaries(a) American Express Company TRS and rated operating subsidiaries(a)(b) American Express Company (a) American Express Travel Related Services Company, Inc. (b) S&P does not provide a rating for TRS short-term debt. Short-Term Ratings Long-Term Ratings R-1 (middle) F1 Prime-1 Prime-2 A-2 A-2 A (high) A+ A2 A3 A- BBB+ Outlook Stable Stable Stable Stable Stable Stable Downgrades in the ratings of our unsecured debt or asset securitization program securities could result in higher funding costs, as well as higher fees related to borrowings under our unused lines of credit. Declines in credit ratings could also reduce our borrowing capacity in the unsecured debt and asset securitization capital markets. We believe our funding mix, including the proportion of U.S. retail deposits insured by the Federal Deposit Insurance Corporation (FDIC), should reduce the impact that credit rating downgrades would have on our funding capacity and costs. SHORT-TERM FUNDING PROGRAMS Short-term borrowings, such as commercial paper, are defined as any debt with an original maturity of 12 months or less, as well as interest- bearing overdrafts with banks. Our short-term funding programs are used primarily to meet working capital needs, such as managing seasonal variations in receivables balances. The amount of short-term borrowings issued in the future will depend on our funding strategy, our needs and market conditions. We had the following short-term borrowings outstanding as of December 31: TABLE 22: SHORT-TERM BORROWINGS OUTSTANDING (Billions) Commercial paper(a) Other short-term borrowings Total 2014 0.8 2.7 3.5 $ $ $ $ 2013 0.2 4.8 5.0 (a) Average commercial paper outstanding was $0.2 billion and $0.1 billion in 2014 and 2013, respectively. Refer to Note 9 to the Consolidated Financial Statements for further description of these borrowings. DEPOSIT PROGRAMS We offer deposits within our American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) subsidiaries (together, the Banks). These funds are currently insured up to $250,000 per account holder through the FDIC. Our ability to obtain deposit funding and offer competitive interest rates is dependent on the Banks’ capital levels. We, through the FSB, have a direct retail deposit program, Personal Savings from American Express, to supplement our distribution of deposit products sourced through third-party distribution channels. The direct retail program makes FDIC-insured certificates of deposit (CDs) and high-yield savings account products available directly to consumers. 44 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW We held the following deposits as of December 31: TABLE 23: CUSTOMER DEPOSITS (Billions) U.S. retail deposits: Savings accounts – Direct Certificates of deposit:(a) Direct Third-party Sweep accounts – Third-party Other retail deposits: Non-U.S. deposits and U.S. non-interest bearing Card Member credit balances – U.S. and non-U.S. Total customer deposits 2014 $ 26.2 $ 0.3 7.8 9.0 0.2 0.7 $ 44.2 $ 2013 24.6 0.5 6.9 8.9 0.1 0.8 41.8 (a) The weighted average remaining maturity and weighted average rate at issuance on the total portfolio of U.S. retail CDs, issued through direct and third-party programs, were 29.5 months and 1.54 percent, respectively, as of December 31, 2014. LONG-TERM DEBT PROGRAMS During 2014, we and our subsidiaries issued debt and asset securitizations with maturities ranging from 3 to 10 years. These amounts included approximately $5.3 billion of AAA-rated securitization certificates and notes, $0.1 billion of subordinated securities and $8.2 billion of unsecured debt across a variety of maturities and markets. During the year, we retained approximately $0.8 billion of subordinated securities, as the pricing and yields for these securities were not attractive compared to our other sources of financing available. Our 2014 debt issuances were as follows: TABLE 24: DEBT ISSUANCES (Billions) American Express Company: Fixed Rate Subordinated Notes (weighted-average coupon of 3.63%) American Express Credit Corporation: Fixed Rate Senior Notes (weighted-average coupon of 1.76%) Floating Rate Senior Notes (3-month LIBOR plus 42 basis points on average) American Express Credit Account Master Trust:(a) Fixed Rate Senior Certificates (weighted-average coupon of 1.41%) Floating Rate Senior Certificates (1-month LIBOR plus 35 basis points on average) Floating Rate Subordinated Certificates (1-month LIBOR plus 49 basis points on average) Total $ 0.6 5.1 2.5 3.5 1.8 0.1 $ 13.6 (a) Issuances from the American Express Credit Account Master Trust (the Lending Trust) do not include $0.8 billion of subordinated securities retained by us during the year. ASSET SECURITIZATION PROGRAMS We periodically securitize Card Member receivables and loans arising from our card business, as the securitization market provides us with cost-effective funding. Securitization of Card Member receivables and loans is accomplished through the transfer of those assets to a trust, which in turn issues securities collateralized by the transferred assets to third party investors. The proceeds from issuance are distributed to us, through our wholly owned subsidiaries, as consideration for the transferred assets. The receivables and loans being securitized are reported as assets on our Consolidated Balance Sheets and the related securities issued to third-party investors are reported as long-term debt. Under the respective terms of the securitization 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 twelve months ended December 31, 2014, no such triggering events occurred. 45 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW LIQUIDITY MANAGEMENT Our liquidity objective is to maintain access to a diverse set of on- and off-balance sheet liquidity sources. We maintain liquidity sources in amounts sufficient to meet business requirements and expected future financial obligations for a period of at least twelve months in the event we are unable to raise new funds under our regular funding programs during a substantial weakening in economic conditions. We have in place a liquidity risk policy that sets out our approach to managing liquidity risk on an enterprise-wide basis. We incur and accept liquidity risk arising in the normal course of offering our products and services. The liquidity risks that we are exposed to can arise from a variety of sources, and thus our liquidity management strategy includes a variety of parameters, assessments and guidelines, including, but not limited to: (cid:2) Maintaining a diversified set of funding sources (refer to Funding Strategy section for more details); (cid:2) Maintaining unencumbered liquid assets and off-balance sheet liquidity sources available to meet obligations; (cid:2) Projecting cash inflows and outflows from a variety of sources and under a variety of scenarios; and (cid:2) Incorporating into the Internal Capital Adequacy Assessment Process trade-offs between the risk of insufficient liquidity and our profitability. We seek to maintain access to a diverse set of liquidity sources, including cash and other liquid assets on-balance sheet as well as off- balance sheet financing sources such as committed bank facilities and ABS conduit facilities, in order to comply with requirements of the Dodd-Frank Act and other regulatory measures of liquidity such as the Liquidity Coverage Ratio (LCR). We, through our U.S. bank subsidiaries, also hold collateral eligible for use at the Federal Reserve’s discount window. We seek to satisfy the requirements of a variety of stress scenarios, including those required by law and regulation as well as our own stress scenario, in order to determine the amount and mix of the liquidity sources we maintain at any given time. These stress scenarios possess distinct characteristics and vary by cash flow assumptions, time horizon and qualifying liquidity sources, among other factors. Our own stress scenario assumes we are unable to access our regular funding programs during a severe macroeconomic scenario, in which case we would target a mix of on- and off-balance sheet liquidity sources to satisfy financial obligations, such as debt maturities, and the projected net cash flows needs of our businesses for a period of at least twelve months. The LCR is another form of stress scenario that prescribes distinct cash flow assumptions over a 30-day period, and establishes criteria for qualifying on balance sheet assets as High-Quality Liquid Assets. We consider various factors in determining the amount of liquidity we maintain, such as economic and financial market conditions, seasonality in business operations, growth in our businesses, potential acquisitions or dispositions, the cost and availability of alternative liquidity sources, and regulatory and credit rating agency considerations. The yield we receive on our cash and readily marketable securities is, generally, less than the interest expense on the sources of funding for these balances. Thus, we incur substantial net interest costs on these amounts. The level of net interest costs will be dependent on the size of our cash and readily marketable securities holdings, as well as the difference between our cost of funding these amounts and their investment yields. Securitized Borrowing Capacity As of December 31, 2014, we maintained our committed, revolving, secured borrowing facility, with a maturity date of July 15, 2016, that gives us the right to sell up to $3.0 billion face amount of eligible AAA notes from the American Express Issuance Trust II (the Charge Trust). We also maintained our committed, revolving, secured borrowing facility, with a maturity date of September 15, 2017, that gives us the right to sell up to $2.0 billion face amount of eligible AAA certificates from the Lending Trust. Both facilities are used in the ordinary course of business to fund seasonal working capital needs, as well as to further enhance our contingent funding resources. As of December 31, 2014, $2.5 billion was drawn on the Charge Trust facility, which was repaid on February 17, 2015, and no amounts were drawn on the Lending Trust facility. Federal Reserve Discount Window As insured depository institutions, the Banks may borrow from the Federal Reserve Bank of San Francisco, subject to the amount of qualifying collateral that they may pledge. The Federal Reserve has indicated that both credit and charge card receivables are a form of qualifying collateral for secured borrowings made through the discount window. Whether specific assets will be considered qualifying collateral and the amount that may be borrowed against the collateral remain at the discretion of the Federal Reserve. 46 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW We had approximately $55.3 billion as of December 31, 2014 in U.S. credit card loans and charge card receivables that could be sold over time through our existing securitization trusts, or pledged in return for secured borrowings to provide further liquidity, subject in each case to applicable market conditions and eligibility criteria. Committed Bank Credit Facilities In addition to the secured borrowing facilities described earlier in this section, we maintained committed syndicated bank credit facilities as of December 31, 2014 of $6.7 billion through facilities in the U.S. and Australia, which expire as follows: TABLE 25: EXPIRATION OF COMMITTED SYNDICATED BANK CREDIT FACILITIES (Billions) 2016 2017 Total $ $ 2.0 4.7 6.7 The availability of the credit lines is subject to our compliance with certain financial covenants, principally the maintenance by American Express Credit Corporation (Credco) of a certain ratio of combined earnings and fixed charges to fixed charges. As of December 31, 2014, we were in compliance with each of our covenants. The drawn balance of the committed credit facilities of $3.7 billion as of December 31, 2014 was used to fund our business activities in the normal course. The remaining capacity of the facilities mainly served to further enhance our contingent funding resources. Our committed bank credit facilities do not contain material adverse change clauses, which might otherwise preclude borrowing under the credit facilities, nor are they dependent on our credit rating. CASH FLOWS The following table summarizes our cash flow activity, followed by a discussion of the major drivers impacting operating, investing and financing cash flows. TABLE 26: CASH FLOWS (Billions) Total cash provided by (used in): Operating activities Investing activities Financing activities Effect of exchange rates changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents 2014 2013 $ $ $ 11.0 (8.0) — (0.2) $ 8.5 (7.2) (3.9) (0.2) 2.8 $ (2.8) $ 2012 7.1 (6.5) (3.3) 0.1 (2.6) Cash Flows from Operating Activities Cash flows from operating activities primarily include net income adjusted for (i) non-cash items included in net income and (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of various payments. For the year ended December 31, 2014, net cash provided by operating activities was $11.0 billion as a result of net income of $5.9 billion adjusted for non-cash items such as certain changes in provisions for losses, depreciation and amortization, stock-based compensation and the pretax gain of $0.6 billion related to the GBT JV transaction. In addition, the pretax gain of $0.7 billion on the sale of our investment in Concur is removed from operating activities since the proceeds of $1.0 billion are included as a cash inflow within investing activities. An increase in accounts payable and other liabilities, which is a source of cash, was driven by higher discount business volumes and the restructuring charge taken in the fourth quarter of the current year. For the year ended December 31, 2013, net cash provided by operating activities was $8.5 billion as a result of net income of $5.4 billion adjusted for non-cash items such as certain changes in provisions for losses, depreciation and amortization and stock-based compensation. 47 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW For the year ended December 31, 2012, net cash provided by operating activities was $7.1 billion as a result of net income of $4.5 billion adjusted for non-cash items such as certain changes in provisions for losses, depreciation and amortization, deferred taxes and other, stock- based compensation. This was partially offset by the cash outflow due to the premium paid on the debt exchange of $0.5 billion. Cash Flows from Investing Activities Our investing activities primarily include changes in Card Member loans and receivables and our available-for-sale investment portfolio. For the year ended December 31, 2014, net cash used in investing activities was $(8.0) billion consisting of a net increase in Card Member receivables and loans as well as purchases of premises and equipment, net of sales. This was partially offset by the sales and maturities of investments, including the $1.0 billion of proceeds from the sale of our investment in Concur. For the year ended December 31, 2013, net cash used in investing activities was $(7.2) billion consisting of a net increase in Card Member receivables and loans as well as purchases of premises and equipment, net of sales. For the year ended December 31, 2012, net cash used in investing activities was $(6.5) billion consisting of a net increase in Card Member receivables and loans as well as purchases of premises and equipment, net of sales, partially offset by the sales and maturities of investments. Cash Flows from Financing Activities Our financing activities primarily include issuing and repaying debt, changes in customer deposits, issuing and repurchasing our common shares, and paying dividends. For the year ended December 31, 2014, net cash provided by financing activities was $11 million, primarily driven by net increases in customer deposits and short- and long-term debt, partially offset by repurchases of American Express common shares. For the year ended December 31, 2013, net cash used in financing activities was $(3.9) billion, primarily driven by repurchases of American Express common shares. For the year ended December 31, 2012, net cash used in financing activities was $(3.3) billion, primarily driven by repurchases of American Express common shares and a net reduction in short- and long-term debt, partially offset by a net increase in customer deposits. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS We have identified both on- and off-balance sheet transactions, arrangements, obligations and other relationships that may have a material current or future effect on our financial condition, changes in financial condition, results of operations, or liquidity and capital resources. 48 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW CONTRACTUAL OBLIGATIONS The table below identifies transactions that represent our contractually committed future obligations. Purchase obligations include our agreements to purchase goods and services that are enforceable and legally binding and that specify significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. TABLE 27: COMMITTED FUTURE OBLIGATIONS BY YEAR (Millions) Long-term debt Interest payments on long-term debt(b) Certificates of deposit Other long-term liabilities(c) Operating lease obligations Purchase obligations(d) Total Payments due by year(a) $ 2015 2016-2017 2018-2019 $ 12,079 1,032 1,765 207 189 364 $ 27,906 1,450 3,627 88 305 122 $ 15,557 390 2,784 17 220 51 2020 and thereafter $ 3,180 1,301 16 20 921 — $ 15,636 $ 33,498 $ 19,019 $ 5,438 $ Total 58,722 4,173 8,192 332 1,635 537 73,591 (a) The table above excludes approximately $0.9 billion of tax liabilities related to the uncertainty in income taxes as inherent complexities and the number of tax years currently open for examination in multiple jurisdictions do not permit reasonable estimates of payments, if any, to be made over a range of years. (b) Estimated interest payments were calculated using the effective interest rate in place as of December 31, 2014, and includes the effect of existing interest rate swaps. Actual cash flows may differ from estimated payments. (c) As of December 31, 2014, there were no minimum required contributions, and no contributions are currently planned, for the U.S. American Express Retirement Plan. For the U.S. American Express Retirement Restoration Plan and non-U.S. defined benefit pension and postretirement benefit plans, contributions in 2015 are anticipated to be approximately $60 million, and this amount has been included within other long-term liabilities. Remaining obligations under defined benefit pension and postretirement benefit plans aggregating $707 million have not been included in the table above as the timing of such obligations is not determinable. Additionally, other long-term liabilities do not include $6.5 billion of Membership Rewards liabilities, which are not considered long-term liabilities as Card Members in good standing can redeem points immediately, without restrictions, and because the timing of point redemption is not determinable. (d) The purchase obligation amounts represent either the early termination fees or non-cancelable minimum contractual obligations, as applicable, by period under contracts that were in effect as of December 31, 2014. We also have obligations to make payments under contractual agreements with certain co-brand partners. We expect to fully satisfy these obligations over the remaining term of these agreements, which range from 2015 to 2022, as part of the ongoing operations of our business. The obligations under such arrangements were approximately $1.0 billion as of December 31, 2014. In addition to the contractual obligations noted above, we have off-balance sheet arrangements that include guarantees and other off- balance sheet arrangements. GUARANTEES Our principal guarantees are associated with Card Member services to enhance the value of owning an American Express card. As of December 31, 2014, we had guarantees totaling approximately $45 billion related to Card Member protection plans, as well as other guarantees in the ordinary course of business. Refer to Note 16 to the Consolidated Financial Statements for further discussion regarding our guarantees. CERTAIN OTHER OFF-BALANCE SHEET ARRANGEMENTS As of December 31, 2014, we had approximately $278 billion of unused credit available to Card Members. Total unused credit available to Card Members does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. Our charge card products generally have no pre-set limit, and therefore are not included in unused credit available to Card Members. To mitigate counterparty credit risk related to derivatives, the Company accepted non-cash collateral in the form of security interests in U.S. Treasury securities from its derivatives counterparties with a fair value of $91 million and nil as of December 31, 2014 and 2013, respectively, none of which was sold or repledged. Refer to Note 13 to the Consolidated Financial Statements for discussion regarding our other off-balance sheet arrangements. 49 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW RISK MANAGEMENT GOVERNANCE We use our comprehensive Enterprise-wide Risk Management (ERM) program to identify, aggregate, monitor, and manage risks. The program also defines our risk appetite, governance, culture and capabilities. The implementation and execution of the ERM program is headed by our Chief Risk Officer. Risk management is overseen by our Board of Directors through three committees: the Risk Committee, the Audit and Compliance Committee, and the Compensation and Benefits Committee. Each committee consists entirely of independent directors and provides regular reports to the Board of Directors regarding matters reviewed at the committee level. In addition to the risks under the purview of a particular committee, the Board of Directors monitors the “tone at the top” and our risk culture, oversees strategic risk, and reviews specific and aggregate risks we face from time to time. These Board committees meet regularly in private sessions with our Chief Risk Officer, the Chief Compliance & Ethics Officer, the General Auditor and other senior management with regard to our risk management processes, controls and capabilities. The Risk Committee of our Board of Directors provides risk oversight on risk policies and our risk management performance. The Risk Committee approves key risk management policies and monitors risk culture, talent, capabilities and outcomes. In particular, the Risk Committee approves our ERM policy along with its sub-policies governing individual credit risk, institutional credit risk, market risk, liquidity risk, operational risk, reputational risk and asset/liability risk, as well as policies governing the launch of new products and services, third-party management and resolution planning. The ERM policy defines the risk appetite as well as governance over risk taking and our risk oversight processes. Risk appetite defines the levels and types of risks we are willing to assume to achieve our business plans while controlling risk exposures well within our risk capacity. In addition, it establishes principles for risk taking in the aggregate and for each risk type, and is supported by a comprehensive system of risk limits, escalation triggers and control programs. The Risk Committee reviews and concurs in the appointment, replacement, performance and compensation of the Company’s Chief Risk Officer. The Risk Committee receives regular updates from the global risk oversight teams that report to the Chief Risk Officer on key risks, transactions and exposures. The Risk Committee reviews our credit risk profile as well as credit risk performance, trends and risk management capabilities. The Risk Committee also reviews enterprise-wide operational risk trends, events and capabilities, with an emphasis on compliance, fraud, legal, process or control failures, information security, and privacy, as well as trends in market, funding, liquidity and reputational risks. The Risk Committee also provides oversight of our compliance with Basel capital and liquidity standards and its Internal Capital Adequacy Assessment Process, including its CCAR submissions; and resolution planning. The Audit and Compliance Committee of our Board of Directors approves our compliance policies and risk tolerance, and reinforces the importance of our compliance risk management. In addition, the Audit and Compliance Committee reviews the effectiveness of our Corporate-wide Compliance Risk Management Program. More broadly, this committee is responsible for assisting the Board in its oversight responsibilities relating to the integrity of our financial statements and financial reporting process; internal and external auditing, including the qualifications and independence of the independent registered public accounting firm and the performance of our internal audit services function; and the integrity of our systems of internal accounting and financial controls. The Audit and Compliance Committee provides oversight of the Company’s Internal Audit Group. The Audit and Compliance Committee reviews and concurs in the appointment, replacement, performance and compensation of the Company’s General Auditor and approves Internal Audit’s annual Audit Plan, charter, policies and budget. The Audit and Compliance Committee also receives regular updates on the Audit Plan’s status and results including significant reports issued by Internal Audit and the status of management’s corrective actions. The Compensation and Benefits Committee of our Board of Directors works with the Chief Risk Officer to ensure the compensation programs covering the Company overall, our business units and risk-taking employees appropriately balance risk with incentives such that business performance is achieved without taking imprudent or uneconomic risks. Our Chief Risk Officer is actively involved in setting goals for the Company and our business units. Our Chief Risk Officer also reviews the current and forward-looking risk profiles of each business unit, and provides input into performance evaluation. The Chief Risk Officer meets with the Compensation and Benefits Committee and attests whether performance goals and results have been achieved without taking imprudent risks. The Compensation and Benefits Committee uses a risk-balanced incentive compensation framework to decide on our bonus pools and the compensation of senior executives. There are several internal management committees, including the Enterprise-wide Risk Management Committee (ERMC), chaired by our Chief Risk Officer, which oversee risks. The ERMC is responsible for risk governance and oversight. It maintains the enterprise-wide risk appetite framework and monitors compliance with limits and escalations defined in it. The ERMC oversees implementation of risk policies across the Company with approval by the appropriate board committee. The ERMC reviews key risk exposures, trends and concentrations, significant compliance matters, economic capital and Basel capital trends, and provides guidance on the steps to monitor, control and report major risks. 50 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW As defined in the ERM policy, we follow the “three lines of defense” approach to risk management. The first line of defense comprises functions and management committees directly initiating risk taking. Business unit presidents, our Chief Credit Officer, Chief Operational Risk Officer, Chief Market Risk Officer and Functional Risk Officer are part of the first line of defense. The second line comprises independent functions overseeing risk taking activities of the first line. The Global Risk Oversight Officer and Market Risk Oversight Officer, the Chief Compliance & Ethics Officer, the Corporate Comptroller and certain control groups, both at the enterprise level and within regulated entities, are part of the second line of defense. The global risk oversight teams oversee the policies, strategies, frameworks, processes and capabilities deployed by the first line teams and act as a check to the first line of defense in managing risks. Our Internal Audit Group constitutes the third line of defense, and provides independent assessments and effective challenge of the first and second lines of defense. In addition, the Asset-Liability Committee (ALCO), chaired by the Company’s Chief Financial Officer, is responsible for managing market, liquidity, asset/liability risk and capital. CREDIT RISK MANAGEMENT PROCESS Credit risk is defined as loss due to obligor or counterparty default or changes in the credit quality of a security. Our credit risks are divided into two broad categories: individual and institutional. Each has distinct risk management capabilities, strategies, and tools. Business units that create individual or institutional credit risk exposures of significant importance are supported by dedicated risk management teams, each led by a Chief Credit Officer. To preserve independence, Chief Credit Officers for all business units report to our Chief Credit Officer, who in turn reports directly to our Chief Risk Officer. INDIVIDUAL CREDIT RISK Individual credit risk arises principally from consumer and small business charge cards, credit cards, lines of credit, and loans. These portfolios consist of millions of customers across multiple geographies, industries and levels of net worth. We benefit from the high-quality profile of our customers, which is driven by our brand, premium customer servicing, product features and risk management capabilities, which span underwriting, customer management and collections. Externally, the risk in these portfolios is correlated to broad economic trends, such as unemployment rates and GDP growth, which can affect customer liquidity. The business unit leaders and their Chief Credit Officers take the lead in managing the individual credit risk process. These Chief Credit Officers are guided by the Individual Credit Risk Committee, which is responsible for implementation and enforcement of the Individual Credit Risk Management Policy. This policy is further supported by subordinate policies and operating manuals covering decision logic and processes of credit extension, including prospecting, new account approvals, point-of-sale authorizations, credit line management and collections. The subordinate risk policies and operating manuals are designed to ensure consistent application of risk management principles and standardized reporting of asset quality and loss recognition. Individual credit risk management is supported by sophisticated proprietary scoring and decision-making models that use the most up- to-date information on prospects and customers, such as spending and payment history and data feeds from credit bureaus. Additional data, such as commercial variables, are integrated to further mitigate small business risk. We have developed data-driven economic decision logic for customer interactions to better serve our customers. INSTITUTIONAL CREDIT RISK Institutional credit risk arises principally within our Global Corporate Payments, Global Merchant Services, GNS, Prepaid Services, and Foreign Exchange Services businesses, as well as investment and liquidity management activities. Unlike individual credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by client- specific events. The absence of large losses in any given year or over several years is not necessarily representative of the level of risk of institutional portfolios, given the infrequency of loss events in such portfolios. 