EX-13 3 axp_ex13a.txt EXHIBIT 13 FINANCIAL REVIEW CONSOLIDATED RESULTS OF OPERATIONS 2000 was a strong year for American Express Company (the company). We delivered very positive financial results while also making significant investments to develop our business. We had solid growth in cards-in-force, average spending per card and average loans in both the United States and internationally at Travel Related Services (TRS), as well as higher sales and greater average managed assets at American Express Financial Advisors (AEFA). The company's 2000 results met or exceeded its long-term targets of achieving, on average and over time: 12 to 15 percent earnings per share growth, at least 8 percent growth in revenues and return on equity of 18 to 20 percent. The company reported record 2000 net income of $2.81 billion, 14 percent higher than the $2.48 billion in 1999, which represented 16 percent growth from 1998. The 1998 results included several first quarter items: a $138 million (after-tax) credit loss provision at American Express Bank (AEB) relating to its Asia/Pacific portfolio, as well as income in the Corporate segment of $78 million (after-tax) representing gains on the sale of First Data Corporation shares and a preferred dividend based on Lehman Brothers' earnings. Excluding these items, 1999 net income rose 12 percent. Diluted earnings per share were $2.07, $1.81 and $1.54 in 2000, 1999 and 1998, respectively. After adjusting 1998 for the above-mentioned AEB credit loss provision and the Corporate gains, diluted earnings per share were $1.59 for that year. On this basis, 2000 and 1999 earnings per share both rose 14 percent. Consolidated net revenues on a managed basis rose 13 percent in 2000 to $22.1 billion, compared with $19.5 billion in 1999, which also represented 13 percent growth from the prior year. The company expects that the weak financial markets and the economic slowdown of the last quarter of 2000 will continue to present challenges in 2001, and be most pronounced early in the year, particularly at AEFA. These challenges are expected to be mitigated by reengineering and cost reduction initiatives that should gain momentum as the year progresses; as a result, full-year 2001 earnings per share growth is expected to be at the low end of our target range. This financial review is presented on the basis used by management to evaluate operations. It differs in two respects from the accompanying financial statements, which are prepared in accordance with accounting principles generally accepted in the United States. First, results are presented as if there had been no asset securitizations at TRS. This format is generally termed on a "managed basis." Second, revenues are shown net of AEFA's provisions for annuities, insurance and investment certificates products, which are essentially spread businesses. 1 (2000 Annual Report p. 26) TRAVEL RELATED SERVICES
RESULTS OF OPERATIONS STATEMENTS OF INCOME (Managed Basis) Years Ended December 31, (Millions) 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- Net Revenues: Discount Revenue $ 7,779 $ 6,741 $ 6,115 Net Card Fees 1,653 1,604 1,584 Lending: Finance Charge Revenue 3,977 2,884 2,470 Interest Expense 1,594 955 810 --------------------------------------------------------------------------------------------------------------- Net Finance Charge Revenue 2,383 1,929 1,660 Travel Commissions and Fees 1,821 1,802 1,647 Travelers Cheque Investment Income 387 345 330 Other Revenues 3,418 2,813 2,188 --------------------------------------------------------------------------------------------------------------- Total Net Revenues 17,441 15,234 13,524 --------------------------------------------------------------------------------------------------------------- Expenses: Marketing and Promotion 1,348 1,247 1,130 Provision for Losses and Claims: Charge Card 1,157 995 994 Lending 1,486 1,186 1,093 Other 105 85 90 --------------------------------------------------------------------------------------------------------------- Total 2,748 2,266 2,177 Charge Card Interest Expense 1,408 1,055 1,040 Human Resources 4,126 3,931 3,610 Other Operating Expenses 5,098 4,352 3,497 --------------------------------------------------------------------------------------------------------------- Total Expenses 14,728 12,851 11,454 --------------------------------------------------------------------------------------------------------------- Pretax Income 2,713 2,383 2,070 Income Tax Provision 784 691 579 --------------------------------------------------------------------------------------------------------------- Net Income $ 1,929 $ 1,692 $ 1,491 ===============================================================================================================
Travel Related Services reported earnings of $1.93 billion in 2000, a 14 percent increase from $1.69 billion in 1999. 1998 earnings were $1.49 billion. TRS' net revenues on a managed basis rose 14 percent and 13 percent in 2000 and 1999, respectively. In both years, TRS' net revenues benefited from growth in worldwide billed business and Cardmember loans outstanding; in addition, 1999 benefited from higher travel commissions and fees. In both 2000 and 1999, growth in billed business was due to higher average spending per Basic Cardmember and growth in average cards outstanding. Greater average spending per Basic Cardmember resulted from several factors, including the benefits of rewards programs and expanded merchant coverage. The increase in U.S. cards during both 2000 and 1999 reflects a greater level of consumer and small business services card acquisition activities, including those related to the Blue and co-branded Costco card products launched in 1999. The international increase in both 2000 and 1999 includes growth in proprietary products, as well as the addition of a substantial number of new network cards. 2 (2000 Annual Report p. 27) Discount revenue rose 15 percent in 2000 and 10 percent in 1999 as a result of higher worldwide billed business. The growth in billed business in both 2000 and 1999 reflects increases in retail and "everyday spend" categories. The increase in 2000 is also the result of growth in airline billings. In 1999, billed business increased despite (i) a general tightening of corporate travel and entertainment expenses which began in the latter half of 1998 and (ii) the company's decision to withdraw from the U.S. Government Card business in the fourth quarter of 1998, which caused the cancellation of 1.6 million U.S. Government cards, representing approximately $3.5 billion in annualized spending. Net card fees increased slightly in 2000 and 1999, reflecting growth in cards-in-force. Lending net finance charge revenue rose 23 percent and 16 percent in 2000 and 1999, respectively, from higher worldwide lending balances. In both 2000 and 1999, the increases were partly offset by a narrowing of interest margins in the U.S. portfolio, as a greater portion of the portfolio was on lower introductory rates, and relatively more products were offered with fixed and lower rates. Travel commissions and fees improved in 2000 and 1999 on an increase in travel sales; the slight increase for 2000 reflects the impact of the sale of an international leisure travel business. In 1999, the improvement was a result of acquisitions during 1998; these acquisitions increased revenues and expenses but did not have a material effect on net income. Both 2000 and 1999 include increased travel sales volumes, offset in part by the continued efforts by airlines to reduce distribution costs and by corporate travel and entertainment expense containment efforts. Travelers Cheque (TC) investment income rose in both years because of an increase in average investments. The increase in other revenues in 2000 and 1999 include the effect of acquisitions and higher fee income. The growth in marketing and promotion expense in both years reflects higher media, card acquisition and merchant-related advertising costs. In 2000, the worldwide Charge Card provision rose mainly due to higher volumes; in 1999, the provision was essentially unchanged from the prior year, as higher volumes were offset by lower loss rates. The worldwide lending provision rose in both 2000 and 1999 due to portfolio growth, offset in part by improved credit quality. Charge Card interest expense rose in 2000 and 1999 as a result of higher volumes; in addition, the increase in 2000 was due to higher borrowing rates. In 1999, the increase was partly offset by lower borrowing rates. The growth in human resources expense in both years was primarily due to larger business volumes and merit increases; in 1999, this increase was also due to acquisitions and greater contract programmer costs for technology-related projects. Other operating expenses rose in 2000 and 1999 due to Cardmember loyalty programs, business growth and investment spending. 3 (2000 Annual Report p. 28)
SELECTED STATISTICAL INFORMATION (Billions, except percentages and where indicated) Years Ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------- Total Cards-In-Force (millions): United States 33.3 29.9 27.8 Outside the United States 18.4 16.1 14.9 ---------------------------------------------------------------------------------------------------------------------- Total 51.7 46.0 42.7 ---------------------------------------------------------------------------------------------------------------------- Basic Cards-In-Force (millions): United States 26.3 23.4 21.7 Outside the United States 13.9 12.3 11.5 ---------------------------------------------------------------------------------------------------------------------- Total 40.2 35.7 33.2 ---------------------------------------------------------------------------------------------------------------------- Card Billed Business: United States $ 221.7 $ 186.4 $ 165.6 Outside the United States 75.0 67.7 61.9 ---------------------------------------------------------------------------------------------------------------------- Total $ 296.7 $ 254.1 $ 227.5 ---------------------------------------------------------------------------------------------------------------------- Average Discount Rate* 2.70% 2.72% 2.73% Average Basic Cardmember Spending (dollars)* $ 8,229 $ 7,758 $ 6,885 Average Fee per Card--Managed (dollars)* $ 36 $ 39 $ 38 Non-Amex Brand:** Cards-in-Force (millions) 0.6 0.3 0.2 Billed Business $ 3.2 $ 0.7 $ 0.2 Travel Sales $ 22.6 $ 22.5 $ 19.9 Travel Commissions and Fees/Sales 8.1% 8.0% 8.3% Travelers Cheque: Sales $ 24.6 $ 23.3 $ 23.6 Average Outstandings $ 6.4 $ 6.2 $ 6.0 Average Investments $ 6.2 $ 5.9 $ 5.8 Tax Equivalent Yield 8.9% 8.8% 9.0% Managed Charge Card Receivables:*** Total Receivables $ 29.0 $ 27.0 $ 24.0 90 Days Past Due as a % of Total 2.3% 2.5% 2.7% Loss Reserves (millions) $ 964 $ 857 $ 897 % of Receivables 3.3% 3.2% 3.7% % of 90 Days Past Due 142% 126% 138% Net Loss Ratio 0.36% 0.41% 0.46% Managed U.S. Cardmember Lending:*** Total Loans $ 28.7 $ 23.4 $ 16.7 Past Due Loans as a % of Total: 30-89 Days 1.9% 1.8% 2.2% 90+ Days 0.9% 0.8% 0.9% Loss Reserves (millions): Beginning Balance $ 672 $ 619 $ 589 Provision 1,258 994 961 Net Charge-Offs/Other (1,110) (941) (931) --------------------------------------------------------------------------------------------------------------------- Ending Balance $ 820 $ 672 $ 619 ===================================================================================================================== % of Loans 2.9% 2.9% 3.7% % of Past Due 104% 110% 120% Average Loans $ 25.8 $ 18.9 $ 15.0 Net Write-Off Rate 4.4% 5.0% 6.4% Net Interest Yield 7.6% 8.6% 9.5% =====================================================================================================================
* Computed from proprietary card activities only. ** This data relates to Visa and Eurocards issued in connection with joint venture activities. *** Managed Cardmember receivables and loans include securitized assets not reflected on the Consolidated Balance Sheets. 4 (2000 Annual Report p. 29) EFFECT OF SECURITIZATIONS TRS securitizes loans and receivables in the normal course of its business. The above statements of income and related discussion present TRS results on a managed basis, as if there had been no securitization transactions. See Note 4 to the Consolidated Financial Statements for further information regarding the company's securitizations. On a GAAP reporting basis, TRS results included securitization gains of $142 million ($92 million after-tax) in 2000, $154 million ($100 million after-tax) in 1999, and $36 million ($23 million after-tax) in 1998. These gains were offset by higher expenses related to card acquisition initiatives and, therefore, had no material impact on net income or total expenses in any year. The following tables reconcile the TRS income statement from a managed basis to a GAAP basis. These tables are not complete statements of income, as they include only those income statement items that are affected by securitizations.
Year Ended December 31, (Millions) 2000 ------------------------------------------------------------------------------------------------------------------------------- Managed Basis Securitization Effect GAAP Basis ------------------------------------------------------------------------------------------------------------------------------- Net Revenues: Net Card Fees $ 1,653 $ (2) $ 1,651 Lending Net Finance Charge Revenue 2,383 (1,396) 987 Other Revenues 3,418 1,077 4,495 Total Net Revenues 17,441 (321) 17,120 Expenses: Marketing and Promotion 1,348 86 1,434 Provision for Losses and Claims: Charge Card 1,157 (151) 1,006 Lending 1,486 (595) 891 Charge Card Interest Expense 1,408 (206) 1,202 Net Discount Expense -- 489 489 Other Operating Expenses 5,098 56 5,154 Total Expenses 14,728 (321) 14,407 Pretax Income $ 2,713 $ -- $ 2,713 =============================================================================================================================== Year Ended December 31, (Millions) 1999 ------------------------------------------------------------------------------------------------------------------------------- Managed Basis Securitization Effect GAAP Basis ------------------------------------------------------------------------------------------------------------------------------- Net Revenues: Net Card Fees $ 1,604 $ (5) $ 1,599 Lending Net Finance Charge Revenue 1,929 (596) 1,333 Other Revenues 2,813 497 3,310 Total Net Revenues 15,234 (104) 15,130 Expenses: Marketing and Promotion 1,247 91 1,338 Provision for Losses and Claims: Charge Card 995 (130) 865 Lending 1,186 (387) 799 Charge Card Interest Expense 1,055 (220) 835 Net Discount Expense -- 479 479 Other Operating Expenses 4,352 63 4,415 Total Expenses 12,851 (104) 12,747 Pretax Income $ 2,383 $ -- $ 2,383 ===============================================================================================================================
5 (2000 Annual Report p. 30)
Year Ended December 31, (Millions) 1998 ------------------------------------------------------------------------------------------------------------------------------- Managed Basis Securitization Effect GAAP Basis ------------------------------------------------------------------------------------------------------------------------------- Net Revenues: Net Card Fees $ 1,584 $ 3 $ 1,587 Lending Net Finance Charge Revenue 1,660 (306) 1,354 Other Revenues 2,188 309 2,497 Total Net Revenues 13,524 6 13,530 Expenses: Marketing and Promotion 1,130 36 1,166 Provision for Losses and Claims: Charge Card 994 (293) 701 Lending 1,093 (171) 922 Charge Card Interest Expense 1,040 (231) 809 Net Discount Expense -- 665 665 Total Expenses 11,454 6 11,460 Pretax Income $ 2,070 $ -- $ 2,070 ===============================================================================================================================
LIQUIDITY AND CAPITAL RESOURCES SELECTED BALANCE SHEET INFORMATION December 31, (Billions, except percentages) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Accounts Receivable, net $29.6 $25.6 Travelers Cheque Investments $ 6.5 $ 6.0 U.S. Cardmember Loans $17.4 $16.1 Total Assets $71.4 $63.2 Travelers Cheques Outstanding $ 6.1 $ 6.2 Short-term Debt $36.7 $31.3 Long-term Debt $ 3.3 $ 4.4 Total Liabilities $64.8 $57.7 Total Shareholder's Equity $ 6.6 $ 5.5 Return on Average Equity* 33.0% 31.2% Return on Average Assets* 3.0% 3.1% =============================================================================================================================== *Excluding the effect of SFAS No. 115.
