Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016

or

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                  to                 

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

    

13-4922250

(State or other jurisdiction of

incorporation or organization)

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

200 Vesey Street, New York, NY

    

10285

(Address of principal executive offices)      (Zip Code)

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

None

 

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

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

Yes   X         No             

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

Yes   X         No             

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Yes               No _X_     

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

 

Class

     Outstanding at July 20, 2016
Common Shares (par value $0.20 per share)        923,780,898 shares

 


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.   Financial Information    Page No.  
  Item 1.    Financial Statements   
     Consolidated Statements of Income – Three Months Ended June 30, 2016 and 2015      1     
     Consolidated Statements of Income – Six Months Ended June 30, 2016 and 2015      2     
     Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2016 and 2015      3     
     Consolidated Balance Sheets – June 30, 2016 and December 31, 2015      4     
     Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015      5     
     Notes to Consolidated Financial Statements      6     
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      33     
   Item 3.    Quantitative and Qualitative Disclosures about Market Risk      71     
   Item 4.    Controls and Procedures      71     
Part II.    Other Information   
   Item 1.    Legal Proceedings      74     
   Item 1A.    Risk Factors      75     
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      76     
   Item 5.    Other Information      77     
   Item 6.    Exhibits      77     
   Signatures      78     
   Exhibit Index      E-1     


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 
Three Months Ended June 30 (Millions, except per share amounts)      2016      2015  

 

    

 

 

    

 

 

 

Revenues

       

Non-interest revenues

       

Discount revenue

     $             4,824       $             4,946   

Net card fees

       715         667   

Other fees and commissions

       702         727   

Other

       545         521   

 

    

 

 

    

 

 

 

Total non-interest revenues

       6,786         6,861   

 

    

 

 

    

 

 

 

Interest income

       

Interest on loans

       1,818         1,776   

Interest and dividends on investment securities

       34         41   

Deposits with banks and other

       33         20   

 

    

 

 

    

 

 

 

Total interest income

       1,885         1,837   

 

    

 

 

    

 

 

 

Interest expense

       

Deposits

       150         109   

Long-term debt and other

       286         305   

 

    

 

 

    

 

 

 

Total interest expense

       436         414   

 

    

 

 

    

 

 

 

Net interest income

       1,449         1,423   

 

    

 

 

    

 

 

 

Total revenues net of interest expense

       8,235         8,284   

 

    

 

 

    

 

 

 

Provisions for losses

       

Charge card

       153         165   

Card Member loans

       285         285   

Other

       25         17   

 

    

 

 

    

 

 

 

Total provisions for losses

       463         467   

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

       7,772         7,817   

 

    

 

 

    

 

 

 

Expenses

       

Marketing and promotion

       788         761   

Card Member rewards

       1,766         1,799   

Card Member services and other

       281         242   

Salaries and employee benefits

       1,451         1,250   

Other, net

       470         1,535   

 

    

 

 

    

 

 

 

Total expenses

       4,756         5,587   

 

    

 

 

    

 

 

 

Pretax income

       3,016         2,230   

Income tax provision

       1,001         757   

 

    

 

 

    

 

 

 

Net income

     $ 2,015       $ 1,473   

 

    

 

 

    

 

 

 

Earnings per Common Share (Note 15): (a)

       

Basic

     $ 2.11       $ 1.43   

Diluted

     $ 2.10       $ 1.42   

 

    

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

       

Basic

       938         1,009   

Diluted

       941         1,013   

Cash dividends declared per common share

     $ 0.29       $ 0.29   

 

 

 

(a) Represents net income less (i) earnings allocated to participating share awards of $17 million and $11 million for the three months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $19 million and $20 million for the three months ended June 30, 2016 and 2015, respectively.

 

See Notes to Consolidated Financial Statements.

 

1


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 
Six Months Ended June 30 (Millions, except per share amounts)      2016      2015  

 

    

 

 

    

 

 

 

Revenues

       

Non-interest revenues

       

Discount revenue

     $           9,467        $             9,606   

Net card fees

       1,414          1,334   

Other fees and commissions

       1,382          1,435   

Other

       1,031          989   

 

    

 

 

    

 

 

 

Total non-interest revenues

       13,294          13,364   

 

    

 

 

    

 

 

 

Interest income

       

Interest on loans

       3,756          3,571   

Interest and dividends on investment securities

       70          82   

Deposits with banks and other

       64          41   

 

    

 

 

    

 

 

 

Total interest income

       3,890          3,694   

 

    

 

 

    

 

 

 

Interest expense

       

Deposits

       300          212   

Long-term debt and other

       561          612   

 

    

 

 

    

 

 

 

Total interest expense

       861          824   

 

    

 

 

    

 

 

 

Net interest income

       3,029          2,870   

 

    

 

 

    

 

 

 

Total revenues net of interest expense

       16,323          16,234   

 

    

 

 

    

 

 

 

Provisions for losses

       

Charge card

       322          339   

Card Member loans

       512          520   

Other

       63          28   

 

    

 

 

    

 

 

 

Total provisions for losses

       897          887   

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

       15,426          15,347   

 

    

 

 

    

 

 

 

Expenses

       

Marketing and promotion

       1,515          1,370   

Card Member rewards

       3,469          3,439   

Card Member services and other

       563          503   

Salaries and employee benefits

       2,789          2,555   

Other, net

       1,890          2,934   

 

    

 

 

    

 

 

 

Total expenses

       10,226          10,801   

 

    

 

 

    

 

 

 

Pretax income

       5,200          4,546   

Income tax provision

       1,759          1,548   

 

    

 

 

    

 

 

 

Net income

     $ 3,441        $ 2,998   

 

    

 

 

    

 

 

 

Earnings per Common Share (Note 15): (a)

       

Basic

     $ 3.55       $ 2.92   

Diluted

     $ 3.54       $ 2.90   

 

    

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

       

Basic

       949         1,013   

Diluted

       952         1,018   

Cash dividends declared per common share

     $ 0.58       $ 0.55   

 

 

 

(a) Represents net income less (i) earnings allocated to participating share awards of $28 million and $22 million for the six months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $40 million and $20 million for the six months ended June 30, 2016 and 2015, respectively.