51 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Similar to Individual Credit Risk, business units taking institutional credit risks are supported by Chief Credit Officers. These officers are guided by the Institutional Risk Management Committee (IRMC), which is responsible for implementation and enforcement of the Institutional Credit Risk Management Policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures. The committee, along with the business unit Chief Credit Officers, makes investment decisions in core risk capabilities, ensures proper implementation of the underwriting standards and contractual rights of risk mitigation, monitors risk exposures, and determines risk mitigation actions. The IRMC formally reviews large institutional risk exposures to ensure compliance with ERMC guidelines and procedures and escalates them to the ERMC as appropriate. At the same time, the IRMC provides guidance to the business unit risk management teams to optimize risk-adjusted returns on capital. A centralized risk rating unit and a specialized airline risk group provide risk assessment of our institutional obligors. Exposure to the Airline Industry We have multiple important co-brand, rewards and corporate payments arrangements with airlines. The ERM program evaluates the risks posed by our airline partners and the overall airline strategy to all functions within the Company through comprehensive business analysis of global airlines. Our largest airline partner is Delta, and this relationship includes exclusive co-brand credit card partnerships and other arrangements including Membership Rewards redemption, merchant acceptance, travel and corporate payments. See Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. Sovereign Debt Exposure As part of our ongoing risk management process, we monitor our financial exposure to both sovereign and non-sovereign customers and counterparties, and measure and manage concentrations of risk by geographic regions, as well as by economic sectors and industries. A primary focus area for monitoring is credit deterioration due to weaknesses in economic and fiscal profiles. We evaluate countries based on the market assessment of the riskiness of their sovereign debt and our assessment of our economic and financial outlook and closely monitor those deemed high risk. As of December 31, 2014, we considered our gross credit exposures to government entities, financial institutions and corporations in those countries deemed high risk to be individually and collectively not material. OPERATIONAL RISK MANAGEMENT PROCESS We define operational risk as the risk of not achieving business objectives due to inadequate or failed processes, people, or information systems, or the external environment, including failures to comply with laws and regulations. Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal and regulatory penalties. To appropriately measure and manage operational risk, we have implemented a comprehensive operational risk framework that is defined in the Operational Risk Management Policy approved by the Risk Committee. The Operational Risk Management Committee (ORMC) coordinates with all control groups on effective risk assessments and controls and oversees the preventive, responsive and mitigation efforts by Lead Operational Risk Officers in the business units and staff groups. To preserve independence, the Lead Operational Risk Officers for all business units report to our Chief Operational Risk Officer, who in turn reports directly to our Chief Risk Officer. We use the operational risk framework to identify, measure, monitor and report inherent and emerging operational risks. This framework, supervised by the ORMC, consists of (a) operational risk event capture, (b) a project office to coordinate issue management and control enhancements, (c) key risk indicators such as customer complaints or pre-implementation test metrics, and (d) process and entity- level risk assessments. The framework requires the assessment of operational risk events to determine root causes, impact to customers and/or us, and resolution plan accountability to correct any defect, remediate customers, and enhance controls and testing to mitigate future issues. Our impact is assessed from an operational, financial, brand, regulatory compliance and legal perspective. INFORMATION SECURITY, PRIVACY, AND DATA GOVERNANCE We have implemented an Information Security Framework and Operating Model that is designed to protect information and information systems from unauthorized access, use, disclosure, disruption, modification or destruction. Chaired by the Chief Information Security Officer, our Information Security Risk Management Committee, a sub-committee of the ORMC, provides oversight and governance for our information security risk management activities. In addition, the committee is responsible for establishing cyber risk tolerances and in managing cyber crisis preparedness. 52 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW We assesses our cyber risk across four categories of “threat actors” that we currently believe pose the greatest risk, namely cyber criminals, nation state sponsored groups, determined insiders and “hacktivists” or social objectors. Our Information Security Framework and Operating Model uses an approach that looks at different phases of security to prepare, prevent, detect, respond and recover from cyber- security attacks. Our Privacy Framework and Operating Model follows a similar structure. It is led by the Chief Privacy Officer and is integrated with the Chief Information Security Officer and Compliance Risk Management leaders. Our Privacy Risk Management Committee, another sub- committee of the ORMC, provides oversight and governance over the collection, notice, use, sharing, transfer, confidentiality and retention of personal data. Our Enterprise Data Governance Framework and Policy defines governance and data standards for data used in regulatory reporting, risk management as well as other critical systems including big data capabilities. COMPLIANCE RISK MANAGEMENT PROCESS We define compliance risk as the risk of legal or reputational harm, fines, monetary penalties and payment of damages or other forms of sanction as a result of non-compliance with applicable laws, regulations, rules or standards of conduct. We view our ability to effectively mitigate compliance risk as an important aspect of our business model. Our Global Compliance and Ethics organization is responsible for establishing and maintaining our corporate-wide Compliance Risk Management Program. Pursuant to this program, we seek to manage and mitigate compliance risk by assessing, controlling, monitoring, measuring and reporting the regulatory risks to which we are exposed. REPUTATIONAL RISK MANAGEMENT PROCESS We define reputational risk as the risk that negative publicity regarding our products, services, business practices, management, clients and partners, whether perceived or real, could cause a decline in the customer base, costly litigation, or revenue reductions. We view protecting our reputation as core to our vision of becoming the world’s most respected service brand and fundamental to our long-term success. Our business leaders are responsible for ensuring that reputational risk implications of transactions, business activities and management practices are appropriately considered and relevant subject matter experts are engaged as needed. The ERMC and its sub-committees are responsible for reviewing decisions where reputational risk may exist and ensuring that reputational risk considerations are properly reflected. MARKET RISK MANAGEMENT PROCESS Market risk is the risk to earnings or value resulting from movements in market prices. Our market risk exposure is primarily generated by: (cid:2) Interest rate risk in our card and insurance businesses, as well as in our investment portfolios; and (cid:2) Foreign exchange risk in our operations outside the U.S. Market risk limits and escalation triggers within the Market Risk and Asset Liability Management (ALM) Policies are approved by the Risk Committee of the Board of Directors and the ERMC. Market risk is centrally monitored for compliance with policy and limits by our Market Risk Committee, which reports into the ALCO and is chaired by the Chief Market Risk Officer. Market risk management is also guided by policies covering the use of derivative financial instruments, funding and liquidity and investments. The Market Risk Oversight Officer provides an independent risk assessment and oversight over the policies for market risk, liquidity risk and ALM activities. Our market exposures are in large part by-products of the delivery of our products and services. Interest rate risk arises through the funding of Card Member receivables and fixed-rate loans with variable-rate borrowings as well as through the risk to net interest margin from changes in the relationship between benchmark rates such as Prime and LIBOR. Interest rate exposure within our charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to effectively convert fixed-rate debt to variable-rate or to convert variable-rate debt to fixed-rate. We may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors. 53 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW We do not engage in derivative financial instruments for trading purposes. Refer to Note 14 to the Consolidated Financial Statements for further discussion of our derivative financial instruments. We analyze a variety of scenarios to inform management of potential impacts to earnings and economic value of equity, which may occur given changes in interest rate curves using a range of severities. As of December 31, 2014, the detrimental effect on our annual net interest income of a hypothetical 100 basis point increase in interest rates would be approximately $212 million. To calculate this effect, we first measure the potential change in net interest income over the following 12 months taking into consideration anticipated future business growth and market-based forward interest rates. We then stress the implied forward interest rate curve with a 100 basis point increase to measure the impact on the projected net interest income. This effect is primarily driven by the volume of charge card receivables that are non-interest earning and credit card loans deemed to be fixed-rate, which are funded by variable-rate liabilities. As of December 31, 2014, the percentage of worldwide charge card accounts receivable and credit card loans that were deemed to be fixed rate was 66.7 percent, or $78 billion, with the remaining 33.3 percent, or $39 billion, deemed to be variable-rate credit card loans. We are also subject to market risk from changes in the relationship between the benchmark Prime rate that determines the yield on our variable-rate lending receivables and the benchmark LIBOR rate that determines the effective interest cost on a significant portion of our outstanding debt. Differences in the rate of change of these two indices, commonly referred to as basis risk, would impact our variable-rate U.S. lending net interest margins because we borrow at rates based on LIBOR but lend to our customers based on the Prime rate. The detrimental effect on our net interest income of a hypothetical 10 basis point decrease in the spread between Prime and one-month LIBOR over the next 12 months is estimated to be $38 million. We currently have approximately $38 billion of Prime-based, variable-rate U.S. lending receivables and $38 billion of LIBOR-indexed debt, including asset securitizations. Foreign exchange risk is generated from three principal sources: 1) Card Member cross-currency charges, 2) foreign subsidiary equity and 3) foreign currency earnings in units outside the U.S. Our foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging a significant proportion of our foreign currency earnings. The exposures that are hedged are based on an economic justification and are executed through various means, including the use of derivative financial instruments such as foreign exchange forward and cross-currency swap contracts. As of December 31, 2014 and 2013, foreign currency derivative instruments with total notional amounts of approximately $30 billion and $27 billion were outstanding, respectively. Derivative hedging activities related to cross-currency charges, balance sheet exposures and foreign currency earnings generally do not qualify for hedge accounting; however, derivative hedging activities related to translation exposure of foreign subsidiary equity generally do. We conduct scenario analysis to inform management of potential impacts to earnings that may occur due to changes in foreign exchange rates of various severities. With respect to cross-currency charges and balance sheet exposures, including related foreign exchange forward contracts outstanding, the effect on our earnings of a hypothetical 10 percent change in the value of the U.S. dollar would be immaterial as of December 31, 2014. With respect to earnings denominated in foreign currencies, the adverse impact on pretax income of a hypothetical 10 percent strengthening of the U.S. dollar related to anticipated overseas operating results for the next 12 months would be approximately $182 million as of December 31, 2014. With respect to translation exposure of foreign subsidiary equity, including related foreign exchange forward contracts outstanding, a hypothetical 10 percent strengthening in the U.S. dollar would result in an immaterial reduction in equity as of December 31, 2014. The actual impact of interest rate and foreign exchange rate changes will depend on, among other factors, the timing of rate changes, the extent to which different rates do not move in the same direction or in the same direction to the same degree, changes in the cost, volume and mix of our hedging activities and changes in the volume and mix of our businesses. FUNDING & LIQUIDITY RISK MANAGEMENT PROCESS Liquidity risk is defined as our inability to meet our ongoing financial and business obligations as they become due at a reasonable cost. General principles and our overall framework for managing liquidity risk are defined in the Liquidity Risk Policy approved by the Risk Committee of the Board of Directors and the ALCO. Liquidity risk limits are approved by the Risk Committee of the Board of Directors and the ERMC. Liquidity risk is centrally managed by the Funding and Liquidity Committee, which reports into the ALCO. In addition, the Market Risk Oversight Officer provides independent oversight of liquidity risk. We manage liquidity risk by maintaining access to a diverse set of cash, readily-marketable securities and contingent sources of liquidity, such that we can continuously meet our business requirements and expected future financing obligations for at least a 12-month period, even in the event we are unable to raise new funds under our regular funding programs during a substantial weakening in economic conditions. We balance the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, and having inadequate liquidity, which may result in financial distress during a liquidity event. 54 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Liquidity risk is managed both at an aggregate corporate level and at the major legal entities in order to ensure that sufficient funding and liquidity resources are available in the amount and in the location needed in a stress event. The Funding and Liquidity Committee reviews the forecasts of our aggregate and subsidiary cash positions and financing requirements, approves the funding plans designed to satisfy those requirements under normal conditions, establishes guidelines to identify the amount of liquidity resources required and monitors positions and determines any actions to be taken. CRITICAL ACCOUNTING ESTIMATES Refer to Note 1 to the Consolidated Financial Statements for a summary of our significant accounting policies referenced, as applicable, to other financial statement footnotes. Certain of our accounting policies that require significant management assumptions and judgments are set forth below. RESERVES FOR CARD MEMBER LOSSES Reserves for Card Member losses represent management’s best estimate of the probable losses inherent in our outstanding portfolio of Card Member loans and receivables, as of the balance sheet date. In estimating these losses, management uses statistical and analytical models that analyze portfolio performance and reflect management’s judgment regarding the quantitative components of the reserve. The models take into account several factors, including delinquency-based loss migration rates, loss emergence periods and average losses over an appropriate historical period, as well as expected future recoveries. Management considers whether to adjust the quantitative reserve for certain external and internal qualitative factors that may increase or decrease the reserves for losses on Card Member loans and receivables. The process of estimating these reserves requires a high degree of judgment. To the extent historical credit experience updated for external environmental trends is not indicative of future performance, actual losses could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for Card Member losses in any quarter. As of December 31, 2014, a 10 percent increase in management’s estimate of losses inherent in the outstanding portfolio of Card Member loans and receivables evaluated collectively for impairment at such date would increase reserves for losses with a corresponding change to provision for losses by approximately $167 million. This sensitivity analysis is provided as a hypothetical scenario to assess the sensitivity of the provision for losses. It does not represent management’s expectations for losses in the future, nor does it include how other portfolio factors such as delinquency-based loss migration rates or recoveries, or the amount of outstanding balances, may impact the level of reserves for losses and the corresponding impact on the provision for losses. LIABILITY FOR MEMBERSHIP REWARDS EXPENSE The Membership Rewards program is our largest card-based rewards program. Card Members can earn points for purchases charged on their enrolled card products. Certain types of purchases allow Card Members to also earn bonus points. Membership Rewards points are redeemable for a broad variety of rewards including travel, entertainment, retail certificates and merchandise. Points typically do not expire, and there is no limit on the number of points a Card Member may earn. We record a Membership Rewards liability that represents the estimated cost of points earned that are expected to be redeemed by Card Members in the future. The Membership Rewards liability is impacted over time by enrollment levels, attrition, the volume of points earned and redeemed, and the associated redemption costs. We estimate the Membership Rewards liability by determining the URR and the WAC per point, which are applied to the points of current enrollees. The URR assumption is used to estimate the number of points earned by current enrollees that will ultimately be redeemed in future periods. Management uses statistical and actuarial models to estimate the URR of points earned to date by current Card Members based on redemption trends, card product type, enrollment tenure, card spend levels and credit attributes. The WAC per point assumption is used to estimate future redemption costs and is primarily based on redemption choices made by Card Members, reward offerings by partners, and Membership Rewards program changes. The WAC per point is derived from the previous 12 months of redemptions and is adjusted as appropriate for certain changes in redemption costs that are not representative of future cost expectations. The process of estimating the Membership Rewards liability includes a high degree of judgment. Actual redemptions and associated redemption costs could differ significantly from management’s judgment, resulting in either higher or lower Membership Rewards expense. Management periodically evaluates its liability estimation process and assumptions based on developments in redemption patterns, cost per point redeemed, partner contract changes and other factors. 55 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Changes in the Membership Rewards URR and WAC per point have the effect of either increasing or decreasing the liability through the current period marketing, promotion, rewards and Card Member services expense by an amount estimated to cover the cost of all points previously earned but not yet redeemed by current enrollees as of the end of the reporting period. As of December 31, 2014, an increase in the estimated URR of current enrollees of 100 basis points would increase the Membership Rewards liability and corresponding rewards expense by approximately $319 million. Similarly, an increase in the WAC per point of 1 basis point would increase the Membership Rewards liability and corresponding rewards expense by approximately $82 million. FAIR VALUE MEASUREMENT We hold investment securities and derivative instruments that are carried at fair value on the Consolidated Balance Sheets. Management makes assumptions and judgments when estimating the fair values of these financial instruments. In accordance with fair value measurement and disclosure guidance, the objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date based on the principal or, in the absence of a principal, most advantageous market for the specific asset or liability. The disclosure guidance establishes a three-level hierarchy of inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to the measurement of fair value based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by the measurement of fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority given to the measurement of fair value based on pricing models with significant unobservable inputs (Level 3). We did not have any Level 3 assets measured on a recurring basis during the year ended December 31, 2014. Refer to Note 15 to the Consolidated Financial Statements. Investment Securities Our investment securities are mostly composed of fixed-income securities issued by states and municipalities as well as the U.S. Government and Agencies. The fair market values for our investment securities, including investments comprising defined benefit pension plan assets, are obtained primarily from pricing services we engage. For each security, we receive one price from a pricing service we engage. The fair values provided by the pricing services are estimated using pricing models, where the inputs to those models are based on observable market inputs or recent trades of similar securities. The pricing services did not apply any adjustments to the pricing models used as of December 31, 2013 and 2014. In addition, we did not apply any adjustments to prices received from the pricing services. We reaffirm our understanding of the valuation techniques used by our pricing services at least annually. In addition, we corroborate the prices provided by our pricing services for reasonableness by comparing the prices from the respective pricing services to valuations obtained from different pricing sources as well as comparing prices to the sale prices received from sold securities at least quarterly. In the measurement of fair value for our investment securities, even though the underlying inputs used in the pricing models are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. Other-Than-Temporary Impairment of Investment Securities Realized losses are recognized when management determines that a decline in the fair value of investment securities is other-than-temporary. Such determination requires judgment regarding the amount and timing of recovery. We review and evaluate our investment securities at least quarterly, and more often as market conditions may require, to identify investment securities that have indications of other-than- temporary impairments. We consider several factors when evaluating debt securities for other-than-temporary impairment, including the determination of the extent to which a decline in the fair value of a security is due to increased default risk for the specific issuer or market interest rate risk. With respect to market interest rate risk, we assess whether we have the intent to sell the investment securities and whether we are more likely than not that we will be required to sell the investment securities before recovery of any unrealized losses. In determining whether any of our investment securities are other-than-temporarily impaired, a change in facts and circumstances could lead to a change in management judgment about our view on collectability and credit quality of the issuer, or the impact of market interest rates on the investment securities. Any such changes could result in us recognizing an other-than-temporary impairment loss through earnings. 56 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Derivative Instruments Our primary derivative instruments are interest rate swaps and foreign currency forward agreements. The fair value of our derivative instruments is estimated by using either a third-party valuation service that uses proprietary pricing models, or by internal pricing models, where the inputs to those models are readily observable from actively quoted markets. We reaffirm our understanding of the valuation techniques used by a third-party valuation service at least annually. To mitigate credit risk arising from our derivative instruments, counterparties are required to be pre-approved and rated as investment grade. In addition, we manage certain counterparty credit risks by exchanging cash and non-cash collateral under executed credit support agreements. The non-cash collateral does not reduce the derivative balance included in the Other assets line but effectively reduces risk exposure as it is available in the event of counterparty default. Based on the assessment of credit risk of our derivative counterparties, we do not have derivative positions that warrant credit valuation adjustments. In the measurement of fair value for our derivative instruments, although the underlying inputs used in the pricing models are readily observable from actively quoted markets, the pricing models do entail a certain amount of subjectivity and, therefore, differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. GOODWILL RECOVERABILITY Goodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at the reporting unit level annually or when events or circumstances arise, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value. Our approach and methodology for conducting our goodwill impairment testing is described in Note 7 to the Consolidated Financial Statements, but is fundamentally based on the measurement of fair value for our reporting units, which inherently entails the use of significant judgment. For valuation, we use a combination of the income approach (discounted cash flows) and market approach (market multiples) in estimating the fair value of our reporting units. When preparing discounted cash flow models under the income approach, we estimate future cash flows using the reporting unit’s internal multi-year forecast, and a terminal value calculated using a growth rate that management believes is appropriate in light of current and expected future economic conditions. To discount these cash flows we use our expected cost of equity, determined using a capital asset pricing model. When using the market method under the market approach, we apply comparable publically traded companies’ multiples (e.g., earnings, revenues) to our reporting units’ actual results. The judgment in estimating forecasted cash flows, discount rates and market comparables is significant, and imprecision could materially affect the fair value of our reporting units. Based upon the updated valuations for our reporting units, we have concluded goodwill is not impaired as of December 31, 2014, nor was any goodwill written off during 2014. However, we could be exposed to increased risk of goodwill impairment if future operating results or macroeconomic conditions differ significantly from management’s current assumptions. INCOME TAXES We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. In establishing a provision for income tax expense, we must make judgments about the application of inherently complex tax laws. Unrecognized Tax Benefits We establish a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements. In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether, and the extent to which, a tax position should be sustained. A tax position is recognized only when it is more likely than not to be sustained upon examination by the relevant taxing authority based on its technical merits. The amount of tax benefit recognized is the largest benefit that management believes is more likely than not to be realized on ultimate settlement. As new information becomes available, we evaluate our tax positions and adjust our unrecognized tax benefits, as appropriate. Tax benefits ultimately realized can differ from amounts previously recognized due to uncertainties, with any such differences generally impacting the provision for income tax. 57 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Deferred Tax Asset Realization Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. Since deferred taxes measure the future tax effects of items recognized in the Consolidated Financial Statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information. Changes in facts or circumstances can lead to changes in the ultimate realization of deferred tax assets due to uncertainties. OTHER MATTERS CERTAIN LEGISLATIVE, REGULATORY AND OTHER DEVELOPMENTS As a participant in the financial services industry, and as a bank holding company, we are subject to comprehensive examination and supervision by the Federal Reserve and to a range of laws and regulations that impact our business and operations. In light of legislative initiatives over the last several years and continuing regulatory reform implementation, compliance requirements and expenditures have risen for financial services firms, including us, and we expect compliance requirements and expenditures will continue to rise in the future. In addition, legislators and regulators in various countries in which we operate have focused on the operation of card networks, including through antitrust actions, legislation and rules that would or do impose changes on certain practices or pricing of card issuers, merchant acquirers and payment networks and the establishment of broad and ongoing regulatory oversight regimes for payment systems. Regulators and legislators have focused on the fees merchants pay to accept cards, including the way bankcard network members collectively set the “interchange” (that is, the fee paid by the bankcard merchant acquirer to the card issuer in payment networks like Visa and MasterCard) and the fees merchants are charged for card acceptance, as well as the rules, contracts and monitoring and other controls governing merchant card acceptance. Although, unlike the Visa and MasterCard networks, the American Express payment network does not have interchange fees or collectively set any fees or rules, antitrust actions and government regulation relating to merchant pricing or terms of merchant rules and contracts could affect all networks directly or indirectly. For example, the European Commission’s (the Commission) decision to make binding Visa Europe’s commitments to cap its cross-border credit card multilateral interchange fees to 30 basis points and change its rules on how cross-border interchange is applied could negatively impact the discount revenue we derive from our business in the EU as a result of downward marketplace pressure on merchant fees, including our discount rates. Broad regulatory oversight over payment systems can also include, in some cases, requirements for international card networks to be locally licensed and/or to localize aspects of their operations. The development and enforcement of regulatory regimes may adversely affect our ability to maintain or increase our revenues and extend our global network. European Union Payments Legislation In July 2013, the Commission proposed legislation in two parts, covering a wide range of topics across the payments industry. The first part was a proposed EU-wide regulation on interchange fees (the Interchange Fee Regulation); the second consisted of revisions to the Payment Services Directive (the PSD2). As part of the EU legislative process, these proposals have been subject to review by the European Parliament and the Council of the European Union, after which these institutions then meet with the Commission to finalize the legislation in a process known as a trialogue. The Interchange Fee Regulation is now in the final stages of the legislative process following political agreement on its substantive content among the Council, the Parliament and the Commission in December 2014. Although the regulation is still subject to final review and formal adoption, the substantive terms agreed among the institutions include the following: (cid:2) Price caps — Interchange fees on consumer card transactions would be capped, generally at 20 basis points for debit and prepaid cards and 30 basis points for credit and charge cards, with opportunity for lower caps in some instances. Although we do not have interchange fees, as “four party” networks such as Visa and MasterCard have, and “three party” networks such as American Express are exempt from the application of the caps, the regulation provides that “three party” networks should be treated as “four party” networks when they license third party providers to issue cards and/or acquire merchants or when they issue cards with a co-brand partner or through an agent. This means, for example, the caps would apply to elements of the financial arrangements agreed to between us and each of our GNS partners in the EU. The caps would take effect six months after the regulation would become effective; however, the effectiveness of these caps in relation to our transactions with no cross-border component may be extended for a further three years. The discount rates we agree to 58 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW with merchants would not be capped, but the interchange caps would likely exert additional downward pressures on merchant fees across the industry, including our discount rates, and may undermine our ability to attract and retain GNS partners. The Interchange Fee Regulation would exclude commercial card transactions from the scope of the caps. (cid:2) Card acceptance terms —“Anti-steering” and honor-all-cards rules across all card networks, including non-discrimination and honor-all- cards provisions in our card acceptance agreements, would be prohibited with some limited exceptions. Removal of these provisions creates significant risk of customer confusion and Card Member dissatisfaction, which would result in harm to the American Express brand. The prohibition on “anti-steering rules” would take effect immediately upon effectiveness of the regulation; the prohibition on honor-all-cards rules would take effect one year later. (cid:2) Network licensing — Beginning six months after the regulation would become effective, the geographic scope of network licenses, including those we agree to with our GNS partners, would cover the entire EU. This may undermine the value of licenses granted to some GNS partners to date, which have been subject to varying levels of exclusivity in relation to a particular country. (cid:2) Separation of network processing — Beginning one year after the date the regulation would become effective, card networks would be required to separate their network processing functions (in which transactions between different issuers and acquirers are processed for authorization, clearing and settlement). This proposal does not apply to three-party payment networks, such as American Express, but may be deemed applicable in situations where a different GNS issuer and acquirer is involved in a transaction, which represent a very small percentage of transactions on our network. (cid:2) Co-badging of cards — Beginning one year after the regulation would become effective, a single card may bear the brand of multiple networks and be used to process transactions on any of those networks. Merchants may install automatic mechanisms in point-of-sale equipment to prioritize selection of a particular network, subject to override by the cardholder. These provisions may harm the American Express brand insofar as GNS issuing partners will be able to offer multiple networks on a single card and merchants may program their point-of-sale equipment to prioritize selection of another network on such cards. The Commission’s PSD2 proposal has been considered by both the Parliament and the Council; however, the trialogue process has only recently begun. Among other terms, the PSD2 could include in its final form provisions that would (i) further regulate surcharging so that transactions falling in scope of the interchange caps could not be surcharged, but transactions falling outside the scope of the caps could be surcharged up to cost, subject potentially to the ability of an individual Member State to prohibit surcharging altogether; and (ii) require all networks, including three-party payment networks that operate with licensing arrangements, such as our GNS business, to establish objective, proportionate and non-discriminatory criteria under which a financial institution may access the network, for example, as a licensed issuer or acquirer. The former may increase instances of differential surcharging of our cards and prompt customer and merchant confusion as to which transactions may be surcharged and Card Member dissatisfaction. The latter would undermine the flexibility and discretion we have had to date in deciding with whom to partner in our GNS business. Unlike the Interchange Fee Regulation, the PSD2 would require transposition into national law by each Member State, likely over a period of two years. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) contains a wide array of provisions intended to govern the practices and oversight of financial institutions and other participants in the financial markets. Among other matters, the law created an independent Consumer Financial Protection Bureau (the CFPB), which has broad rulemaking authority over providers of credit, savings, payment and other consumer financial products and services with respect to certain federal consumer financial laws. Moreover, the CFPB has examination and enforcement authority with respect to certain federal consumer financial laws for providers of consumer financial products and services, including American Express Company and certain of our subsidiaries. The CFPB is directed to prohibit “unfair, deceptive or abusive” acts or practices, and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services. The review of products and practices to prevent unfair, deceptive or abusive conduct will be a continuing focus of the CFPB and banking regulators more broadly, as well as our own internal reviews. Internal and regulatory reviews have resulted in, and are likely to continue to result in, changes to our practices, products and procedures. Such reviews are also likely to continue to result in increased costs related to regulatory oversight, supervision and examination, and additional restitution to our Card Members and may result in additional regulatory actions, including civil money penalties. 59 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW In December 2013, we announced that certain of our subsidiaries reached settlements with several banking regulators, including the CFPB, to resolve regulatory reviews of marketing and billing practices related to several credit card add-on products. For a description of these settlements, see Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2013. In October 2012, we announced that American Express Company and certain of our subsidiaries reached settlements with several bank regulators, including the CFPB, relating to certain aspects of our U.S. consumer card practices. For a description of these settlements, see Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2012. Dodd-Frank prohibits payment card networks from restricting merchants from offering discounts or incentives to customers to pay with particular forms of payment, such as cash, check, credit or debit card, or restricting merchants from setting certain minimum, and for certain merchants maximum, transaction amounts for credit cards, as long as any such discounts or incentives or any minimum or maximum transaction amounts do not discriminate on the basis of the issuer or network and comply with applicable federal or state disclosure requirements. Under Dodd-Frank, the Federal Reserve is also authorized to regulate interchange fees paid to financial institutions on debit card and certain general-use prepaid card transactions to ensure that they are “reasonable and proportional” to the cost of processing individual transactions, and to prohibit payment card networks and issuers from requiring transactions to be processed on a single payment network or fewer than two unaffiliated networks. The Federal Reserve’s rule provides that the regulations on interchange and routing do not apply to a three-party network like American Express when it acts as both the issuer and the network for prepaid cards, and we are therefore not a “payment card network” as that term is defined and used for the specific purposes of the rule. Dodd-Frank also authorizes the Federal Reserve to establish enhanced prudential regulatory requirements, including capital, leverage and liquidity standards, risk management requirements, concentration limits on credit exposures, mandatory resolution plans (so-called “living wills”) and stress tests for, among others, large bank holding companies, such as American Express Company, that have greater than $50 billion in assets. We are also required to develop and maintain a “capital plan,” and to submit the capital plan to the Federal Reserve for our quantitative and qualitative review under the Federal Reserve’s CCAR process. In addition, certain derivative transactions are now required to be centrally cleared, which have increased our collateral posting requirements. In September 2014, the CFTC and the U.S. federal banking agencies issued proposals that would impose mandatory margining requirements for certain non-cleared swaps, which may further increase collateral posting requirements for us. Department of Justice Litigation The DOJ and certain states’ attorneys general have brought an action against us alleging that the provisions in our card acceptance agreements with merchants that prohibit merchants from discriminating against our card products at the point of sale violate the U.S. antitrust laws. On February 19, 2015, the trial court found that the challenged provisions were anticompetitive and will now determine the scope of the remedy when it enters judgment in the case. We intend to vigorously pursue an appeal of the decision and judgment. See Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2014 for descriptions of the DOJ action and related cases. Visa and MasterCard, which were also defendants in the DOJ and state action, entered into a settlement agreement and have been dismissed as parties pursuant to that agreement. The settlement enjoins Visa and MasterCard, with certain exceptions, from adopting or enforcing rules or entering into contracts that prohibit merchants from engaging in various actions to steer cardholders to other card products or payment forms at the point of sale. If similar conditions were imposed on American Express, it could have a material adverse effect on our business. See Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for further information on the potential impacts of an adverse decision on our business. Other Legislative and Regulatory Initiatives In certain countries, such as Australia, and in certain Member States in the EU, merchants are permitted by law to surcharge card purchases. While surcharging continues to be actively considered in certain jurisdictions, the benefits to customers have not been apparent in countries that have allowed it, and in some cases regulators are addressing concerns about excessive surcharging by merchants. Surcharging, particularly where it disproportionately impacts American Express Card Members, which is known as differential surcharging, could have a material adverse effect on us if it becomes widespread. The Reserve Bank of Australia allows us and other networks to limit a merchant’s right to surcharge to “the reasonable cost of card acceptance.” In the EU, the Consumer Rights Directive prohibits merchants from surcharging card purchases more than the merchants’ cost of acceptance in those Member States that permit surcharging. Although neither a legislative nor regulatory initiative, the settlement by MasterCard and Visa in a U.S. merchant class litigation required, among other things, MasterCard and Visa to permit U.S. merchants, subject to certain conditions, to surcharge credit cards, while allowing them to continue to prohibit surcharges on debit and prepaid card transactions. In December 2013, we announced the proposed settlement of a number of U.S. merchant class action lawsuits, which, if approved, would change certain surcharging provisions in our U.S. card acceptance agreements. For a further description of the proposed settlement, see Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2014. Refer to “Consolidated Capital Resources and Liquidity” for a discussion of capital adequacy requirements established by federal banking regulators. 60 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW RECENTLY ISSUED ACCOUNTING STANDARDS Refer to the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements. GLOSSARY OF SELECTED TERMINOLOGY Adjusted average loans — Represents average Card Member loans excluding the impact of certain non-traditional Card Member loans and other fees. Adjusted net interest income — Represents net interest income attributable to our Card Member loans portfolio excluding the impact of interest expense and interest income not attributable to our Card Member loans portfolio. Asset securitizations — Asset securitization involves the transfer and sale of receivables or loans to a special-purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities that are secured by the transferred receivables or loans. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying receivables or loans. The receivables and loans of our Charge Trust and Lending Trust being securitized are reported as assets on our Consolidated Balance Sheets. Average discount rate — This calculation is generally designed to reflect pricing at merchants accepting general purpose American Express cards. It represents the percentage of billed business (generated from both proprietary and GNS Card Member spend) retained by us from merchants we acquire or, for merchants acquired by a third party on our behalf, net of amounts retained by such third party. Basel III supplementary leverage ratio — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definition. Basic cards-in-force — Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee Card Members. Non-proprietary basic cards-in-force includes cards that are issued and outstanding under network partnership agreements, except for supplemental cards and retail co-brand Card Member accounts which have had no out-of-store spend activity during the prior 12-month period. Billed business — Includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements (non-proprietary billed business), corporate payments and certain insurance fees charged on proprietary cards. In-store spend activity within retail co-brand portfolios in GNS, from which we earn no revenue, is not included in non-proprietary billed business. Card billed business is included in the U.S. or outside the U.S. based on where the issuer is located. Capital ratios — Represents the minimum standards established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient capital to absorb on- and off-balance sheet losses beyond current loss accrual estimates. Card Member — The individual holder of an issued American Express-branded charge, credit card and certain prepaid cards. Card Member loans — Represents the outstanding amount due from Card Members for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Card Member loans also include revolving balances on certain American Express charge card products. Card Member receivables — Represents the outstanding amount due from Card Members for charges made on their American Express charge cards as well as any card-related fees. Charge cards — Represents cards that generally carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Charge Card Members generally must pay the full amount billed each month. No finance charges are assessed on charge cards. Each charge card transaction is authorized based on its likely economics reflecting a customer’s most recent credit information and spend patterns. Some charge card accounts have an additional lending-on-charge feature that allows revolving certain balances. Common Equity Tier 1 risk-based capital ratio — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definitions under Transitional Basel III and Fully Phased-in Basel III. Credit cards — Represents cards that have a range of revolving payment terms, grace periods, and rate and fee structures. 61 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Discount revenue — Represents revenue earned from fees generally charged to merchants with whom we have entered into a card acceptance agreement for processing Card Member transactions. The discount fee generally is deducted from our payment reimbursing the merchant for Card Member purchases. Discount revenue is reduced by other payments made to merchants, third-party card issuing partners, cash-back reward costs, corporate incentive payments and other contra-revenue items. Interest expense — Interest expense includes interest incurred primarily to fund Card Member loans, charge card product receivables, general corporate purposes, and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) debt, which primarily relates to interest expense on our long-term financing and short-term borrowings, which primarily relates to interest expense on commercial paper, federal funds purchased, bank overdrafts and other short-term borrowings. Interest income — Interest income includes (i) interest on loans, (ii) interest and dividends on investment securities and (iii) interest income on deposits with banks and other. Interest on loans — is assessed using the average daily balance method for loans. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written off. Interest and dividends on investment securities — primarily relates to our performing fixed-income securities. Interest income is accrued as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that the related investment security recognizes a constant rate of return on the outstanding balance throughout its term. These amounts are recognized until these securities are in default or when it is likely that future interest payments will not be made as scheduled. Interest income on deposits with banks and other — is recognized as earned, and primarily relates to the placement of cash in excess of near-term funding requirements in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts. Liquidity Coverage Ratio — Represents the proposed minimum standards being established by the regulatory agencies as a measure to determine whether the regulated entity has sufficient liquidity to meet liquidity needs in periods of financial and economic stress. Merchant acquisition — Represents the signing of merchants to accept American Express-branded cards. Net card fees — Represents the card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of provision for projected refunds for cancellation of card membership. Net interest yield on Card Member loans — Net interest yield on Card Member loans is computed by dividing adjusted net interest income by adjusted average loans, computed on an annualized basis. The calculation of net interest yield on Card Member loans includes interest that is deemed uncollectible. For all presentations of net interest yield on Card Member loans, reserves and net write-offs related to uncollectible interest are recorded through provisions for losses — Card Member loans; therefore, such reserves and net write-offs are not included in the net interest yield calculation. Net loss ratio — Represents the ratio of ICS and GCS charge card write-offs consisting of principal (resulting from authorized transactions) and fee components, less recoveries, on Card Member receivables expressed as a percentage of gross amounts billed to Card Members. Net write-off rate — principal only — Represents the amount of Card Member loans or USCS and ICS Card Member receivables written off consisting of principal (resulting from authorized transactions), less recoveries, as a percentage of the average loan balance or USCS and ICS average receivables during the period. Net write-off rate — principal, interest and fees — Includes, in the calculation of the net write-off rate, amounts for interest and fees in addition to principal for Card Member loans, and fees in addition to principal for USCS and ICS Card Member receivables. Operating expenses — Represents salaries and employee benefits, professional services, occupancy and equipment, communications and other expenses. Return on average equity — Calculated by dividing one-year period net income by one-year average total shareholders’ equity. Return on average segment capital — Calculated by dividing one-year period segment income by one-year average segment capital. 62 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW Return on average tangible segment capital — Computed in the same manner as return on average segment capital except the computation of average tangible segment capital excludes from average segment capital average goodwill and other intangibles. Risk-weighted assets — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definitions under Basel I and Fully Phased-in Basel III. Segment capital — Represents the capital allocated to a segment based upon specific business operational needs, risk measures, and regulatory capital requirements. Tier 1 leverage ratio — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definitions under Transitional Basel III and Fully Phased-in Basel III. Tier 1 risk-based capital ratio — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definitions under Transitional Basel III and Fully Phased-in Basel III. Total cards-in-force — Represents the number of cards that are issued and outstanding. Non-proprietary cards-in-force includes all cards that are issued and outstanding under network partnership agreements, except for retail co-brand Card Member accounts which have no out- of-store spend activity during the prior 12-month period. Total risk-based capital ratio — Refer to the Capital Strategy section under “Consolidated Capital Resources and Liquidity” for the definition. Travel sales — Represents the total dollar amount of travel transaction volume for airline, hotel, car rental, and other travel arrangements made for consumers and small businesses. We earn revenue on these transactions by charging a transaction or management fee. 63 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements, which address our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, include, but are not limited to, the following: (cid:2) the ability to maintain discipline over operating expenses during 2015 and 2016 as well as management’s ability to re-scale our expense base, which will depend in part on unanticipated increases in significant categories of operating expenses, such as consulting or professional fees, compliance or regulatory-related costs and technology costs, the payment of civil money penalties, disgorgement and restitution, our decision to increase or decrease discretionary operating expenses depending on overall business performance, our ability to achieve the expected benefits of our reengineering plans, our ability to balance expense control and investments in the business, the impact of changes in foreign currency exchange rates on costs and results, the impact of accounting changes and reclassifications, and the level of acquisition activity and related expenses; (cid:2) (cid:2) the actual impact on our year over year EPS for the full year 2015 from increased competition and pricing regulation, the strengthening of the U.S. dollar, the expiration of our U.S. Costco co-brand relationship in 2016 and other factors discussed under “Current Business Environment/Outlook,” which will depend on the factors described herein, the behavior of Card Members and their actual spending patterns, credit trends, currency and interest rate fluctuations, the timing and size of the investments we make to attract Card Members, including those from the Costco relationship, and in other growth initiatives, as well as our success in implementing our strategies and business initiatives including growing profitable spending through proprietary, co-brand and network products, increasing penetration among corporate clients, expanding our international footprint, growing reloadable prepaid, loyalty coalitions and marketing services, increasing merchant acceptance, controlling expenses and executing our share repurchase program; the actual amount to be spent by us on investments in the business, which will be based in part on management’s assessment of competitive opportunities, our ability to control operating, infrastructure, advertising, promotion and rewards expenses, credit trends and changes in macroeconomic conditions; (cid:2) uncertainty related to our ability to drive growth from discretionary investments, which will depend in part on our ability to develop and market value propositions that appeal to Card Members and new customers and on our ability to offer attractive services and rewards programs, as well as increasing competition, brand perceptions and reputation and ineffective or diminished investments by us; (cid:2) changes affecting our ability or desire to repurchase up to $1.0 billion of our common shares in the first quarter of 2015, such as acquisitions, results of operations, capital needs and the amount of shares issued by us to employees upon the exercise of options, among other factors, which could significantly impact our capital ratios; (cid:2) changes affecting our ability or desire to issue preferred shares during the first quarter of 2015, such as actions by bank regulatory agencies, capital needs, any reduction in our credit ratings, which could materially increase the cost and other terms of preferred shares, and market conditions, among other factors; (cid:2) our funding plan for the full year 2015 being implemented in a manner inconsistent with current expectations, which will depend on various factors such as future business growth, the impact of global economic, political and other events on market capacity, demand for securities we offer, regulatory changes, ability to securitize and sell receivables and the performance of receivables previously sold in securitization transactions; 64 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW (cid:2) our ability to meet our on-average and over-time growth targets for revenues net of interest expense, EPS and ROE, which will depend on factors such as our success in implementing our strategies and business initiatives including growing our share of overall spending, addressing the loss of the Costco U.S. relationship, retaining and growing our other co-brand and other partner relationships, increasing merchant coverage, enhancing our prepaid offerings, expanding the GNS business and controlling expenses, and on factors outside management’s control including the willingness and ability of Card Members to sustain spending, the effectiveness of marketing and loyalty programs, regulatory and market pressures on pricing, credit trends, changes in foreign currency exchange and interest rates, and changes in general economic conditions, such as GDP growth, consumer confidence, unemployment and the housing market; (cid:2) our ability to meet our on-average and over-time objective to return 50 percent of capital generated to shareholders through dividends and share repurchases, which will depend on factors such as approval of our capital plans by our regulators, the amount we spend on acquisitions, our results of operations and capital needs in any given period, and the amount of shares issued by us to employees upon the exercise of options; (cid:2) uncertainty relating to the outcomes and costs associated with merchant class actions, including the success or failure of the settlement agreement, such as objections to the settlement agreement by plaintiffs and other parties and uncertainty and timing related to the approval of the settlement agreement by the Court, which can be impacted by appeals; (cid:2) changes in global economic and business conditions, including consumer and business spending, the availability and cost of credit, unemployment and political conditions, all of which may significantly affect spending on American Express cards, delinquency rates, loan balances and other aspects of our business and results of operations; (cid:2) changes in capital and credit market conditions, including sovereign creditworthiness, which may significantly affect our ability to meet our liquidity needs, expectations regarding capital and liquidity ratios, access to capital and cost of capital, including changes in interest rates; changes in market conditions affecting the valuation of our assets; or any reduction in our credit ratings or those of our subsidiaries, which could materially increase the cost and other terms of our funding, restrict our access to the capital markets or result in contingent payments under contracts; (cid:2) (cid:2) litigation, such as class actions or proceedings brought by governmental and regulatory agencies (including the lawsuit filed against us by the U.S. Department of Justice and certain state attorneys general), that could result in (i) the imposition of behavioral remedies against us or us voluntarily making certain changes to our business practices, the effects of which in either case could have a material adverse impact on our business; (ii) the imposition of substantial monetary damages and penalties, disgorgement and restitution; and/or (iii) damage to our global reputation and brand; legal and regulatory developments wherever we do business, including legislative and regulatory reforms in the U.S., such as the actions of the CFPB and Dodd-Frank’s stricter regulation of large, interconnected financial institutions, which could make fundamental changes to many of our business practices or materially affect our capital or liquidity requirements, results of operations, or ability to pay dividends or repurchase our stock; actions and potential future actions by the FDIC and credit rating agencies applicable to securitization trusts, which could impact our ABS program; or potential changes to the taxation of our businesses, the allowance of deductions for significant expenses, or the incidence of consumption taxes on our transactions, products and services; (cid:2) changes in the substantial and increasing worldwide competition in the payments industry, including competitive pressure that may impact the prices we charge merchants that accept our cards, competition for co-brand relationships and the success of marketing, promotion or rewards programs; (cid:2) changes in the financial condition and creditworthiness of our business partners, such as bankruptcies, restructurings or consolidations, involving merchants that represent a significant portion of our business, such as the airline industry, or our partners in GNS or financial institutions that we rely on for routine funding and liquidity, which could materially affect our financial condition or results of operations; (cid:2) the impact of regulatory changes in the EU, including the introduction of price regulation, the elimination of honor all cards and “anti- steering” rules and requirements on granting access to our network, among other important changes, which will depend on various factors, including, but not limited to the actual final laws and regulations ultimately adopted in the EU and its Member States, including any exemptions and phase-in periods, our ability to adapt and change our business model to address regulatory requirements and competitive pressures, and our success in continuing to offer value propositions that potential partners, merchants and customers find attractive; 65 AMERICAN EXPRESS COMPANY 2014 FINANCIAL REVIEW (cid:2) our ability to maintain and expand our presence in the digital payments space, including online and mobile channels, which will depend on our success in evolving our business models and processes for the digital environment, building partnerships and executing programs with companies, and utilizing digital capabilities that can be leveraged for future growth; (cid:2) (cid:2) factors beyond our control such as fire, power loss, disruptions in telecommunications, severe weather conditions, natural disasters, health pandemics, terrorism, cyber-attacks or fraud, which could significantly affect spending on American Express cards, delinquency rates, loan balances and travel-related spending or disrupt our global network systems and ability to process transactions; and the potential failure of the U.S. Congress to renew legislation regarding the active financing exception to Subpart F of the Internal Revenue Code, which could increase our effective tax rate and have an adverse impact on net income. A further description of these uncertainties and other risks can be found in our Annual Report on Form 10-K for the year ended December 31, 2014 and our other reports filed with the Securities and Exchange Commission. 