The American Express Credit Account Master Trust (the Trust) securitized $4 billion of loans in both 2000 and 1999, through the public issuance of investor certificates. The securitized assets consist of loans arising in a portfolio of designated consumer American Express credit card, Optima Line of Credit and Sign & Travel/Special Purchase Account revolving credit accounts or features owned by American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS, and, in the future, may include other charge or credit accounts or features or products. At December 31, 2000 and 1999, TRS had a total of $11 billion and $7 billion, respectively, of Trust-related securitized loans, which are not on the Consolidated Balance Sheets. In February 2001, the Trust securitized an additional $750 million of loans. In addition, the American Express Master Trust (the Master Trust) securitizes Charge Card receivables generated under designated American Express Card, Gold Card and Platinum Card consumer accounts through the issuance of trust certificates. In 2000 and 1999, $600 million and $500 million Class A Fixed Rate Accounts Receivable Trust Certificates, respectively, matured from the Charge Card securitization portfolio. At December 31, 2000 and 1999, TRS had securitized receivables of $2.85 billion and $3.45 billion, respectively, which are not on the Consolidated Balance Sheets. 6 (2000 Annual Report p. 31) In 1999, TRS issued and sold, exclusively outside the United States and to non-U.S. persons, $500 million 5.625% Fixed Rate Notes. These notes are listed on the Luxembourg Stock Exchange, and will mature in 2004. In 2000, American Express Credit Corporation (Credco), a wholly-owned subsidiary of TRS, called $150 million 1.125% Cash Exchangeable Notes due 2003. The notes were exchangeable for an amount in cash which was linked to the price of the common shares of the company. Credco had entered into agreements to fully hedge its obligations. Accordingly, the related hedging agreements were called at the same time. TRS, primarily through Credco, maintained commercial paper outstanding of approximately $20.4 billion at an average interest rate of 6.4% and approximately $18.5 billion at an average interest rate of 5.6% at December 31, 2000 and 1999, respectively. Unused lines of credit of approximately $9.7 billion, which expire in increments from 2001 through 2002, were available at December 31, 2000 to support a portion of TRS' commercial paper borrowings. Borrowings under bank lines of credit totaled $1.4 billion and $1.5 billion at December 31, 2000 and 1999, respectively.
AMERICAN EXPRESS FINANCIAL ADVISORS RESULTS OF OPERATIONS STATEMENTS OF INCOME Years Ended December 31, (Millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Revenues: Investment Income $2,292 $2,443 $2,437 Management and Distribution Fees 2,812 2,270 1,851 Other Revenues 1,026 923 807 ------------------------------------------------------------------------------------------------------------------------------- Total Revenues 6,130 5,636 5,095 =============================================================================================================================== Provision for Losses and Benefits: Annuities 1,018 1,071 1,150 Insurance 556 522 489 Investment Certificates 337 306 275 ------------------------------------------------------------------------------------------------------------------------------- Total 1,911 1,899 1,914 =============================================================================================================================== Net Revenues 4,219 3,737 3,181 ------------------------------------------------------------------------------------------------------------------------------- Expenses: Human Resources 2,093 1,744 1,530 Other Operating Expenses 643 630 459 ------------------------------------------------------------------------------------------------------------------------------- Total Expenses 2,736 2,374 1,989 =============================================================================================================================== Pretax Income 1,483 1,363 1,192 Income Tax Provision 451 428 374 ------------------------------------------------------------------------------------------------------------------------------- Net Income $1,032 $ 935 $ 818 ===============================================================================================================================
American Express Financial Advisors (AEFA) reported increases in net revenues of 13 percent and 17 percent and earnings of 10 percent and 14 percent for 2000 and 1999, respectively. Revenues and earnings in both years benefited primarily from higher fees due to growth in average managed assets and product sales; in 2000 this was partially offset by the effect of narrower spreads on the investment portfolio. Management and distribution fees rose 24 percent and 23 percent in 2000 and 1999, respectively; in both years, the increase was due to greater management fee revenue from higher average managed and separate account assets. These assets increased due to positive net sales in both years and strong market appreciation in 1999. In 2000, management 7 (2000 Annual Report p. 32) fees also rose from $105 million of net year-over-year benefits from equity fee hedges, reflecting hedge value appreciation during 2000 compared with depreciation in 1999. Distribution fees also grew, reflecting greater mutual fund sales and asset levels. Investment income decreased in 2000, but increased in 1999. Both years benefited from growth in average investments, while in 2000 this was more than offset by the negative impact of deterioration in the high-yield bond sector, as well as a generally lower average yield. Losses on directly owned high-yield bonds and low grades in other structured investments reduced investment income by approximately $123 million in 2000. Other revenues rose in both years from increased life and property-casualty insurance premiums and higher financial planning fees as well as the addition in 2000 of franchise fees from Platform 2 advisors (those that operate as independent contractors under the American Express brand) and certain revenues related to non-proprietary funds. The provision for losses and benefits for annuities declined due to lower fixed annuities in force in both years; this was partially offset by higher accrual rates in 2000, while 1999 benefited from lower accrual rates compared with prior year. The provisions for insurance and investment certificates rose in 2000 and 1999, reflecting higher in-force levels in both years and greater accrual rates in 2000. In 1999, the increase in certificate provisions also reflects growth in the stock market certificates, which are hedged by indexed options and resulted in a corresponding increase in investment income, with minimal effect on net income. Human resources expense rose in both years due to higher financial advisors' compensation from growth in sales and asset levels and a greater number of advisors and employees to support business expansion; additionally, the increase in 2000 reflects costs related to the new advisor platforms. The increase in other operating expenses in both years includes higher data processing, technology and advertising expenditures and, in 1999, a $74 million (pretax) fourth quarter charge (above reserves already established in prior periods) in connection with an agreement in principle to settle three class-action lawsuits related to the sales of insurance and annuity products. The growth in human resources and other operating expenses also reflected higher amortization of deferred acquisition costs (DAC) for variable insurance and annuity products in 2000. In 1999, these costs were mitigated by reduced amortization of DAC due to strong equity market performance during the year. While AEFA's earnings in 2000 rose 10 percent for the full year, AEFA reported 2000 fourth quarter net income of $242 million, a 2 percent increase over $238 million a year ago. The modest growth in earnings and net revenues for the quarter reflected narrower spreads on the investment portfolio and the effect of a decline in equity markets during the quarter. The narrower spreads resulted from losses of $49 million on high-yield securities and the continued impact of higher interest rates. Management fees for the quarter included a net year-over-year benefit of $58 million from a fee hedge that minimized the effect of the equity market decline on management fees. The company expects that these challenges will continue into 2001 and be most pronounced early in the year as: - Equity market levels at the outset of 2001 are lower versus last year and lower than expected later in 2001. - The equity fee hedges that provided protection against the fourth quarter's substantial market decline expired at the end of 2000. The company's view is that hedging the market similarly in 2001 would not be economical. - The current interest rate environment will continue to pressure spreads early in 2001, although comparisons are expected to improve as the year progresses. - Default rates within the high-yield sector of the market enter 2001 at higher levels than a year ago. - The higher relative platform-related compensation levels for advisors early in 2001 will not become comparable until the second quarter. As a result, we expect AEFA's net income to be significantly adversely affected for the full year 2001. 8 (2000 Annual Report p. 33)
SELECTED STATISTICAL INFORMATION (Millions, except percentages and where indicated) Years Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Life Insurance in Force (billions) $ 98.1 $ 89.2 $ 81.1 Deferred Annuities in Force (billions) $ 45.3 $ 47.4 $ 42.8 Assets Owned, Managed or Administered (billions): Assets Managed for Institutions $ 55.0 $ 55.5 $ 45.7 Assets Owned, Managed or Administered for Individuals: Owned Assets: Separate Account Assets 32.3 35.9 27.3 Other Owned Assets 41.3 38.7 37.3 ------------------------------------------------------------------------------------------------------------------------------- Total Owned Assets 73.6 74.6 64.6 =============================================================================================================================== Managed Assets 112.0 115.1 92.0 Administered Assets 34.4 24.8 16.6 ------------------------------------------------------------------------------------------------------------------------------- Total $ 275.0 $ 270.0 $ 218.9 =============================================================================================================================== Market Appreciation (Depreciation) During the Period: Owned Assets: Separate Account Assets $ (5,109) $ 8,172 $ 3,547 Other Owned Assets $ 106 $(1,126) $ (109) Managed Assets $(14,467) $23,774 $13,954 Cash Sales: Mutual Funds $ 44,068 $34,269 $27,567 Annuities 5,886 3,902 3,298 Investment Certificates 3,297 3,591 2,342 Life and Other Insurance Products 900 746 605 Institutional 6,601 5,012 5,113 Other 3,557 3,514 3,167 ------------------------------------------------------------------------------------------------------------------------------- Total Cash Sales $ 64,309 $51,034 $42,092 =============================================================================================================================== Number of Financial Advisors 12,663 11,366 10,350 Fees from Financial Plans and Advice Services (thousands) $ 97,680 $88,509 $72,366 Percentage of Total Sales from Financial Plans and Advice Services 68.1% 66.7% 65.4% ===============================================================================================================================
Note: In 2000, reporting of data related to cash sales and assets owned, managed and administered was revised to better reflect AEFA's multiple sales channel strategy and broadening of its product portfolio through additional non-proprietary offerings. All prior period amounts have been restated to conform to this presentation.
LIQUIDITY AND CAPITAL RESOURCES SELECTED BALANCE SHEET INFORMATION December 31, (Billions, except percentages) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Investments $30.5 $30.3 Separate Account Assets $32.3 $35.9 Total Assets $73.6 $74.6 Client Contract Reserves $31.4 $31.0 Total Liabilities $69.2 $70.7 Total Shareholder's Equity $ 4.4 $ 3.9 Return on Average Equity* 22.6% 22.9% =============================================================================================================================== *Excluding the effect of SFAS No. 115.
9 (2000 Annual Report p. 34) AEFA's total assets and liabilities decreased in 2000 due to a decline in separate account assets as a result of market depreciation, partly offset by positive net sales. Investments comprised primarily corporate bonds and mortgage-backed securities, including $3.7 billion and $3.6 billion in below investment grade debt securities, and $4.1 billion and $4.0 billion in mortgage loans at December 31, 2000 and 1999, respectively. Non-performing assets relative to invested assets were 0.9% (36% covered by reserves) and 0.3% (68% covered by reserves) at December 31, 2000 and 1999, respectively. Investments are principally funded by sales of insurance, annuities and certificates and by reinvested income. Maturities of these investments are largely matched with the expected future payments of insurance and annuity obligations. Separate account assets, primarily investments carried at market value, are for the exclusive benefit of variable annuity and variable life insurance contract holders. AEFA earns investment management and administration fees from the related accounts.
AMERICAN EXPRESS BANK RESULTS OF OPERATIONS STATEMENTS OF INCOME Years Ended December 31, (Millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Net Revenues: Interest Income $735 $737 $ 854 Interest Expense 484 446 564 ------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 251 291 290 Commissions and Fees 214 179 167 Foreign Exchange Income and Other Revenues 126 151 163 ------------------------------------------------------------------------------------------------------------------------------- Total Net Revenues 591 621 620 =============================================================================================================================== Expenses: Human Resources 257 271 256 Other Operating Expenses 273 294 261 Provision for Losses 28 29 238 ------------------------------------------------------------------------------------------------------------------------------- Total Expenses 558 594 755 =============================================================================================================================== Pretax Income/(Loss) 33 27 (135) Income Tax Provision/(Benefit) 4 5 (51) ------------------------------------------------------------------------------------------------------------------------------- Net Income/(Loss) $ 29 $ 22 $ (84) ===============================================================================================================================
American Express Bank (AEB) reported net income of $29 million in 2000, compared with $22 million in 1999 and a net loss of $84 million in 1998. The 1998 results included a $138 million ($213 million pretax) credit loss provision related to AEB's business in the Asia/Pacific region, particularly Indonesia. Net interest income in 2000 declined from a year ago, primarily due to the effects of higher funding costs. In 1999, net interest income was essentially unchanged versus the prior year as the effect of a lower loan portfolio was offset by the previous year's reversals of accrued interest on loans transferred to non-performing status in Indonesia. The increase in commissions and fees for both years reflects growth in the private banking and personal financial services (PFS) businesses; the current year increase also reflects growth in the financial institution (formerly correspondent banking) business. Foreign exchange income and other revenue declined in both years. The decline in 2000 is a result of lower securities gains and joint venture income. In 1999, the decline reflects lower foreign exchange revenues, primarily in Asia/Pacific, due to stabilization of currencies compared with 1998, when AEB posted strong trading results due to currency volatility. 10 (2000 Annual Report p. 35) Human resources and other operating expenses declined in 2000 from a year ago, reflecting reengineering savings and the benefits of lower employee levels, as AEB rationalizes certain country activities. The growth in other operating expenses in 1999 was primarily a result of costs related to business building initiatives in private banking and PFS, as well as reengineering costs incurred as AEB realigned business activities in certain countries.
SELECTED STATISTICAL INFORMATION Years Ended December 31, (Billions, except percentages) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Assets Managed*/Administered $10.6 $ 8.6 $ 6.2 Assets of Non-consolidated Joint Ventures $ 2.1 $ 2.2 $ 2.6 ====================================================================================================================================
* Includes assets managed by American Express Financial Advisors.