 

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

  

 

    

 

(Millions)    2016   2015      2016   2015

 

  

 

 

 

    

 

 

 

Net income

   $          2,015    $          1,473       $          3,441    $          2,998 

Other comprehensive loss:

           

Net unrealized securities gains (losses), net of tax of: 2016, $2 and $2; 2015, $(10) and $(11)

     (20)        (20)

Foreign currency translation adjustments, net of tax of: 2016, $100 and $61; 2015, $(48) and $40

   (130)   11       (126)   (244)

Net unrealized pension and other postretirement benefit gains, net of tax of: 2016, $10 and $29; 2015, $(3) and $16

          32    29 

 

  

 

 

 

    

 

 

 

Other comprehensive loss

   (119)   (3)      (87)   (235)

 

  

 

 

 

    

 

 

 

Comprehensive income

   $          1,896    $          1,470       $          3,354    $          2,763 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 
(Millions, except share data)  

June 30,

2016

       December 31,
2015
 

 

 

 

 

      

 

 

 

Assets

      

Cash and cash equivalents

      

Cash and due from banks

  $               2,811          $               2,935    

Interest-bearing deposits in banks (includes securities purchased under resale agreements:
2016, $129; 2015, $41)

    30,379            19,569    

Short-term investment securities

    577            258    

 

 

 

 

      

 

 

 

Total cash and cash equivalents

    33,767            22,762    

Card Member loans and receivables held for sale (includes gross loans and receivables available to settle obligations of consolidated variable interest entities: 2016, nil; 2015, $4,966)

    —            14,992    

Accounts receivable

      

Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2016, $5,828; 2015, $6,649), less reserves: 2016, $423; 2015, $462

    44,800            43,671    

Other receivables, less reserves: 2016, $50; 2015, $43

    2,697            3,024    

Loans

      

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity:
2016, $25,334; 2015, $23,559), less reserves: 2016, $1,091; 2015, $1,028

    58,796            57,545    

Other loans, less reserves: 2016, $36; 2015, $20

    1,132            1,254    

Investment securities

    3,892            3,759    

Premises and equipment, less accumulated depreciation and amortization: 2016, $4,855; 2015, $6,801

    4,210            4,108    

Other assets (includes restricted cash of consolidated variable interest entities: 2016, $35; 2015, $155)

    10,348            10,069    

 

 

 

 

      

 

 

 

Total assets

  $ 159,642          $ 161,184    

 

 

 

 

      

 

 

 

Liabilities and Shareholders’ Equity

      

Liabilities

      

Customer deposits

  $ 54,404          $ 54,997    

Travelers Cheques and other prepaid products

    2,803            3,247    

Accounts payable

    11,729            11,822    

Short-term borrowings (includes debt issued by a consolidated variable interest entity: 2016, nil; 2015, $100)

    2,343            4,812    

Long-term debt (includes debt issued by consolidated variable interest entities: 2016, $14,609; 2015, $13,602)

    50,649            48,061    

Other liabilities

    17,002            17,572    

 

 

 

 

      

 

 

 

Total liabilities

    138,930            140,511    

 

 

 

 

      

 

 

 

Commitments and Contingencies (Note 8)

      

Shareholders’ Equity

      

Preferred shares, $1.662/3 par value, authorized 20 million shares; issued and outstanding 1,600 shares as of June 30, 2016 and December 31, 2015

    —            —    

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 925 million shares as of June 30, 2016 and 969 million shares as of December 31, 2015

    185            194    

Additional paid-in capital

    12,868            13,348    

Retained earnings

    10,280            9,665    

Accumulated other comprehensive loss

      

Net unrealized securities gains, net of tax: 2016, $34; 2015, $32

    65            58    

Foreign currency translation adjustments, net of tax: 2016, $(39); 2015, $(100)

    (2,170)           (2,044)   

Net unrealized pension and other postretirement benefit losses, net of tax: 2016, $(194); 2015, $(223)

    (516)           (548)   

 

 

 

 

      

 

 

 

Total accumulated other comprehensive loss

    (2,621)           (2,534)   

 

 

 

 

      

 

 

 

Total shareholders’ equity

    20,712            20,673    

 

 

 

 

      

 

 

 

Total liabilities and shareholders’ equity

  $ 159,642          $       161,184    

 

 

 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 
Six Months Ended June 30 (Millions)      2016      2015  

 

    

 

 

    

 

 

 

Cash Flows from Operating Activities

       

Net income

     $           3,441        $           2,998    

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

       

Provisions for losses

       897          887    

Depreciation and amortization

       536          514    

Deferred taxes and other

       (852)         146    

Stock-based compensation

       133          140    

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

       

Other receivables

       293          (271)   

Other assets

       (107)         1,616    

Accounts payable and other liabilities

       (759)         (1,381)   

Travelers Cheques and other prepaid products

       (444)         (414)   

 

    

 

 

    

 

 

 

Net cash provided by operating activities

       3,138          4,235    

 

    

 

 

    

 

 

 

Cash Flows from Investing Activities

       

Sales of available-for-sale investment securities

       45          —    

Maturities and redemptions of available-for-sale investment securities

       567          991    

Purchases of investments

       (791)         (1,212)   

Net decrease (increase) in Card Member receivables and loans, including held for sale (a)

       13,002          (569)   

Purchase of premises and equipment, net of sales: 2016, $2; 2015, $32

       (649)         (537)   

Acquisitions/dispositions, net of cash acquired

       (162)         (74)   

Net decrease (increase) in restricted cash

       126          (1,529)   

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

       12,138          (2,930)   

 

    

 

 

    

 

 

 

Cash Flows from Financing Activities

       

Net (decrease) increase in customer deposits

       (594)         3,017    

Net (decrease) increase in short-term borrowings

       (2,520)         1,033    

Issuance of long-term debt

       3,778          3,457    

Principal payments on long-term debt

       (1,558)         (8,410)   

Issuance of American Express preferred shares

       —          841    

Issuance of American Express common shares

       75          143    

Repurchase of American Express common shares

       (2,852)         (1,971)   

Dividends paid

       (601)         (533)   

 

    

 

 

    

 

 

 

Net cash used in financing activities

       (4,272)         (2,423)   

 

    

 

 

    

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

               (99)   

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

       11,005          (1,217)   

Cash and cash equivalents at beginning of period

       22,762          22,288    

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 33,767        $ 21,071    

 

 

 

(a) Refer to Note 2 for additional information.