66 AMERICAN EXPRESS COMPANY MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP), and includes those policies and procedures that: (cid:2) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; (cid:2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (cid:2) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on management’s assessment and those criteria, we conclude that, as of December 31, 2014, our internal control over financial reporting is effective. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has issued an attestation report appearing on the following page on the effectiveness of our internal control over financial reporting as of December 31, 2014. 67 AMERICAN EXPRESS COMPANY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AMERICAN EXPRESS COMPANY: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows and shareholders’ equity present fairly, in all material respects, the financial position of American Express Company and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York February 24, 2015 68 AMERICAN EXPRESS COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Income – For the Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Comprehensive Income – For the Years Ended December 31, 2014, 2013 and 2012 Consolidated Balance Sheets – December 31, 2014 and 2013 Consolidated Statements of Cash Flows – For the Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Shareholders’ Equity – For the Years Ended December 31, 2014, 2013 and 2012 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies Note 2 – Acquisitions and Divestitures Note 3 – Accounts Receivable and Loans Note 4 – Reserves for Losses Note 5 – Investment Securities Note 6 – Asset Securitizations Note 7 – Other Assets Note 8 – Customer Deposits Note 9 – Debt Note 10 – Other Liabilities Note 11 – Stock Plans Note 12 – Retirement Plans Note 13 – Commitments and Contingencies Note 14 – Derivatives and Hedging Activities Note 15 – Fair Values Note 16 – Guarantees Note 17 – Common and Preferred Shares Note 18 – Changes in Accumulated Other Comprehensive (Loss) Income Note 19 – Non-Interest Revenue and Expense Detail Includes further details of: (cid:2) Other Commissions and Fees (cid:2) Other Revenues (cid:2) Marketing, Promotion, Rewards, Card Member Services and Other (cid:2) Other, Net Note 20 – Restructuring Charges Note 21 – Income Taxes Note 22 – Earnings Per Share Note 23 – Regulatory Matters and Capital Adequacy Note 24 – Significant Credit Concentrations Note 25 – Reportable Operating Segments and Geographic Operations Note 26 – Parent Company Note 27 – Quarterly Financial Data (Unaudited) PAGE 70 71 72 73 74 75 78 79 84 86 88 89 91 92 95 95 98 98 100 104 108 109 110 111 112 113 115 116 117 118 121 123 69 AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31 (Millions, except per share amounts) 2014 2013 2012 Revenues Non-interest revenues Discount revenue Net card fees Travel commissions and fees Other commissions and fees Other Total non-interest revenues Interest income Interest on loans Interest and dividends on investment securities Deposits with banks and other Total interest income Interest expense Deposits Long-term debt and other Total interest expense Net interest income Total revenues net of interest expense Provisions for losses Charge card Card member loans Other Total provisions for losses Total revenues net of interest expense after provisions for losses Expenses Marketing, promotion, rewards and Card Member services Salaries and employee benefits Other, net Total expenses Pretax income Income tax provision Net income Earnings per Common Share – (Note 22) Basic(a) Diluted Average common shares outstanding for earnings per common share: Basic Diluted $ $ $ $ $ $ $ 19,493 2,712 1,118 2,508 2,989 28,820 6,929 179 71 7,179 373 1,334 1,707 5,472 18,695 2,631 1,913 2,414 2,274 27,927 6,718 201 86 7,005 442 1,516 1,958 5,047 34,292 32,974 792 1,138 114 2,044 32,248 11,073 6,095 6,089 23,257 8,991 3,106 5,885 5.58 5.56 1,045 1,051 $ $ 648 1,115 69 1,832 31,142 10,267 6,191 6,796 23,254 7,888 2,529 5,359 4.91 4.88 1,082 1,089 17,739 2,506 1,940 2,317 2,425 26,927 6,511 246 97 6,854 480 1,746 2,226 4,628 31,555 601 1,030 81 1,712 29,843 9,944 6,597 6,851 23,392 6,451 1,969 4,482 3.91 3.89 1,135 1,141 (a) Represents net income less earnings allocated to participating share awards of $46 million, $47 million and $49 million for the years ended December 31, 2014, 2013 and 2012, respectively. See Notes to Consolidated Financial Statements. 70 AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 (Millions) Net income Other comprehensive income (loss): Net unrealized securities gains (losses), net of tax Net unrealized derivatives gains, net of tax Foreign currency translation adjustments, net of tax Net unrealized pension and other postretirement benefit (losses) gains, net of tax Other comprehensive loss Comprehensive income 2014 2013 $ 5,885 $ 5,359 $ 33 — (409) (117) (493) (252) — (336) 89 (499) 2012 4,482 27 1 (72) (7) (51) $ 5,392 $ 4,860 $ 4,431 See Notes to Consolidated Financial Statements. 71 AMERICAN EXPRESS COMPANY CONSOLIDATED BALANCE SHEETS December 31 (Millions, except per share data) Assets Cash and cash equivalents Cash and due from banks Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2014, $204; 2013, $143) $ Short-term investment securities Total cash and cash equivalents Accounts receivable Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2014, $7,025; 2013, $7,329 less reserves: 2014, $465; 2013, $386 Other receivables, less reserves: 2014, $61; 2013, $71 Loans Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2014, $30,115; 2013, $31,245), less reserves: 2014, $1,201; 2013, $1,261 Other loans, less reserves: 2014, $12; 2013, $13 Investment securities Premises and equipment, less accumulated depreciation and amortization: 2014, $6,270; 2013, $5,978 Other assets (includes restricted cash of consolidated variable interest entities: 2014, $64; 2013, $58) 2014 2013 $ 2,628 19,190 470 22,288 44,386 2,614 69,184 920 4,431 3,938 11,342 2,212 16,776 498 19,486 43,777 3,408 65,977 608 5,016 3,875 11,228 Total assets Liabilities and Shareholders’ Equity Liabilities Customer deposits Travelers Cheques and other prepaid products Accounts payable Short-term borrowings (includes debt issued by consolidated variable interest entities: 2014, nil; 2013, $2,000) Long-term debt (includes debt issued by consolidated variable interest entities: 2014, $19,516; 2013, $18,690) Other liabilities Total liabilities Commitments and Contingencies (Note 13) Shareholders’ Equity Preferred shares, $1.662/3 par value, authorized 20 million shares; issued and outstanding 750 shares as of December 31, 2014 and nil as of December 31, 2013 (Note 17) Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 1,023 million shares as of December 31, 2014 and 1,064 million shares as of December 31, 2013 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Net unrealized securities gains, net of tax of: 2014, $52; 2013, $33 Foreign currency translation adjustments, net of tax of: 2014, $(317); 2013, $(526) Net unrealized pension and other postretirement benefit losses, net of tax of: 2014, $(223); 2013, $(177) Total accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity $ $ 159,103 $ 153,375 $ 44,171 3,673 11,300 3,480 57,955 17,851 41,763 4,240 10,615 5,021 55,330 16,910 $ 138,430 $ 133,879 — 205 12,874 9,513 96 (1,499) (516) (1,919) 20,673 — 213 12,202 8,507 63 (1,090) (399) (1,426) 19,496 $ 159,103 $ 153,375 See Notes to Consolidated Financial Statements. 72 AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 (Millions) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses Depreciation and amortization Deferred taxes and other Stock-based compensation Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Other receivables Other assets Accounts payable and other liabilities Travelers Cheques and other prepaid products Premium paid on debt exchange Net cash provided by operating activities Cash Flows from Investing Activities Sales of available-for-sale investment securities Maturities and redemptions of available-for-sale investment securities Sales of other investments Purchase of investments Net increase in Card Member loans/receivables Purchase of premises and equipment, net of sales: 2014, $3; 2013, $72; 2012, $3 Acquisitions/dispositions, net of cash acquired Net decrease in restricted cash Net cash used in investing activities Cash Flows from Financing Activities Net increase in customer deposits Net (decrease) increase in short-term borrowings Issuance of long-term debt Principal payments on long-term debt Issuance of American Express preferred shares Issuance of American Express common shares Repurchase of American Express common shares Dividends paid Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information Non-cash financing activities Charge related to impact of debt exchange on long-term debt Gain on business travel joint venture transaction 2014 2013 2012 $ 5,885 $ 5,359 $ 4,482 2,044 1,012 (941) 290 (56) 650 2,594 (488) — 10,990 242 1,116 990 (886) (8,077) (1,195) (229) 72 (7,967) 2,459 (1,374) 16,020 (12,768) 742 362 (4,389) (1,041) 11 (232) 2,802 19,486 1,832 1,020 (5) 350 (73) 335 88 (359) — 8,547 217 1,292 — (1,348) (6,301) (1,006) (195) 72 (7,269) 1,195 1,843 11,995 (14,763) — 721 (3,943) (939) (3,891) (151) (2,764) 22,250 1,712 991 496 297 153 390 (358) (540) (541) 7,082 525 1,562 — (473) (6,671) (1,053) (466) 31 (6,545) 2,300 (1,015) 13,934 (14,076) — 443 (3,952) (902) (3,268) 88 (2,643) 24,893 $ $ $ 22,288 $ 19,486 $ 22,250 — 630 $ $ — — $ $ 439 — See Notes to Consolidated Financial Statements. 73 AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Three Years Ended December 31, 2014 (Millions, except per share amounts) Balances as of December 31, 2011 $ Net income Other comprehensive loss Repurchase of common shares Other changes, primarily employee plans Cash dividends declared common, $0.80 per share Balances as of December 31, 2012 Net income Other comprehensive loss Repurchase of common shares Other changes, primarily employee plans Cash dividends declared common, $0.89 per share Balances as of December 31, 2013 Net income Other comprehensive loss Preferred shares issued Repurchase of common shares Other changes, primarily employee plans Cash dividends declared common, $1.01 per share Total 18,794 4,482 (51) (4,000) 570 (909) 18,886 5,359 (499) (4,000) 717 (967) 19,496 5,885 (493) 742 (4,378) 476 (1,055) Preferred Shares Common Shares Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) $ — $ 232 $ 12,217 $ (876) $ (14) 3 (765) 615 — 221 12,067 (11) 3 (648) 783 (51) (927) (499) — 213 12,202 (1,426) (10) 2 742 (604) 534 (493) Retained Earnings 7,221 4,482 (3,221) (48) (909) 7,525 5,359 (3,341) (69) (967) 8,507 5,885 (3,764) (60) (1,055) Balances as of December 31, 2014 $ 20,673 $ — $ 205 $ 12,874 $ (1,919) $ 9,513 See Notes to Consolidated Financial Statements. 74 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. After June 30, 2014, business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). Until June 30, 2014, the business travel operations were wholly owned. The Company also focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Significant intercompany transactions are eliminated. The Company consolidates entities in which it holds a “controlling financial interest.” For voting interest entities, the Company is considered to hold a controlling financial interest when it is able to exercise control over the investees’ operating and financial decisions. For variable interest entities (VIEs), it is considered to hold a controlling financial interest when it is determined to be the primary beneficiary. A primary beneficiary is the party that has both: (1) the power to direct the activities that most significantly impact that entity’s economic performance, and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity’s equity. Entities in which the Company’s voting interest in common equity does not provide it with control, but allows the Company to exert significant influence over the operating and financial decisions, are accounted for under the equity method. All other investments in equity securities, to the extent that they are not considered marketable securities, are accounted for under the cost method. FOREIGN CURRENCY Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each year. The resulting translation adjustments, along with any related qualifying hedge and tax effects, are included in accumulated other comprehensive income (loss) (AOCI), a component of shareholders’ equity. Translation adjustments, including qualifying hedge and tax effects, are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to transactions in a currency other than the functional currency, including operations outside the U.S. where the functional currency is the U.S. dollar, are reported net in the Company’s Consolidated Statements of Income, in other non-interest revenue, interest income, interest expense, or other expenses, depending on the nature of the activity. Net foreign currency transaction gains amounted to approximately $44 million, $108 million and $120 million in 2014, 2013 and 2012, respectively. AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for Card Member losses on loans and receivables, the proprietary point liability for Membership Rewards costs, fair value measurement, goodwill and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ. 75 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TOTAL REVENUES NET OF INTEREST EXPENSE Discount Revenue Discount revenue represents the amount earned by the Company on transactions occurring at merchants with which the Company, or a Global Network Services (GNS) partner, has entered into card acceptance agreements for facilitating transactions between the merchants and the Company’s Card Members. The discount fee generally is deducted from the payment to the merchant and recorded as discount revenue at the time the charge is captured. Net Card Fees Card fees, net of direct card acquisition costs and a reserve for projected membership cancellations, are deferred and recognized on a straight-line basis over the 12-month card membership period as Net Card Fees in the Consolidated Statements of Income. The unamortized net card fee balance is reported net in Other Liabilities on the Consolidated Balance Sheets (refer to Note 10). Travel Commissions and Fees The Company earns travel commissions and fees by charging clients transaction or management fees for selling and arranging travel and for travel management services. Client transaction fee revenue is recognized at the time the client books the travel arrangements. Travel management services revenue is recognized over the contractual term of the agreement. The Company’s travel suppliers (e.g., airlines, hotels and car rental companies) pay commissions and fees on tickets issued, sales and other services based on contractual agreements. Commissions and fees from travel suppliers are generally recognized at the time a ticket is purchased or over the term of the contract. Commissions and fees that are based on services rendered (e.g., hotel stays and car rentals) are recognized based on usage. Other Commissions and Fees Other commissions and fees include foreign currency conversion fees, Card Member delinquency fees, service fees and other card-related assessments, which are recognized primarily in the period in which they are charged to the Card Member (refer to Note 19). In addition, service fees are also earned from other customers (e.g., merchants) for a variety of services and are recognized when the service is performed, which is generally in the period the fee is charged. Also included are fees related to the Company’s Membership Rewards program, which are deferred and recognized over the period covered by the fee. The unamortized Membership Rewards fee balance is included in Other Liabilities on the Consolidated Balance Sheets (refer to Note 10). Contra-revenue The Company regularly makes payments through contractual arrangements with merchants, corporate payments clients, Card Members and certain other customers. Payments to such customers, including cash rebates paid to Card Members, are generally classified as contra- revenue unless a specifically identifiable benefit (e.g., goods or services) is received by the Company or its Card Members in consideration for that payment, and the fair value of such benefit is determinable and measurable. If no such benefit is identified, then the entire payment is classified as contra-revenue and included in the Consolidated Statements of Income in the revenue line item where the related transactions are recorded (e.g., discount revenue, travel commissions and fees and other commissions and fees). If such a benefit is identified, then the payment is classified as expense up to the estimated fair value of the benefit. Interest Income Interest on Card Member loans is assessed using the average daily balance method. Unless the loan is classified as non-accrual, interest is recognized based upon the outstanding balance, in accordance with the terms of the applicable account agreement, until the outstanding balance is paid or written off. Interest and dividends on investment securities primarily relates to the Company’s performing fixed-income securities. Interest income is accrued as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that a constant rate of return is recognized on the investment security’s outstanding balance. Amounts are recognized until such time as a security is in default or when it is likely that future interest payments will not be received as scheduled. Interest on deposits with banks and other is recognized as earned, and primarily relates to the placement of cash in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts. 76 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest Expense Interest expense includes interest incurred primarily to fund Card Member loans, charge card product receivables, general corporate purposes, and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) long-term debt and other, which primarily relates to interest expense on the Company’s long-term financing and short-term borrowings, and the realized impact of derivatives hedging interest rate risk. BALANCE SHEET Cash and Cash Equivalents Cash and cash equivalents include cash and amounts due from banks, interest-bearing bank balances, including securities purchased under resale agreements, and other highly liquid investments with original maturities of 90 days or less. Premises and Equipment Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation. Costs incurred during construction are capitalized and are depreciated once an asset is placed in service. Depreciation is generally computed using the straight-line method over the estimated useful lives of assets, which range from 3 to 10 years for equipment, furniture and building improvements. Premises are depreciated based upon their estimated useful life at the acquisition date, which generally ranges from 30 to 50 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the remaining term of the leased facility or the economic life of the improvement, which ranges from 5 to 10 years. The Company maintains operating leases worldwide for facilities and equipment. Rent expense for facility leases is recognized ratably over the lease term, and includes adjustments for rent concessions, rent escalations and leasehold improvement allowances. The Company recognizes lease restoration obligations at the fair value of the restoration liabilities when incurred, and amortizes the restoration assets over the lease term. The Company capitalizes certain costs associated with the acquisition or development of internal-use software. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s estimated useful life, generally 5 years. OTHER SIGNIFICANT ACCOUNTING POLICIES The following table identifies the Company’s other significant accounting policies, the Note and page where the Note can be found. Significant Accounting Policy Accounts Receivable Loans Reserves for Losses Investment Securities Asset Securitizations Goodwill and Other Intangible Assets Membership Rewards Stock-based Compensation Retirement Plans Legal Contingencies Note Number Note Title Note 3 Accounts Receivable and Loans Note 3 Accounts Receivable and Loans Note 4 Reserves for Losses Note 5 Investment Securities Note 6 Asset Securitizations Note 7 Other Assets Note 10 Other Liabilities Note 11 Stock Plans Note 12 Retirement Plans Note 13 Commitments and Contingencies Derivative Financial Instruments and Hedging Activities Note 14 Derivatives and Hedging Activities Fair Value Measurements Income Taxes Note 15 Fair Values Note 21 Income Taxes Regulatory Matters and Capital Adequacy Note 23 Regulatory Matters and Capital Adequacy Reportable Operating Segments Note 25 Reportable Operating Segments and Geographic Operations Page Page 79 Page 79 Page 84 Page 86 Page 88 Page 89 Page 95 Page 95 Page 98 Page 98 Page 100 Page 104 Page 113 Page 116 Page 118 77 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RECENTLY ISSUED ACCOUNTING STANDARDS Accounting Standards Update (ASU) No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers was issued on May 28, 2014. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance supersedes most of the current revenue recognition requirements, and will be effective January 1, 2017. The Company is currently evaluating the impact this guidance, including the method of implementation, will have on its financial position, results of operations and cash flows, among other items. ASU No. 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects was issued on January 15, 2014. Provided certain conditions are met, this standard permits entities to account for investments in qualified affordable housing projects using the proportional amortization method, which results in amortizing the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizing the net investment performance in the income statement as a component of income tax expense. Additionally, the standard requires new disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. The standard, which is to be retrospectively applied, is effective January 1, 2015, and if adopted is not expected to have a material impact on the Company’s financial position or results of operations upon adoption. CLASSIFICATION OF VARIOUS ITEMS Certain reclassifications of prior period amounts have been made to conform to the current period presentation. These reclassifications did not have a material impact on the Company’s financial position, results of operations or cash flows. NOTE 2 ACQUISITIONS AND DIVESTITURES GLOBAL BUSINESS TRAVEL On June 30, 2014, the Company completed a transaction to establish a non-consolidated joint venture, GBT JV, comprising the former Global Business Travel (GBT) operations of the Company and an external cash investment. Historically, the Company reported the GBT operations within the Global Commercial Services (GCS) segment. The Company has retained a 50 percent ownership interest in the GBT JV with an estimated fair value of that interest of approximately $900 million, which is accounted for as an equity method investment effective June 30, 2014 and reported in other assets within the Consolidated Balance Sheet. In exchange for a cash contribution of $900 million paid into the GBT JV, an unrelated investor group holds the remaining 50 percent ownership interest. The investor group’s cash contribution provides the primary basis for the Company’s determination of the estimated fair value of its 50 percent ownership interest at June 30, 2014. As a result of this transaction, the Company deconsolidated the GBT net assets and for the year ended December 31, 2014, recognized a net gain of $630 million ($412 million after-tax), as a reduction to other expense. The Company recognized $626 million ($409 million after- tax) in the second quarter and subsequently recognized the remaining closing-related amounts in the third and fourth quarters. Prior to the deconsolidation, the carrying amount of GBT’s assets and liabilities were not material to the Company’s financial position. The GBT JV operates under the “American Express Global Business Travel” brand, pursuant to a trademark license agreement provided by the Company. The Company has also entered into a transition services agreement and certain other operating agreements with the GBT JV, pursuant to which the Company and the GBT JV provide one another with certain services and that result in related-party receivables and payables. There was no material impact to the Company during the year ended December 31, 2014, related to the GBT JV’s results of operations or the Company’s agreements with the GBT JV. LOYALTY PARTNER In conjunction with the March 1, 2011 acquisition of a controlling interest in Loyalty Partner, the Company had an option to acquire the remaining non-controlling equity interest (NCI) in the future. In November 2013, the Company entered into an agreement to extinguish a portion of the NCI in its Loyalty Partner subsidiary, in exchange for a cash payment of $132 million and to convert the remaining NCI to an option that is accounted for as a long-term liability with an initial value of $121 million. The Company reduced equity by $107 million in connection with this agreement. 78 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 ACCOUNTS RECEIVABLE AND LOANS The Company’s charge and lending payment card products result in the generation of Card Member receivables and Card Member loans, respectively. CARD MEMBER AND OTHER RECEIVABLES Card Member receivables, representing amounts due on charge card products, are recorded at the time a Card Member enters into a point- of-sale transaction with a merchant. Each charge card transaction is authorized based on its likely economics, a Card Member’s most recent credit information and spend patterns. Additionally, global spend limits are established to limit the maximum exposure for the Company. Charge Card Members generally must pay the full amount billed each month. Card Member receivable balances are presented on the Consolidated Balance Sheets net of reserves for losses (refer to Note 4), and include principal and any related accrued fees. Accounts receivable by segment as of December 31, 2014 and 2013 consisted of: (Millions) U.S. Card Services(a) International Card Services Global Commercial Services(b) Global Network & Merchant Services(c) Card Member receivables(d) Less: Reserve for losses Card Member receivables, net Other receivables, net(e) 2014 22,468 7,653 14,583 147 44,851 465 44,386 2,614 $ $ $ $ $ $ 2013 21,842 7,771 14,391 159 44,163 386 43,777 3,408 (a) Includes $7.0 billion and $7.3 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of December 31, 2014 and 2013, respectively. (b) Includes $636 million and $836 million due from airlines, of which Delta Air Lines (Delta) comprises $606 million and $628 million as of December 31, 2014 and 2013, respectively. (c) Includes receivables primarily related to the Company’s International Currency Card portfolios. (d) Includes approximately $13.3 billion and $13.8 billion of Card Member receivables outside the U.S. as of December 31, 2014 and 2013, respectively. (e) Other receivables primarily represent amounts related to (i) certain merchants for billed discount revenue and (ii) GNS partner banks for items such as royalty and franchise fees. Additionally, for 2013, the balance also included purchased GNS joint venture receivables. Other receivables are presented net of reserves for losses of $61 million and $71 million as of December 31, 2014 and 2013, respectively. CARD MEMBER AND OTHER LOANS Card Member loans, representing revolving amounts due on lending card products, are recorded at the time a Card Member enters into a point-of-sale transaction with a merchant, as well as amounts due from charge Card Members who utilize the lending-on-charge feature on their account and elect to revolve a portion of the outstanding balance by entering into a revolving payment arrangement with the Company. These loans have a range of terms such as credit limits, interest rates, fees and payment structures, which can be revised over time based on new information about Card Members and in accordance with applicable regulations and the respective product’s terms and conditions. Card Members holding revolving loans are typically required to make monthly payments based on pre-established amounts. The amounts that Card Members choose to revolve are subject to finance charges. Card Member loans are presented on the Consolidated Balance Sheets net of reserves for losses (refer to Note 4), and include principal, accrued interest and fees receivable. The Company’s policy generally is to cease accruing interest on a Card Member loan at the time the account is written off, and establish reserves for interest that the Company believes will not be collected. 79 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans by segment as of December 31, 2014 and 2013 consisted of: (Millions) U.S. Card Services(a) International Card Services Global Commercial Services Card Member loans Less: Reserve for losses Card Member loans, net Other loans, net(b) 2014 62,592 7,744 49 70,385 1,201 69,184 920 $ $ $ $ $ $ 2013 58,395 8,790 53 67,238 1,261 65,977 608 (a) Includes approximately $30.1 billion and $31.2 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of December 31, 2014 and 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 $12 million and $13 million as of December 31, 2014 and 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 December 31, 2014 and 2013: 2014 (Millions) Card Member Loans: U.S. Card Services International Card Services Card Member Receivables: U.S. Card Services International Card Services(a) Global Commercial Services 2013 (Millions) Card Member Loans: U.S. Card Services International Card Services Card Member Receivables: U.S. Card Services International Card Services Global Commercial Services 30-59 Days Past Due 179 39 129 29 (b) 30-59 Days Past Due 183 43 125 (b) (b) $ $ $ $ 60-89 Days Past Due 128 27 72 20 (b) 60-89 Days Past Due 134 28 69 (b) (b) $ $ $ $ 90+ Days Past Due 290 57 171 47 120 90+ Days Past Due 306 55 160 83 132 $ $ $ $ Total 62,592 7,744 22,468 7,653 14,583 Total 58,395 8,790 21,842 7,771 14,391 $ $ $ $ Current 61,995 7,621 22,096 7,557 (b) Current 57,772 8,664 21,488 (b) (b) $ $ $ $ (a) Beginning in the 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 December 31, 2014 and ICS and GCS as of December 31, 2013, delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes. 80 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CREDIT QUALITY INDICATORS FOR CARD MEMBER LOANS AND RECEIVABLES The following tables present the key credit quality indicators as of or for the years ended December 31: Card Member Loans: U.S. Card Services International Card Services(b) Card Member Receivables: U.S. Card Services International Card Services(b) Card Member Receivables: International Card Services Global Commercial Services 2014 Net Write-Off Rate Principal Only(a) Principal, Interest, & Fees(a) 1.5% 2.0% 1.6% 1.9% 1.7% 2.4% 1.8% 2.1% 30 Days Past Due as a % of Total 1.0% 1.6% 1.7% 1.3% 2013 Net Write-Off Rate Principal Only(a) Principal, Interest, & Fees(a) 1.8% 1.9% 1.7% (c) 2.0% 2.3% 1.9% (c) 30 Days Past Due as a % of Total 1.1% 1.4% 1.6% (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 (c) 0.09% (c) 0.8% 0.20% 0.08% 1.1% 0.9% (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 the 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 4 for additional indicators, including external environmental qualitative factors, management considers in its monthly evaluation process for reserves for losses. IMPAIRED CARD MEMBER LOANS AND RECEIVABLES Impaired loans and receivables are 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. The Company considers impaired loans and receivables to include: (i) loans over 90 days past due still accruing interest, (ii) non- accrual loans and (iii) loans and receivables modified as troubled debt restructurings (TDRs). The Company may modify, through various company sponsored programs, Card Member loans and receivables in instances where the Card Member is experiencing financial difficulty in order to minimize losses and improve collectability while providing Card Members with temporary or permanent financial relief. The Company has classified Card Member loans and receivables in these modification programs as TDRs. Such modifications to the loans and receivables primarily include (i) temporary interest rate reductions (possibly as low as zero percent, in which case the loan is characterized as non-accrual in the Company’s TDR disclosures), (ii) placing the Card Member on a fixed payment plan not to exceed 60 months and (iii) suspending delinquency fees until the Card Member exits the modification program. Upon entering the modification program, the Card Member’s ability to make future purchases is either cancelled or in certain cases suspended until the Card Member successfully exits the modification program. In accordance with the modification agreement with the Card Member, loans may revert back to the original contractual terms (including the contractual interest rate) when the Card Member exits the modification program, which is (i) when all payments have been made in accordance with the modification agreement or, (ii) when the Card Member defaults out of the modification program. The Company establishes a reserve for Card Member interest charges and fees considered to be uncollectible. 