LIQUIDITY AND CAPITAL RESOURCES SELECTED BALANCE SHEET INFORMATION December 31, (Billions, except percentages and where indicated) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Total Loans $ 5.3 $ 5.1 Total Non-performing Loans (millions) $ 137 $ 168 Other Non-performing Assets (millions) $ 24 $ 37 Reserve for Credit Losses (millions)* $ 153 $ 189 Loan Loss Reserve as a % of Total Loans 2.6% 3.3% Total Assets $11.4 $11.4 Deposits $ 8.0 $ 8.3 Total Liabilities $10.7 $10.7 Total Shareholder's Equity (millions) $ 754 $ 691 Return on Average Assets** 0.26% 0.20% Return on Average Common Equity** 4.4% 3.5% Risk-Based Capital Ratios: Tier I 10.1% 9.9% Total 11.4% 12.0% Leverage Ratio 5.9% 5.6% ------------------------------------------------------------------------------------------------------------------------------------ *Allocation (millions) Loans $ 137 $ 169 Other Assets, primarily derivatives 14 16 Other Liabilities 2 4 ------------------------------------------------------------------------------------------------------------------------------------ Total Credit Loss Reserves $ 153 $ 189 ====================================================================================================================================
** Excluding the effect of SFAS No. 115. AEB had approximately $5.3 billion outstanding in worldwide loans at December 31, 2000, up from $5.1 billion at December 31, 1999. Current year activities included a $140 million decrease in corporate banking loans, as AEB continued to focus on reducing exposure in this activity and emphasizing consumer and private banking loans, which rose by $410 million ($340 million excluding the effect of asset sales and securitizations in the consumer loan portfolio). In addition, financial institution loans rose by $40 million. Other banking activities, such as securities, unrealized gains on foreign exchange and derivatives contracts, various contingencies and market placements added approximately $7.4 billion and $7.6 billion to AEB's credit exposures at December 31, 2000 and December 31, 1999, respectively. 11 (2000 Annual Report p. 36) CORPORATE AND OTHER Corporate and Other reported net expenses of $180 million, $174 million and $84 million in 2000, 1999 and 1998, respectively. 1998 results include income of $78 million after-tax ($106 million pretax) comprising a $39 million after-tax ($60 million pretax) gain from sales of common stock of First Data Corporation and a $39 million after-tax ($46 million pretax) preferred stock dividend based on earnings from Lehman Brothers. Excluding these items, Corporate and Other had net expenses of $162 million in 1998. Results for both 2000 and 1999 include a $39 million after-tax ($46 million pretax) preferred stock dividend based on earnings from Lehman Brothers. 1998 includes a benefit due to an earnings payout from Travelers Inc., related to the 1993 sale of the Shearson Lehman Brothers Division, and benefits from the sale of securities and adjustment of valuation allowances related to certain corporate assets. The above items were offset by business building initiatives in each year, and costs related to the Y2K issue in 1999 and 1998. OTHER REPORTING MATTERS ACCOUNTING DEVELOPMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued, and subsequently amended, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which the company adopted on January 1, 2001. This Statement establishes accounting and reporting standards for derivative instruments, including some embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of a derivative will be recorded in income or directly to equity, depending on the instrument's designated use. A one-time opportunity to reclassify held-to-maturity investments to available-for-sale is allowed without tainting the remaining securities in the held-to-maturity portfolio. The company has elected to take this opportunity to reclass its held-to-maturity investments to available-for-sale. As of January 1, 2001, the cumulative impact of applying the Statement's requirements to the company's results of operations and equity is not significant. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of FASB Statement No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000 (See Note 4 to Consolidated Financial Statements). The company does not expect SFAS No. 140 to have a material impact on the company's financial position or results of operations. In July 2000, the FASB's Emerging Issues Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." The consensus must be adopted for fiscal quarters beginning after March 15, 2001, with earlier adoption permitted. Issue 99-20 prescribes new procedures for recording interest income and measuring impairment on retained and purchased beneficial interests. The rule primarily affects certain AEFA high-yield investments contained in off-balance sheet trusts whose cash flows have been negatively affected by credit experience. As of January 1, 2001, the rule would require AEFA to adjust the carrying amount of these investments downward by approximately $30 million. 12 (2000 Annual Report p. 37) CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES The company believes allocating capital to businesses with a return on risk-adjusted equity in excess of its cost of capital and sustained earnings growth in its core business will continue to build shareholder value. The company's philosophy is to retain enough earnings to provide capital such that the company can meet its growth objectives. To the extent capital available exceeds investment opportunities, the company has returned excess capital to shareholders. As further described in Note 7 to the Consolidated Financial Statements, the company has undertaken share repurchase programs to offset new share issuances. FINANCING ACTIVITIES The company has procedures to immediately transfer short-term funds within the company to meet liquidity needs. These internal transfer mechanisms are subject to and comply with various contractual and regulatory constraints. The parent company generally meets its short-term funding needs through an intercompany dividend policy and also has the ability to issue commercial paper. The Board of Directors has authorized a parent company commercial paper program that is supported by a $1.2 billion multi-purpose credit facility that expires in increments from 2001 through 2002. No borrowings have been made under this credit facility. There was no parent company commercial paper outstanding during 2000 or 1999. Total parent company long-term debt outstanding was $1.4 billion and $1.1 billion at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, the parent company had $4.6 billion and $2.1 billion, respectively, of debt or equity securities available for issuance under shelf registrations filed with the Securities and Exchange Commission. In addition, TRS, Centurion Bank, Credco, American Express Overseas Credit Corporation Limited, a wholly-owned subsidiary of Credco, and AEB have established programs for the issuance, outside the United States, of debt instruments to be listed on the Luxembourg Stock Exchange. The maximum aggregate principal amount of debt instruments outstanding at any one time under the program will not exceed $6.0 billion. At both December 31, 2000 and 1999, $1.6 billion of debt has been issued under this program. RISK MANAGEMENT Management establishes and oversees implementation of Board-approved policies covering the company's funding, investments and use of derivative financial instruments and monitors aggregate risk exposures on an ongoing basis. The company's objective is to realize returns commensurate with the level of risk assumed while achieving consistent earnings growth. The company's treasury department is responsible for overseeing the individual business segments' management of their respective exposures within the context of Board-approved policies. See Note 8 to the Consolidated Financial Statements for a discussion of the company's use of derivatives. The following sections include sensitivity analyses of three different types of market risk and estimate the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year's earnings, based on year-end positions. The market changes, assumed to occur as of year end, are a 100 basis point increase in market interest rates, a 10% strengthening of the U.S. dollar versus all other currencies, and a 10% decline in the value of equity securities under management at AEFA. Computations of the prospective effects of hypothetical interest rate, foreign exchange rate and equity market changes are based on numerous assumptions, including relative levels of market interest rates, foreign exchange rates and equity prices, as well as the levels of assets and liabilities. The hypothetical changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not incorporate actions that management could take if the hypothetical market changes actually occur. As a result, actual earnings consequences will differ from those quantified below. TRS' hedging policies are established, maintained and monitored by the company's treasury department. TRS generally manages its exposures along product lines. A variety of interest rate and foreign exchange hedging strategies are employed to manage interest rate and foreign currency risks. 13 (2000 Annual Report p. 38) TRS funds its Charge Card receivables and Cardmember loans using both on-balance sheet funding sources, such as long- and short-term debt, medium-term notes and commercial paper, as well as asset securitizations. Cardmember receivables are predominantly funded by Credco and its subsidiaries; funding for Cardmember loans is primarily through Centurion Bank. For its Charge Card and fixed rate lending products, interest rate exposure is managed through the issuance of long- and short-term debt and the use of interest rate swaps and, to a lesser extent, caps. During 2000, TRS continued its strategy by augmenting its portfolio of interest rate swaps that convert a majority of its domestic funding from floating rate to fixed rate. TRS regularly reviews its strategy and may modify it. For the majority of its Cardmember loans, which are linked to a floating rate base and generally reprice each month, TRS uses floating rate funding. The detrimental effect on TRS pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $80 million ($61 million related to the U.S. dollar) and $124 million ($109 million related to the U.S. dollar), based on 2000 and 1999 year-end positions, respectively. This effect is primarily a function of the extent of variable rate funding of Charge Card and fixed rate lending products. The above detrimental effect that was calculated based on year-end 1999 positions was substantially reduced by additional swaps that were put in place in early 2000. In early 2001, TRS initiated additional interest rate swap transactions designed to offset interest rate exposure related to actual and anticipated growth in Cardmember receivables. TRS' foreign exchange risk arising from cross-currency charges and balance sheet exposures is managed primarily by entering into agreements to buy and sell currencies on a spot or forward basis. In the latter parts of 2000 and 1999, foreign currency forward contracts were both sold (with notional amounts of $386 million and $611 million, respectively) and purchased (with notional amounts of $92 million and $25 million, respectively) to manage a majority of anticipated cash flows in major overseas markets for the subsequent year. Based on the year-end 2000 and 1999 foreign exchange positions, but excluding the forward contracts managing the anticipated overseas cash flows for the subsequent year, the effect on TRS' earnings of the hypothetical 10 percent strengthening of the U.S. dollar would be immaterial. With respect to the forward contracts related to anticipated cash flows for the subsequent year, the 10 percent strengthening would create hypothetical pretax gains of $27 million and $53 million related to the 2000 and 1999 year-end positions, respectively. Such gains, if any, would mitigate the negative effect of a stronger U.S. dollar on overseas earnings for the subsequent year. AEFA's owned investment securities are, for the most part, held by its life insurance and investment certificate subsidiaries, which primarily invest in long-term and intermediate-term fixed income securities to provide their clients with a competitive rate of return on their investments while controlling risk. Investment in fixed income securities provides AEFA with a dependable and targeted margin between the interest rate earned on investments and the interest rate credited to clients' accounts. AEFA does not invest in securities to generate trading profits for its own account. AEFA's life insurance and investment certificate subsidiaries' investment committees regularly review models projecting different interest rate scenarios and their effect on the profitability of each subsidiary. The committees' objectives are to structure their investment security portfolios based upon the type and behavior of the products in the liability portfolios to achieve targeted levels of profitability and to meet contractual obligations. Rates credited to customers' accounts are generally reset at shorter intervals than the maturity of underlying investments. Therefore, AEFA's margins may be affected by changes in the general level of interest rates. Part of the committees' strategies includes the use of derivatives, such as interest rate caps, swaps and floors, for risk-management purposes. AEFA's fees earned on the management of fixed income securities in variable annuities, variable insurance and mutual funds are generally based on the value of the portfolios. 14 (2000 Annual Report p. 39) The negative effect on AEFA's pretax earnings of a 100 basis point increase in interest rates, which assumes repricings and customer behavior based on the application of proprietary models, to the book of business at December 31, 2000 and 1999, would be approximately $44 million and $40 million for 2000 and 1999, respectively. AEFA's fees earned on the management of equity securities in variable annuities, variable insurance, mutual funds and other managed assets are generally based on the value of the portfolios. To manage the level of fee income in 2000, AEFA entered into a series of stock index option transactions in early 2000, to mitigate, for a substantial portion of the portfolios, the negative effect on fees that would result from a decline in the equity markets. In addition, AEFA writes and purchases index options to manage the margin related to certain investment certificate and annuity products that pay interest based upon the relative change in a major stock market index between the beginning and end of the product's term. The negative effect on AEFA's pretax earnings of a 10 percent decline in equity markets would be approximately $99 million and $103 million based on assets under management, certificate and annuity business in force, and index options as of December 31, 2000 and 1999, respectively. Had the series of stock index option transactions entered into in early 2000 been in effect at December 31, 1999, the 1999 effect would have been substantially lower. AEB employs a variety of on- and off-balance sheet financial instruments in managing its exposure to fluctuations in interest and currency rates. Derivative instruments consist principally of foreign exchange spot and forward contracts, foreign currency options, interest rate swaps, futures, and forward rate agreements. Generally, they are used to manage specific on-balance sheet interest rate and foreign exchange exposures related to deposits, long-term debt, equity, loans and securities holdings. The negative effect of the 100 basis point increase in interest rates on AEB's pretax earnings would be $16 million and $8 million as of December 31, 2000 and 1999, respectively. The effect on earnings of the 10 percent strengthening of the U.S. dollar would be negligible and, with respect to translation exposure of foreign operations, would result in a $10 million and $8 million pretax charge against equity as of December 31, 2000 and 1999, respectively. AEB utilizes foreign exchange and interest rate products to meet the needs of its customers. Customer positions are usually, but not always, offset. They are evaluated in terms of AEB's overall interest rate or foreign exchange exposure. AEB also takes limited proprietary positions. Potential daily exposure from trading activities is calculated using a Value at Risk methodology. This model employs a parametric technique using a correlation matrix based on historical data. The Value at Risk measure uses a 99 percent confidence interval to estimate potential trading losses over a one-day period. During 2000 and 1999, the Value at Risk for AEB was less than $3 million. Asset/liability and market risk management at AEB are supervised by the Asset and Liability Committee, which comprises senior business managers of AEB. It meets monthly and monitors: (i) liquidity, (ii) capital exposure, (iii) capital adequacy, (iv) market risk and (v) investment portfolios. The committee evaluates current market conditions and determines AEB's tactics within risk limits approved by AEB's Board of Directors. AEB's treasury, risk management and global trading management issue policies and control procedures and delegate risk limits throughout AEB's regional trading centers. AEB's overall credit policies are approved by the Finance and Credit Policy Committee of AEB's Board of Directors. Credit lines are based on a tiered approval ladder, with levels of authority delegated to each country, geographic area, AEB's senior management and AEB's Board of Directors. Approval authorities are based on factors such as type of borrower, nature of transaction, collateral, and overall risk rating. AEB controls the credit risk arising from derivative transactions through the same procedures. The Credit Audit department reviews all significant exposures periodically. Risk of all foreign exchange and derivative transactions is reviewed by AEB on a regular basis. 