 

See Notes to Consolidated Financial Statements

 

5


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

Effective for the first quarter of 2016, the Company realigned its segment presentation to reflect the organizational changes announced during the fourth quarter of 2015. Prior periods have been restated to conform to the new reportable operating segments, which are as follows:

 

    U.S. Consumer Services (USCS), including the proprietary U.S. Consumer Card Services business and travel services in the United States;

 

    International Consumer and Network Services (ICNS), including the proprietary International Consumer Card Services business, Global Network Services (GNS) business and travel services outside the United States;

 

    Global Commercial Services (GCS), including the proprietary Global Corporate Payments (GCP) business, small business services businesses in the United States and internationally (collectively, Global Small Business Services), merchant financing products and foreign exchange services operations; and

 

    Global Merchant Services (GMS), including the Global Merchant Services business and global loyalty coalition businesses.

Corporate functions and certain other businesses and operations are included in Corporate & Other.

The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the Annual Report). If not materially different, certain footnote disclosures included therein have been omitted from this Quarterly Report on Form 10-Q.

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

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

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. During 2016, the Company determined that in the Consolidated Statements of Cash Flows for the comparative periods ended June 30, 2015, September 30, 2015 and December 31, 2015, certain

 

6


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

activities related to long-term debt repayments were misclassified between financing activities and operating activities. There is no impact to the Consolidated Statements of Income or Consolidated Balance Sheets. The Company has evaluated the effects of these misclassifications and concluded that none are material to any of its previously issued quarterly or annual Consolidated Financial Statements. Nevertheless, the Company has elected to revise prospectively the comparative periods mentioned above. For the six months ended June 30, 2015, this revision resulted in a $66 million decrease to both Net cash used in financing activities and Net cash provided by operating activities. In addition, travel commissions and fees, which were separately disclosed on the Consolidated Statements of Income historically, are now included within Other fees and commissions.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance on revenue recognition. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance, as amended, supersedes most of the current revenue recognition requirements, and is effective January 1, 2018, with early adoption as of January 1, 2017, permitted. The Company does not intend to adopt the new standard early and continues to evaluate the impact this guidance, including the method of implementation, will have on its financial position, results of operations and cash flows, among other items.

In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities. The guidance, which is effective January 1, 2018, makes targeted changes to current GAAP, specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial instruments. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.

In February 2016, the FASB issued new accounting guidance on leases. The guidance, which is effective January 1, 2019, with early adoption permitted, requires virtually all leases to be recognized on the Consolidated Balance Sheets. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.

In March 2016, the FASB issued new accounting guidance on employee share-based payments. The guidance, which is effective January 1, 2017, with early adoption permitted, simplifies various aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for award forfeitures, and classification on the Consolidated Statements of Cash Flows. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items.

In June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, which is effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information and will likely result in earlier recognition of credit reserves. The Company is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new CECL model will alter the assumptions used in

 

7


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

calculating credit losses on Card Member loans and receivables, among other financial instruments, and may result in material changes to the Company’s credit reserves.

 

2.   Business Events

During the first half of 2016, the Company completed the sales of substantially all of its outstanding Card Member loans and receivables held for sale (HFS) and recognized gains, as an expense reduction, in Other expenses, of $127 million and $1.1 billion during the three months ended March 31, 2016 and June 30, 2016, respectively. In addition, the Company reclassified $245 million and $1 million of retained Card Member loans and receivables HFS back to Card Member loans and Card Member receivables held for investment, respectively. The impact of the sales, including the recognition of the proceeds received and the reclassification of the retained Card Member loans and receivables, is reported within the investing section of the Consolidated Statements of Cash Flows as a net decrease in Card Member receivables and loans, including held for sale.

 

3.   Loans and Accounts Receivable

The Company’s lending and charge payment card products result in the generation of Card Member loans and Card Member receivables, respectively. This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of December 31, 2015; the Company did not have any Card Member loans and receivables HFS as of June 30, 2016.

Card Member loans by segment and Other loans as of June 30, 2016 and December 31, 2015 consisted of:

 

 

 

(Millions)

   2016      2015  

U.S. Consumer Services(a)

   $             44,594       $             43,495   

International Consumer and Network Services

     6,600         7,072   

Global Commercial Services

     8,693         8,006   

 

  

 

 

    

 

 

 

Card Member loans

     59,887         58,573   

Less: Reserve for losses

     1,091         1,028   

 

  

 

 

    

 

 

 

Card Member loans, net

   $ 58,796       $ 57,545   

 

  

 

 

    

 

 

 

Other loans, net(b)

   $ 1,132       $ 1,254   

 

 

 

  (a) Includes approximately $25.3 billion and $23.6 billion of gross Card Member loans available to settle obligations of a consolidated variable interest entity (VIE) as of June 30, 2016 and December 31, 2015, respectively.
  (b) Other loans primarily represent loans to merchants. Other loans are presented net of reserves for losses of $36 million and $20 million as of June 30, 2016 and December 31, 2015, respectively.

 

8


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member accounts receivable by segment and Other receivables as of June 30, 2016 and December 31, 2015 consisted of:

 

 

 

(Millions)

   2016      2015  

U.S. Consumer Services (a)

   $             10,587       $             11,807   

International Consumer and Network Services

     5,582         5,599   

Global Commercial Services

     29,054         26,727   

 

  

 

 

    

 

 

 

Card Member receivables (b)

     45,223         44,133   

Less: Reserve for losses

     423         462   

 

  

 

 

    

 

 

 

Card Member receivables, net

   $ 44,800       $ 43,671   

 

  

 

 

    

 

 

 

Other receivables, net (c)

   $ 2,697       $ 3,024   

 

 

 

  (a) Includes $5.8 billion and $6.6 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively.