81 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reserves for Card Member loans and receivables modified as TDRs are determined as the difference between the cash flows expected to be received from the Card Member (taking into consideration the probability of subsequent defaults), discounted at the original effective interest rates, and the carrying value of the Card Member loan or receivable balance. The Company determines the original effective interest rate as the interest rate in effect prior to the imposition of any penalty interest rate. All changes in the impairment measurement are included in the provision for losses in the Consolidated Statements of Income. The following table provides additional information with respect to the Company’s impaired Card Member loans, which are not significant for GCS, and Card Member receivables, which are not significant for ICS and GCS, as of or for the years ended December 31: As of December 31, 2014 For the Year Ended December 31, 2014 Loans over 90 Days Past Due & Accruing Interest(a) Non- Accrual Loans(b) Loans & Receivables Modified as a TDR(c) Total Impaired Loans & Receivables Unpaid Principal Balance(d) Allowance for TDRs(e) Average Balance of Impaired Loans Interest Income Recognized $ $ $ 161 57 — $ 241 — — $ 286 — 48 $ 688 57 48 $ 646 56 48 $ 67 — 35 $ 750 62 47 218 $ 241 $ 334 $ 793 $ 750 $ 102 $ 859 $ 49 16 — 65 As of December 31, 2013 For the Year Ended December 31, 2013 Loans over 90 Days Past Due & Accruing Interest(a) Non- Accrual Loans(b) Loans & Receivables Modified as a TDR(c) Total Impaired Loans & Receivables Unpaid Principal Balance(d) Allowance for TDRs(e) Average Balance of Impaired Loans Interest Income Recognized $ $ $ 167 54 — $ 294 4 — $ 351 5 50 $ 812 63 50 $ 775 62 49 221 $ 298 $ 406 $ 925 $ 886 $ 78 — 38 116 $ $ 948 67 81 $ 1,096 $ 46 16 — 62 As of December 31, 2012 For the Year Ended December 31, 2012 Loans over 90 Days Past Due & Accruing Interest(a) Non- Accrual Loans(b) Loans & Receivables Modified as a TDR(c) Total Impaired Loans & Receivables Unpaid Principal Balance(d) Allowance for TDRs(e) Average Balance of Impaired Loans Interest Income Recognized $ $ $ 73 59 — $ 426 5 — 627 6 117 $ $ 1,126 70 1,073 69 $ 117 111 152 1 91 $ $ 1,221 75 135 132 $ 431 $ 750 $ 1,313 $ 1,253 $ 244 $ 1,431 $ 47 16 — 63 2014 (Millions) Card Member Loans: U.S. Card Services International Card Services Card Member Receivables: U.S. Card Services Total 2013 (Millions) Card Member Loans: U.S. Card Services(f) International Card Services Card Member Receivables: U.S. Card Services Total 2012 (Millions) Card Member Loans: U.S. Card Services International Card Services Card Member Receivables: U.S. Card Services Total (a) The Company’s policy is generally to accrue interest through the date of write-off (i.e. 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 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 $34 million, $43 million and $320 million that are non-accrual and $26 million, $29 million and $6 million that are past due 90 days and still accruing interest as of December 31, 2014, 2013 and 2012, respectively. (d) Unpaid principal balance consists of Card Member charges billed and excludes other amounts charged directly by the Company such as interest and fees. (e) Represents the reserve for losses for TDRs, which are evaluated individually for impairment. The Company records a reserve for losses for all impaired loans. Refer to Card Member Loans Evaluated Individually and Collectively for Impairment in Note 4 for further disclosures regarding the reserve for losses on loans over 90 days past due and accruing interest and non-accrual loans, which are evaluated collectively for impairment. (f) For the year 2013, certain amounts and their related reserves have been reclassified between Non-Accrual Loans & Receivables Modified as TDR. 82 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CARD MEMBER LOANS AND RECEIVABLES MODIFIED AS TDRS The following table provides additional information with respect to the U.S. Card Services (USCS) Card Member loans and receivables modified as TDRs for the years ended December 31. The ICS and GCS Card Member loans and receivables modifications were not significant. 2014 Troubled Debt Restructurings: Card Member Loans Card Member Receivables Total 2013 Troubled Debt Restructurings: Card Member Loans Card Member Receivables Total 2012 Troubled Debt Restructurings: Card Member Loans Card Member Receivables Total Number of Accounts (in thousands) Outstanding Balances(a,b) ($ in millions) Average Interest Rate Reduction (% points) Average Payment Term Extensions (# of months) 46 15 61 Number of Accounts (in thousands) 60 20 80 Number of Accounts (in thousands) 106 37 143 $ $ $ $ $ $ 342 176 518 10 (c) (c) 12 Outstanding Balances(a,b) ($ in millions) Average Interest Rate Reduction (% points) Average Payment Term Extensions (# of months) 448 247 695 10 (c) (c) 12 Outstanding Balances(a,b) ($ in millions) Average Interest Rate Reduction (% points) Average Payment Term Extensions (# of months) 779 425 1,204 12 (c) (c) 13 (a) Represents the outstanding balance immediately prior to modification. In certain modifications, the principal balance was reduced in the aggregate amount of $4 million and $24 million for the years ended December 31, 2013 and 2012, respectively. Modifications did not reduce the aggregate principal balance for the year ended December 31, 2014. (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. 83 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information for the years ended December 31, 2014, 2013 and 2012, 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 in default from a modification program after one and up to two consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables. The defaulted ICS Card Member loan and receivable modifications were not significant. 2014 (Accounts in thousands, Dollars in millions) Troubled Debt Restructurings That Subsequently Defaulted: Card Member Loans Card Member Receivables Total 2013 (Accounts in thousands, Dollars in millions) Troubled Debt Restructurings That Subsequently Defaulted: Card Member Loans Card Member Receivables Total 2012 (Accounts in thousands, Dollars in millions) Troubled Debt Restructurings That Subsequently Defaulted: Card Member Loans Card Member Receivables Total Aggregated Outstanding Balances Upon Default(a) Number of Accounts 10 3 13 $ $ 85 44 129 Aggregated Outstanding Balances Upon Default(a) Number of Accounts 18 3 21 $ $ 159 38 197 Aggregated Outstanding Balances Upon Default(a) Number of Accounts 23 1 24 $ $ 182 37 219 (a) The outstanding balance includes principal, fees, and accrued interest on Card Member loans and principal and fees on Card Member receivables. NOTE 4 RESERVES FOR LOSSES Reserves for losses relating to Card Member loans and receivables represent management’s best estimate of the probable inherent losses in the Company’s outstanding portfolio of loans and receivables, as of the Balance Sheet date. Management’s evaluation process requires certain estimates and judgments. Reserves for losses are primarily based upon statistical and analytical models that analyze portfolio performance and reflect management’s judgment regarding the quantitative components of the reserve. The models take into account several factors, including delinquency based loss migration rates, loss emergence periods and average losses and recoveries over an appropriate historical period. Management considers whether to adjust the quantitative reserves for certain external and internal qualitative factors, which may increase or decrease the reserves for losses on Card Member loans and receivables. External factors include employment, spend, sentiment, housing and credit, and changes in the legal and regulatory environment while internal factors include increased risk in certain portfolios, impact of risk management initiatives, changes in underwriting requirements and overall process stability. As part of this evaluation process, management also considers various reserve coverage metrics, such as reserves as a percentage of past due amounts, reserves as a percentage of Card Member receivables or loans and net write-off coverage ratios. Card Member loans and receivables balances are written off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due. Card Member loans and receivables in bankruptcy or owed by deceased individuals are generally written off upon notification, and recoveries are recognized as they are collected. 84 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHANGES IN CARD MEMBER RECEIVABLES RESERVE FOR LOSSES The following table presents changes in the Card Member receivables reserve for losses for the years ended December 31: (Millions) Balance, January 1 Provisions(a) Net write-offs(b) Other(c) Balance, December 31 $ 2014 386 792 (683) (30) $ 2013 428 648 (669) (21) 465 $ 386 $ $ $ 2012 438 601 (640) 29 428 (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 $358 million, $402 million and $383 million, including net write-offs from TDRs of $15 million, $12 million and $87 million, for the years ended December 31, 2014, 2013 and 2012, respectively. (c) Beginning in the first quarter 2014, reserves for card-related fraud losses of $(7) million are included in Other liabilities. Also includes foreign currency translation adjustments of $(15) million, $(4) million and $2 million for the years ended December 31, 2014, 2013 and 2012, respectively; a reclassification of Card Member bankruptcy reserves of $18 million from Other liabilities to credit reserves in 2012 only and other items of $(8) million, $(17) million and $9 million for the years ended December 31, 2014, 2013 and 2012, 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 December 31: (Millions) Card Member receivables evaluated individually for impairment(a) Related reserves(a) Card Member receivables evaluated collectively for impairment Related reserves(b) 2014 48 35 44,803 430 $ $ $ $ $ $ $ $ 2013 50 38 44,113 348 $ $ $ $ 2012 117 91 42,649 337 (a) Represents receivables modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 3 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. CHANGES IN CARD MEMBER LOANS RESERVE FOR LOSSES The following table presents changes in the Card Member loans reserve for losses for the years ended December 31: (Millions) Balance, January 1 Provisions(a) Net write-offs Principal(b) Interest and fees(b) Other(c) Balance, December 31 $ 2014 1,261 1,138 $ (1,023) (164) (11) $ 2013 1,471 1,115 (1,141) (150) (34) $ 1,201 $ 1,261 $ 2012 1,874 1,030 (1,280) (157) 4 1,471 (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 $428 million, $452 million and $493 million, including net write-offs from TDRs of $(10) million, $(1) million and $25 million, for the years ended December 31, 2014, 2013 and 2012, respectively. Recoveries of interest and fees were de minimis. (c) Beginning in the first quarter 2014, reserves for card-related fraud losses of $(6) million are included in Other liabilities. Also includes foreign currency translation adjustments of $(17) million, $(12) million and $7 million for the years ended December 31, 2014, 2013 and 2012, respectively, a reclassification of Card Member bankruptcy reserves of $4 million from Other liabilities to credit reserves in 2012 only and other items of $12 million, $(22) million and $(7) million for the years ended December 31, 2014, 2013 and 2012, respectively. 85 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31: (Millions) Card Member loans evaluated individually for impairment(a) Related reserves(a) Card Member loans evaluated collectively for impairment(b) Related reserves(b) 2014 286 67 70,100 1,134 $ $ $ $ 2013 356 78 66,882 1,183 $ $ $ $ $ $ $ $ 2012 633 153 64,596 1,318 (a) Represents loans modified in a TDR and related reserves. Refer to the Impaired Card Member Loans and Receivables discussion in Note 3 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. NOTE 5 INVESTMENT SECURITIES Investment securities include debt and equity securities that the Company classifies as available-for-sale. The Company’s investment securities, principally debt securities, are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in 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. Refer to Note 15 for a description of the Company’s methodology for determining the fair value of investment securities. The following is a summary of investment securities as of December 31: Description of Securities (Millions) State and municipal obligations U.S. Government agency obligations U.S. Government treasury obligations Corporate debt securities Mortgage-backed securities(a) Equity securities(b) Foreign government bonds and obligations Other(c) Total 2014 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ $ 129 — 4 3 8 1 9 — $ (2) $ — — — — — — (1) 3,493 3 350 40 136 1 359 49 Cost 4,060 3 318 43 160 29 272 50 $ Cost 3,366 3 346 37 128 — 350 50 2013 2012 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Estimated Fair Value $ 54 — 3 3 5 95 5 — $ (79) $ — (1) — (1) — (1) (2) $ 4,035 3 320 46 164 124 276 48 4,474 3 338 79 224 296 149 51 $ 4,280 $ 154 $ (3) $ 4,431 $ 4,935 $ 165 $ (84) $ 5,016 $ 5,614 (a) Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. (b) Primarily represents the Company’s investment in the Industrial and Commercial Bank of China (ICBC) as of December 31, 2013 and 2012. (c) Other comprises investments in various mutual funds. The following table provides information about the Company’s investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of December 31: Description of Securities (Millions) State and municipal obligations Foreign government bonds and obligations U.S. Government treasury obligations Mortgage-backed securities Other Total 2014 2013 Less than 12 months 12 months or more Less than 12 months 12 months or more Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses $ $ — $ — — — — — $ — $ — — — — — $ 86 $ 72 — — — 33 $ (2) $ — — — (1) 1,320 208 166 35 30 (63) $ (1) (1) (1) (1) 105 $ (3) $ 1,759 $ (67) $ 106 — — — 17 123 $(16) — — — (1) $(17) AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of December 31: 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 Less than 12 months 12 months or more Total 2014: 90%–100% Total as of December 31, 2014 2013: 90%–100% Less than 90% Total as of December 31, 2013 — $ — $ — $ — $ 228 13 241 $ $ 1,665 94 1,759 $ $ — — (53) (14) (67) 15 15 6 5 11 $ $ $ $ 105 105 24 99 123 $ $ $ $ (3) (3) (2) (15) (17) 15 15 234 18 252 $ $ $ $ 105 105 1,689 193 1,882 $ $ $ $ (3) (3) (55) (29) (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 identified above, (i) the Company does not intend to sell the investment securities, (ii) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (iii) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the periods presented. SUPPLEMENTAL INFORMATION Contractual maturities and weighted average yields for investment securities, excluding equity securities and other securities, as of December 31, 2014 were as follows: (Millions) State and municipal obligations(a) U.S. Government agency obligations U.S. Government treasury obligations Corporate debt securities Mortgage-backed securities(a) Foreign government bonds and obligations Total Estimated Fair Value Total Cost Weighted average yields(b)(c) Due within 1 year Due after 1 year but within 5 years Due after 5 years but within 10 years Due after 10 years $ $ $ $ $ $ 182 — 66 6 — 307 561 560 2.50% $ $ $ 74 — 264 34 2 7 381 374 2.07% $ $ $ 233 — 8 — — — 241 225 6.71% $ 3,004 3 12 — 134 45 3,198 3,071 6.81% Total 3,493 3 350 40 136 359 4,381 4,230 (a) 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. (b) Average yields for investment securities have been calculated using the effective yield on the date of purchase. (c) Yields on tax-exempt investment securities have been computed on a tax-equivalent basis using the U.S. federal statutory tax rate of 35 percent. 87 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 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. Card Member receivables are transferred to the American Express Issuance Trust II (the Charge Trust). Card Member loans are transferred to the American Express Credit Account Master Trust (the Lending Trust). The Charge Trust and the Lending Trust are consolidated by American Express Travel Related Services Company, Inc. (TRS), which is a consolidated subsidiary of the Company. The trusts are considered VIEs as they have insufficient equity at risk to finance their activities, which are to issue securities that are collateralized by the underlying Card Member receivables and loans. Details on the principles of consolidation can be found in the summary of significant accounting policies (refer to Note 1). TRS, in its role as servicer of the Charge Trust and the Lending Trust, has the power to direct the most significant activity of the trusts, which is the collection of the underlying Card Member receivables and loans in the trusts. In addition, TRS, excluding its consolidated subsidiaries, owns approximately $1.2 billion of subordinated securities issued by the Lending Trust as of December 31, 2014. These subordinated securities have the obligation to absorb losses of the Lending Trust and provide the right to receive benefits from the Lending Trust, both of which are significant to the VIE. TRS’ role as servicer for the Charge Trust does not provide it with a significant obligation to absorb losses or a significant right to receive benefits. However, TRS’ position as the parent company of the entities that transferred the receivables to the Charge Trust makes it the party most closely related to the Charge Trust. Based on these considerations, TRS is the primary beneficiary of both the Charge Trust and the Lending Trust. The debt securities issued by the Charge Trust and the Lending Trust are non-recourse to the Company. Securitized Card Member receivables and loans held by the Charge Trust and the Lending Trust are available only for payment of the debt securities or other obligations issued or arising in the securitization transactions (refer to Note 3). The long-term debt of each trust is payable only out of collections on their respective underlying securitized assets (refer to Note 9). The following table presents the restricted cash held by the Charge Trust and the Lending Trust as of December 31, 2014 and 2013, included in Other Assets on the Company’s Consolidated Balance Sheets: (Millions) Charge Trust Lending Trust Total 2014 2 62 64 $ $ $ $ 2013 2 56 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. 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 certificates. During the year ended December 31, 2014, no such triggering events occurred. 88 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 OTHER ASSETS The following is a summary of other assets as of December 31: (Millions) Goodwill Deferred tax assets, net(a) Prepaid expenses(b) Other intangible assets, at amortized cost Derivative assets(a) Restricted cash(c) Other Total $ $ 2014 3,024 2,110 1,626 854 711 384 2,633 2013 3,198 2,443 1,998 817 329 486 1,957 $ 11,342 $ 11,228 (a) Refer to Notes 21 and 14 for a discussion of deferred tax assets, net and derivative assets, respectively, as of December 31, 2014 and 2013. Derivative assets reflect the impact of master netting agreements. For 2014, $96 million of foreign deferred tax liabilities is reflected in Other Liabilities. (b) Includes prepaid miles and reward points acquired primarily from airline partners of approximately $1.1 billion and $1.5 billion as of December 31, 2014 and 2013, respectively, including approximately $0.6 billion and $0.9 billion, respectively, from Delta. (c) Includes restricted cash of approximately $64 million and $58 million as of December 31, 2014 and 2013, respectively, which is primarily held for coupon and certain asset-backed securitization maturities. GOODWILL Goodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired and liabilities assumed. The Company assigns goodwill to its reporting units for the purpose of impairment testing. A reporting unit is defined as an operating segment, or a business that is one level below an operating segment for which discrete financial information is regularly reviewed by the operating segment manager. The Company evaluates goodwill for impairment annually as of June 30 and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The goodwill impairment test utilizes a two-step approach. The first step in the impairment test identifies whether there is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss. As of December 31, 2014 and 2013, goodwill was not impaired and there were no accumulated impairment losses. Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value using widely accepted valuation techniques. The Company uses a combination of the income approach (discounted cash flows) and market approach (market multiples). When preparing discounted cash flow models under the income approach, the Company uses internal forecasts to estimate future cash flows expected to be generated by the reporting units. Actual results may differ from forecasted results. The Company calculates discount rates based on the expected cost of equity financing, estimated using a capital asset pricing model, to discount future cash flows for each reporting unit. The Company believes the discount rates used appropriately reflect the risks and uncertainties in the financial markets generally and specifically in the Company’s internally developed forecasts. When using market multiples under the market approach, the Company applies comparable publically traded companies’ multiples (e.g. earnings, revenues) to its reporting units’ actual results. The changes in the carrying amount of goodwill reported in the Company’s reportable operating segments and Corporate & Other were as follows: (Millions) Balance as of January 1, 2013 Acquisitions Dispositions Other, including foreign currency translation Balance as of December 31, 2013 Acquisitions Dispositions Other, including foreign currency translation Balance as of December 31, 2014 USCS $ $ 175 — — (1) 174 — — — $ $ ICS 1,031 — — 21 1,052 — — (70) $ $ GCS 1,544 — — (1) 1,543 — (102) — GNMS Corporate & Other $ $ 160 — — — 160 — — — $ $ 271 — — (2) 269 — — (2) Total 3,181 — — 17 3,198 — (102) (72) 174 $ 982 $ 1,441 $ 160 $ 267 $ 3,024 $ $ $ 89 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER INTANGIBLE ASSETS Intangible assets, primarily customer relationships, are amortized over their estimated useful lives of 3 to 22 years on a straight-line basis. The Company reviews intangible assets for impairment quarterly and whenever events and circumstances indicate their carrying amounts may not be recoverable. In addition, on an annual basis, the Company performs an impairment evaluation of all intangible assets by assessing the recoverability of the asset values based on the cash flows generated by the relevant assets or asset groups. An impairment is recognized if the carrying amount is not recoverable and exceeds the asset’s fair value. The components of other intangible assets were as follows: (Millions) Customer relationships(a) Other Total 2014 2013 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount $ $ 1,455 255 1,710 $ $ (754) (102) (856) $ $ 701 153 854 $ $ 1,297 269 1,566 $ $ (660) (89) (749) $ $ 637 180 817 (a) Includes net intangibles acquired from airline partners of $340 million and $290 million as of December 31, 2014 and 2013, respectively, including approximately $206 million and $117 million, respectively, from Delta. Amortization expense for the years ended December 31, 2014, 2013 and 2012 was $174 million, $193 million and $198 million, respectively. Intangible assets acquired in 2014 and 2013 are being amortized, on average, over 7 and 6 years, respectively. Estimated amortization expense for other intangible assets over the next five years is as follows: (Millions) Estimated amortization expense 2015 2016 2017 2018 $ 158 $ 134 $ 117 $ 109 $ 2019 87 OTHER The Company had $622 million and $541 million in affordable housing and other tax credit investment partnership interests as of December 31, 2014 and 2013, respectively, included in other assets in the table above. The Company is a non-controlling partner in these tax credit investment partnerships, and therefore accounts for its ownership interests as equity method investment joint ventures. In 2014, the Company received $990 million in net cash proceeds for the sale of its equity method investment in Concur Technologies (Concur) with a carrying amount of $246 million and recognized a gain of $744 million in Other revenues. 90 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 CUSTOMER DEPOSITS As of December 31, customer deposits were categorized as interest-bearing or non-interest-bearing as follows: (Millions) U.S.: Interest-bearing Non-interest-bearing (includes Card Member credit balances of: 2014, $372 million; 2013, $340 million) Non-U.S.: Interest-bearing Non-interest-bearing (includes Card Member credit balances of: 2014, $347 million; 2013, $437 million) Total customer deposits Customer deposits by deposit type as of December 31 were as follows: (Millions) U.S. retail deposits: Savings accounts – Direct Certificates of deposit: Direct Third-party Sweep accounts –Third-party Other retail deposits: Non-U.S. deposits and U.S. non-interest bearing deposits Card Member credit balances – U.S. and non-U.S. Total customer deposits The scheduled maturities of certificates of deposit as of December 31, 2014 were as follows: 2014 2013 $ 43,279 418 $ 40,831 360 115 359 121 451 $ 44,171 $ 41,763 2014 2013 $ 26,159 $ 24,550 333 7,838 8,949 173 719 489 6,929 8,863 155 777 $ 44,171 $ 41,763 (Millions) 2015 2016 2017 2018 2019 After 5 years Total $ U.S. 1,744 2,136 1,491 1,480 1,304 16 $ 8,171 $ Non-U.S. 21 — — — — — 21 As of December 31, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows: (Millions) U.S. Non-U.S. Total 2014 111 17 128 $ $ Total 1,765 2,136 1,491 1,480 1,304 16 8,192 2013 148 — 148 $ $ $ $ 91 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 DEBT SHORT-TERM BORROWINGS The Company’s short-term borrowings outstanding, defined as borrowings with original maturities of less than one year, as of December 31 were as follows: (Millions, except percentages) Commercial paper Other short-term borrowings(b)(c) Total 2014 2013 Outstanding Balance $ $ 769 2,711 3,480 Year-End Stated Rate on Debt(a) Outstanding Balance 0.29% $ 0.81 0.69% $ 200 4,821 5,021 Year-End Stated Rate on Debt(a) 0.19% 1.08 1.04% (a) For floating-rate debt issuances, the stated interest rates are weighted based on outstanding balances and floating rates in effect as of December 31, 2014 and 2013. (b) Includes interest-bearing overdrafts with banks of $470 million and $489 million as of December 31, 2014 and 2013, respectively. In addition, balances include fully drawn secured borrowing facility (maturing on September 15, 2015, which was repaid on February 18, 2014), certain book overdrafts (i.e., primarily timing differences arising in the ordinary course of business), short-term borrowings from banks, as well as interest-bearing amounts due to merchants in accordance with merchant service agreements. The secured borrowing facility gives the Company the right to sell up to $2.0 billion face amount of eligible certificates issued from the Lending Trust. (c) The Company paid $7.0 million and $7.2 million in fees to maintain the secured borrowing facility in 2014 and 2013, respectively. 92 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM DEBT The Company’s long-term debt outstanding, defined as debt with original maturities of one year or greater, as of December 31 was as follows: (Millions, except percentages) American Express Company (Parent Company only) Fixed Rate Senior Notes Floating Rate Senior Notes Subordinated Notes(d) American Express Credit Corporation Fixed Rate Senior Notes Floating Rate Senior Notes Borrowings under Bank Credit Facilities American Express Centurion Bank Fixed Rate Senior Notes Floating Rate Senior Notes American Express Bank, FSB Fixed Rate Senior Notes Floating Rate Senior Notes American Express Charge Trust II Floating Rate Senior Notes Floating Rate Subordinated Notes American Express Lending Trust Fixed Rate Senior Notes Floating Rate Senior Notes Fixed Rate Subordinated Notes Floating Rate Subordinated Notes Other Fixed Rate Instruments(e) Floating Rate Borrowings Unamortized Underwriting Fees Total Long-Term Debt 2014 2013 Maturity Dates Outstanding Balance(a) Year-End Stated Rate on Debt(b) Year-End Effective Interest Rate with Swaps(b)(c) Outstanding Balance(a) Year-End Stated Rate on Debt(b) Year-End Effective Interest Rate with Swaps(b)(c) 2016-2042 $ 2018 2024-2036 2015-2019 2015-2019 2016-2017 2015-2017 2015-2018 2017 2017 2016-2018 2016-2018 2015-2017 2015-2019 2015-2017 2015-2019 2016-2033 2015-2019 7,535 850 1,350 16,260 4,400 3,672 2,089 675 999 300 3,700 87 6,100 8,876 300 488 143 247 (116) 5.15% 4.20% $ 8,784 0.85 5.39 2.26 0.82 4.25 4.12 0.68 6.00 0.46 0.41 0.80 1.11 0.72 1.08 0.73 3.09 0.59 — 4.42 1.22 — — 3.32 — — — — — — — — — — —% 850 749 14,875 2,855 4,012 2,102 675 999 300 4,200 87 2,600 10,685 300 847 239 276 (105) 5.43% 0.84 6.80 3.13 1.14 4.18 4.12 0.67 6.00 0.47 0.49 0.80 0.72 0.81 1.08 0.81 3.95 0.62 4.60% — — 2.03 — — 3.32 — — — — — — — — — — —% $ 57,955 2.34% $ 55,330 2.56% (a) The outstanding balances include (i) unamortized discount and premium, (ii) the impact of movements in exchange rates on foreign currency denominated debt and (iii) the impact of fair value hedge accounting on certain fixed-rate notes that have been swapped to floating rate through the use of interest rate swaps. Under fair value hedge accounting, the outstanding balances on these fixed-rate notes are adjusted to reflect the impact of changes in fair value due to changes in interest rates. Refer to Note 14 for more details on the Company’s treatment of fair value hedges. (b) For floating-rate debt issuances, the stated and effective interest rates are weighted based on outstanding balances and floating rates in effect as of December 31, 2014 and 2013. (c) Effective interest rates are only presented when swaps are in place to hedge the underlying debt. (d) For the $750 million of subordinated debentures issued in 2006 and outstanding as of December 31, 2014, the maturity date will automatically be extended to September 1, 2066, except in the case of either (i) a prior redemption or (ii) a default. (e) Includes $31 million and $109 million as of December 31, 2014 and 2013, respectively, related to capitalized lease transactions. 