15 (2000 Annual Report p. 40) FORWARD-LOOKING STATEMENTS This Annual Report includes forward-looking statements about the company's financial performance and business prospects. These are subject to certain risks and uncertainties which could cause actual results to differ materially from such statements. These statements are contained in the sections "Letter to Shareholders" and "Financial Review -- Results of Operations," among others. The words "believe," "expect," "anticipate," "optimistic," "intend," "aim," "will," "should," "could," and similar expressions are intended to identify forward-looking statements. 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. The company undertakes no obligation to update publicly or revise any forward-looking statements. In addition to those described elsewhere in this report, factors that could cause actual results to differ materially from the forward-looking statements, including the company's goals referred to herein, include but are not limited to: fluctuation in the equity markets in 2001, which can affect the amount and types of investment products sold by AEFA, the market value of its managed assets, and management and distribution fees received based on those assets; potential deterioration in the high-yield sector, which could result in further losses in AEFA's investment portfolio; developments relating to AEFA's new platform structure for financial advisors, including the ability to increase advisor productivity, moderate the growth of new advisors and create efficiencies in the infrastructure; AEFA's ability to effectively manage the economics in selling a growing volume of non-proprietary products to clients; investment performance in AEFA's mutual fund business; the success and financial impact of reengineering initiatives being implemented at the company, including cost management, structural and strategic measures such as vendor and process consolidation, outsourcing and using lower cost internal distribution channels; the ability to control and manage operating, infrastructure, marketing and promotion and other expenses as business expands or changes, including balancing the need for longer-term investment spending; consumer and business spending on the company's travel-related services products, particularly credit and charge cards and growth in card lending balances, which depend in part on the ability to issue new and enhanced card products and increase revenues from such products, attract new cardholders, capture a greater share of existing cardholders' spending, sustain premium discount rates, increase merchant coverage, retain Cardmembers after low introductory lending rates have expired, and expand the global network services business; successfully expanding the company's on-line and off-line distribution channels and cross-selling financial, travel, card and other products and services to its customer base, both in the U.S. and abroad; effectively leveraging the company's assets, such as its brand, customers and international presence, in the Internet environment; investing in and competing at the leading edge of technology across all businesses; increasing competition in all of the company's major businesses; fluctuations in interest rates, which impact the company's borrowing costs, return on lending products and spreads in the investment and insurance businesses; credit trends and the rate of bankruptcies, which can affect spending on card products, debt payments by individual and corporate customers and returns on the company's investment portfolios; foreign currency exchange rates; political or economic instability in certain regions or countries, which could affect commercial lending activities, among other businesses; legal and regulatory developments, such as in the areas of consumer privacy and data protection; acquisitions; and outcomes in litigation. Other risks and uncertainties can be found in the company's most recent 10-K, 10-Q and 8-K reports filed with the SEC. 16 (2000 Annual Report p. 41)
CONSOLIDATED STATEMENTS OF INCOME AMERICAN EXPRESS COMPANY Years Ended December 31, (Millions, except per share amounts) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ REVENUES Discount revenue $ 7,779 $ 6,741 $ 6,115 Interest and dividends, net 3,290 3,346 3,277 Management and distribution fees 2,812 2,269 1,851 Net card fees 1,651 1,599 1,587 Travel commissions and fees 1,821 1,802 1,647 Other commissions and fees 2,344 1,824 1,657 Cardmember lending net finance charge revenue 987 1,333 1,354 Life and other insurance premiums 575 517 469 Other 2,416 1,847 1,175 ------------------------------------------------------------------------------------------------------------------------------------ Total 23,675 21,278 19,132 ==================================================================================================================================== EXPENSES Human resources 6,633 6,038 5,470 Provisions for losses and benefits: Annuities and investment certificates 1,355 1,377 1,425 Life insurance, international banking and other 694 639 822 Charge card 1,006 865 701 Cardmember lending 891 799 922 Interest 1,354 1,051 999 Marketing and promotion 1,515 1,424 1,228 Occupancy and equipment 1,528 1,328 1,250 Professional services 1,530 1,322 1,191 Communications 514 518 474 Other 2,747 2,479 1,725 ------------------------------------------------------------------------------------------------------------------------------------ Total 19,767 17,840 16,207 ==================================================================================================================================== Pretax income 3,908 3,438 2,925 Income tax provision 1,098 963 784 ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 2,810 $ 2,475 $ 2,141 ==================================================================================================================================== EARNINGS PER COMMON SHARE Basic $ 2.12 $ 1.85 $ 1.57 Diluted $ 2.07 $ 1.81 $ 1.54 ------------------------------------------------------------------------------------------------------------------------------------ Average common shares outstanding for earnings per common share: Basic 1,327 1,340 1,363 Diluted 1,360 1,369 1,388 ====================================================================================================================================
See notes to consolidated financial statements. 17 (2000 Annual Report p. 42)
CONSOLIDATED BALANCE SHEETS AMERICAN EXPRESS COMPANY December 31, (Millions, except share data) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 8,487 $ 7,471 Accounts receivable and accrued interest: Cardmember receivables, less reserves: 2000, $809; 1999, $728 25,067 22,541 Other receivables, less reserves: 2000, $123; 1999, $78 5,476 3,926 Investments 43,747 43,052 Loans: Cardmember lending, less reserves: 2000, $650; 1999, $581 19,855 17,666 International banking, less reserves: 2000, $137; 1999, $169 5,207 4,928 Other, net 1,026 988 Separate account assets 32,349 35,895 Deferred acquisition costs 3,574 3,235 Land, buildings and equipment--at cost, less accumulated depreciation: 2000, $2,219; 1999, $2,109 2,506 1,996 Other assets 7,129 6,819 ------------------------------------------------------------------------------------------------------------------------------- Total assets $154,423 $148,517 =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Customers' deposits $ 13,870 $ 13,139 Travelers Cheques outstanding 6,127 6,213 Accounts payable 7,495 6,367 Insurance and annuity reserves: Fixed annuities 19,417 20,552 Life and disability policies 4,681 4,459 Investment certificate reserves 7,348 5,951 Short-term debt 36,030 30,627 Long-term debt 4,711 5,995 Separate account liabilities 32,349 35,895 Other liabilities 10,211 8,724 ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 142,239 137,922 =============================================================================================================================== GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES 500 500 SHAREHOLDERS' EQUITY Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,326 million shares in 2000 and 1,341 million shares in 1999 265 268 Capital surplus 5,439 5,196 Retained earnings 6,198 5,033 Other comprehensive loss, net of tax: Net unrealized securities losses (145) (296) Foreign currency translation adjustments (73) (106) ------------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive loss (218) (402) ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 11,684 10,095 =============================================================================================================================== Total liabilities and shareholders' equity $154,423 $148,517 ===============================================================================================================================
See notes to consolidated financial statements. 18 (2000 Annual Report p. 43)
CONSOLIDATED STATEMENTS OF CASH FLOWS AMERICAN EXPRESS COMPANY Years Ended December 31, (Millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,810 $ 2,475 $ 2,141 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses and benefits 2,697 2,392 2,491 Depreciation, amortization, deferred taxes and other 393 13 (212) Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable and accrued interest (1,623) (1,079) (665) Other assets (426) (294) 92 Accounts payable and other liabilities 2,377 2,371 131 (Decrease) increase in Travelers Cheques outstanding (82) 392 253 Increase in insurance reserves 207 173 182 ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,353 6,443 4,413 =============================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Sale of investments 3,117 3,031 1,656 Maturity and redemption of investments 5,295 5,279 7,331 Purchase of investments (9,121) (11,287) (10,176) Net increase in Cardmember loans/receivables (10,661) (11,787) (5,000) Cardmember loans/receivables sold to trust, net 3,338 3,586 1,683 Proceeds from repayment of loans 24,288 21,002 24,560 Issuance of loans (24,587) (20,762) (23,866) Purchase of land, buildings and equipment (919) (737) (391) Sale of land, buildings and equipment 35 11 26 Dispositions (acquisitions), net of cash sold/acquired 212 (82) (471) ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (9,003) (11,746) (4,648) =============================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Net increase in customers' deposits 954 2,853 1,039 Sale of annuities and investment certificates 5,588 5,719 5,337 Redemption of annuities and investment certificates (5,641) (5,504) (5,690) Net increase in debt with maturities of 3 months or less 7,117 305 1,239 Issuance of debt 12,559 18,623 7,373 Principal payments on debt (15,362) (12,049) (7,426) Issuance of Trust preferred securities -- -- 500 Issuance of American Express common shares 226 233 137 Repurchase of American Express common shares (1,377) (1,120) (1,890) Dividends paid (421) (404) (414) ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 3,643 8,656 205 Effect of exchange rate changes on cash 23 26 (57) ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,016 3,379 (87) Cash and cash equivalents at beginning of year 7,471 4,092 4,179 ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 8,487 $ 7,471 $ 4,092 ===============================================================================================================================
See notes to consolidated financial statements. 19 (2000 Annual Report p. 44)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AMERICAN EXPRESS COMPANY Accumulated Other Common Capital Comprehensive Retained Three Years Ended December 31, 2000 (Millions) Total Shares Surplus (Loss)/Income Earnings ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1997 $ 9,574 $ 280 $ 4,624 $ 482 $ 4,188 ==================================================================================================================================== Comprehensive income: Net income 2,141 2,141 Change in net unrealized securities gains 4 4 Foreign currency translation adjustments (15) (15) -------- Total comprehensive income 2,130 Repurchase of common shares (1,890) (12) (196) (1,682) Other changes, primarily employee plans 294 2 381 (89) Cash dividends declared: Common, $.30 per share (410) (410) ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1998 9,698 270 4,809 471 4,148 ==================================================================================================================================== Comprehensive income: Net income 2,475 2,475 Change in net unrealized securities gains (879) (879) Foreign currency translation adjustments 6 6 -------- Total comprehensive income 1,602 Repurchase of common shares (1,170) (5) (98) (1,067) Other changes, primarily employee plans 369 3 485 (119) Cash dividends declared: Common, $.30 per share (404) (404) ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1999 10,095 268 5,196 (402) 5,033 ==================================================================================================================================== Comprehensive income: Net income 2,810 2,810 Change in net unrealized securities gains 151 151 Foreign currency translation adjustments 33 33 -------- Total comprehensive income 2,994 Repurchase of common shares (1,327) (5) (228) (1,094) Other changes, primarily employee plans 348 2 471 (125) Cash dividends declared: Common, $.32 per share (426) (426) ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 2000 $ 11,684 $ 265 $ 5,439 $ (218) $ 6,198 ====================================================================================================================================
See notes to consolidated financial statements. 20 (2000 Annual Report p. 45) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying Consolidated Financial Statements include the accounts of American Express Company and its subsidiaries (the company). All significant intercompany transactions are eliminated. Some amounts are based on estimates and assumptions, e.g., reserves for Cardmember Receivables and Loans, Deferred Acquisition Costs, and Insurance and Annuity Reserves. These reflect the best judgment of management and actual results could differ. Certain amounts from prior years have been reclassified to conform to the current presentation. REVENUES Cardmember Lending Net Finance Charge Revenue is presented net of interest expense of $1,039 million, $674 million and $653 million for the years ended December 31, 2000, 1999 and 1998, respectively. Interest and Dividends is presented net of interest expense related primarily to the company's international banking activities of $559 million, $453 million and $572 million for the years ended December 31, 2000, 1999 and 1998, respectively. MARKETING AND PROMOTION The company expenses advertising costs in the year in which the advertising first takes place. CASH AND CASH EQUIVALENTS At December 31, 2000 and 1999, cash and cash equivalents included $1.2 billion and $0.8 billion, respectively, segregated in special bank accounts for the benefit of customers. The company has defined cash equivalents to include time deposits with original maturities of 90 days or less. SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate account assets and liabilities are funds held for the exclusive benefit of variable annuity and variable life insurance contract holders. The company receives investment management fees, mortality and expense assurance fees, minimum death benefit guarantee fees and cost of insurance charges from the related accounts. Note 2 INVESTMENTS The following is a summary of investments included on the Consolidated Balance Sheets at December 31:
(Millions) 2000 1999 ---------------------------------------------------------------------------------------------------- Held-to-Maturity, at amortized cost $ 8,404 $ 9,221 Available-for-Sale, at fair value 31,052 29,570 Investment mortgage loans (fair value: 2000, $4,178; 1999, $3,901) 4,097 3,984 Trading 194 277 ---------------------------------------------------------------------------------------------------- Total $43,747 $43,052 ====================================================================================================
21 (2000 Annual Report p. 46) Investments classified as Held-to-Maturity and Available-for-Sale at December 31 are distributed by type and maturity as presented below:
Held-to-Maturity ----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Unrealized Unrealized Fair Unrealized Unrealized Fair (Millions) Cost Gains (Losses) Value Cost Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------------------------- Corporate debt securities $5,304 $138 $(130) $5,312 $6,400 $111 $(114) $6,397 Mortgage-backed securities 1,785 12 -- 1,797 1,393 5 (33) 1,365 State and municipal obligations 986 47 -- 1,033 1,036 27 (3) 1,060 Foreign government bonds and obligations 83 10 -- 93 98 9 -- 107 U.S. Government and agencies obligations 50 4 -- 54 64 1 (2) 63 Other 196 2 (1) 197 230 -- (4) 226 ----------------------------------------------------------------------------------------------------------------------------------- Total $8,404 $213 $(131) $8,486 $9,221 $153 $(156) $9,218 ===================================================================================================================================
Available-for-Sale ----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Unrealized Unrealized Fair Unrealized Unrealized Fair (Millions) Cost Gains (Losses) Value Cost Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------------------------- Corporate debt securities $12,714 $124 $(908) $11,930 $12,238 $ 53 $ (742) $11,549 Mortgage-backed securities 9,259 126 (25) 9,360 8,898 14 (241) 8,671 State and municipal obligations 5,886 267 (15) 6,138 5,430 81 (160) 5,351 Foreign government bonds and obligations 993 13 (4) 1,002 985 9 (15) 979 U.S. Government and agencies obligations 48 3 -- 51 47 -- -- 47 Equity securities 510 197 (27) 680 611 525 (6) 1,130 Other 1,891 -- -- 1,891 1,844 -- (1) 1,843 ----------------------------------------------------------------------------------------------------------------------------------- Total $31,301 $730 $(979) $31,052 $30,053 $682 $(1,165) $29,570 ===================================================================================================================================