 

  (b) Includes approximately $12.7 billion and $11.9 billion of Card Member receivables outside the United States as of June 30, 2016 and December 31, 2015, respectively.

 

  (c) Other receivables primarily represent amounts related to (i) GNS partner banks for items such as royalty and franchise fees, (ii) certain merchants for billed discount revenue, and (iii) loyalty coalition partners for points issued, as well as program participation and servicing fees. Other receivables are presented net of reserves for losses of $50 million and $43 million as of June 30, 2016 and December 31, 2015, respectively.

 

9


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Card Member Receivables Aging

Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member loans and receivables as of June 30, 2016 and December 31, 2015:

 

 

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

2016 (Millions)

              

Card Member Loans:

              

U.S. Consumer Services

   $     44,120         $         128         $         100         $         246         $         44,594     

International Consumer and Network Services

     6,491           33           23           53           6,600     

Global Commercial Services

              

Global Small Business Services

     8,547           27           20           50           8,644     

Global Corporate Payments(a)

     (b)          (b)          (b)          1           49     

Card Member Receivables:

              

U.S. Consumer Services

   $ 10,464         $ 44         $ 24         $ 55         $ 10,587     

International Consumer and Network Services

     5,503           24           15           40           5,582     

Global Commercial Services

              

Global Small Business Services

     13,516           64           39           87           13,706     

Global Corporate Payments(a)

     (b)          (b)          (b)          111           15,348     

 

 
              

 

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

2015 (Millions)

   Current       Due       Due       Due       Total   

Card Member Loans:

              

U.S. Consumer Services

   $ 43,063         $ 128         $ 94         $ 210         $ 43,495     

International Consumer and Network Services

     6,961           34           25           52           7,072     

Global Commercial Services

              

Global Small Business Services

     7,867           26           18           40           7,951     

Global Corporate Payments(a)

     (b)          (b)          (b)          1           55     

Card Member Receivables:

              

U.S. Consumer Services

   $ 11,646         $ 54         $ 32         $ 75         $ 11,807     

International Consumer and Network Services

     5,515           24           18           42           5,599     

Global Commercial Services

              

Global Small Business Services

     12,734           69           45           102           12,950     

Global Corporate Payments(a)

     (b)          (b)          (b)          124           13,777     

 

 

 

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

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Card Member Loans and Receivables

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

 

 

 
     2016     2015  
     Net Write-Off Rate           Net Write-Off Rate        
  

 

 

    Principal

Only

  

 (a) 

 

 

 

 

Principal,

    Interest, &

Fees

  

  

 (a) 

   

 

 

 

    30+ Days

Past Due

as a % of

Total

  

  

  

  

 

 

 

    Principal

Only

  

 (a) 

 

 

 

 

Principal,

    Interest, &

Fees

  

 

 (a) 

   

 

 

 

    30+ Days

Past Due

as a % of

Total

  

  

  

  

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Card Member Loans:

            

U.S. Consumer Services

     1.5     1.7     1.1     1.4     1.7     0.9

International Consumer and Network Services

     2.0     2.4     1.7     2.0     2.5     1.6

Global Small Business Services

     1.3     1.6     1.1     1.3     1.5     0.9

Card Member Receivables:

            

U.S. Consumer Services

     1.5     1.8     1.2     1.7     1.9     1.4

International Consumer and Network Services

     2.2     2.4     1.4     2.0     2.2     1.5

Global Small Business Services

     1.7     2.0     1.4     2.0     2.3     1.6

 

 

 

 

 
     2016     2015  
    
 

 
 
 

    Net Loss
Ratio as

a % of
Charge
Volume

  
  

  
  
  

   

 

 
 

90+ Days

Past Billing

as a % of
 Receivables

  

  

  
  

   
 

 
 
 

    Net Loss
Ratio as

a % of
Charge
Volume

  
  

  
  
  

   

 

 
 

90+ Days

Past Billing

as a % of
 Receivables

  

  

  
  

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Card Member Receivables:

        

Global Corporate Payments

     0.09     0.7     0.10     0.7

 

 

 

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

Impaired Card Member Loans and Receivables

Impaired loans and receivables are individual larger balance or homogeneous pools of smaller balance loans and receivables for which it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the Card Member agreement. In certain cases, these Card Member loans and receivables are included in one of the Company’s various Troubled Debt Restructuring (TDR) modification programs.

 

11


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables provide additional information with respect to the Company’s impaired Card Member loans and receivables. Impaired Card Member receivables are not significant for ICNS as of June 30, 2016 and December 31, 2015; therefore, the segment’s receivables are not included in the following tables.

 

 

 
     As of June 30, 2016  
     Over 90 days           Accounts Classified                       
     Past Due &           as a TDR(c)      Total      Unpaid         
     Accruing     Non-            Out of      Impaired      Principal      Allowance  

2016 (Millions)

     Interest (a)      Accruals (b)      In Program(d)         Program(e)         Balance         Balance         for TDRs   

Card Member Loans:

                  

U.S. Consumer Services

   $         162       $         141       $         174        $         116        $         593        $         545        $         52    

International Consumer and Network Services

     53                                53          53            

Global Commercial Services

     29         32         28          24          113          104          10    

Card Member Receivables:

                  

U.S. Consumer Services

                                   12          11            

Global Commercial Services

                   18                  25          25          14    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 244       $ 173       $ 228        $ 151        $ 796        $ 738        $ 81    

 

 
                  

 

 
     As of December 31, 2015  
     Over 90 days           Accounts Classified                       
     Past Due &           as a TDR(c)      Total      Unpaid         
     Accruing     Non-            Out of      Impaired      Principal      Allowance  

2015 (Millions)