93 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2014 and 2013, the Company had $750 million principal outstanding of Subordinated Debentures that accrue interest at an annual rate of 6.8 percent until September 1, 2016, and at an annual rate of three-month LIBOR plus 2.23 percent thereafter. At the Company’s option, these Subordinated Debentures are redeemable for cash after September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. If the Company fails to achieve specified performance measures, it will be required to issue common shares and apply the net proceeds to make interest payments on these Subordinated Debentures. No dividends on the Company’s common or preferred shares could be paid until such interest payments are made. The Company would fail to meet these specific performance measures if (i) the Company’s tangible common equity is less than 4 percent of total adjusted assets for the most recent quarter or (ii) if the trailing two quarters’ consolidated net income is equal to or less than zero and tangible common equity as of the trigger determination date, and as of the end of the quarter end six months prior, has in each case declined by 10 percent or more from tangible common equity as of the end of the quarter 18 months prior to the trigger determination date. The Company met the specified performance measures in 2014. The Company issued $600 million of 3.6 percent subordinated notes on December 5, 2014 that are senior in right of payment to the outstanding $750 million of Subordinated Debentures. Aggregate annual maturities on long-term debt obligations (based on final maturity dates) as of December 31, 2014 were as follows: (Millions) American Express Company (Parent Company only) American Express Credit Corporation American Express Centurion Bank American Express Bank, FSB American Express Charge Trust II American Express Lending Trust Other Unamortized Underwriting Fees Unamortized Discount and Premium Impacts due to Fair Value Hedge Accounting Total Long-Term Debt 2015 $ — $ 5,227 1,305 — — 5,422 125 $ 2016 1,350 7,057 — — 2,500 500 145 $ 2017 1,500 6,532 1,300 1,300 — 5,639 83 $ 2018 3,850 1,295 125 — 1,287 2,886 — 2019 Thereafter Total $ 641 4,150 — — — 1,317 6 3,147 — 2 — — — 31 $ 10,488 24,261 2,732 1,300 3,787 15,764 390 $ 12,079 $ 11,552 $ 16,354 $ 9,443 $ 6,114 $ 3,180 58,722 (116) (932) 281 $ 57,955 As of December 31, 2014 and 2013, the Company maintained total bank lines of credit of $6.7 billion and $7.0 billion, respectively. Of the total credit lines, $3.0 billion were undrawn as of both December 31, 2014 and 2013. Undrawn amounts support commercial paper borrowings and contingent funding needs. The availability of these credit lines is subject to the Company’s compliance with certain financial covenants, principally, the maintenance by American Express Credit Corporation (Credco) of a 1.25 ratio of combined earnings and fixed charges to fixed charges. As of December 31, 2014 and 2013, the Company was not in violation of any of its debt covenants. Additionally, the Company maintained a 3-year committed, revolving, secured borrowing facility that gives the Company the right to sell up to $3.0 billion face amount of eligible notes issued from the Charge Trust at any time through July 15, 2016. As of December 31, 2014, $2.5 billion was drawn on this facility. The Company paid $49.9 million and $50.2 million in fees to maintain these lines in 2014 and 2013, respectively. These committed facilities do not contain material adverse change clauses, which might otherwise preclude borrowing under the credit facilities, nor are they dependent on the Company’s credit rating. The Company paid total interest primarily related to short- and long-term debt, corresponding interest rate swaps and customer deposits of $1.7 billion, $2.0 billion and $2.2 billion in 2014, 2013 and 2012, respectively. 94 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 OTHER LIABILITIES The following is a summary of Other liabilities as of December 31: (Millions) Membership Rewards liability Employee-related liabilities(a) Rebate and reward accruals(b) Deferred card and other fees, net Book overdraft balances Other(c) Total $ $ 2014 6,521 2,258 2,389 1,308 647 4,728 2013 6,151 2,227 2,210 1,314 442 4,566 $ 17,851 $ 16,910 (a) Employee-related liabilities include employee benefit plan obligations and incentive compensation. (b) Rebate and reward accruals include payments to third-party card-issuing partners and cash-back reward costs. (c) Other includes accruals for general operating expenses, client incentives, advertising and promotion, restructuring and reengineering reserves and derivatives. MEMBERSHIP REWARDS The Membership Rewards program allows enrolled Card Members to earn points that can be redeemed for a broad range of rewards including travel, entertainment, retail certificates and merchandise. The Company records a balance sheet liability that represents management’s best estimate of the cost of points earned that are expected to be redeemed in the future. The Ultimate Redemption Rate (URR) and weighted average cost (WAC) per point are key assumptions used to approximate the Membership Rewards liability. The expense for Membership Rewards points is included in marketing, promotion, rewards and Card Member services expenses. The Company periodically evaluates its liability estimation process and assumptions based on developments in redemption patterns, cost per point redeemed, partner contract changes and other factors. DEFERRED CARD AND OTHER FEES, NET The carrying amount of deferred card and other fees, net of deferred direct acquisition costs and reserves for membership cancellations as of December 31 was as follows: (Millions) Deferred card and other fees(a) Deferred direct acquisition costs Reserves for membership cancellations Deferred card and other fees, net (a) Includes deferred fees for Membership Rewards program participants. 2014 1,615 (176) (131) 1,308 $ $ 2013 1,609 (164) (131) 1,314 $ $ NOTE 11 STOCK PLANS STOCK OPTION AND AWARD PROGRAMS Under the 2007 Incentive Compensation Plan and previously under the 1998 Incentive Compensation Plan, awards may be granted to employees and other key individuals who perform services for the Company and its participating subsidiaries. These awards may be in the form of stock options, restricted stock awards or units (RSAs), portfolio grants (PGs) or other incentives, and similar awards designed to meet the requirements of non-U.S. jurisdictions. For the Company’s Incentive Compensation Plans, there were a total of 35 million, 35 million and 36 million common shares unissued and available for grant as of December 31, 2014, 2013 and 2012, respectively, as authorized by the Company’s Board of Directors and shareholders. The Company granted stock option awards to its Chief Executive Officer (CEO) in November 2007 and January 2008 that have performance-based and market-based conditions. These option awards are separately disclosed and are excluded from the information and tables presented in the following paragraphs. 95 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of stock option and RSA activity as of December 31, 2014, and changes during the year is presented below: Stock Options RSAs (Shares in thousands) Outstanding as of December 31, 2013 Granted Exercised/vested Forfeited Expired Outstanding as of December 31, 2014 Options vested and expected to vest as of December 31, 2014 Shares 18,615 295 (5,893) (242) (46) 12,729 12,726 Options exercisable as of December 31, 2014 11,628 $ Weighted- Average Exercise Price $ 44.98 86.64 48.05 51.83 47.84 44.39 44.39 42.64 Weighted- Average Grant Price 51.88 86.65 47.25 60.98 — 64.48 — — $ Shares 9,578 2,639 (3,427) (916) — 7,874 $ — — The Company recognizes the cost of employee stock awards granted in exchange for employee services based on the grant-date fair value of the award, net of expected forfeitures. Those costs are recognized ratably over the vesting period. STOCK OPTIONS Each stock option has an exercise price equal to the market price of the Company’s common stock on the date of grant and a contractual term of 10 years from the date of grant. Stock options generally vest 25 percent per year beginning with the first anniversary of the grant date or at 100 percent on the third anniversary of the grant date. The weighted-average remaining contractual life and the aggregate intrinsic value (the amount by which the fair value of the Company’s stock exceeds the exercise price of the option) of the stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2014 are as follows: Weighted-average remaining contractual life (in years) Aggregate intrinsic value (millions) Outstanding Exercisable Vested and Expected to Vest $ 3.8 619 $ 3.5 586 $ 3.8 619 The intrinsic value for options exercised during 2014, 2013 and 2012 was $245 million, $374 million and $209 million, respectively (based upon the fair value of the Company’s stock price at the date of exercise). Cash received from the exercise of stock options in 2014, 2013 and 2012 was $283 million, $580 million and $368 million, respectively. The tax benefit realized from income tax deductions from stock option exercises, which was recorded in additional paid-in capital, in 2014, 2013 and 2012 was $54 million, $84 million and $45 million, respectively. The fair value of each option is estimated on the date of grant using a Black-Scholes-Merton option-pricing model. The following weighted- average assumptions were used for grants issued in 2014, 2013 and 2012, the majority of which were granted in the beginning of each year: Dividend yield Expected volatility(a) Risk-free interest rate Expected life of stock option (in years)(b) Weighted-average fair value per option 2014 1.1% 46% 2.2% 6.7 32.36 $ 2013 1.4% 39% 1.3% 6.3 21.11 $ 2012 1.5% 41% 1.3% 6.3 17.48 $ (a) The expected volatility is based on both weighted historical and implied volatilities of the Company’s common stock price. (b) In 2014, 2013 and 2012, the expected life of stock options was determined using both historical data and expectations of option exercise behavior. 96 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTIONS WITH PERFORMANCE-BASED AND MARKET-BASED CONDITIONS On November 30, 2007 and January 31, 2008, the Company’s CEO was granted in the aggregate 2,750,000 of non-qualified stock option awards with performance-based and market-based conditions. Both awards have a contractual term of 10 years and a vesting period of 6 years. The aggregate grant date fair value of options with performance-based conditions was approximately $33.8 million. Compensation expense for these awards was not recognized as the performance metrics were not achieved, and therefore, these stock options were forfeited. No compensation expense for these awards was recorded in 2014, 2013 and 2012. The aggregate grant date fair value of options with market-based conditions was approximately $10.5 million. Compensation expense for these awards was recognized ratably over the vesting period. In January 2014, following the completion of the performance period, the Compensation and Benefits Committee reviewed the Company’s performance and confirmed that the market-based condition was achieved, resulting in a vesting of these stock options (687,000 out of 2,750,000 options became exercisable). No compensation expense for these awards was recorded in 2014. Total compensation expense of approximately $0.3 million and $0.5 million was recorded in 2013 and 2012, respectively. RESTRICTED STOCK AWARDS RSAs are valued based on the stock price on the date of grant and generally vest 25 percent per year beginning with the first anniversary of the grant date or at 100 percent on the third anniversary of the grant date. RSA holders receive non-forfeitable dividends or dividend equivalents. The total fair value of shares vested during 2014, 2013 and 2012 was $298 million, $336 million and $296 million, respectively (based upon the Company’s stock price at the vesting date). The weighted-average grant date fair value of RSAs granted in 2014, 2013 and 2012, is $86.65, $60.13 and $49.80, respectively. LIABILITY-BASED AWARDS Certain employees are awarded PGs and other incentive awards that can be settled with cash or equity shares at the Company’s discretion and final Compensation and Benefits Committee payout approval. These awards earn value based on performance, market and service conditions and vest over periods of one to three years. PGs and other incentive awards are generally settled with cash and thus are classified as liabilities and, therefore, the fair value is determined at the date of grant and remeasured quarterly as part of compensation expense over the vesting period. Cash paid upon vesting of these awards in 2014, 2013 and 2012 was $62 million, $43 million and $66 million, respectively. Summary of Stock Plan Expense The components of the Company’s total stock-based compensation expense (net of forfeitures) for the years ended December 31 are as follows: (Millions) Restricted stock awards(a) Stock options(a) Liability-based awards Performance/market-based stock options Total stock-based compensation expense(b) $ 2014 193 13 84 — 290 $ 2013 208 23 119 — 350 $ $ $ $ 2012 197 29 70 1 297 (a) As of December 31, 2014, the total unrecognized compensation cost related to unvested RSAs and options of $211 million and $6 million, respectively, will be recognized ratably over the weighted-average remaining vesting period of 1.3 years and 2.1 years, respectively. (b) The total income tax benefit recognized in the Consolidated Statements of Income for stock-based compensation arrangements for the years ended December 31, 2014, 2013 and 2012 was $104 million, $127 million and $107 million, respectively. 97 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 RETIREMENT PLANS DEFINED CONTRIBUTION RETIREMENT PLANS The Company sponsors defined contribution retirement plans, the principal plan being the Retirement Savings Plan (RSP), a 401(k) savings plan with a profit-sharing component. The RSP is a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974 (ERISA) and covers most employees in the U.S. The total expense for all defined contribution retirement plans globally was $272 million, $281 million and $254 million in 2014, 2013 and 2012, respectively. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company’s primary defined benefit pension plans that cover certain employees in the U.S. and United Kingdom are closed to new entrants and existing participants do not accrue any additional benefits. Most employees outside the U.S. and United Kingdom are covered by local retirement plans, some of which are funded, while other employees receive payments at the time of retirement or termination under applicable labor laws or agreements. The Company complies with minimum funding requirements in all countries. The Company sponsors unfunded other postretirement benefit plans that provide health care and life insurance to certain retired U.S. employees. The total expense for these plans was $24 million, $59 million and $93 million in 2014, 2013 and 2012, respectively. The Company recognizes the funded status of its defined benefit pension plans and other postretirement benefit plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the Consolidated Balance Sheets. As of December 31, 2014 and 2013, the funded status related to the defined benefit pension plans and other postretirement benefit plans was underfunded by $767 million and $661 million, respectively, and is recorded in Other liabilities. NOTE 13 COMMITMENTS AND CONTINGENCIES LEGAL 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 December 31, 2014, the Company and various of its subsidiaries were named as a defendant or were otherwise involved in numerous legal proceedings and governmental examinations in various jurisdictions, both in and outside the U.S. The Company discloses its material legal proceedings and governmental examinations under “Legal Proceedings” in its Annual Report on Form 10-K for the year ended December 31, 2014 (Legal Proceedings). The Company has recorded liabilities for certain of its outstanding legal proceedings and governmental examinations. A liability is accrued when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. There may be instances in which an exposure to loss exceeds the accrued liability. The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the liability that has been previously accrued or a revision to the disclosed estimated range of possible losses, as applicable. The Company’s legal proceedings range from cases brought by a single plaintiff to class actions with millions of putative class members. These legal proceedings, as well as governmental examinations, involve various lines of business of the Company and a variety of claims (including, but not limited to, common law tort, contract, antitrust and consumer protection claims), some of which present novel factual allegations and/or unique legal theories. While some matters pending against the Company specify the damages claimed by the plaintiff, many seek an unspecified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company are stated, the claimed amount may be exaggerated and/or unsupported. As a result, some matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss. 98 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other matters have progressed sufficiently through discovery and/or development of important factual information and legal issues so that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed or referred to in Legal Proceedings where a loss is reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a range of possible loss, the current estimated range is zero to $360 million in excess of any accrued liability related to these matters. This aggregate range represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimated range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time and actual results may vary significantly from current estimates. Based on its current knowledge, and taking into consideration its litigation-related liabilities, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding or governmental examination that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s earnings for that period. OTHER COMMITMENTS The Company also has obligations to make payments under contractual agreements with certain co-brand partners. The Company expects to fully satisfy these obligations over the remaining term of these agreements, which range from 2015 to 2022, as part of the ongoing operations of its business. The obligations under such arrangements were approximately $1.0 billion as of December 31, 2014. RENT EXPENSE AND LEASE COMMITMENTS The Company leases certain facilities and equipment under non-cancelable and cancelable agreements. The total rental expense amounted to $237 million in 2014, $281 million in 2013 and $305 million in 2012. As of December 31, 2014, the minimum aggregate rental commitment under all non-cancelable operating leases (net of subleases of $34 million) was as follows: (Millions) 2015 2016 2017 2018 2019 Thereafter Total $ 189 161 144 126 94 921 $ 1,635 As of December 31, 2014, the Company’s future minimum lease payments under capital leases or other similar arrangements is approximately $4 million in 2015 through 2019, and $19 million thereafter. 99 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 DERIVATIVES AND HEDGING ACTIVITIES The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. Derivatives derive their value from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity index or price. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not engage in derivatives for trading purposes. Market risk is the risk to earnings or value resulting from movements in market prices. The Company’s market risk exposure is primarily generated by: (cid:2) Interest rate risk in its card, insurance and Travelers Cheque and other prepaid products businesses, as well as its investment portfolios; and (cid:2) Foreign exchange risk in its operations outside the U.S. and the associated funding of such operations. The Company centrally monitors market risks using market risk limits and escalation triggers as defined in its Asset/Liability Management Policy. The Company’s market exposures are in large part byproducts of the delivery of its products and services. Interest rate risk arises through the funding of Card Member receivables and fixed-rate loans with variable-rate borrowings as well as through the risk to net interest margin from changes in the relationship between benchmark rates such as Prime and LIBOR. Interest rate exposure within the Company’s charge card and fixed-rate lending products is managed by varying the proportion of total funding provided by short-term and variable-rate debt and deposits compared to fixed-rate debt and deposits. In addition, interest rate swaps are used from time to time to economically convert fixed-rate debt obligations to variable-rate obligations or to convert variable-rate debt obligations to fixed-rate obligations. The Company may change the mix between variable-rate and fixed-rate funding based on changes in business volumes and mix, among other factors. Foreign exchange risk is generated by Card Member cross-currency charges, foreign currency balance sheet exposures, foreign subsidiary equity and foreign currency earnings in entities outside the U.S. The Company’s foreign exchange risk is managed primarily by entering into agreements to buy and sell currencies on a spot basis or by hedging this market exposure to the extent it is economically justified through various means, including the use of derivatives such as foreign exchange forwards and cross-currency swap contracts, which can help mitigate the Company’s exposure to specific currencies. In addition to the exposures identified above, effective August 1, 2011, the Company entered into a total return contract (TRC) to hedge its exposure to changes in the fair value of its equity investment in ICBC in local currency. Under the terms of the TRC, the Company received from the TRC counterparty an amount equivalent to any reduction in the fair value of its investment in ICBC in local currency, and the Company paid to the TRC counterparty an amount equivalent to any increase in the fair value of its investment in local currency, along with all dividends paid by ICBC, as well as ongoing hedge costs. The TRC was fully unwound on July 18, 2014 upon the sale of the remaining underlying ICBC shares. Derivatives may give rise to counterparty credit risk, which is the risk that a derivative counterparty will default on, or otherwise be unable to perform pursuant to, an uncollateralized derivative exposure. The Company manages this risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next 12 months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative credit risk, counterparties are required to be pre-approved by the Company and rated as investment grade. Counterparty risk exposures are centrally monitored by the Company. Additionally, in order to mitigate the bilateral counterparty credit risk associated with derivatives, the Company has in certain instances entered into master netting agreements with its derivative counterparties, which provide a right of offset for certain exposures between the parties. A majority of the Company’s derivative assets and liabilities as of December 31, 2014 and 2013 is subject to such master netting agreements with its derivative counterparties. There are no instances in which management makes an accounting policy election to not net assets and liabilities subject to an enforceable master netting agreement on the Company’s Consolidated Balance Sheets. To further mitigate bilateral counterparty credit risk, the Company exercises its rights under executed credit support agreements with certain of its derivative counterparties. These agreements require that, in the event the fair value change in the net derivatives position between the two parties exceeds certain dollar thresholds, the party in the net liability position posts collateral to its counterparty. All derivative contracts cleared through a central clearinghouse are collateralized to the full amount of the fair value of the contracts. In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk- related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of December 31, 2014 and 2013, the Company does not have derivative positions that warrant credit valuation adjustments. 100 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s derivatives are carried at fair value on the Consolidated Balance Sheets. The accounting for changes in fair value depends on the instruments’ intended use and the resulting hedge designation, if any, as discussed below. Refer to Note 15 for a description of the Company’s methodology for determining the fair value of derivatives. The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of December 31: (Millions) Derivatives designated as hedging instruments: Interest rate contracts Fair value hedges Total return contract Fair value hedge Foreign exchange contracts Net investment hedges Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments: Foreign exchange contracts, including certain embedded derivatives(a) Total derivatives, gross Less: Cash collateral netting(b) Derivative asset and derivative liability netting(c) Total derivatives, net(d) Other Assets Fair Value Other Liabilities Fair Value 2014 2013 2014 2013 $ 314 $ 455 $ 4 $ — 492 806 185 991 (158) (122) 8 174 637 64 701 (336) (36) — 46 50 114 164 (4) (122) $ 711 $ 329 $ 38 $ 2 — 116 118 95 213 — (36) 177 (a) Includes foreign currency derivatives embedded in certain operating agreements. (b) Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. Additionally, the Company received non-cash collateral from a counterparty in the form of security interest in U.S. Treasury securities with a fair value of $91 million and nil as of December 31, 2014 and 2013, respectively, none of which was sold or repledged. Such non-cash collateral economically reduces the Company’s risk exposure to $620 million as of December 31, 2014, but does not reduce the net exposure on the Company’s Consolidated Balance Sheets. Additionally, the Company posted $114 million and $26 million as of December 31, 2014 and 2013, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Company’s Consolidated Balance Sheets and are not netted against the derivative balances. (c) Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement. (d) The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Company’s Consolidated Balance Sheets. DERIVATIVE FINANCIAL INSTRUMENTS THAT QUALIFY FOR HEDGE ACCOUNTING Derivatives executed for hedge accounting purposes are documented and designated as such when the Company enters into the contracts. In accordance with its risk management policies, the Company structures its hedges with terms similar to that of the item being hedged. The Company formally assesses, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of the hedged items. These assessments usually are made through the application of a regression analysis method. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue the application of hedge accounting. FAIR VALUE HEDGES A fair value hedge involves a derivative designated to hedge the Company’s exposure to future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. Interest Rate Contracts The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate long-term debt obligations to floating-rate obligations at the time of issuance. As of December 31, 2014 and 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. 101 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To the extent the fair value hedge is effective, the gain or loss on the hedging instrument offsets the loss or gain on the hedged item attributable to the hedged risk. Any difference between the changes in the fair value of the derivative and the hedged item is referred to as hedge ineffectiveness and is reflected in earnings as a component of other expenses. Hedge ineffectiveness may be caused by differences between the debt’s interest coupon and the benchmark rate, primarily due to credit spreads at inception of the hedging relationship that are not reflected in the valuation of the interest rate swap. Furthermore, hedge ineffectiveness may be caused by changes in the relationship between 3-month LIBOR and 1-month LIBOR, as well as between the overnight indexed swap rate (OIS) and 1-month LIBOR, as basis spreads may impact the valuation of the interest rate swap without causing an offsetting impact in the value of the hedged debt. If a fair value hedge is de-designated or no longer considered to be effective, changes in fair value of the derivative continue to be recorded through earnings but the hedged asset or liability is no longer adjusted for changes in fair value resulting from changes in interest rates. The existing basis adjustment of the hedged asset or liability is amortized or accreted as an adjustment to yield over the remaining life of that asset or liability. Total Return Contract The Company hedged its exposure to changes in the fair value of its equity investment in ICBC in local currency. The Company used a TRC to transfer this exposure to its derivative counterparty. On July 18, 2014, the Company sold its remaining 34.3 million shares in ICBC and terminated the TRC. As of December 31, 2013 only, the fair value of the equity investment in ICBC was $122 million (180.7 million shares). Prior to termination, to the extent the hedge was effective, the gain or loss on the TRC offset the gain or loss on the investment in ICBC. Any difference between the changes in the fair value of the derivative and the hedged item resulted in hedge ineffectiveness and was recognized in Other expenses in the Consolidated Statements of Income. The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s hedges of its fixed-rate long-term debt and its investment in ICBC for the years ended December 31: (Millions) Derivative relationship Interest rate contracts Derivative contract Hedged item Gains (losses) recognized in income Income Statement Line Item Amount 2014 2013 2012 Income Statement Line Item Amount Net hedge ineffectiveness 2014 2013 2012 2014 2013 2012 Other expenses $ (143) $ (370) $ (178) Other expenses $ 148 $ 351 $ 132 Total return contract Other non-interest revenues $ 11 $ 15 $ (53) Other non-interest revenues $ (11) $ (15) $ 54 $ $ 5 $ (19) $ (46) — $ — $ 1 The Company also recognized a net reduction in interest expense on long-term debt of $283 million, $346 million and $491 million for the years ended December 31, 2014, 2013 and 2012, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges. CASH FLOW HEDGES As of December 31, 2014 and 2013, the Company did not have any designated cash flow hedges. During the year ended December 31, 2012 only, the Company reclassified $(1) million from AOCI into earnings as a component of interest expense. Any ineffective portion of the gain or loss on the derivatives is reported as a component of other expenses. No ineffectiveness associated with cash flow hedges was reclassified from AOCI into income for the years ended December 31, 2014, 2013 and 2012. NET INVESTMENT HEDGES A net investment hedge is used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company primarily designates foreign currency derivatives, typically foreign exchange forwards, and on occasion foreign currency denominated debt, as hedges of net investments in certain foreign operations. These instruments reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S. subsidiaries. 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 $455 million, $253 million and $(288) million for the years ended 2014, 2013 and 2012, 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 years ended December 31, 2014, 2013 and 2012, the Company reclassified $10 million, nil and nil, 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 years ended December 31, 2014, 2013 and 2012. 102 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVES NOT DESIGNATED AS HEDGES The Company has derivatives that act as economic hedges, but are not designated as such for hedge accounting purposes. Foreign currency transactions and non-U.S. dollar cash flow exposures from time to time may be partially or fully economically hedged through foreign currency contracts, primarily foreign exchange forwards, options and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. The changes in the fair value of the derivatives effectively offset the related foreign exchange gains or losses on the underlying balance sheet exposures. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business. The Company has certain operating agreements containing payments that may be linked to a market rate or price, primarily foreign currency rates. The payment components of these agreements may meet the definition of an embedded derivative, in which case the embedded derivative is accounted for separately and is classified as a foreign exchange contract based on its primary risk exposure. For derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. 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 years ended December 31: Description (Millions) Interest rate contracts Foreign exchange contracts(a) Total Pretax gains (losses) Income Statement Line Item Other expenses Interest expense on long-term debt and other Other expenses Cost of Card Member services Amount 2014 2013 $ $ — $ — 194 4 198 $ 1 — 72 — 73 $ $ 2012 (1) (1) (56) — (58) (a) Foreign exchange contracts include forwards and embedded foreign currency derivatives. Gains (losses) on these embedded derivatives are included in Other expenses. 103 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 FAIR VALUES Fair value is defined as the price that would be required to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows: (cid:2) Level 1 — Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access. (cid:2) Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including: – Quoted prices for similar assets or liabilities in active markets; – Quoted prices for identical or similar assets or liabilities in markets that are not active; – Inputs other than quoted prices that are observable for the asset or liability; and – Inputs that are derived principally from or corroborated by observable market data by correlation or other means. (cid:2) Level 3 — Inputs that are unobservable and reflect the Company’s own estimates about the estimates market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2014 and 2013, although the disclosed fair value of certain assets that are not carried at fair value, as presented later in this Note, are classified within Level 3. The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement at the beginning of the reporting period during which the transfer occurred. For the year ended December 31, 2014, there were no significant transfers between levels. FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE The following table summarizes the Company’s financial assets and financial categorized by GAAP’s valuation hierarchy (as described in the preceding paragraphs), as of December 31: liabilities measured at fair value on a recurring basis, (Millions) Assets: Investment securities:(a) Equity securities Debt securities and other Derivatives(a) Total assets Liabilities: Derivatives(a) Total liabilities 2014 2013 Total Level 1 Level 2 Total Level 1 Level 2 $ $ $ 1 4,430 991 5,422 1 350 — 351 $ — $ 4,080 991 5,071 $ 124 4,892 701 5,717 164 164 $ — — $ 164 164 $ 213 213 $ $ 124 320 — 444 — — $ — 4,572 701 5,273 213 213 (a) Refer to Note 5 for the fair values of investment securities and to Note 14 for the fair values of derivative assets and liabilities, on a further disaggregated basis. VALUATION TECHNIQUES USED IN THE FAIR VALUE MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE For the financial assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques: Investment Securities When available, quoted prices of identical investment securities in active markets are used to estimate fair value. Such investment securities are classified within Level 1 of the fair value hierarchy. 104 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS When quoted prices of identical investment securities in active markets are not available, the fair values for the Company’s investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated using pricing models, where the inputs to those models are based on observable market inputs or recent trades of similar securities. Such investment securities are classified within Level 2 of the fair value hierarchy. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades and broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. The Company reaffirms its understanding of the valuation techniques used by its pricing services at least annually. In addition, the Company corroborates the prices provided by its pricing services for reasonableness by comparing the prices from the respective pricing services to valuations obtained from different pricing sources. In instances where price discrepancies are identified between different pricing sources, the Company evaluates such discrepancies to ensure that the prices used for its valuation represent the fair value of the underlying investment securities. Refer to Note 5 for additional fair value information. Derivative Financial Instruments The fair value of the Company’s derivative financial instruments is estimated by third-party valuation services that use proprietary pricing models or by internal pricing models, where the inputs to those models are readily observable from actively quoted markets. The pricing models used are consistently applied and reflect the contractual terms of the derivatives as described below. The Company reaffirms its understanding of the valuation techniques used by the third-party valuation services at least annually. The Company’s derivative instruments are classified within Level 2 of the fair value hierarchy. The fair value of the Company’s interest rate swaps is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the swap such as the notional amount, fixed coupon rate, floating coupon rate (based on interbank rates consistent with the frequency and currency of the interest cash flows) and tenor, as well as discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated. The fair value of the Company’s total return contract, which served as a hedge against the Hong Kong dollar (HKD) change in fair value associated with the Company’s investment in ICBC, is determined based on a discounted cash flow method using the following significant inputs as of the valuation date: number of shares of the Company’s underlying ICBC investment, the quoted market price of the shares in HKD and the monthly settlement terms of the contract inclusive of price and tenor. The fair value of foreign exchange forward contracts is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the forward contracts such as the notional amount, maturity dates and contract rate, as well as relevant foreign currency forward curves, and discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated. Credit valuation adjustments are necessary when the market parameters, such as a benchmark curve, used to value derivatives are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure. Refer to Note 14 for additional fair value information. 105 48 — 61 8 60 $ 48 — 60 8 58 $ — — 71 — — — — — — 67 — — — AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT OTHER THAN FAIR VALUE The following table discloses the estimated fair value for the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of December 31, 2014 and 2013: Carrying Value Corresponding Fair Value Amount Total Level 1 Level 2 Level 3 2014 (Billions) Financial Assets: Financial assets for which carrying values equal or approximate fair value Cash and cash equivalents Other financial assets(b) Financial assets carried at other than fair value Loans, net $ Financial Liabilities: Financial liabilities for which carrying values equal or approximate fair value Financial liabilities carried at other than fair value Certificates of deposit(d) Long-term debt $ 1(a) $ $ 22 48 70 61 8 $ 22 48 71(c) 61 8 21 — — — — $ 58 $ 60(c) $ — $ 2013 (Billions) Financial Assets: Carrying Value Corresponding Fair Value Amount Total Level 1 Level 2 Level 3 Financial assets for which carrying values equal or approximate fair value Cash and cash equivalents Other financial assets(b) Financial assets carried at other than fair value Loans, net Financial Liabilities: Financial liabilities for which carrying values equal or approximate fair value Financial liabilities carried at other than fair value Certificates of deposit(d) Long-term debt $ $ 19 48 67 60 7 55 $ $ 19 48 67(c) 60 8 $ 58(c) $ 17 — — — — — $ $ 2(a) $ (a) Reflects time deposits. (b) Includes accounts receivable (including fair values of Card Member receivables of $7.0 billion and $7.3 billion held by consolidated VIEs as of December 31, 2014 and 2013, respectively), restricted cash and other miscellaneous assets. (c) Includes fair values of loans of $29.9 billion and $31.0 billion, and long-term debt of $19.5 billion and $18.8 billion, held by consolidated VIEs as of December 31, 2014 and 2013, respectively. (d) Presented as a component of customer deposits on the Consolidated Balance Sheets. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of December 31, 2014, and require management judgment. These figures may not be indicative of future fair values. The fair value of the Company cannot be reliably estimated by aggregating the amounts presented. 106 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VALUATION TECHNIQUES USED IN THE FAIR VALUE MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT OTHER THAN FAIR VALUE For the financial assets and liabilities that are not required to be carried at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques to measure fair value: Financial Assets For Which Carrying Values Equal or Approximate Fair Value Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, Card Member receivables, accrued interest and certain other assets. For these assets, the carrying values approximate fair value because they are short term in duration, have no defined maturity or have a market-based interest rate. Financial Assets Carried At Other Than Fair Value Loans Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair value for the Company’s loans the Company uses a discounted cash flow model. Due to the lack of a comparable whole loan sales market for similar credit card receivables and the lack of observable pricing inputs thereof, the Company uses various inputs derived from an equivalent securitization market to estimate fair value. Such inputs include projected income (inclusive of future interest payments and late fee revenue), estimated pay-down rates, discount rates and relevant credit costs. Financial Liabilities For Which Carrying Values Equal Or Approximate Fair Value Financial liabilities for which carrying values equal or approximate fair value include accrued interest, customer deposits (excluding certificates of deposit, which are described further below), Travelers Cheques and other prepaid products outstanding, accounts payable, short-term borrowings and certain other liabilities for which the carrying values approximate fair value because they are short term in duration, have no defined maturity or have a market-based interest rate. Financial Liabilities Carried At Other Than Fair Value Certificates of Deposit Certificates of deposit (CDs) are recorded at their historical issuance cost on the Consolidated Balance Sheets. Fair value is estimated using a discounted cash flow methodology based on the future cash flows and the discount rate that reflects the Company’s current rates for similar types of CDs within similar markets. Long-term Debt Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets adjusted for the impact of fair value hedge accounting on certain fixed-rate notes and current translation rates for foreign-denominated debt. The fair value of the Company’s long-term debt is measured using quoted offer prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates currently observed in publicly-traded debt markets for debt of similar terms and credit risk. For long-term debt, where there are no rates currently observable in publicly traded debt markets of similar terms and comparable credit risk, the Company uses market interest rates and adjusts those rates for necessary risks, including its own credit risk. In determining an appropriate spread to reflect its credit standing, the Company considers credit default swap spreads, bond yields of other long-term debt offered by the Company, and interest rates currently offered to the Company for similar debt instruments of comparable maturities. 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 years ended December 31, 2014 and 2013, the Company did not have any material assets that were measured at fair value due to impairment. 107 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 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. For the Company, guarantees primarily consist of card and travel protection programs, including: (cid:2) Return Protection — refunds the price of qualifying purchases made with the eligible cards where the merchant will not accept the return for up to 90 days from the date of purchase; and (cid:2) Merchant Protection — protects Card Members primarily against non-delivery of goods and services, usually in the event of bankruptcy or liquidation of a merchant. When this occurs, the Card Member may dispute the transaction for which the Company will generally credit the Card Member’s account. If the Company is unable to collect the amount from the merchant, it will bear the loss for the amount credited to the Card Member. The largest component of the maximum potential future payments relates to Card Member transactions associated with travel-related merchants, primarily through business arrangements where the Company has remitted payment to such merchant for a Card Member travel purchase that has not yet been used or “flown”. In relation to its maximum potential undiscounted future payments as shown in the table that follows, to date the Company has not experienced any significant losses related to guarantees. The Company’s initial recognition of guarantees is at fair value. In addition, the Company establishes reserves when a loss is probable and the amount can be reasonably estimated. The following table provides information related to such guarantees as of December 31: Type of Guarantee Return and Merchant Protection Other(c) Total Maximum potential undiscounted future payments(a) (Billions) Related liability(b) (Millions) 2014 2013 2014 $ $ 37 8 45 $ $ 37 8 45 $ $ 44 67 111 $ $ 2013 84 77 161 (a) Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed parties. The maximum potential undiscounted future payments for Merchant Protection are measured using management’s best estimate of maximum exposure based on all eligible claims in relation to annual billed business volumes. (b) Included in Other liabilities on the Company’s Consolidated Balance Sheets. (c) Primarily includes guarantees related to the Company’s purchase protection, business dispositions and real estate. 108 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 COMMON AND PREFERRED SHARES The following table shows authorized shares and provides a reconciliation of common shares issued and outstanding for the years ended December 31: (Millions, except where indicated) Common shares authorized (billions)(a) Shares issued and outstanding at beginning of year Repurchases of common shares Other, primarily stock option exercises and restricted stock awards granted Shares issued and outstanding as of December 31 2014 3.6 1,064 (49) 8 1,023 2013 3.6 1,105 (55) 14 1,064 2012 3.6 1,164 (69) 10 1,105 (a) Of the common shares authorized but unissued as of December 31, 2014, approximately 56 million shares are reserved for issuance under employee stock and employee benefit plans. On March 25, 2013, the Board of Directors authorized the repurchase of 150 million of common shares over time in accordance with the Company’s capital distribution plans submitted to the Federal Reserve and subject to market conditions. This authorization replaces all prior repurchase authorizations. During 2014 and 2013, the Company repurchased 49 million common shares with a cost basis of $4.4 billion and 55 million common shares with a cost basis of $4.0 billion, respectively. The cost basis includes commissions paid of $1.0 million and $1.1 million in 2014 and 2013, respectively. As of December 31, 2014, the Company has 59 million common shares remaining under the Board share repurchase authorization. Such authorization does not have an expiration date. Common shares are generally retired by the Company upon repurchase (except for 3.2 million, 3.5 million and 3.9 million shares held as treasury shares as of December 31, 2014, 2013 and 2012, respectively); retired common shares and treasury shares are excluded from the shares outstanding in the table above. The treasury shares, with a cost basis of $280 million, $260 million and $236 million as of December 31, 2014, 2013 and 2012, respectively, are included as a reduction to additional paid-in capital in shareholders’ equity on the Consolidated Balance Sheets. The Board of Directors is authorized to permit the Company to issue up to 20 million preferred shares at a par value of $1.662/3 without further shareholder approval. On November 10, 2014, the Company issued 750,000 depositary shares with an aggregate liquidation preference of $750 million, each representing a 1/1000th interest in a perpetual Fixed Rate/Floating Rate Noncumulative Preferred Share, Series B (Preferred Shares). Dividends on the Preferred Shares are payable, if declared, semi-annually at an annual rate of 5.2 percent on May 15 and November 15 of each year beginning on May 15, 2015 to, but excluding, November 15, 2019. From, and including, November 15, 2019, dividends will be paid, to three-month LIBOR plus 3.428 percent on February 15, May 15, August 15 and November 15 of each year, beginning on February 15, 2020. The Company may redeem the Preferred Shares in whole, or in part, from time to time, on any dividend payment date on or after November 15, 2019 or in whole, but not in part, within 90 days of certain bank regulatory changes at $1,000 per depositary share plus any declared but unpaid dividends. if declared, quarterly at an annual rate equal There were no preferred shares issued and outstanding as of December 31, 2013 and 2012. There were no warrants issued and outstanding as of December 31, 2014, 2013 and 2012. 109 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME AOCI is a balance sheet item in the Shareholders’ Equity section of the Company’s Consolidated Balance Sheets. It is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component of AOCI for the three years ended December 31 were as follows: (Millions), net of tax(a) Balances as of December 31, 2011 $ Net unrealized gains (Decrease) increase due to amounts reclassified into earnings Net translation gain of investments in foreign operations Net (losses) related to hedges of investment in foreign operations Pension and other postretirement (losses) benefit Net change in accumulated other comprehensive income (loss) Balances as of December 31, 2012 Net unrealized (losses) (Decrease) due to amounts reclassified into earnings Net translation (loss) of investments in foreign operations Net gains related to hedges of investment in foreign operations Pension and other postretirement benefit gains Net change in accumulated other comprehensive (loss) income Balances as of December 31, 2013 Net unrealized gains (Decrease) increase due to amounts reclassified into earnings Net translation (loss) of investments in foreign operations Net gains related to hedges of investment in foreign operations Pension and other postretirement (losses) benefit Net change in accumulated other comprehensive income (loss) Balances as of December 31, 2014 $ Net Unrealized Gains (Losses) on Investment Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Foreign Currency Translation Adjustments Net Unrealized Pension and Other Postretirement Benefit Losses Accumulated Other Comprehensive (Loss) Income (1) $ (682) $ (481) $ $ 288 106 (79) 27 315 (159) (93) (252) 63 104 (71) 1 1 — — — 33 96 $ — — $ 1 215 (288) (72) (754) (589) 253 (336) (1,090) 5 (869) 455 (409) (7) (7) (488) 89 89 (399) (117) (117) (1,499) $ (516) $ (876) 106 (77) 215 (288) (7) (51) (927) (159) (93) (589) 253 89 (499) (1,426) 104 (66) (869) 455 (117) (493) (1,919) (a) The following table shows the tax impact for the three years ended December 31 for the changes in each component of accumulated other comprehensive (loss) income: (Millions) Investment securities Cash flow hedges Foreign currency translation adjustments Net investment hedges Pension and other postretirement benefit losses Total tax impact $ $ 2014 2013 19 — (64) 273 (46) $ (142) $ — (49) 135 56 182 $ — $ 2012 7 1 24 (176) — (144) 110 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statements of Income for the years ended December 31: (Gains) losses recognized in income Amount Description (Millions) Available-for-sale securities Income Statement Line Item 2014 Net gain in AOCI reclassifications for previously unrealized net gains on investment securities Related income tax expense Other non-interest revenues $ Income tax provision Reclassification to net income related to available-for-sale securities Foreign currency translation adjustments Reclassification of realized losses on translation adjustments and related hedges Related income tax expense Other expenses Income tax provision $ 111 (40) 71 (9) 4 (5) Reclassification of foreign currency translation adjustments Total NOTE 19 NON-INTEREST REVENUE AND EXPENSE DETAIL The following is a detail of Other commissions and fees for the years ended December 31: (Millions) Foreign currency conversion fee revenue Delinquency fees Loyalty Partner-related fees Service fees Other(a) Total Other commissions and fees (a) Other primarily includes fee revenue from fees related to Membership Rewards programs. The following is a detail of Other revenues for the years ended December 31: (Millions) Gain on sale of investment in Concur Technologies Global Network Services partner revenues Net realized gains on investment securities(a) Other(b) Total Other revenues $ 66 $ $ $ 2014 877 722 383 366 160 $ 2013 877 667 310 375 185 $ 2,508 $ 2,414 $ 2014 744 694 100 1,451 2013 $ — $ 650 136 1,488 2,989 $ 2,274 $ $ $ 2013 145 (52) 93 — — — 93 2012 855 604 290 362 206 2,317 2012 — 664 126 1,635 2,425 (a) Net realized gains on investment securities include gross losses of nil, nil and $1 million for the years ended December 31, 2014, 2013 and 2012. Specific identification method is used to reclass unrealized gain (losses) into earnings from AOCI upon sale or maturity. (b) Other includes revenues arising from foreign exchange gains on cross-border Card Member spending, merchant-related fees, insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques-related revenues, revenues related to the GBT JV transition services agreement, earnings from equity method investments and other miscellaneous revenue and fees. The following is a detail of Marketing, promotion, rewards, Card Member services and other for the years ended December 31: (Millions) Marketing and promotion Card Member rewards Card Member services and other Total Marketing, promotion, rewards, Card Member services and other 2014 3,320 6,931 822 $ 2013 3,043 6,457 767 $ 11,073 $ 10,267 $ $ $ 2012 2,890 6,282 772 9,944 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. 111 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a detail of Other, net expenses for the years ended December 31: (Millions) Professional services Occupancy and equipment Card-related fraud losses Communications Gain on business travel joint venture transaction Other(a) Total Other, net $ $ 2014 3,008 1,807 369 383 (630) 1,152 $ 2013 3,102 1,904 278 379 — 1,133 $ 6,089 $ 6,796 $ 2012 2,963 1,823 278 383 — 1,404 6,851 (a) Other expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations (other than the joint venture transaction), litigation, certain internal and regulatory review-related reimbursements and insurance costs or settlements, business travel investment impairments and certain Loyalty Partner-related expenses. NOTE 20 RESTRUCTURING From time to time, the Company initiates restructuring programs to become more efficient and effective, and to support new business strategies. In connection with these programs, the Company typically will incur severance and other exit costs. During 2014, the Company recorded $411 million of restructuring charges, net of revisions to prior estimates. The 2014 activity primarily relates to $313 million and $133 million of restructuring charges recorded in the fourth quarter and second quarter, respectively. During 2012, the Company recorded $403 million of restructuring charges, net of revisions to prior estimates. The 2012 activity primarily relates to $400 million of restructuring charges recorded in the fourth quarter. Restructuring charges related to severance obligations are included in salaries and employee benefits in the Company’s Consolidated Statements of Income, while charges pertaining to other exit costs are included in occupancy and equipment and other expenses. The following table summarizes the Company’s restructuring reserves activity for the years ended December 31, 2014, 2013 and 2012: (Millions) Liability balance as of December 31, 2011 Restructuring charges, net of $16 in revisions(b) Payments Liability balance as of December 31, 2012 Restructuring charges, net of $4 in revisions(b) Payments Other non-cash(c) Liability balance at December 31, 2013 Restructuring charges, net of $35 in revisions(b) Payments Other non-cash(d) Liability balance as of December 31, 2014(e) Severance Other(a) $ $ 170 366 (124) 412 (7) (206) (3) 196 383 (93) (51) $ 30 37 (9) 58 3 (23) (1) 37 28 (22) (8) $ 435 $ 35 $ Total 200 403 (133) 470 (4) (229) (4) 233 411 (115) (59) 470 (a) Other primarily includes facility exit and contract termination costs. (b) Revisions primarily relate to higher than anticipated redeployments of displaced employees to other positions within the Company, business changes and modifications to existing initiatives. (c) Consists primarily of foreign exchange impacts. (d) Consists of $42 million reserve transferred to the GBT JV in the second quarter of 2014 as part of the GBT sale and $17 million of foreign exchange and other non-cash charges. (e) The majority of cash payments related to the remaining restructuring liabilities are expected to be completed in 2015, and to a lesser extent certain contractual long-term severance arrangements and lease obligations are expected to be completed in 2016 and 2019, respectively. 112 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company’s restructuring charges, net of revisions, by reportable operating segment and Corporate & Other for the year ended December 31, 2014, and the cumulative amounts relating to the restructuring programs that were in progress during 2014 and initiated at various dates between 2009 and 2014. (Millions) USCS ICS GCS GNMS Corporate & Other Total Cumulative Restructuring Expense Incurred To Date On In-Progress Restructuring Programs 2014 Total Restructuring Charges, net revisions Severance Other $ $ 38 139 54 25 155 411 $ $ 66 220 249 68 195 798 $ $ $ 6 1 18 — 96 121 $ Total 72 221 267 68 291(a) 919(b) (a) Corporate & Other includes certain severance and other charges of $222 million related to Company-wide support functions which were not allocated to the Company’s reportable operating segments, as these were corporate initiatives, which is consistent with how such charges were reported internally. (b) As of December 31, 2014, the total expenses to be incurred for previously approved restructuring activities that were in progress are not expected to be materially different than the cumulative expenses incurred to date for these programs. NOTE 21 INCOME TAXES The components of income tax expense for the years ended December 31 included in the Consolidated Statements of Income were as follows: (Millions) Current income tax expense: U.S. federal U.S. state and local Non-U.S. Total current income tax expense Deferred income tax expense (benefit): U.S. federal U.S. state and local Non-U.S. Total deferred income tax expense Total income tax expense $ 2014 2,136 264 412 2,812 352 39 (97) 294 3,106 $ 2013 1,730 288 514 2,532 $ 113 4 (120) (3) 2,529 $ $ $ 2012 982 189 445 1,616 359 39 (45) 353 1,969 A reconciliation of the U.S. federal statutory rate of 35% percent to the Company’s actual income tax rate for the years ended December 31 on continuing operations was as follows: U.S. statutory federal income tax rate (Decrease) increase in taxes resulting from: Tax-exempt income State and local income taxes, net of federal benefit Non-U.S. subsidiaries earnings(a) Tax settlements(b) All other Actual tax rates(a) 2014 35.0% (1.5) 2.7 (2.2) (0.5) 1.0 34.5% 2013 35.0% (1.6) 3.1 (2.8) (1.9) 0.3 32.1% 2012 35.0 % (1.6) 2.5 (5.2) (0.2) — 30.5 % (a) Results for all years primarily included tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely. In addition, 2012 included tax benefits of $146 million, which decreased the actual tax rates by 2.3 percent related to the realization of certain foreign tax credits. (b) Relates to the resolution of tax matters in various jurisdictions. The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. 113 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table: (Millions) Deferred tax assets: Reserves not yet deducted for tax purposes Employee compensation and benefits Other Gross deferred tax assets Valuation allowance Deferred tax assets after valuation allowance Deferred tax liabilities: Intangibles and fixed assets Deferred revenue Deferred interest Asset securitization Investment in joint ventures Other Gross deferred tax liabilities Net deferred tax assets $ $ 2014 3,926 789 266 4,981 (75) 4,906 1,597 498 350 162 223 62 2,892 $ 2,014 $ 2013 3,813 721 546 5,080 (121) 4,959 1,465 453 363 130 10 95 2,516 2,443 A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances as of December 31, 2014 and 2013 are associated with net operating losses and other deferred tax assets in certain non-U.S. operations of the Company. Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $9.7 billion as of December 31, 2014, are intended to be permanently reinvested outside the U.S. The Company does not provide for federal income taxes on foreign earnings intended to be permanently reinvested outside the U.S. Accordingly, federal taxes, which would have aggregated approximately $3.0 billion as of December 31, 2014, have not been provided on those earnings. Net income taxes paid by the Company during 2014, 2013 and 2012, were approximately $2.5 billion, $2.0 billion and $1.9 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years. The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome. The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2011. 114 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents changes in unrecognized tax benefits: (Millions) Balance, January 1 Increases: Current year tax positions Tax positions related to prior years Decreases: Tax positions related to prior years Settlements with tax authorities Lapse of statute of limitations Effects of foreign currency translations Balance, December 31 2014 2013 $ 1,044 $ 1,230 $ 4 111 (181) (67) (1) (1) 124 176 (371) (94) (21) — 2012 1,223 51 64 (44) (25) (37) (2) $ 909 $ 1,044 $ 1,230 Included in the unrecognized tax benefits of $0.9 billion, $1.0 billion and $1.2 billion for December 31, 2014, 2013 and 2012 are approximately $412 million, $427 million and $452 million, respectively that, if recognized, would favorably affect the effective tax rate in a future period. The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $489 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 $489 million of unrecognized tax benefits, approximately $369 million relates to amounts that if recognized would be recorded to shareholders’ equity and would not impact the Company’s results of operations or the effective tax rate. Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. During the years ended December 31, 2014, 2013 and 2012, the Company recognized benefits of approximately $19 million, $31 million and $8 million, respectively, of interest and penalties. The Company has approximately $126 million and $144 million accrued for the payment of interest and penalties as of December 31, 2014 and 2013, respectively. NOTE 22 EARNINGS PER COMMON SHARE (EPS) The computations of basic and diluted EPS for the years ended December 31 were as follows: (Millions, except per share amounts) Numerator: Basic and diluted: Net income Earnings allocated to participating share awards(a) Net income attributable to common shareholders Denominator:(a) Basic: Weighted-average common stock Add: Weighted-average stock options(b) Diluted Basic EPS Diluted EPS 2014 2013 2012 $ $ $ $ 5,885 (46) 5,839 $ $ 5,359 (47) 5,312 $ $ 1,045 6 1,051 1,082 7 1,089 5.58 5.56 $ $ 4.91 4.88 $ $ 4,482 (49) 4,433 1,135 6 1,141 3.91 3.89 (a) The Company’s unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator. (b) The dilutive effect of unexercised stock options excludes 0.2 million, 0.1 million and 7.6 million options from the computation of EPS for the years ended December 31, 2014, 2013 and 2012, respectively, because inclusion of the options would have been anti-dilutive. For the years ended December 31, 2014, 2013 and 2012, the Company met specified performance measures related to the Subordinated Debentures of $750 million issued in 2006, and maturing in 2036. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments. 115 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 REGULATORY MATTERS AND CAPITAL ADEQUACY The Company is supervised and regulated by the Federal Reserve and is subject to the Federal Reserve’s requirements for risk-based capital and leverage ratios. The Company’s two U.S. bank operating subsidiaries, American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB) (together, the Banks), are subject to supervision and regulation, including similar regulatory capital requirements by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), respectively. Under the risk-based capital guidelines of the Federal Reserve, the Company is required to maintain minimum ratios of Common Equity Tier 1 (CET1), Tier 1 and Total (Tier 1 plus Tier 2) capital to risk-weighted assets, as well as a minimum leverage ratio (Tier 1 capital to average adjusted on-balance sheet assets). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Company’s and the Banks’ operating activities. As of December 31, 2014 and 2013, the Company and its Banks met all capital requirements to which each was subject and maintained regulatory capital ratios in excess of those required to qualify as well capitalized. The following table presents the regulatory capital ratios for the Company and the Banks: (Millions, except percentages) December 31, 2014:(a) American Express Company American Express Centurion Bank American Express Bank, FSB December 31, 2013: American Express Company American Express Centurion Bank American Express Bank, FSB Well-capitalized ratios(e) Minimum capital ratios(e) CET1 capital(b) $ $ 17,525 6,174 6,722 (b) $ (b) (b) Tier 1 capital 18,176 6,174 6,722 16,174 6,366 6,744 Total CET1 Tier 1 Total Tier 1 capital capital ratio(b) capital ratio capital ratio leverage ratio $ $ 20,801 6,584 7,604 18,585 6,765 7,662 13.1 % 18.8 14.2 (b) (b) (b) (f) 4.0 % 13.6% 18.8 14.2 12.5% 19.9 15.6 6.0% 5.5% 15.6% 20.1 16.0 14.4% 21.2 17.7 10.0% 8.0% 11.8 % 18.7 15.1(c) 10.9 % 19.0 17.5(c) 5.0 %(d) 4.0 % (a) Beginning in 2014, as a Basel III Advanced Approaches institution, capital ratios are reported using Basel III capital definitions, inclusive of transition provisions and Basel I risk-weighted assets. (b) As part of the new Basel III capital rule, effective for 2014, Basel III Advanced Approaches institutions are required to disclose Common Equity Tier 1 capital and associated ratio. (c) FSB Tier 1 leverage ratio is calculated using ending total assets in 2013 and average total assets in 2014 as prescribed by OCC regulations applicable to federal savings banks. (d) Represents requirements for banking subsidiaries to be considered “well-capitalized” pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no “well-capitalized” definition for the Tier 1 leverage ratio for a bank holding company. (e) As defined by the regulations issued by the Federal Reserve, OCC and FDIC for the year ended December 31, 2014. (f) Beginning January 1, 2015, Basel III CET1 well-capitalized ratios become relevant capital measures under the prompt and corrective action requirements defined by the regulations for Advanced Approaches institutions. 116 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESTRICTED NET ASSETS OF SUBSIDIARIES Certain of the Company’s subsidiaries are subject to restrictions on the transfer of net assets under debt agreements and regulatory requirements. These restrictions have not had any effect on the Company’s shareholder dividend policy and management does not anticipate any impact in the future. Procedures exist to transfer net assets between the Company and its subsidiaries, while ensuring compliance with the various contractual and regulatory constraints. As of December 31, 2014, the aggregate amount of net assets of subsidiaries that are restricted to be transferred to the Company was approximately $11.0 billion. BANK HOLDING COMPANY DIVIDEND RESTRICTIONS The Company is limited in its ability to pay dividends by the Federal Reserve, which could prohibit a dividend that would be considered an unsafe or unsound banking practice. It is the policy of the Federal Reserve that bank holding companies generally should pay dividends on preferred and common stock only out of net income available to common shareholders generated over the past year, and only if prospective earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. Moreover, bank holding companies are required by statute to be a source of strength to their insured depository institution subsidiaries and should not maintain dividend levels that undermine their ability to do so. On an annual basis, the Company is required to develop and maintain a capital plan, which includes planned dividends over a two-year horizon, and to submit the capital plan to the Federal Reserve. BANKS’ DIVIDEND RESTRICTIONS In the years ended December 31, 2014 and 2013, Centurion Bank paid dividends from retained earnings to its parent of $1.9 billion and $1.4 billion, respectively, and FSB paid dividends from retained earnings to its parent of $2.1 billion and $1.8 billion, respectively. The Banks are subject to statutory and regulatory limitations on their ability to pay dividends. The total amount of dividends that may be paid at any date, subject to supervisory considerations of the Banks’ regulators, is generally limited to the retained earnings of the respective bank. As of December 31, 2014 and 2013, the Banks’ retained earnings, in the aggregate, available for the payment of dividends were $3.6 billion and $4.6 billion, respectively. In determining the dividends to pay its parent, the Banks must also consider the effects on applicable risk-based capital and leverage ratio requirements, as well as policy statements of the federal regulatory agencies. In addition, the Banks’ banking regulators have authority to limit or prohibit the payment of a dividend by the Banks under a number of circumstances, including if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound banking practice in light of the financial condition of the banking organization. NOTE 24 SIGNIFICANT CREDIT CONCENTRATIONS Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of counterparties whose aggregate credit exposure is material in relation to American Express’ total credit exposure. The Company’s customers operate in diverse industries, economic sectors and geographic regions. The following table details the Company’s maximum credit exposure by category, including the credit exposure associated with derivative financial instruments, as of December 31: (Billions) On-balance sheet: Individuals(a) Financial institutions(b) U.S. Government and agencies(c) All other(d) Total on-balance sheet(e) Unused lines-of-credit – individuals(f) 2014 2013 $ $ 101 25 4 17 147 278 $ $ 98 22 4 17 141 265 (a) Individuals primarily include Card Member loans and receivables. (b) Financial institutions primarily include debt obligations of banks, broker-dealers, insurance companies and savings and loan associations. (c) U.S. Government and agencies represent debt obligations of the U.S. Government and its agencies, states and municipalities and government-sponsored entities. (d) All other primarily includes Card Member receivables from other corporate institutions. (e) Certain distinctions between categories require management judgment. (f) Because charge card products generally have no preset spending limit, the associated credit limit on charge products is not quantifiable. Therefore, the quantified unused line-of-credit amounts only include the approximate credit line available on lending products. 117 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2014 and 2013, the Company’s most significant concentration of credit risk was with individuals, including Card Member receivables and loans. These amounts are generally advanced on an unsecured basis. However, the Company reviews each potential customer’s credit application and evaluates the applicant’s financial history and ability and willingness to repay. The Company also considers credit performance by customer tenure, industry and geographic location in managing credit exposure. The following table details the Company’s Card Member loans and receivables exposure (including unused lines-of-credit on Card Member loans) in the U.S. and outside the U.S. as of December 31: (Billions) On-balance sheet: U.S. Non-U.S. On-balance sheet(a)(b) Unused lines-of-credit – individuals: U.S. Non-U.S. Total unused lines-of-credit – individuals 2014 2013 $ $ 94 21 115 234 44 278 $ $ 89 22 111 219 46 265 (a) Represents Card Member loans to individuals as well as receivables from individuals and corporate institutions as discussed in footnotes (a) and (d) from the previous table. (b) The remainder of the Company’s on-balance sheet exposure includes cash, investments, other loans, other receivables and other assets including derivative financial instruments. These balances are primarily within the U.S. NOTE 25 REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC OPERATIONS 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 GNMS. The Company considers a combination of factors when evaluating the composition of its reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily U.S. versus non-U.S.), and regulatory environment considerations. The following is a brief description of the primary business activities of the Company’s four reportable operating segments: (cid:2) USCS issues a wide range of card products and services to consumers and small businesses in the U.S., and provides consumer travel services to Card Members and other consumers. (cid:2) ICS issues proprietary consumer and small business cards outside the U.S. and operates coalition loyalty business in various countries. (cid:2) GCS offers global corporate payment services to large and mid-sized companies. The Company’s business travel operations, which had been included in GCS, were deconsolidated effective June 30, 2014 in connection with the GBT JV transaction. (cid:2) GNMS operates a global payments network that processes and settles proprietary and non-proprietary card transactions. GNMS acquires merchants and provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the Company’s global closed-loop network. It enters into partnership agreements with third-party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network. Corporate functions and certain other businesses, including the Company’s Enterprise Growth Group and other operations, are included in Corporate & Other. 118 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents certain selected financial information as of or for the years ended December 31, 2014, 2013 and 2012: (Millions, except where indicated) USCS ICS GCS GNMS Corporate & Other(a) Consolidated 2014 Non-interest revenues Interest income Interest expense Total revenues net of interest expense Total provision Pretax income (loss) from continuing operations Income tax provision (benefit) Net income (loss) Total equity (billions) 2013 Non-interest revenues Interest income Interest expense Total revenues net of interest expense Total provision Pretax income (loss) from continuing operations Income tax provision (benefit) Net income (loss) Total equity (billions) 2012 Non-interest revenues Interest income Interest expense Total revenues net of interest expense Total provision Pretax income (loss) from continuing operations Income tax provision (benefit) Net income (loss) $ $ 12,732 5,786 604 17,914 1,396 5,100 1,900 3,200 10.4 12,123 5,565 693 16,995 1,250 4,994 1,801 3,193 9.3 11,469 5,342 765 16,046 1,253 4,069 1,477 2,592 $ 4,737 1,085 330 5,492 370 449 38 411 3.0 4,644 1,118 361 5,401 388 643 12 631 3.1 4,561 1,147 402 5,306 279 659 25 634 $ 5,173 15 240 4,948 180 2,408 865 1,543 3.8 5,085 13 245 4,853 129 1,244 384 860 3.7 4,995 11 257 4,749 106 960 316 644 $ 5,426 52 (269) 5,747 93 2,620 960 1,660 2.0 5,229 32 (252) 5,513 67 2,469 894 1,575 2.0 5,005 23 (243) 5,271 73 2,219 776 1,443 $ 752 241 802 191 5 (1,586) (657) (929) 1.5 846 277 911 212 (2) (1,462) (562) (900) 1.4 897 331 1,045 183 1 (1,456) (625) (831) Total equity (billions) $ 8.7 $ 2.9 $ 3.6 $ 2.0 $ 1.7 $ (a) Corporate & Other includes adjustments and eliminations for intersegment activity. 28,820 7,179 1,707 34,292 2,044 8,991 3,106 5,885 20.7 27,927 7,005 1,958 32,974 1,832 7,888 2,529 5,359 19.5 26,927 6,854 2,226 31,555 1,712 6,451 1,969 4,482 18.9 Total Revenues Net of Interest Expense The Company allocates discount revenue and certain other revenues among segments using a transfer pricing methodology. Within the USCS, ICS and GCS segments, discount revenue reflects the issuer component of the overall discount revenue generated by each segment’s Card Members; within the GNMS segment, discount revenue reflects the network and acquirer component of the overall discount revenue. Net card fees and travel commissions and fees are directly attributable to the segment in which they are reported. Interest and fees on loans and certain investment income is directly attributable to the segment in which it is reported. Interest expense represents an allocated funding cost based on a combination of segment funding requirements and internal funding rates. Provisions for Losses The provisions for losses are directly attributable to the segment in which they are reported. Expenses Marketing and promotion expenses are included in each segment based on actual expenses incurred, with the exception of brand advertising, which is primarily reflected in the GNMS and USCS segments. Rewards and Card Member services expenses are included in each segment based on actual expenses incurred within each segment. Salaries and employee benefits and other operating expenses include expenses such as professional services, occupancy and equipment and communications incurred directly within each segment. In addition, expenses related to the Company’s support services, such as technology costs, are allocated to each segment primarily based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated from Corporate & Other to the other segments based on a mix of each segment’s direct consumption of services and relative level of pretax income. 119 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital Each business segment is allocated capital based on established business model operating requirements, risk measures and regulatory capital requirements. Business model operating requirements include capital needed to support operations and specific balance sheet items. The risk measures include considerations for credit, market and operational risk. Income Taxes An income tax provision (benefit) is allocated to each business segment based on the effective tax rates applicable to various businesses that comprise the segment. GEOGRAPHIC OPERATIONS The following table presents the Company’s total revenues net of interest expense and pretax income (loss) from continuing operations in different geographic regions: (Millions) 2014(c) Total revenues net of interest expense Pretax income (loss) from continuing operations 2013(c) Total revenues net of interest expense Pretax income (loss) from continuing operations 2012(c) Total revenues net of interest expense Pretax income (loss) from continuing operations U.S. EMEA(a) JAPA(a) LACC(a) Other Unallocated(b) Consolidated $ $ $ 24,855 8,869 23,745 7,679 22,631 6,468 $ $ $ 3,767 525 3,700 524 3,594 505 $ $ $ 2,934 463 2,952 488 3,106 426 $ $ $ 2,888 683 2,900 701 2,774 605 $ $ $ (152) $ (1,549) 34,292 8,991 (323) $ (1,504) (550) $ (1,553) 32,974 7,888 31,555 6,451 (a) EMEA represents Europe, the Middle East and Africa; JAPA represents Japan, Asia/Pacific and Australia; and LACC represents Latin America, Canada and the Caribbean. (b) Other Unallocated includes net costs which are not directly allocable to specific geographic regions, including costs related to the net negative interest spread on excess liquidity funding and executive office operations expenses. (c) The data in the above table is, in part, based upon internal allocations, which necessarily involve management’s judgment. 120 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 PARENT COMPANY PARENT COMPANY — CONDENSED STATEMENTS OF INCOME Years Ended December 31 (Millions) 2014 2013 2012 Revenues Non-interest revenues Gain on sale of securities Other Total non-interest revenues Interest income Interest expense Total revenues net of interest expense Expenses Salaries and employee benefits Other Total Pretax loss Income tax benefit Net loss before equity in net income of subsidiaries and affiliates Equity in net income of subsidiaries and affiliates Net income PARENT COMPANY — CONDENSED BALANCE SHEETS As of December 31 (Millions) Assets Cash and cash equivalents Investment securities Equity in net assets of subsidiaries and affiliates Accounts receivable, less reserves Premises and equipment, less accumulated depreciation: 2014, $106; 2013, $76 Loans to subsidiaries and affiliates Due from subsidiaries and affiliates Other assets Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable and other liabilities Due to subsidiaries and affiliates Short-term debt of subsidiaries and affiliates Long-term debt Total liabilities Shareholders’ equity Preferred Shares Common shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity 121 $ $ 99 270 369 141 (543) (33) 275 357 632 (665) (249) (416) 6,301 $ 135 5 140 134 (583) (309) 206 261 467 (776) (297) (479) 5,838 $ 5,885 $ 5,359 $ 121 (12) 109 137 (609) (363) 165 214 379 (742) (258) (484) 4,966 4,482 2014 2013 $ $ 8,824 1 20,123 134 139 7,809 1,477 365 38,872 1,590 964 5,937 9,708 18,199 — 205 12,874 9,513 (1,919) 20,673 $ 38,872 $ 6,076 123 19,571 378 136 5,236 1,126 335 32,981 1,386 926 819 10,354 13,485 — 213 12,202 8,507 (1,426) 19,496 32,981 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PARENT COMPANY — CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31 (Millions) 2014 2013 2012 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to cash provided by operating activities Equity in net income of subsidiaries and affiliates Dividends received from subsidiaries and affiliates Gain on sale of securities Other operating activities, primarily with subsidiaries and affiliates Premium paid on debt exchange Net cash provided by operating activities Cash Flows from Investing Activities Sales of available-for-sale investment securities Purchase of premises and equipment Loans to subsidiaries and affiliates Investments in subsidiaries and affiliates Net cash (used in) provided by investing activities Cash Flows from Financing Activities (Principal payments on) / issuance of long-term debt Short-term debt of subsidiaries and affiliates Issuance of American Express preferred shares Issuance of American Express common shares and other Repurchase of American Express common shares Dividends paid Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information Non-cash financing activities Charge related to impact of debt exchange on long-term debt Gain on business travel joint venture transaction $ 5,885 $ 5,359 $ 4,482 (6,301) 5,455 (99) 173 — 5,113 111 (39) (2,574) — (2,502) (655) 5,118 742 362 (4,389) (1,041) 137 2,748 6,076 (5,838) 4,768 (135) 324 — 4,478 157 (39) 1,498 — 1,616 843 (1,497) — 721 (3,943) (939) (4,815) 1,279 4,797 8,824 $ 6,076 $ (4,966) 3,355 (121) 196 (541) 2,405 118 (38) (1,601) (11) (1,532) — 1,421 — 443 (3,952) (902) (2,990) (2,117) 6,914 4,797 — $ $ 630 — $ — $ 439 — $ $ $ 122 AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27 QUARTERLY FINANCIAL DATA (UNAUDITED) (Millions, except per share amounts) Quarters Ended Total revenues net of interest expense Pretax income Net income Earnings Per Common Share – Basic: Net income attributable to common shareholders(a) Earnings Per Common Share – Diluted: Net income attributable to common shareholders(a) Cash dividends declared per common share Common share price: High Low $ 12/31 9,107 2,225 1,447 $ 2014 9/30 8,329 2,246 1,477 $ 6/30 8,657 2,312 1,529 $ 3/31 8,199 2,208 1,432 $ 12/31 8,547 1,980 1,308 $ 2013 9/30 8,301 2,004 1,366 $ 6/30 8,245 1,995 1,405 $ 3/31 7,881 1,909 1,280 $ 1.40 $ 1.41 $ 1.44 $ 1.34 $ 1.22 $ 1.26 $ 1.28 $ 1.15 1.39 0.26 1.40 0.26 1.43 0.26 1.33 0.23 1.21 0.23 1.25 0.23 1.27 0.23 94.89 78.41 $ 96.24 85.75 96.04 83.99 $ $ 94.35 82.63 $ 90.79 72.08 $ 78.63 71.47 $ 78.61 63.43 $ $ 1.15 0.20 67.48 58.31 (a) Represents net income, less earnings allocated to participating share awards of $11 million for the quarter ended December 31, 2014, $11 million for the quarter ended September 30, 2014, $12 million for the quarter ended June 30, 2014, $12 million for the quarter ended March 31, 2014, $11 million for the quarter ended December 31, 2013, $12 million for the quarter ended September 30, 2013, $13 million for the quarter ended June 30, 2013 and $11 million for the quarter ended March 31, 2013. 123 AMERICAN EXPRESS COMPANY CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Millions, except per share amounts, share data, percentages and where indicated) 2014 2013 2012 2011 2010 Operating Results Total revenues net of interest expense(a) Expenses(a) Provisions for losses Income from continuing operations Income (loss) from discontinued operations Net income Return on average equity(b) Return on average assets(c) Balance Sheet Cash and cash equivalents Accounts receivable, net Loans, net Investment securities Total assets Customer deposits Travelers Cheques outstanding and other prepaid products Short-term borrowings(d) Long-term debt Shareholders’ equity Average shareholders’ equity to average total assets ratio Common Share Statistics Earnings per share: Income from continuing operations: Basic Diluted Income (loss) from discontinued operations: Basic Diluted Net income: Basic Diluted Cash dividends declared per share Dividend payout ratio(e) Book value per share Market price per share: High Low Close Average common shares outstanding for earnings per share: Basic Diluted Shares outstanding at period end Other Statistics Number of employees at period end (thousands): U.S. Outside the U.S. Total(f) Number of shareholders of record $ $ $ $ $ $ $ $ $ $ $ $ 34,292 23,257 2,044 5,885 — 5,885 29.1% 3.8% 22,288 47,000 70,104 4,431 159,103 44,171 3,673 3,480 57,955 20,673 13.1% 5.58 5.56 — — 5.58 5.56 1.01 18.1% 20.21 96.24 78.41 93.04 1,045 1,051 1,023 22 32 54 25,767 $ $ $ $ $ $ 32,974 23,254 1,832 5,359 — 5,359 27.8% 3.5% 19,486 47,185 66,585 5,016 153,375 41,763 4,240 5,021 55,330 19,496 12.6% 4.91 4.88 — — 4.91 4.88 0.89 18.1% 18.32 90.79 58.31 90.73 1,082 1,089 1,064 26 37 63 22,238 $ $ $ $ $ $ 31,555 23,392 1,712 4,482 — 4,482 23.1% 3.0% 22,250 45,914 64,309 5,614 153,140 39,803 4,601 3,314 58,973 18,886 12.9% 3.91 3.89 — — 3.91 3.89 0.80 20.5% 17.09 61.42 47.40 57.48 1,135 1,141 1,105 27 37 64 32,565 $ $ $ $ $ $ 29,962 21,894 1,112 4,899 36 4,935 27.7% 3.3% 24,893 44,109 61,166 7,147 153,337 37,898 5,123 4,337 59,570 18,794 12.0% 4.11 4.09 0.03 0.03 4.14 4.12 0.72 17.4% 16.15 53.8 41.30 47.17 1,178 1,184 1,164 29 33 62 35,541 27,582 19,411 2,207 4,057 — 4,057 27.5% 2.8% 16,356 40,434 57,616 14,010 146,689 29,727 5,618 3,620 66,416 16,230 10.2% 3.37 3.35 — — 3.37 3.35 0.72 21.4% 13.56 49.19 36.6 42.92 1,188 1,195 1,197 29 32 61 38,384 (a) In the first quarter of 2013, the Company reclassified $27 million on the December 31, 2012 Consolidated Statements of Income by reducing other revenue and reducing marketing, promotion, rewards, and Card Member services expense, from amounts previously reported in order to conform to the current period presentation. (b) Return on average equity is calculated by dividing one-year period of net income by one-year average of total shareholders’ equity. (c) Return on average assets is calculated by dividing one-year period of net income by one-year average of total assets. (d) In the first quarter of 2012, the Company reclassified $913 million and $206 million on the December 31, 2011 and 2010 Consolidated Balance Sheets, respectively, by increasing short-term borrowings and reducing other liabilities, from amounts previously reported in order to correct the effect of a misclassification. (e) Calculated on year’s dividends declared per share as a percentage of the year’s net income per basic share. (f) Amounts include employees from discontinued operations. 124 AMERICAN EXPRESS COMPANY COMPARISON OF FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS Cumulative Value of $100 Invested on December 31, 2009 AXP S&P 500 Index S&P Financial Index $300 $250 $200 $150 $100 $50 $0 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Year-end Data* American Express S&P 500 Index S&P Financial Index 2009 100.00 100.00 100.00 $ $ $ 2010 107.70 114.82 112.03 $ $ $ $ $ $ 2011 120.17 117.22 93.05 $ $ $ 2012 148.42 135.83 119.59 $ $ $ 2013 236.50 179.36 161.80 $ $ $ 2014 245.08 203.60 186.05 This chart compares the cumulative total shareholder return on our common shares with the total return on the S&P 500 Index and the S&P Financial Index for the last five years. It shows the growth of a $100 investment on December 31, 2009, including the reinvestment of all dividends. * Source: Bloomberg (returns compounded annually) 125 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK EXECUTIVE OFFICERS Kenneth I. Chenault Chairman and Chief Executive Officer Douglas E. Buckminster President, Global Network and International Card Services James P. Bush Executive Vice President, World Service Jeffrey C. Campbell Executive Vice President and Chief Financial Officer L. Kevin Cox Chief Human Resources Officer Edward P. Gilligan President BOARD OF DIRECTORS Charlene Barshefsky Senior International Partner WilmerHale Ursula M. Burns Chairman and Chief Executive Officer Xerox Corporation Kenneth I. Chenault Chairman and Chief Executive Officer American Express Company Peter Chernin Founder and Chairman Chernin Entertainment, Inc. Marc D. Gordon Executive Vice President and Chief Information Officer Ash Gupta Chief Risk Officer and President, Risk and Information Management John D. Hayes Executive Vice President and Chief Marketing Officer Michael J. O’Neill Executive Vice President, Corporate Affairs and Communications Neal Sample President, Enterprise Growth Laureen E. Seeger Executive Vice President and General Counsel Joshua G. Silverman President, Consumer Products and Services Susan Sobbott President, Global Corporate Payments Stephen J. Squeri Group President, Global Corporate Services Anré Williams President, Global Merchant Services Theodore J. Leonsis Chairman and Chief Executive Officer Monumental Sports & Entertainment, LLC Daniel L. Vasella Honorary Chairman and Former Chairman and Chief Executive Officer Novartis AG Robert D. Walter Founder and Former Chairman and Chief Executive Officer Cardinal Health, Inc. Ronald A. Williams Former Chairman and Chief Executive Officer Aetna Inc. Richard C. Levin Chief Executive Officer Coursera President Emeritus Yale University Samuel J. Palmisano Former Chairman, President and Chief Executive Officer International Business Machines Corporation (IBM) Steven S Reinemund Former Dean Wake Forest School of Business Retired Chairman and Chief Executive Officer PepsiCo Anne Lauvergeon Chairman and Chief Executive Officer A.L.P SAS ADVISORS TO THE BOARD OF DIRECTORS Vernon E. Jordan, Jr. Senior Managing Director Lazard Freres & Co. LLC Henry A. Kissinger Chairman, Kissinger Associates, Inc. Former Secretary of State of the United States of America Frank P. Popoff Former Chairman and Chief Executive Officer The Dow Chemical Company GENERAL INFORMATION EXECUTIVE OFFICES ANNUAL MEETING For more information, contact: American Express Company 200 Vesey Street New York, NY 10285 212.640.2000 INFORMATION AVAILABLE TO SHAREHOLDERS Copies of the company’s Form 10-K, proxy statement, press releases and other documents, as well as information on financial results, products and services, are available on the American Express website at americanexpress.com. Information on the company’s corporate social responsibility programs and a report on the company’s federal and state political contributions are available at americanexpress.com. Written copies of these materials are available without charge upon written request to the Secretary’s Office at the address above. The Annual Meeting of Shareholders of American Express Company will be held at the company’s headquarters at 200 Vesey Street, New York, NY 10285, on Monday, May 11, 2015, at 9:00 a.m., Eastern Time. A written transcript of the meeting will be available upon written request to the Secretary’s Office. CORPORATE GOVERNANCE Copies of American Express Company’s governance documents, including its Corporate Governance Principles, as well as the charters of the standing committees of the Board of Directors and the American Express Company Code of Conduct, are available on the company’s website at ir.americanexpress.com. Copies of these materials are also available without charge upon written request to the Secretary’s Office at the address above. TRANSFER AGENT AND REGISTRAR DIRECT DEPOSIT OF DIVIDENDS Computershare Shareowner Services LLC 250 Royall Street, Canton, MA 02021 800.463.5911 or 201.680.6578 Hearing impaired: 800.231.5469 www.computershare.com/investor STOCK EXCHANGE LISTING New York Stock Exchange (Symbol: AXP) INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 300 Madison Avenue New York, NY 10017-6204 The company has established an Electronic Direct Deposit of Dividends service for the electronic payment of quarterly dividends on the company’s common shares. With this service, registered shareholders may have their dividend payments sent electronically to their checking account or financial institution on the payment date. Shareholders interested in enrolling in this service should call Computershare Shareowner Services LLC at 800.463.5911. STOCK PURCHASE PLAN The CIP Plan, a direct stock purchase plan sponsored and administered by Computershare, provides shareholders and new investors with a convenient way to purchase common shares through optional cash investments and reinvestment of dividends. m o c . i n o s d d a . w w w i n o s d d A y b i n g s e D Computershare Shareowner Services LLC P.O. Box 30170 College Station, TX 77842-3170 800.463.5911 www.computershare.com/investor SHAREHOLDER AND INVESTOR INQUIRIES Written shareholder inquiries may be sent either to Computershare Shareowner Services LLC Investor Care Network, P.O. Box 30170, College Station, TX 77842-3170, or to the Secretary’s Office at American Express Company’s executive offices at the address above. Written inquiries from the investment community should be sent to Investor Relations at American Express Company’s executive offices at the address above. TRADEMARKS AND SERVICE MARKS The following American Express trademarks and service marks may appear in this report: American Express® American Express Blue Box Logo American Express Card Design American Express World Service & Design Amex EveryDay® Credit Card Blue Cash Everyday® Card Bluebird® Centurion® The Centurion® Lounge Loyalty Partner® Membership Rewards® Opt Blue® PAYBACK® Platinum Card® Serve® Shop Small® Small Business Saturday® ©2015 American Express Company. All rights reserved. A M E R I C A N E X P R E S S C O M P A N Y A N N U A L R E P O R T 2 0 1 4 AMERICAN EXPRESS COMPANY A M E R I C A N E X P R E S S C O M PA N Y 200 Vesey Street, New York, NY 10285 212.640.2000 www.americanexpress.com A N N U A L R E P O R T

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