Held-to-Maturity Available-for-Sale ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 (Millions) Cost Fair Value Cost Fair Value ---------------------------------------------------------------------------------------------------------------------------------- Due within 1 year $ 962 $ 971 $ 2,120 $ 2,120 Due after 1 year through 5 years 3,365 3,353 5,606 5,502 Due after 5 years through 10 years 1,602 1,664 7,960 7,419 Due after 10 years 690 701 5,846 5,971 ---------------------------------------------------------------------------------------------------------------------------------- 6,619 6,689 21,532 21,012 Mortgage-backed securities 1,785 1,797 9,259 9,360 Equity securities -- -- 510 680 ---------------------------------------------------------------------------------------------------------------------------------- Total $8,404 $8,486 $31,301 $31,052 ==================================================================================================================================
Mortgage-backed securities primarily include GNMA, FNMA and FHLMC securities at December 31, 2000 and 1999. 22 (2000 Annual Report p. 47) The table below includes purchases, sales and maturities of investments classified as Held-to-Maturity and Available-for-Sale for the years ended December 31:
2000 1999 -------------------------------------------------------------------------------- Held-to- Available- Held-to- Available- (Millions) Maturity for-Sale Maturity for-Sale -------------------------------------------------------------------------------- Purchases $110 $8,465 $ 93 $11,557 Sales $ 61 $2,998 $ 90 $ 2,941 Maturities $848 $3,647 $1,313 $ 4,441 ================================================================================
Investments classified as Held-to-Maturity were sold during 2000 and 1999 due to credit deterioration. Gross realized gains and losses on sales were negligible. Gross realized gains and (losses) on sales of securities classified as Available-for-Sale, using the specific identification method, were $170 million and ($47 million), $64 million and ($23 million) and $130 million and ($42 million) for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in net unrealized gains on Trading securities, which is included in income, was $16 million, $30 million and $3 million for the years ended December 31, 2000, 1999 and 1998, respectively. In connection with the spin-off of Lehman Brothers Holdings Inc. (Lehman) in 1994, the company acquired 928 shares and Nippon Life Insurance company (Nippon Life) acquired 72 shares of Lehman's redeemable voting preferred stock for a nominal dollar amount. This security entitles its holders to receive an aggregate annual dividend of 50 percent of Lehman's net income in excess of $400 million for each of eight years ending in May 2002, with a maximum dividend of $50 million in any one year. In each of the three years ended December 31, 2000, the company received a dividend of $46 million on these shares. In addition, the company and Nippon Life were entitled to receive 92.8 percent and 7.2 percent, respectively, of an earnings-related payout from Travelers Inc. (Travelers) that was assigned by Lehman to the company and Nippon Life in connection with the spin-off transaction. The earnings-related payout, which was 10 percent of after-tax profits of Smith Barney, a subsidiary of Travelers, in excess of $250 million per year, was for five years and ended in 1998. The amount recognized in relation to this payout was approximately $70 million in 1998. The change in net unrealized securities gains recognized in Other Comprehensive (Loss)/Income includes two components: (1) unrealized gains (losses) that arose during the period from changes in market value of securities that were held during the period (Holding gains (losses)), and (2) gains (losses) that were previously unrealized, but have been recognized in current period Net Income due to sales of Available-for-Sale securities (Reclassification for realized gains). This reclassification has no effect on total Comprehensive Income or Shareholders' Equity. The following table presents these components of other comprehensive (loss)/income, net of tax:
(Millions, net of tax) 2000 1999 1998 ------------------------------------------------------------------------------------------------------ Holding gains (losses) $ 231 $(852) $ 61 Reclassification for realized gains (80) (27) (57) ------------------------------------------------------------------------------------------------------ Increase (decrease) in net unrealized securities gains recognized in other comprehensive (loss)/income $ 151 $(879) $ 4 ======================================================================================================
23 (2000 Annual Report p. 48) Note 3 LOANS Loans at December 31 consisted of:
(Millions) 2000 1999 --------------------------------------------------------------------------- Cardmember and Consumer Loans $22,486 $19,955 Commercial Loans: Commercial and industrial 1,879 1,898 Loans to banks and other institutions 1,591 1,612 Mortgage and real estate 159 142 Other, principally policyholders' loans 769 728 ---------------------------------------------------------------------------- 26,884 24,335 Less: Reserves for credit losses 796 753 ---------------------------------------------------------------------------- Total $26,088 $23,582 ===========================================================================
Note: American Express Financial Advisors (AEFA) mortgage loans of $4.1 billion and $4.0 billion in 2000 and 1999, respectively, are included in Investment Mortgage Loans and are presented in Note 2. The following table presents changes in Reserves for Credit Losses related to loans:
(Millions) 2000 1999 -------------------------------------------------------------------------------- Balance, January 1 $ 753 $ 812 Provision for credit losses 924 832 Write-offs (1,031) (1,062) Recoveries of amounts previously written-off 150 171 -------------------------------------------------------------------------------- Balance, December 31 $ 796 $ 753 ================================================================================
Note 4 SECURITIZED LOANS AND RECEIVABLES The company securitizes loans and receivables and, in large part, subsequently sells the interests in those assets' cash flows to third party investors. The company continues to service the accounts and receives a fee for doing so; the fair value and carrying amount of these future servicing fees, net of related costs, are nil. Each new sale of securitized assets results in the removal of the sold assets from the balance sheet, a reduction in a previously established reserve for credit losses and the recognition of the present value of the future net cash flows (i.e., finance charge income less interest paid to investors, credit losses and servicing fees) related to the sold assets. This present value amount represents a retained interest known as an interest-only strip. In some instances, the company invests in subordinated interests issued by the securitization trust; these are recorded as Investments classified as Available-for-Sale. The gain or loss recorded when assets are securitized is the difference between the proceeds of sale and the book basis of the assets sold. That book basis is determined by allocating the carrying amount of the assets, net of applicable reserve for losses, between the assets sold and the retained interests based on their relative fair values. Fair values are based on market prices at date of transfer for assets sold and on the estimated present value of future cash flows for retained interests. The securitized loans and receivables sold as of December 31, 2000 are as follows:
Investments in (Billions) Sold subordinated interests Net --------------------------------------------------------------------------------- U.S. Cardmember Loans $11.3 $ 0.8 $10.5 Cardmember Receivables 3.1 0.2 2.9 --------------------------------------------------------------------------------- Total $14.4 $ 1.0 $13.4 =================================================================================
24 (2000 Annual Report p. 49) U.S. CARDMEMBER LOANS During 2000, 1999 and 1998, the company sold $4.0 billion, $4.0 billion and $1.0 billion, respectively, of U.S. Cardmember Loans, or $3.6 billion, $3.7 billion and $0.9 billion net of investments in subordinated interests. The pretax gains on these securitizations were $142 million, $154 million and $36 million, respectively. Cash flows from interest-only strips as well as servicing revenue, which is 2 percent of principal, are recorded in other revenues. The value of retained interests is primarily subject to changes in credit risk, average loan life, and interest rates on the transferred financial assets. Key economic assumptions used in measuring the retained interests resulting from securitizations during 2000 were as follows (rates are per annum):
Cash flows from Returns to Investors Average loan life Expected credit retained interests ---------------------------------------------- (months) losses discounted at Variable Fixed ------------------------------------------------------------------------------------------------------------------- 8-12 4.46%-5.12% 6.0%-12.0% Contractual spread 5.6%-7.4% over LIBOR ranging from .09% to .9% ===================================================================================================================
The following table presents quantitative information about delinquencies, net credit losses, and components of securitized U.S. Cardmember Loans at December 31, 2000:
Total Principal Principal Amount of Loans Net Credit Losses (Billions) Amount of Loans 30 Days or More Past due During the Year 2000 ------------------------------------------------------------------------------------------------------------------- Cardmember Loans managed $28.7 $0.8 $1.1 ------------------------------------------------------------------------------------------------------------------- Less: Securitized Loans sold 11.3 ------------------------------------------------------------------------------------------------------------------- Cardmember Loans on balance sheet $17.4 ===================================================================================================================
At December 31, 2000, retained interests, excluding subordinated interests, were $272 million compared with $236 million a year earlier. The key economic assumptions and the sensitivity of the current year's fair value to immediate 10 percent and 20 percent adverse changes in assumed economics are as follows:
Cash flows from Average loan life Expected credit retained interests (Millions, except rates per annum) (months) losses discounted at Interest Rates ------------------------------------------------------------------------------------------------------------------- Assumption 8.5 4.48% 12% 6.74% ------------------------------------------------------------------------------------------------------------------- Impact on fair value of 10% adverse change $17.4 $17.7 $1.7 $ 9.6 ------------------------------------------------------------------------------------------------------------------- Impact on fair value of 20% adverse change $33.5 $35.3 $3.3 $19.1 ===================================================================================================================
These sensitivities are hypothetical and will be different from what actually occurs in the future. As the figures indicate, any change in fair value based on a 10 percent variation in assumptions cannot be extrapolated because the relationship of the change in assumption on the fair value of the retained interest is calculated independent from any change in another assumption; in reality, changes in one factor may result in changes in another, which magnify or counteract the sensitivities. The table below summarizes cash flows received from securitization trusts in 2000:
(Millions) ------------------------------------------------------------------------------------------------------------------- Proceeds from new securitizations during the period $ 3,630 Proceeds from reinvestment of payments in Cardmember securitizations $12,480 Servicing fees received $ 191 Other cash flows received on retained interests $ 667 ===================================================================================================================
25 (2000 Annual Report p. 50) CARDMEMBER RECEIVABLES Sales of securitized Charge Card receivables result in a reduction of interest expense and provisions for losses, and recognition of servicing revenues, which is offset by discount expense on the securitized receivables. An obligation to the securitization trust equal to the reserve for losses previously carried against the receivables is recorded in Other Liabilities. Charge Card receivables are collected generally within 30 days of billing and, as such, the book value approximates fair value; therefore, recorded amounts are not sensitive to the same factors as Cardmember Loans. At December 31, 2000, $2.9 billion in securitized Charge Card receivables had been sold. Note 5 SHORT- AND LONG-TERM DEBT AND BORROWING AGREEMENTS SHORT-TERM DEBT At December 31, 2000 and 1999, the company's total short-term debt outstanding was $36.0 billion and $30.6 billion, respectively, with weighted average interest rates of 6.5% and 5.6%, respectively. At December 31, 2000 and 1999, $9.7 billion and $8.2 billion, respectively, of short-term debt outstanding was covered by interest rate swaps. The year-end weighted average effective interest rates were 6.4% and 5.5% for 2000 and 1999, respectively. The company generally paid fixed rates of interest under the terms of interest rate swaps. Unused lines of credit to support commercial paper borrowings were approximately $9.7 billion at December 31, 2000.
LONG-TERM DEBT December 31, (Dollars in millions) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Year-End Year-End Year-End Effective Year-End Effective Notional Stated Interest Notional Stated Interest Maturity Outstanding Amount Rate on Rate with Maturity Outstanding Amount Rate on Rate with of Balance of Swaps Debt(a,b) Swaps(a,b) of Swaps Balance of Swaps Debt(a,b) Swaps(a,b) Swaps ------------------------------------------------------------------------------------------------------------------------------------ Notes due November 1, 2005 $ 496 -- 6.875% -- -- -- -- -- -- -- Notes due June 23, 2004 500 -- 6.75% -- -- $ 499 -- 6.75% -- -- Notes due January 22, 2004 498 -- 5.625% -- -- 497 -- 5.625% -- -- Notes due August 12, 2002 400 $ 400 6.50% 6.83% 2002 400 $ 400 6.50% 6.06% 2002 Notes due June 15, 2000 -- -- -- -- -- 300 300 6.125% 6.29% 2000 Notes due November 15, 2001 300 -- 6.125% -- -- 300 300 6.125% 6.46% 2001 Notes due August 15, 2001 300 -- 8.50% -- -- 300 -- 8.50% -- -- Floating Rate Notes due May 1, 2002 400 400 6.81% 6.90% 2002 400 400 6.26% 6.00% 2002 Floating Rate Notes due December 31, 2001 300 -- 6.66% -- -- 300 -- 6.265% -- -- Other Fixed Senior Notes due 2001- 2000- 2000-2022 538 410 7.35% 7.68% 2012 1,271 865 6.66% 6.87% 2012 Other Floating Senior Notes due 2000-2002 505 -- 6.57% -- -- 1,243 50 5.16% 5.19% 2000 Other Floating Rate Notes due 2001- 2000-2004 267 165 7.56% 7.55% 2004 251 150 6.97% 7.33% 2004 Other Fixed Rate Notes due 2003- 2001- 2000-2006 207 36 5.42% 5.53% 2004 234 54 5.62% 5.32% 2006 ------------------------------------------------------------------------------------------------------------------------------------ Total $4,711 $1,411 6.73% $5,995 $2,519 6.23% ====================================================================================================================================
(a) For floating rate debt issuances, the stated and effective interest rates were based on the respective rates at December 31, 2000 and 1999; these rates are not an indication of future interest rates. (b) Weighted average rates were determined where appropriate. 26 (2000 Annual Report p. 51) The above interest rate swaps generally require the company to pay a floating rate, with a predominant index of LIBOR (London Interbank Offered Rate). The company paid interest (net of amounts capitalized) of $3.6 billion, $2.6 billion and $2.6 billion in 2000, 1999 and 1998, respectively. Aggregate annual maturities of long-term debt for the five years ending December 31, 2005 are as follows (millions): 2001, $1,703; 2002, $932; 2003, $14; 2004, $1,220; and 2005, $615. Note 6 CUMULATIVE QUARTERLY INCOME PREFERRED SHARES In 1998, American Express Company Capital Trust I, a wholly-owned subsidiary of the company, established as a Delaware statutory business trust (the Trust), completed a public offering of 20 million shares (carrying value of $500 million) of 7.0% Cumulative Quarterly Income Preferred Shares Series I (QUIPS)(liquidation preference of $25 per share). Proceeds of the issue were invested in Junior Subordinated Debentures (the Debentures) issued by the company due 2028, which represent the sole assets of the Trust. The QUIPS are subject to mandatory redemption upon repayment of the Debentures at maturity or their earlier redemption. The company has the option to redeem the Debentures, in whole or in part, at any time on or after July 16, 2003, which will result in the redemption of a corresponding amount of QUIPS. The company has unconditionally guaranteed all distributions required to be made by the Trust, but only to the extent the Trust has funds legally available for such distributions. The only source of funds for the Trust is the company's interest payments on the Debentures. The company has the right to defer such interest payments up to 20 consecutive quarters; as a consequence, quarterly dividend payments on the QUIPS can be deferred by the Trust during any such interest payment period. If the company defers any interest payments, the company may not, among other things, pay any dividends on its capital stock until all interest in arrears is paid to the Trust. Distributions on the QUIPS are reported as Interest Expense in the Consolidated Statements of Income. Note 7 COMMON AND PREFERRED SHARES In September 1998, the company's Board of Directors authorized the company to repurchase up to 120 million additional common shares over the subsequent two to three years, subject to market conditions. The company has repurchased approximately 343 million shares since 1994 pursuant to several authorizations, including 43 million under the current authorization. These plans are designed to allow the company to purchase shares, both to offset the issuance of new shares as part of employee compensation plans and to reduce shares outstanding. Of the common shares authorized but unissued at December 31, 2000, 180 million shares were reserved for issuance for employee stock, employee benefit and dividend reinvestment plans, as well as stock purchase agreements. During 2000, the company entered into an agreement under which a third party purchased 8 million company common shares at an average purchase price of approximately $55 per share. During the term of the agreement, the company will periodically issue shares to or receive shares from the third party so that the value of the shares held by the third party equals the original purchase price for the shares. At maturity in five years, the company is required to deliver to the third party an amount equal to such original purchase price. The company may elect to settle this amount (i) physically, by paying cash against delivery of the shares held by the third party or (ii) on a net cash or net share basis. The company may also prepay outstanding amounts at any time prior to the end of the five-year term. The foregoing is in addition to a similar agreement entered into during 1999, under which a third party purchased 21 million of the 27 (2000 Annual Report p. 52) company's common shares at an average purchase price of approximately $49 per share. During 2000, net settlements under these agreements resulted in the company receiving 2.4 million shares. These agreements, which partially offset the company's exposure from its stock option program, are separate from the company's previously authorized share repurchase program. During 2000, the company's shareholders approved an increase in authorized shares to effectuate a three-for-one stock split for shareholders of record as of April 25, 2000. All of the information in this financial report reflects the effect of the stock split. Common shares activity for each of the last three years ended December 31 was:
(Millions) 2000 1999 1998 -------------------------------------------------------------------------------------------------- Shares outstanding at beginning of year 1,341 1,351 1,399 Repurchases of common shares (25) (27) (58) Other, primarily employee plans 10 17 10 -------------------------------------------------------------------------------------------------- Shares outstanding at end of year 1,326 1,341 1,351 ==================================================================================================
The Board of Directors is authorized to permit the company to issue up to 20 million preferred shares without further shareholder approval. Note 8 DERIVATIVE AND OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The company uses derivative financial instruments for nontrading purposes to manage its exposure to interest and foreign exchange rates, financial indices and its funding costs. In addition, American Express Bank (AEB) enters into derivative contracts both to meet the needs of its clients and, to a limited extent, for proprietary trading purposes. There are a number of risks associated with derivatives. Market risk is the possibility that the value of the derivative financial instrument will change. The company is not exposed to market risk related to derivatives held for nontrading purposes beyond that inherent in cash market transactions. AEB is generally not subject to market risk when it enters into a contract with a client, as it usually enters into an offsetting contract or uses the position to offset an existing exposure. AEB takes proprietary positions within approved limits. These positions are monitored daily at the local and headquarters levels against Value at Risk (VAR) limits. The company does not enter into derivative contracts with features that would leverage or multiply its market risk. Credit risk related to derivatives and other off-balance sheet financial instruments is the possibility that the counterparty will not fulfill the terms of the contract. It is monitored through established approval procedures, including setting concentration limits by counterparty and country, reviewing credit ratings and requiring collateral where appropriate. For its trading activities with clients, AEB requires collateral when it is not willing to assume credit exposure to counterparties for either contract mark-to-market or delivery risk. A significant portion of the company's transactions are with counterparties rated A or better by nationally recognized credit rating agencies. The company also uses master netting agreements which allow the company to settle multiple contracts with a single counterparty in one net receipt or payment in the event of counterparty default. Credit risk approximates the fair value of contracts in a gain position (asset) and totaled $0.8 billion and $0.7 billion at December 31, 2000 and 1999, respectively. The fair value represents the replacement cost and is determined by market values, dealer quotes or pricing models. 28 (2000 Annual Report p. 53) The following tables detail information regarding the company's derivatives at December 31:
NONTRADING 2000 ---------------------------------------------------------------------------------------------------------- Carrying Value Fair Value (Millions) Notional Amount Asset Liability Asset Liability ---------------------------------------------------------------------------------------------------------- Interest Rate Products: Interest rate swaps $32,161 $105 $ 48 $152 $ 296 Interest rate caps and floors purchased 3,575 7 -- 2 1 Forward rate agreements 1,399 -- -- -- -- Other 64 -- -- -- 62 ---------------------------------------------------------------------------------------------------------- Total Interest Rate Products 37,199 112 48 154 359 Foreign currency forward and spot contracts 8,471 57 121 80 182 Other Products 2,532 97 31 189 14 ---------------------------------------------------------------------------------------------------------- Total $48,202 $266 $200 $423 $ 555 ========================================================================================================== NONTRADING 1999 ---------------------------------------------------------------------------------------------------------- Carrying Value Fair Value (Millions) Notional Amount Asset Liability Asset Liability ---------------------------------------------------------------------------------------------------------- Interest Rate Products: Interest rate swaps $20,971 $ 63 $ 64 $137 $ 225 Interest rate caps and floors purchased 3,625 10 -- 15 2 Forward rate agreements 567 8 9 -- -- Other 63 -- -- -- 63 ---------------------------------------------------------------------------------------------------------- Total Interest Rate Products 25,226 81 73 152 290 Foreign currency forward and spot contracts 6,910 62 53 76 114 Other Products 1,705 174 50 175 68 ---------------------------------------------------------------------------------------------------------- Total $33,841 $317 $176 $403 $472 ========================================================================================================== TRADING 2000 ---------------------------------------------------------------------------------------------------------- Carrying/Fair Value Average Fair Value (Millions) Notional Amount Asset Liability Asset Liability ---------------------------------------------------------------------------------------------------------- Interest Rate Products: Interest rate swaps $ 2,115 $ 41 $ 32 $ 45 $ 39 Futures options written 800 -- -- -- -- Futures options purchased 800 -- -- -- -- Other 1,612 1 2 1 2 ---------------------------------------------------------------------------------------------------------- Total Interest Rate Products 5,327 42 34 46 41 ---------------------------------------------------------------------------------------------------------- Foreign Currency Products:* Forward and spot contracts 16,112 315 288 260 209 Foreign currency options written 1,550 -- 38 -- 36 Foreign currency options purchased 1,642 42 -- 38 -- ---------------------------------------------------------------------------------------------------------- Total Foreign Currency Products 19,304 357 326 298 245 ---------------------------------------------------------------------------------------------------------- Other Products 128 1 1 -- -- ---------------------------------------------------------------------------------------------------------- Total $24,759 $400 $361 $344 $286 ==========================================================================================================
29 (2000 Annual Report p. 54)
TRADING 1999 --------------------------------------------------------------------------------------------------- Carrying/Fair Value Average Fair Value (Millions) Notional Amount Asset Liability Asset Liability --------------------------------------------------------------------------------------------------- Interest Rate Products: Interest rate swaps $ 2,184 $ 54 $ 45 $ 54 $ 46 Other 446 1 2 1 4 --------------------------------------------------------------------------------------------------- Total Interest Rate Products 2,630 55 47 55 50 --------------------------------------------------------------------------------------------------- Foreign Currency Products:* Forward and spot contracts 13,183 204 142 211 169 Foreign currency options written 1,263 -- 39 -- 37 Foreign currency options purchased 1,272 45 -- 37 -- --------------------------------------------------------------------------------------------------- Total Foreign Currency Products 15,718 249 181 248 206 --------------------------------------------------------------------------------------------------- Total $18,348 $304 $228 $303 $256 ===================================================================================================
*These are predominantly contracts with clients and the related hedges of those client contracts. The company's net trading foreign currency exposure was approximately $72 million and $93 million at December 31, 2000 and 1999, respectively. The average aggregate fair values of derivative financial instruments held for trading purposes were computed based on monthly information. Net derivative trading gains of $96 million and $83 million for 2000 and 1999, respectively, were primarily due to trading in foreign currency forward contracts and are included in Other Commissions and Fees. INTEREST RATE PRODUCTS The company uses interest rate products, principally swaps, primarily to manage funding costs related to Travel Related Services' (TRS) Charge Card and Cardmember lending businesses. For its Charge Card and fixed rate lending products, TRS uses interest rate swaps and, to a lesser extent, caps to achieve a mix of fixed and floating rate funding. For the majority of its Cardmember loans, which are linked to a floating rate base and generally reprice each month, TRS uses floating rate funding. AEB uses interest rate products to manage its portfolio of loans, deposits, long-term debt and securities holdings. The termination dates of nontrading interest rate swaps are generally matched with the maturity dates of the underlying assets and liabilities. For interest rate swaps that are used for nontrading purposes and meet the criteria for hedge accounting, interest is accrued and reported in Other Receivables and Interest and Dividends or Accounts Payable and Interest Expense, as appropriate. Products used for trading purposes are reported at fair value in Other Assets or Other Liabilities, as appropriate, with unrealized gains and losses recognized currently in Other Revenues. AEFA uses interest rate caps, swaps and floors to protect the margin between the interest rates earned on investments and the interest rates credited to holders of investment certificates and fixed annuities. Interest rate caps, swaps and floors generally mature within five years. The costs of interest rate caps and floors are reported in Other Assets and amortized into Interest and Dividends on a straight-line basis over the term of the contract; benefits are recognized in income when earned. See Note 5 for further information regarding the company's use of interest rate products related to short- and long-term debt obligations. FOREIGN CURRENCY PRODUCTS The company uses foreign currency products primarily to hedge net investments in foreign operations and to manage transactions denominated in foreign currencies. In addition, AEB enters into derivative contracts both to meet the needs of its clients and, to a limited extent, for trading purposes, including taking proprietary positions. 30 (2000 Annual Report p. 55) Foreign currency exposures are hedged, where practical and economical, through foreign currency contracts. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed-upon rate for settlement on a specified date. Foreign currency forward contracts generally mature within one year, whereas foreign currency spot contracts generally settle within two days. For foreign currency products used to hedge net investments in foreign operations, unrealized gains and losses as well as related premiums and discounts are reported in Shareholders' Equity. For foreign currency contracts related to transactions denominated in foreign currencies, unrealized gains and losses are reported in Other Assets and Other Commissions and Fees or Other Liabilities and Other Expenses, as appropriate. Related premiums and discounts are reported in Other Assets or Other Liabilities, as appropriate, and amortized into Interest Expense and Other Expenses over the term of the contract. Foreign currency products used for trading purposes are reported at fair value in Other Assets or Other Liabilities, as appropriate, with unrealized gains and losses recognized currently in Other Commissions and Fees. The company also uses foreign currency forward contracts to hedge its firm commitments. In addition, for selected major overseas markets, the company uses foreign currency forward contracts to hedge future income, generally for periods not exceeding one year; unrealized gains and losses are recognized currently in income. In the latter part of 2000 and 1999, foreign currency forward contracts were both sold (with notional amounts of $386 million and $611 million, respectively) and purchased (with notional amounts of $92 million and $25 million, respectively) to manage a majority of anticipated future cash flows in major overseas markets. The impact of these activities was not material. OTHER PRODUCTS Other Products also include written and purchased index options used by AEFA to manage the margin related to certain investment certificate and annuity products that pay interest based upon the relative change in a major stock market index between the beginning and end of the product's term. Purchased and written options used in conjunction with these products are reported in Other Assets and Other Liabilities, respectively. The amortization of the cost of purchased options and the proceeds of written options, along with changes in intrinsic value of the contracts, are included in Interest and Dividends. At December 31, 2000 and 1999, the notional value of these options was $2.1 billion and $1.6 billion, respectively. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The company's other off-balance sheet financial instruments principally relate to extending credit to satisfy the needs of its clients. The contractual amount of these instruments represents the maximum potential credit risk, assuming the contract amount is fully utilized, the counterparty defaults and collateral held is worthless. Management does not expect any material adverse consequence to the company's financial position to result from these contracts.
December 31, (Millions) 2000 1999 ---------------------------------------------------------------------------------------------------- Unused credit available to Cardmembers $91,667 $67,565 Loan commitments and other lines of credit $ 1,312 $ 1,254 Standby letters of credit and guarantees $ 1,100 $ 1,407 Commercial and other letters of credit $ 500 $ 411 ====================================================================================================
The company is committed to extend credit to certain Cardmembers as part of established lending product agreements. Many of these are not expected to be drawn; therefore, total unused credit available to Cardmembers does not represent future cash requirements. The company's Charge Card products have no preset spending limit and are not reflected in unused credit available to Cardmembers. The company may require collateral to support its loan commitments based on the creditworthiness of the borrower. 31 (2000 Annual Report p. 56) Standby letters of credit and guarantees primarily represent conditional commitments to insure the performance of the company's customers to third parties. These commitments generally expire within one year. The company issues commercial and other letters of credit to facilitate the short-term trade-related needs of its clients, which typically mature within six months. At December 31, 2000 and 1999, the company held $687 million and $1,023 million, respectively, of collateral supporting standby letters of credit and guarantees and $242 million and $220 million, respectively, of collateral supporting commercial and other letters of credit. Other financial institutions have committed to extend lines of credit to the company of $12.4 billion and $11.5 billion at December 31, 2000 and 1999, respectively. Note 9 FAIR VALUES OF FINANCIAL INSTRUMENTS The following table discloses fair value information for on- and off-balance sheet financial instruments. Certain items, such as life insurance obligations, employee benefit obligations and investments accounted for under the equity method are excluded. The fair values of financial instruments are estimates based upon market conditions and perceived risks at December 31, 2000 and 1999 and require management judgment. These figures may not be indicative of their future fair values.