     Interest (a)      Accruals (b)      In Program(d)         Program(e)         Balance         Balance         for TDRs   

Card Member Loans:

                  

U.S. Consumer Services

   $         140       $         124       $         149        $         89        $         502        $         463        $         44    

International Consumer and Network Services

     52                                52          51            

Global Commercial Services

     24         26         23          18          91          85            

Card Member Receivables:

                  

U.S. Consumer Services

                   11                  14          14            

Global Commercial Services

                   16                  19          19          12    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 216       $ 150       $ 199        $ 113        $ 678        $ 632        $ 73    

 

 

 

  (a) The Company’s policy is generally to accrue interest through the date of write-off (typically 180 days past due). The Company establishes reserves for interest that it believes will not be collected. Amounts presented exclude loans classified as a TDR.
  (b) Non-accrual loans not in modification programs primarily include certain Card Member loans placed with outside collection agencies for which the Company has ceased accruing interest.
  (c) Accounts classified as a TDR include $19 million and $20 million that are over 90 days past due and accruing interest and $16 million and $18 million that are non-accruals as of June 30, 2016 and December 31, 2015, respectively.
  (d) In Program TDRs include Card Member accounts that are currently enrolled in a modification program.
  (e) Out of Program TDRs include $114 million and $84 million of Card Member accounts that have successfully completed a modification program and $37 million and $29 million of Card Member accounts that were not in compliance with the terms of the modification programs as of June 30, 2016 and December 31, 2015, respectively.

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information with respect to the Company’s average balances of, and interest income recognized from, impaired Card Member loans and the average balances of impaired Card Member receivables for the three and six months ended June 30:

 

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2016  
            Interest             Interest  
     Average      Income      Average      Income  
(Millions)    Balance      Recognized      Balance      Recognized  

 

  

 

 

    

 

 

 

Card Member Loans:

           

U.S. Consumer Services

   $                         551        $                         12        $                         555        $                         24    

International Consumer and Network Services

     54                  53            

Global Commercial Services

     102                  103            

Card Member Receivables:

           

U.S. Consumer Services

     13          —          12          —    

Global Commercial Services

     25          —          20          —    
  

 

 

    

 

 

 

Total

   $ 745        $ 19        $ 743        $ 38    

 

 
     

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2015      June 30, 2015  
            Interest             Interest  
     Average      Income      Average      Income  
(Millions)    Balance      Recognized      Balance      Recognized  

 

  

 

 

    

 

 

 

Card Member Loans:

           

U.S. Consumer Services

   $ 582        $ 11        $ 578        $ 22    

International Consumer and Network Services

     55                  58            

Global Commercial Services

     109                  106            

Card Member Receivables:

           

U.S. Consumer Services

     10          —          14          —    

Global Commercial Services

     17          —          24          —    
  

 

 

    

 

 

 

Total

   $ 773        $ 17        $ 780        $ 34    

 

 

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs for the three and six months ended June 30, 2016 and 2015. The ICNS Card Member loans and receivables modifications were not significant; therefore, this segment is not included in the following TDR disclosures.

 

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2016  
                          Average                           Average  
                   Average      Payment                    Average      Payment  
     Number of      Outstanding      Interest Rate      Term      Number of      Outstanding        Interest Rate      Term  
     Accounts      Balances(a)      Reduction      Extension      Accounts      Balances(a)      Reduction      Extension  

 

   (in thousands)      ($ in millions)      (% Points)      (# of Months)      (in thousands)        ($ in millions)      (% Points)        (# of Months)  

Troubled Debt Restructurings:

                       

Card Member Loans

     7       $ 50         10         (b)         15       $ 107         11         (b)   

Card Member Receivables

     2         27         (c)         17         5         65         (c)         17   

 

  

 

 

    

 

 

          

 

 

    

 

 

       

Total

     9       $ 77               20       $ 172         

 

 
                       

 

 
     Three Months Ended         Six Months Ended   
     June 30, 2015         June 30, 2015   
                          Average                           Average  
                   Average      Payment                    Average      Payment  
     Number of      Outstanding        Interest Rate      Term      Number of      Outstanding      Interest Rate      Term  
     Accounts      Balances(a)      Reduction      Extension      Accounts      Balances(a)      Reduction      Extension  
       (in thousands)        ($ in millions)      (% Points)        (# of Months)        (in thousands)      ($ in millions)      (% Points)      (# of Months)  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings:

                       

Card Member Loans

     10        $ 70         10         (b)         21       $ 150         11         (b)   

Card Member Receivables

             34         (c)         12         6         74         (c)         12   

 

  

 

 

    

 

 

          

 

 

    

 

 

       

Total

     13        $ 104               27       $ 224         

 

 

 

  (a) Represents the outstanding balance immediately prior to modification. The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables. Modifications did not reduce the principal balance.
  (b) For Card Member loans, there have been no payment term extensions.
  (c) The Company does not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification during the three and six months ended June 30, 2016 and 2015. A Card Member is considered in default of a modification program after one and up to two consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables.

 

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2016  
            Aggregated             Aggregated  
            Outstanding             Outstanding  
     Number of      Balances      Number of      Balances  
     Accounts        Upon Default(a)      Accounts        Upon Default(a)  

 

     (in thousands)      ($ in millions)        (in thousands)      ($ in millions)  

Troubled Debt Restructurings That Subsequently Defaulted:

           

Card Member Loans

     1       $ 9         2       $ 18   

Card Member Receivables

     1         1         2         2   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 10         4       $ 20   

 

 
           

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2015      June 30, 2015  
            Aggregated             Aggregated  
            Outstanding             Outstanding  
     Number of      Balances      Number of      Balances  
     Accounts      Upon Default(a)      Accounts      Upon Default(a)  

 

   (in thousands)      ($ in millions)      (in thousands)      ($ in millions)  

Troubled Debt Restructurings That Subsequently Defaulted:

           

Card Member Loans

     3       $ 15         5       $ 25   

Card Member Receivables

     1         1         2         2   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 16         7       $ 27   

 

 

 

  (a) The outstanding balances upon default include principal, fees and accrued interest on Card Member loans, and principal and fees on Card Member receivables.

4.  Reserves for Losses

Reserves for losses relating to Card Member loans and receivables represent management’s best estimate of the probable inherent losses in the Company’s outstanding portfolio of loans and receivables, as of the balance sheet date. Management’s evaluation process requires certain estimates and judgments.

This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of December 31, 2015; the Company did not have any Card Member loans and receivables HFS as of June 30, 2016.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in Card Member Loans Reserve for Losses

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

 

 

 

(Millions)

   2016      2015  

Balance, January 1

   $                 1,028       $                 1,201   

Provisions(a)

     512         520   

Net write-offs

     

Principal(b)

     (437)         (502)   

Interest and fees(b)

     (80)         (85)   

Other(c)

     68         (2)   

 

  

 

 

    

 

 

 

Balance, June 30

   $ 1,091       $ 1,132   

 

 

 

  (a) Provisions for principal, interest and fee reserve components.
  (b) Consists of principal write-offs, less recoveries of $179 million and $212 million, including net write-offs from TDRs of $17 million and $22 million, for the six months ended June 30, 2016 and 2015, respectively. Recoveries of interest and fees were de minimis.
  (c) Includes foreign currency translation adjustments of $(2) million and $(8) million and other adjustments of $3 million and $6 million for the six months ended June 30, 2016 and 2015, respectively. The six months ended June 30, 2016 also includes reserves of $7 million in the first quarter and $60 million in the second quarter associated with $20 million and $245 million of retained Card Member loans, respectively, reclassified from HFS to held for investment during those periods as a result of the respective sales of the JetBlue Airways Corporation (JetBlue) and Costco Wholesale Corporation in the United States (Costco) cobrand card portfolios.

Card Member Loans Evaluated Individually and Collectively for Impairment

The following table presents Card Member loans evaluated individually and collectively for impairment and related reserves as of June 30, 2016 and December 31, 2015:

 

 

 

(Millions)

   2016      2015  

Card Member loans evaluated individually for impairment(a)

   $ 342       $ 279   

Related reserves (a)

   $ 62       $ 53   

 

 

Card Member loans evaluated collectively for impairment(b)

   $         59,545       $         58,294   

Related reserves (b)

   $ 1,029       $ 975   

 

 

 

  (a) Represents loans modified as a TDR and related reserves.
  (b) Represents current loans and loans less than 90 days past due, loans over 90 days past due and accruing interest, and non-accrual loans. The reserves include the quantitative results of analytical models that are specific to individual pools of loans, and reserves for internal and external qualitative risk factors that apply to loans that are collectively evaluated for impairment.

Changes in Card Member Receivables Reserve for Losses

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

 

 

 

(Millions)

   2016      2015  

Balance, January 1

   $ 462       $                 465   

Provisions(a)

     322         339   

Net write-offs(b)

     (359)         (370)   

Other(c)

     (2)         (14)   

 

  

 

 

    

 

 

 

Balance, June 30

   $                 423       $ 420   

 

 

 

  (a) Provisions for principal and fee reserve components.
  (b) Consists of principal and fee components, less recoveries of $202 million and $201 million, including net write-offs from TDRs of $16 million and $42 million, for the six months ended June 30, 2016 and 2015, respectively.
  (c) Includes foreign currency translation adjustments of $(1) million and $(7) million and other adjustments of $(1) million and $(7) million for the six months ended June 30, 2016 and 2015, respectively.

 

16


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Receivables Evaluated Individually and Collectively for Impairment

The following table presents Card Member receivables evaluated individually and collectively for impairment, and related reserves, as of June 30, 2016 and December 31, 2015:

 

 

 

(Millions)

   2016      2015  

Card Member receivables evaluated individually for impairment(a)

   $ 37       $ 33   

Related reserves (a)

   $ 19       $ 20   

 

 

Card Member receivables evaluated collectively for impairment

   $             45,186       $             44,100   

Related reserves (b)

   $ 404       $ 442   

 

 

 

  (a) Represents receivables modified as a TDR and related reserves.
  (b) The reserves include the quantitative results of analytical models that are specific to individual pools of receivables, and reserves for internal and external qualitative risk factors that apply to receivables that are collectively evaluated for impairment.

5.  Investment Securities

Investment securities principally include debt securities the Company classifies as available-for-sale and carries at fair value on the Consolidated Balance Sheets, with unrealized gains (losses) recorded in Accumulated Other Comprehensive Loss (AOCI), net of income taxes. Realized gains and losses are recognized on a trade-date basis in the Consolidated Statements of Income upon disposition of the securities using the specific identification method.

The following is a summary of investment securities as of June 30, 2016 and December 31, 2015:

 

 

 
     2016      2015  

Description of
Securities (Millions)

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

State and municipal obligations

   $         2,530         $                   72         $                 —         $             2,602         $         2,813         $                 85         $                   (5)       $             2,893     

U.S. Government agency obligations

     2           —           —           2           2           —           —           2     

U.S. Government treasury obligations

     354           14           —           368           406           4           (1)         409     

Corporate debt securities

     26           1           —           27           29           1           —           30     

Mortgage-backed securities (a)

     111           5           —           116           117           4           —           121     

Equity securities

     1           —           —           1           1           —           —           1     

Foreign government bonds and obligations

     718           9           —           727           250           6           (1)         255     

Other (b)

     50           —           (1)         49           50           —           (2)         48     

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,792         $ 101         $ (1)       $ 3,892         $ 3,668       $ 100       $ (9)       $ 3,759   

 

 

 

  (a) Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
  (b) Other comprises investments in various mutual funds.