December 31, (Millions) 2000 1999 --------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value --------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Assets for which carrying values approximate fair values $73,940 $73,940 $71,735 $71,735 Investments $43,747 $43,910 $43,052 $42,963 Loans $26,213 $26,118 $23,680 $23,594 Derivative financial instruments, net $ 105 $ (93) $ 217 $ 7 ===================================================================================================================== FINANCIAL LIABILITIES Liabilities for which carrying values approximate fair values $68,975 $68,975 $60,932 $60,932 Fixed annuity reserves $18,021 $17,479 $19,189 $18,592 Investment certificate reserves $ 7,322 $ 7,289 $ 5,922 $ 5,905 Long-term debt $ 4,711 $ 4,743 $ 5,995 $ 5,949 Separate account liabilities $28,792 $27,823 $31,870 $31,015 =====================================================================================================================
The carrying and fair values of other off-balance sheet financial instruments are not material as of December 31, 2000 and 1999. See Notes 2 and 8 for carrying and fair value information regarding investments and derivative financial instruments, respectively. The following methods were used to estimate the fair values of financial assets and financial liabilities: FINANCIAL ASSETS Assets for which carrying values approximate fair values include cash and cash equivalents, accounts receivable and accrued interest, separate account assets and certain other assets. For variable rate loans that reprice within a year where there has been no significant change in counterparties' creditworthiness, fair values are based on carrying values. The fair values of all other loans, except those with significant credit deterioration, are estimated using discounted cash flow analysis, based on current interest rates for loans with similar terms to borrowers of similar credit quality. For loans with significant credit deterioration, fair values are based on estimates of future cash flows discounted at rates commensurate with the risk inherent in the revised cash flow projections, or for collateral dependent loans, on collateral values. 32 (2000 Annual Report p. 57) FINANCIAL LIABILITIES Liabilities for which carrying values approximate fair values include customers' deposits, travelers cheques outstanding, accounts payable, short-term debt and certain other liabilities. Fair values of fixed annuities in deferral status are estimated as the accumulated value less applicable surrender charges and loans. For annuities in payout status, fair value is estimated using discounted cash flows, based on current interest rates. The fair value of these reserves excludes life insurance-related elements of $1.3 billion and $1.4 billion in 2000 and 1999, respectively. For variable rate investment certificates that reprice within a year, fair values approximate carrying values. For other investment certificates, fair value is estimated using discounted cash flows based on current interest rates. The valuations are reduced by the amount of applicable surrender charges and related loans. For variable rate long-term debt that reprices within a year, fair values approximate carrying values. For other long-term debt, fair value is estimated using either quoted market prices or discounted cash flows based on the company's current borrowing rates for similar types of borrowing. Fair values of separate account liabilities, after excluding life insurance-related elements of $3.6 billion and $4.0 billion in 2000 and 1999, respectively, are estimated as the accumulated value less applicable surrender charges. Note 10 SIGNIFICANT CREDIT CONCENTRATIONS A credit concentration may exist if customers are involved in similar industries. The company's customers operate in diverse economic sectors. Therefore, management does not expect any material adverse consequences to the company's financial position to result from credit concentrations. Certain distinctions between categories require management judgment.
December 31, (Dollars in millions) 2000 1999 ------------------------------------------------------------------------------------------------- Financial institutions(a) $ 19,221 $17,489 Individuals(b) 143,926 112,616 U.S. Government and agencies(c) 17,015 16,498 All other 25,398 26,127 ------------------------------------------------------------------------------------------------- Total $205,560 $172,730 ================================================================================================= Composition: On-balance sheet 54% 59% Off-balance sheet 46 41 ------------------------------------------------------------------------------------------------- Total 100% 100% =================================================================================================
(a) Financial institutions primarily include banks, broker-dealers, insurance companies and savings and loan associations. (b) Charge Card products have no preset spending limit; therefore, the quantified credit amount includes only Cardmember receivables recorded on the Consolidated Balance Sheets. (c) U.S. Government and agencies represent the U.S. Government and its agencies, states and municipalities, and quasi-government agencies. Note 11 STOCK PLANS Under the 1998 Incentive Compensation Plan and previously under the 1989 Long-Term Incentive Plan (the Plans), awards may be granted to officers, other key 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, stock appreciation rights, restricted stock, performance grants and similar awards designed to meet the requirements of non-U.S. jurisdictions. The company also has options outstanding pursuant to a Directors' Stock Option Plan. Under these plans, there were a total of 87.9 million, 122.9 million and 159.2 million common shares available for grant at December 31, 2000, 1999 33 (2000 Annual Report p. 58) and 1998, respectively. Each option has an exercise price at least equal to the market price of the company's common stock on the date of grant and a maximum term of 10 years. Options granted prior to 1999 generally vest at 33 1/3 percent per year beginning with the first anniversary of the grant date. Starting in 1999, options granted generally vest at 33 1/3 percent per year beginning with the second anniversary of the grant date. The company also sponsors the American Express Incentive Savings Plan, under which purchases of the company's common shares are made by or on behalf of participating employees. In 1998, the Compensation and Benefits Committee adopted a restoration stock option program applicable to existing and future stock option awards. This program provides that employees who exercise options that have been outstanding at least five years by surrendering previously owned shares as payment will automatically receive a new (restoration) stock option with an exercise price equal to the market price on the date of exercise. The size of the restoration option is equal to the number of shares surrendered plus any shares surrendered or withheld to satisfy the employees' income tax requirements. The term of the restoration option, which is exercisable six months after grant, is equal to the remaining life of the original option. Senior officers must be in compliance with their stock ownership guidelines to exercise restoration options. The company granted 1.5 million, 1.3 million and 0.4 million restricted stock awards with a weighted average grant date value of $43.46, $36.25 and $29.66 per share for 2000, 1999 and 1998, respectively. Restrictions generally expire four years from date of grant. The compensation cost that has been charged against income for the company's restricted stock awards was $41 million, $38 million and $36 million for 2000, 1999 and 1998, respectively. The company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options. Therefore, no compensation cost has been recognized related to stock options. If the company had elected to account for its stock options under the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation," the company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below:
(Millions, except per share amounts) 2000 1999 1998 -------------------------------------------------------------------------------------------------- Net income: As reported $2,810 $2,475 $2,141 Pro forma $2,616 $2,348 $2,060 Basic EPS: As reported $ 2.12 $ 1.85 $ 1.57 Pro forma $ 1.97 $ 1.75 $ 1.51 Diluted EPS: As reported $ 2.07 $ 1.81 $ 1.54 Pro forma $ 1.92 $ 1.71 $ 1.48 ==================================================================================================
The fair value of each option is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively: 2000 1999 1998 -------------------------------------------------------------------------------------------------- Dividend yield 1.1% 1.5% 2.0% Expected volatility 29% 30% 24% Risk-free interest rate 6.7% 5.1% 5.5% Expected life of stock option 5 years 5 years 5 years ==================================================================================================
34 (2000 Annual Report p. 59) The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The weighted average fair value per option was $14.92, $11.09 and $7.23 for options granted during 2000, 1999 and 1998, respectively. A summary of the status of the company's stock option plans as of December 31 and changes during each of the years then ended is presented below:
(Shares in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 94,512 $27.96 76,658 $21.49 60,123 $14.77 Granted 39,273 $44.38 36,529 $36.53 34,483 $29.51 Exercised (14,114) $19.45 (16,033) $16.20 (13,230) $11.72 Forfeited/Expired (5,211) $36.87 (2,642) $29.82 (4,718) $21.96 ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 114,460 $34.23 94,512 $27.96 76,658 $21.49 ------------------------------------------------------------------------------------------------------------------------------------ Options exercisable at end of year 33,966 $23.61 32,476 $18.70 29,153 $13.37 ====================================================================================================================================
The following table summarizes information about the stock options outstanding at December 31, 2000:
(Shares in thousands) Options Outstanding Options Exercisable ------------------------------------------------------------------------------------------------------------------------------------ Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------------------------------------------------------------------------------------------------------------------ $ 6.25-$28.99 22,903 5.4 $18.25 20,021 $16.97 $29.00-$34.99 20,682 7.2 $29.45 10,880 $29.55 $35.00-$41.99 31,277 8.2 $36.01 726 $37.36 $42.00-$61.44 39,598 8.8 $44.55 2,339 $48.47 ------------------------------------------------------------------------------------------------------------------------------------ $ 6.25-$61.44 114,460 7.7 $34.23 33,966 $23.61 ------------------------------------------------------------------------------------------------------------------------------------
Note 12 RETIREMENT PLANS PENSION PLANS The company sponsors the American Express Retirement Plan (the Plan), a noncontributory defined benefit plan which is a qualified plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), under which the cost of retirement benefits for eligible employees in the United States is measured by length of service, compensation and other factors and is currently being funded through a trust. Funding of retirement costs for the Plan complies with the applicable minimum funding requirements specified by ERISA. Employees' accrued benefits are based on recordkeeping account balances which are maintained for each individual and are credited with additions equal to a percentage, based on age plus service, of base pay, certain commissions and bonuses, overtime and shift differential, each pay period. Employees' balances are also credited daily with a fixed rate of interest that is updated each January 1 and is based on the average of the daily five-year U.S. Treasury Note yields for the previous October 1 through November 30. Employees have the option to receive annuity payments or a lump sum payout at vested termination or retirement. In addition, the company sponsors an unfunded non-qualified Supplemental Retirement Plan (the SRP) for certain highly compensated employees to replace the benefit that cannot be provided by the Plan. The SRP generally parallels the Plan but offers different payment options. 35 (2000 Annual Report p. 60) Most employees outside the United States are covered by local retirement plans, some of which are funded, or receive payments at the time of retirement or termination under applicable labor laws or agreements. Plan assets consist principally of equities and fixed income securities. The components of the net pension cost for all defined benefit plans accounted for under SFAS No. 87, "Employers' Accounting for Pensions," are as follows:
(Millions) 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Service cost $ 95 $ 89 $ 79 Interest cost 98 88 80 Expected return on plan assets (102) (93) (85) Amortization of: Prior service cost (9) (9) (9) Transition obligation 3 1 1 Reversion gain (4) (4) (4) Recognized net actuarial loss 5 7 -- Settlement/Curtailment gain (22) (16) (13) ------------------------------------------------------------------------------------------------------ Net periodic pension benefit cost $ 64 $ 63 $ 49 ======================================================================================================
The funded status of the company's pension plans is based on valuations as of September 30. The following tables provide a reconciliation of the changes in the plans' benefit obligation and fair value of assets for all plans accounted for under SFAS No. 87: RECONCILIATION OF CHANGE IN BENEFIT OBLIGATION
(Millions) 2000 1999 ------------------------------------------------------------------------------------------------------- Benefit obligation, October 1 prior year $1,330 $1,322 Service cost 95 89 Interest cost 98 88 Benefits paid (40) (40) Actuarial loss (gain) 39 (56) Settlements/Curtailments (84) (53) Foreign currency exchange rate changes (35) (20) ------------------------------------------------------------------------------------------------------- Benefit obligation at September 30, $1,403 $1,330 ======================================================================================================= RECONCILIATION OF CHANGE IN FAIR VALUE OF PLAN ASSETS (Millions) 2000 1999 ------------------------------------------------------------------------------------------------------- Fair value of plan assets, October 1 prior year $1,347 $1,178 Actual return on plan assets 244 220 Employer contributions 41 56 Benefits paid (40) (40) Settlements/Curtailments (80) (52) Foreign currency exchange rate changes (32) (15) ------------------------------------------------------------------------------------------------------- Fair value of plan assets at September 30, $1,480 $1,347 =======================================================================================================
36 (2000 Annual Report p. 61) The following table reconciles the plans' funded status to the amounts recognized on the Consolidated Balance Sheets:
FUNDED STATUS (Millions) 2000 1999 ----------------------------------------------------------------------------------------------------- Funded status at September 30, $ 77 $ 17 Unrecognized net actuarial gain (237) (141) Unrecognized prior service cost (51) (60) Unrecognized net transition obligation (3) (1) Fourth quarter contributions (net of benefit payments) 3 4 ----------------------------------------------------------------------------------------------------- Net amount recognized at December 31, $(211) $(181) =====================================================================================================
The following table provides the amounts recognized on the Consolidated Balance Sheets as of December 31:
(Millions) 2000 1999 ----------------------------------------------------------------------------------------------------- Accrued benefit liability $(314) $(275) Prepaid benefit cost 89 80 Intangible asset 14 14 ----------------------------------------------------------------------------------------------------- Net amount recognized at December 31, $(211) $(181) =====================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $191 million, $171 million and $16 million, respectively, as of December 31, 2000, and $175 million, $156 million and $16 million, respectively, as of December 31, 1999. The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10 percent of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. The weighted average assumptions used in the company's defined benefit plans were:
2000 1999 ----------------------------------------------------------------------------------------------------- Discount rates 7.4% 7.3% Rates of increase in compensation levels 4.4% 4.3% Expected long-term rates of return on assets 9.5% 9.4% =====================================================================================================
The company also has a defined contribution retirement plan (a 401(k) savings plan with a profit sharing feature) covering most employees in the United States. The defined contribution plan expense was $137 million, $126 million and $106 million in 2000, 1999 and 1998, respectively. OTHER POSTRETIREMENT BENEFITS The company sponsors postretirement benefit plans that provide health care, life insurance and other postretirement benefits to retired U.S. employees. Net periodic postretirement benefit expenses were $26 million, $20 million and $17 million in 2000, 1999 and 1998, respectively. The liabilities recognized on the Consolidated Balance Sheets for the company's defined postretirement benefit plans (other than pension plans) at December 31, 2000 and 1999 were $211 million and $205 million, respectively. 37 (2000 Annual Report p. 62) Note 13 INCOME TAXES The provisions for income taxes were as follows:
(Millions) 2000 1999 1998 -------------------------------------------------------------------------------------------- Federal $ 748 $ 645 $ 465 State and local 76 76 35 Foreign 274 242 284 -------------------------------------------------------------------------------------------- Total $1,098 $ 963 $784 ============================================================================================
Accumulated net earnings of certain foreign subsidiaries, which totaled $1.9 billion at December 31, 2000, are intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated $287 million, have not been provided on those earnings. The current and deferred components of the provision for income taxes were as follows:
(Millions) 2000 1999 1998 --------------------------------------------------------------------------------------------- Current $1,209 $ 716 $ 883 Deferred (111) 247 (99) --------------------------------------------------------------------------------------------- Total $1,098 $ 963 $ 784 =============================================================================================
The company's net deferred tax assets at December 31 were as follows:
(Millions) 2000 1999 --------------------------------------------------------------------------------------------- Deferred tax assets $3,500 $3,126 Deferred tax liabilities 2,023 1,691 --------------------------------------------------------------------------------------------- Net deferred tax assets $1,477 $1,435 =============================================================================================
Deferred tax assets for 2000 and 1999 primarily reflect reserves not yet deducted for tax purposes of $1.9 billion and $1.7 billion, respectively; deferred Cardmember fees of $254 million and $230 million, respectively; deferred compensation of $370 million and $358 million, respectively; and deferred taxes related to SFAS No. 115 of $71 million and $145 million, respectively. Deferred tax liabilities for 2000 and 1999 are mainly comprised of deferred acquisition costs of $987 million and $919 million, respectively; and depreciation and amortization of $323 million and $200 million, respectively. The principal reasons that the aggregate income tax provision is different from that computed by using the U.S. statutory rate of 35 percent are as follows:
(Millions) 2000 1999 1998 --------------------------------------------------------------------------------------------- Combined tax at U.S. statutory rate $1,368 $1,203 $1,024 Changes in taxes resulting from: Tax-preferred investments (211) (171) (157) Tax-exempt element of dividend income (26) (43) (38) Foreign income taxed at rates other than U.S. statutory rate (38) (35) (44) State and local income taxes 50 49 23 All other (45) (40) (24) --------------------------------------------------------------------------------------------- Income tax provision $1,098 $ 963 $ 784 =============================================================================================
38 (2000 Annual Report p. 63) Net income taxes paid by the company during 2000, 1999 and 1998 were $858 million, $392 million and $977 million, respectively, and include estimated tax payments and cash settlements relating to prior tax years. The items composing comprehensive income in the Consolidated Statements of Shareholders' Equity are presented net of income tax provision (benefit). The changes in net unrealized securities gains are presented net of tax provision (benefit) of $81 million, $(473) million and $2 million for 2000, 1999 and 1998, respectively. Foreign currency translation adjustments are presented net of tax provision (benefit) of $18 million, $3 million and $(8) million for 2000, 1999 and 1998, respectively. Note 14 EARNINGS PER COMMON SHARE Basic earnings per share (EPS) is computed using the average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of stock options, restricted stock awards (RSAs) and other financial instruments that may be converted into common shares. The basic and diluted EPS computations are as follows:
(Millions, except per share amounts) 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Numerator: Net income $2,810 $2,475 $2,141 Denominator: Denominator for basic EPS--weighted-average shares 1,327 1,340 1,363 Effect of dilutive securities: Stock Options, RSAs and other 33 29 25 --------------------------------------------------------------------------------------------------------- Denominator for diluted EPS 1,360 1,369 1,388 --------------------------------------------------------------------------------------------------------- Basic EPS $ 2.12 $ 1.85 $ 1.57 --------------------------------------------------------------------------------------------------------- Diluted EPS $ 2.07 $ 1.81 $ 1.54 =========================================================================================================
Note 15 OPERATING SEGMENTS AND GEOGRAPHIC OPERATIONS OPERATING SEGMENTS The company is principally engaged in providing travel related, financial advisory and international banking services throughout the world. Travel Related Services' (TRS) products and services include, among others, Charge Cards, Cardmember lending products, Travelers Cheques, and corporate and consumer travel services. American Express Financial Advisors' (AEFA) services and products include financial planning and advice, investment advisory services and a variety of products, including insurance and annuities, investment certificates and mutual funds. American Express Bank (AEB) products and services include providing financial institution, corporate and private banking, personal financial services and global trading. The company operates on a global basis, although the principal market for financial advisory services is the United States. The following table presents certain information regarding these operating segments at December 31, 2000, 1999 and 1998 and for each of the years then ended. The TRS segment now includes Travelers Cheque (TC) operations, which had previously been included in the American Express Bank/TC segment. For certain income statement items that are affected by asset securitizations at TRS, data is provided on both a managed basis, which excludes the effect of securitizations, as well as on a GAAP basis. See Note 4 to the Consolidated Financial Statements and the TRS Results of Operations section of the Financial Review for further information regarding the effect of securitizations on the financial statements. In addition, net revenues (managed basis) are presented net of provisions for losses and benefits for annuities, insurance and investment certificate products of AEFA. 39 (2000 Annual Report p. 64)
American Travel Express American Corporate Adjustments Related Financial Express and and (Millions) Services Advisors Bank Other Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------- 2000 Net revenues (managed basis) $17,441 $ 4,219 $ 591 $ 167 $ (333) $ 22,085 Revenues (GAAP basis) 17,120 6,130 591 167 (333) 23,675 Interest and dividends, net 803 2,292 251 165 (221) 3,290 Cardmember lending net finance charge revenue: Managed basis 2,383 -- -- -- -- 2,383 GAAP basis 987 -- -- -- -- 987 Interest expense: Managed basis 1,571 22 -- 180 (214) 1,559 GAAP basis 1,366 22 -- 180 (214) 1,354 Pretax income (loss) 2,713 1,483 33 (321) -- 3,908 Income tax provision (benefit) 784 451 4 (141) -- 1,098 ------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,929 1,032 29 (180) -- 2,810 ------------------------------------------------------------------------------------------------------------------- Assets $71,419 $73,560 $11,413 $16,487 $(18,456) $154,423 =================================================================================================================== 1999 Net revenues (managed basis) $15,234 $ 3,737 $ 621 $ 109 $ (218) $ 19,483 Revenues (GAAP basis) 15,130 5,636 621 109 (218) 21,278 Interest and dividends, net 643 2,443 291 105 (136) 3,346 Cardmember lending net finance charge revenue: Managed basis 1,929 -- -- -- -- 1,929 GAAP basis 1,333 -- -- -- -- 1,333 Interest expense: Managed basis 1,204 32 -- 164 (129) 1,271 GAAP basis 984 32 -- 164 (129) 1,051 Pretax income (loss) 2,383 1,363 27 (335) -- 3,438 Income tax provision (benefit) 691 428 5 (161) -- 963 ------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,692 935 22 (174) -- 2,475 ------------------------------------------------------------------------------------------------------------------- Assets $63,233 $74,644 $11,354 $14,449 $(15,163) $148,517 =================================================================================================================== 1998 Net revenues (managed basis) $13,524 $ 3,181 $ 620 $ 112 $ (225) $ 17,212 Revenues (GAAP basis) 13,530 5,095 620 112 (225) 19,132 Interest and dividends, net 581 2,437 290 103 (134) 3,277 Cardmember lending net finance charge revenue: Managed basis 1,660 -- -- -- -- 1,660 GAAP basis 1,354 -- -- -- -- 1,354 Interest expense: Managed basis 1,191 21 -- 149 (131) 1,230 GAAP basis 960 21 -- 149 (131) 999 Pretax income (loss) 2,070 1,192 (135) (202) -- 2,925 Income tax provision (benefit) 579 374 (51) (118) -- 784 ------------------------------------------------------------------------------------------------------------------- Net income (loss) 1,491 818 (84) (84) -- 2,141 ------------------------------------------------------------------------------------------------------------------- Assets $51,164 $64,637 $11,576 $ 3,606 $ (4,050) $126,933 ===================================================================================================================
40 (2000 Annual Report p. 65) Income tax provision (benefit) is calculated on a separate return basis; however, benefits from operating losses, loss carrybacks and tax credits (principally foreign tax credits) recognizable for the company's consolidated reporting purposes are allocated based upon the tax sharing agreement among members of the American Express Company consolidated U.S. tax group. Assets are those that are used or generated exclusively by each industry segment. The adjustments and eliminations required to determine the consolidated amounts shown above consist principally of the elimination of intersegment amounts. GEOGRAPHIC OPERATIONS The following table presents the company's revenues and pretax income (loss) in different geographic regions.
Adjustments United and (Millions) States Europe Asia/Pacific All Other Eliminations Consolidated ----------------------------------------------------------------------------------------------------------------------- 2000 Revenues $18,529 $2,731 $1,582 $1,629 $(796) $23,675 Pretax income $ 3,049 $ 411 $ 199 $ 249 -- $ 3,908 1999 Revenues $16,362 $2,729 $1,456 $1,466 $(735) $21,278 Pretax income $ 2,756 $ 316 $ 175 $ 191 -- $ 3,438 1998 Revenues $14,535 $2,476 $1,332 $1,444 $(655) $19,132 Pretax income (loss) $ 2,520 $ 340 $ (59) $ 124 -- $ 2,925 =======================================================================================================================
Most services of the company are provided on an integrated worldwide basis. Therefore, it is not practical to separate precisely the U.S. and international services. Accordingly, the data in the above table are, in part, based upon internal allocations, which necessarily involve management's judgment. Note 16 LEASE COMMITMENTS AND OTHER CONTINGENT LIABILITIES The company leases certain office facilities and operating equipment under noncancellable and cancellable agreements. Total rental expense amounted to $477 million, $452 million and $388 million in 2000, 1999 and 1998, respectively. At December 31, 2000, the minimum aggregate rental commitment under all noncancellable leases (net of subleases) was (millions): 2001, $360; 2002, $276; 2003, $205; 2004, $159; 2005, $139; and thereafter, $1,661. The company is not a party to any pending legal proceedings that, in the opinion of management, would have a material adverse effect on the company's financial position. 41 (2000 Annual Report p. 66) Note 17 TRANSFER OF FUNDS FROM SUBSIDIARIES The Securities and Exchange Commission requires the disclosure of certain restrictions on the flow of funds to a parent company from its subsidiaries in the form of loans, advances or dividends. Restrictions on the transfer of funds exist under debt agreements and regulatory requirements of certain of the company's subsidiaries. These restrictions have not had any effect on the company's shareholder dividend policy and management does not anticipate any effect in the future. At December 31, 2000, the aggregate amount of net assets of subsidiaries that may be transferred to the parent company was approximately $8.0 billion. Should specific additional needs arise, procedures exist to permit immediate transfer of short-term funds between the company and its subsidiaries, while complying with the various contractual and regulatory constraints on the internal transfer of funds. Note 18 QUARTERLY FINANCIAL DATA (Unaudited)
(Millions, except per share amounts) 2000 1999 ------------------------------------------------------------------------------------------------------------------- Quarters Ended 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31 ------------------------------------------------------------------------------------------------------------------- Net revenues (managed basis) $5,714 $5,554 $5,558 $5,259 $5,227 $4,920 $4,811 $4,524 Revenues (GAAP basis) 6,067 5,981 5,970 5,657 5,699 5,311 5,298 4,971 Pretax income 913 1,029 1,046 920 844 907 895 791 Net income 677 737 740 656 606 648 646 575 Earnings per common share: Basic 0.51 0.56 0.56 0.49 0.45 0.48 0.48 0.43 Diluted 0.50 0.54 0.54 0.48 0.44 0.47 0.47 0.42 Cash dividends declared per common share .08 .08 .08 .08 .075 .075 .075 .075 Common share prices: High 63.00 62.25 57.19 56.50 56.29 50.21 47.54 43.21 Low 50.06 50.69 43.94 39.83 43.42 40.63 38.17 31.63 ====================================================================================================================
42 (2000 Annual Report p. 67) REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN EXPRESS COMPANY We have audited the accompanying consolidated balance sheets of American Express Company as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the management of American Express Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Express Company at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 8, 2001 43 (2000 Annual Report p. 69) CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Millions, except per share amounts and percentages) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net revenues (managed basis)(a) $ 22,085 $ 19,483 $ 17,212 $ 15,857 $ 14,473 Percent increase 13% 13% 9% 10% 3% Revenues (GAAP basis) 23,675 21,278 19,132 17,760 16,380 Percent increase 11% 11% 8% 8% 3% Expenses 19,767 17,840 16,207 15,010 13,716 Net income: As reported 2,810 2,475 2,141 1,991 1,901 Adjusted(b) 2,810 2,475 2,201 1,991 1,739 Return on average shareholders' equity(c) 25.3% 25.3% 24.0% 23.5% 22.8% ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Cash and cash equivalents $ 8,487 $ 7,471 $ 4,092 $ 4,179 $ 2,677 Accounts receivable and accrued interest, net 30,543 26,467 22,224 21,774 20,491 Investments 43,747 43,052 41,299 39,648 38,339 Loans, net 26,088 23,582 21,054 20,109 18,518 Total assets 154,423 148,517 126,933 120,003 108,512 Customers' deposits 13,870 13,139 10,398 9,444 9,555 Travelers Cheques outstanding 6,127 6,213 5,823 5,634 5,838 Insurance and annuity reserves 24,098 25,011 25,433 26,165 25,674 Short-term debt 36,030 30,627 22,605 20,570 18,402 Long-term debt 4,711 5,995 7,019 7,873 6,552 Shareholders' equity 11,684 10,095 9,698 9,574 8,528 ----------------------------------------------------------------------------------------------------------------------------------- COMMON SHARE STATISTICS Earnings per share: Basic Basic adjusted(b) $ 2.12 $ 1.85 $ 1.57 $ 1.43 $ 1.34 Diluted $ 2.12 $ 1.85 $ 1.61 $ 1.43 $ 1.22 Diluted adjusted(b) $ 2.07 $ 1.81 $ 1.54 $ 1.38 $ 1.30 Percent increase: $ 2.07 $ 1.81 $ 1.59 $ 1.38 $ 1.19 Basic Basic adjusted(b) 15% 18% 10% 7% 26% Diluted 15% 15% 13% 17% 15% Diluted adjusted(b) 14% 18% 12% 6% 26% Cash dividends declared per share 14% 14% 15% 16% 16% Book value per share: $ .32 $ .30 $ .30 $ .30 $ .30 Actual Pro forma(c) $ 8.81 $ 7.52 $ 7.18 $ 6.84 $ 6.01 Market price per share: $ 8.92 $ 7.74 $ 6.75 $ 6.43 $ 5.74 High Low $ 63.00 $ 56.29 $ 39.54 $ 30.50 $ 20.13 Close $ 39.83 $ 31.63 $ 22.33 $ 17.88 $ 12.88 Average common shares outstanding for earnings per share: $ 54.94 $ 55.42 $ 34.17 $ 29.75 $ 18.83 Basic 1,327 1,340 1,363 1,393 1,417 Diluted 1,360 1,369 1,388 1,438 1,465 Shares outstanding at year end 1,326 1,341 1,351 1,399 1,419 ----------------------------------------------------------------------------------------------------------------------------------- OTHER STATISTICS Number of employees at year end: United States 53,352 52,858 50,266 44,691 43,688 Outside United States 35,498 35,520 34,466 28,929 28,611 Total 88,850 88,378 84,732 73,620 72,299 ----------------------------------------------------------------------------------------------------------------------------------- Number of shareholders of record 53,884 56,020 51,597 53,576 55,803 ===================================================================================================================================
(a) Net revenues (managed basis) are total revenues as reported under U.S. Generally Accepted Accounting Principles (GAAP), net of American Express Financial Advisors' provision for losses and benefits, and exclude the effect of TRS' asset securitization activities. (b) 1998 is adjusted to exclude the following first quarter items: $138 million credit loss provision at American Express Bank relating to its Asia/Pacific portfolio, as well as income of $78 million representing gains on the sale of First Data Corporation shares and a preferred dividend based on Lehman Brothers' earnings. 1996 is adjusted to exclude a $300 million gain on the exchange of the company's DECS and a $138 million restructuring charge. (c) Return on average shareholders' equity is based on adjusted income in 1996 and excludes the effect of SFAS No. 115. In addition, book value per share excludes the effect of SFAS No. 115. 44 (2000 Annual Report p. 70)