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information about the Company’s investment securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2016 and December 31, 2015:

 

 

 
     2016      2015  
     Less than 12 months      12 months or more      Less than 12 months      12 months or more  
            Gross             Gross             Gross             Gross  

Description of Securities (Millions)

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

State and municipal obligations

   $               —         $             —         $             —                         —         $             100         $               (3)       $                 13         $               (2)   

U.S. Government treasury obligations

     —           —           —           —           253           (1)         —           —     

Foreign government bonds and obligations

     —           —           —           —           99           (1)         —           —     

Other

     —           —           33           (1)         —           —           33           (2)   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 33         $ (1)       $ 452         $ (5)       $ 46         $ (4)   

 

 

The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of June 30, 2016 and December 31, 2015:

 

 

 
     Less than 12 months      12 months or more      Total  
Ratio of Fair Value to Amortized Cost    Number of      Estimated      Gross
Unrealized
     Number of      Estimated      Gross
Unrealized
     Number of      Estimated      Gross
Unrealized
 

(Dollars in millions)

   Securities      Fair Value      Losses      Securities      Fair Value      Losses      Securities      Fair Value      Losses  

2016:

                          

90%–100%

                 —         $             —         $             —                       24         $             36         $                 (1)                         24         $             36         $               (1)   

Less than 90%

     —           —           —           —           —           —           —           —           —     

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total as of June 30, 2016

     —         $ —         $ —           24         $ 36         $ (1)         24         $ 36         $ (1)   

 

 
                          

 

 

2015:

                          

90%–100%

     52       $ 450       $ (5)         15       $ 37       $ (2)         67       $ 487       $ (7)   

Less than 90%

     —           —           —                           (2)                         (2)   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total as of December 31, 2015

     52         $ 450         $ (5)         17       $ 46       $ (4)         69       $ 496       $ (9)   

 

 

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

Contractual maturities of investment securities with stated maturities as of June 30, 2016 were as follows:

 

 

 
            Estimated  

(Millions)

   Cost        Fair Value  

Due within 1 year

   $                 815         $                     817     

Due after 1 year but within 5 years

     172           177     

Due after 5 years but within 10 years

     413           435     

Due after 10 years

     2,341           2,413     

 

  

 

 

    

 

 

 

Total(a)

   $ 3,741         $ 3,842     

 

 

 

  (a) Balances primarily represent investments in state and municipal obligations, and foreign government bonds and obligations.

The expected payments on state and municipal obligations and mortgage-backed securities may not coincide with their contractual maturities because the issuers have the right to call or prepay certain obligations.

 

18


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.  Asset Securitizations

The Company periodically securitizes Card Member loans and receivables arising from its card business, including Card Member loans and receivables HFS, through the transfer of those assets to securitization trusts. The trusts then issue debt securities to third-party investors, collateralized by the transferred assets.

The following table provides information on the restricted cash held by the American Express Issuance Trust II (the Charge Trust) and the American Express Credit Account Master Trust (the Lending Trust, collectively the Trusts) as of June 30, 2016 and December 31, 2015, included in Other assets on the Consolidated Balance Sheets:

 

 

 

(Millions)

   2016      2015  

Charge Trust

   $                     2       $                     2   

Lending Trust

     33         153   

 

  

 

 

    

 

 

 

Total

   $ 35       $ 155   

 

 

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

American Express Travel Related Services Company, Inc. (TRS), in its role as servicer of the Trusts, has the power to direct the most significant activity of the Trusts, which is the collection of the underlying Card Member loans and receivables. In addition, TRS directly and indirectly (through its consolidated subsidiaries) holds all of the variable interests in both Trusts, with the exception of the debt securities issued to third-party investors. As of June 30, 2016, TRS’ direct and indirect ownership of variable interests was $13.9 billion for the Lending Trust and $2.5 billion for the Charge Trust. These variable interests held by TRS provide it with the right to receive benefits and the obligation to absorb losses, which could be significant to both the Lending Trust and the Charge Trust. Based on these considerations, TRS is the primary beneficiary of both Trusts and therefore consolidates both Trusts.

Under the respective terms of the Charge Trust and the Lending Trust agreements, the occurrence of certain triggering events associated with the performance of the assets of each Trust could result in payment of trust expenses, establishment of reserve funds, or, in a worst-case scenario, early amortization of debt securities. During the six months ended June 30, 2016 and the year ended December 31, 2015, no such triggering events occurred.

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.   Customer Deposits

As of June 30, 2016 and December 31, 2015, customer deposits were categorized as interest bearing or non-interest bearing, as follows:

 

                                         

 

(Millions)

               2016    

            2015

U.S.:

    

Interest bearing

   $ 53,666       $         54,102

Non-interest bearing (includes Card Member credit balances of: 2016, $311 million; 2015, $389 million)

     343       478

Non-U.S.:

    

Interest bearing

     89       82

Non-interest bearing (includes Card Member credit balances of: 2016, $293 million; 2015, $323 million)

     306       335

 

  

 

 

   

 

Total customer deposits

   $ 54,404      $         54,997

 

Customer deposits by deposit type as of June 30, 2016 and December 31, 2015 were as follows:

 

                                         

 

(Millions)

               2016    

            2015

U.S. retail deposits:

    

Savings accounts – Direct

   $ 30,221       $         29,023

Certificates of deposit:

    

Direct

     287       281

Third-party (brokered)

     13,460       13,856

Sweep accounts – Third-party (brokered)

     9,698       10,942

Other retail deposits:

    

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

     134       183

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

     604       712

 

  

 

 

   

 

Total customer deposits

   $ 54,404      $         54,997

 

The scheduled maturities of certificates of deposit as of June 30, 2016 were as follows:

 

                                

 

 

(Millions)

               U.S.           Non-U.S.                 Total  

2016

   $ 2,030       $      $ 2,035    

2017

     3,657                3,662    

2018

     3,197         —         3,197    

2019

     2,332         —         2,332    

2020

     2,517         —         2,517    

After 5 years

     14         —         14    

 

  

 

 

   

 

 

   

 

 

 

Total

   $ 13,747       $ 10       $ 13,757    

 

 

As of June 30, 2016 and December 31, 2015, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:

 

                                         

 

(Millions)

               2016    

            2015

U.S.

   $ 113       $            105

Non-U.S.

         

 

  

 

 

   

 

Total

   $ 116      $            106

 

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Contingencies

In the ordinary course of business, the Company and its subsidiaries are subject to various claims, investigations, examinations, pending and potential legal actions, and other matters relating to compliance with laws and regulations (collectively, legal proceedings). The Company discloses its material legal proceedings under Part II, Item 1. “Legal Proceedings” in this Quarterly Report on Form 10-Q and Part I, Item 3. “Legal Proceedings” in the Annual Report.

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

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

For those disclosed material legal proceedings where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal contingencies or where there is no such reserve, and for which the Company is able to estimate a range of possible loss, the current estimated range is zero to $350 million in excess of any reserves related to those matters. This range represents management’s estimate based on currently available information and does not represent the Company’s maximum loss exposure; actual results may vary significantly. As such proceedings evolve, including the merchant claims described under “Legal Proceedings” in the Annual Report, the Company may need to increase its range of possible loss or reserves for legal contingencies.

Based on its current knowledge, and taking into consideration its litigation-related liabilities, the Company believes it is not a party to, nor are any of its properties the subject of, any legal proceeding that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, it is possible that the outcome of legal proceedings, including the possible resolution of merchant claims, could have a material impact on the Company’s results of operations.

 

21


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.   Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates, foreign exchange rates, and equity index or price, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk management. The Company does not transact in derivatives for trading purposes.

In relation to the Company’s credit risk, under the terms of the derivative agreements it has with its various counterparties, the Company is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of the Company’s derivative counterparties as of June 30, 2016 and December 31, 2015, the Company does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2016 and December 31, 2015:

 

 

 
       Other Assets
Fair Value
     Other Liabilities
Fair Value
 

(Millions)

             2016              2015              2016              2015  

Derivatives designated as hedging instruments:

             

Interest rate contracts

             

Fair value hedges

     $ 452        $ 236        $ —        $   

Foreign exchange contracts

             

Net investment hedges

       216          191          141          57    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

       668          427          141          66    

Derivatives not designated as hedging instruments:

             

Foreign exchange contracts, including certain embedded derivatives(a)

       475          117          248          135    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives, gross

       1,143          544          389          201    

Less: Cash collateral netting(b)

       (361)         (155)         —          —    

Derivative asset and derivative liability netting(c)

       (169)         (107)         (169)         (107)   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives, net(d)

     $ 613        $ 282        $ 220        $ 94    

 

 

 

  (a) Includes foreign currency derivatives embedded in certain operating agreements.
  (b) Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. The Company received non-cash collateral from a counterparty in the form of security interests in U.S. Treasury securities with a fair value of $30 million as of June 30, 2016, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $583 million but did not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company did not have any such non-cash collateral as of December 31, 2015. Additionally, the Company posted $159 million and $149 million as of June 30, 2016 and December 31, 2015, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance Sheets and are not netted against the derivative balances.
  (c) Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
  (d) The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of June 30, 2016 and December 31, 2015 are subject to master netting agreements with its derivative counterparties. The Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hedges

The Company is exposed to interest rate risk associated with its fixed-rate long-term debt. The Company uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. The Company hedged $20.3 billion and $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of June 30, 2016 and December 31, 2015, respectively.

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three and six months ended June 30:

 

 

 

Three Months Ended June 30 (Millions)

 
    Gains (losses) recognized in income  
    Derivative contract     Hedged item     Net hedge  
        Amount         Amount     ineffectiveness  

Derivative

relationship

  Income Statement Line Item           2016             2015     Income Statement Line Item           2016             2015             2016             2015  

Interest rate

contracts

 

Other expenses

  $ 61      $ (89)      Other expenses   $ (53)      $ 85      $ 8      $ (4)   

 

 

 

 

Six Months Ended June 30 (Millions)

 
    Gains (losses) recognized in income  
    Derivative contract     Hedged item     Net hedge  
        Amount         Amount     ineffectiveness  

Derivative

relationship

  Income Statement Line Item           2016             2015     Income Statement Line Item           2016             2015             2016             2015  

Interest rate

contracts

  Other expenses   $ 226      $ (26)      Other expenses   $ (224)      $ 29       $      $   

 

 

The Company also recognized a net reduction in interest expense on long-term debt of $59 million and $71 million for the three months ended June 30, 2016 and 2015, respectively, and $118 million and $140 million for the six months ended June 30, 2016 and 2015, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was $ 135 million and $(34) million for the three months ended June 30, 2016 and 2015, respectively, and $43 million and $161 million for the six months ended June 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change.

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s net investment hedges for the three and six months ended June 30:

 

 

 

Three Months Ended June 30: (Millions)

 
    Gains (losses) recognized in income  
        Amount reclassified from
AOCI into income
        Net hedge
ineffectiveness
 

Description

  Income Statement Line Item                 2016     2015     Income Statement Line Item               2016                 2015  

Net investment hedges:

           

Foreign exchange contracts

  Other, net expenses   $ 5      $ —       Other, net expenses   $ —       $ 1   

 

 

Six Months Ended June 30: (Millions)

 
    Gains (losses) recognized in income  
        Amount reclassified from
AOCI into income
        Net hedge
ineffectiveness
 

Description

  Income Statement Line Item             2016     2015     Income Statement Line Item           2016             2015  

Net investment hedges:

           

Foreign exchange contracts

  Other, net expenses   $ 5      $ —       Other, net expenses   $ —       $ 1   

 

 

Derivatives Not Designated as Hedges

The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net gains of $6 million and $8 million for the three months ended June 30, 2016 and 2015, respectively, and a net loss of $8 million and a net gain of $105 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Other expenses.

Related to its derivatives not designated as hedges, the Company previously disclosed in Note 9 to the Consolidated Financial Statements in its Quarterly Report on Form 10-Q for the period ended June 30, 2015, a gain of $40 million for the three months ended June 30, 2015, and a loss of $4 million for the six months ended June 30, 2015. These amounts should have been disclosed as gains of $87 million and $381 million, respectively, which are the amounts used to calculate the above-referenced net gains of $8 million and $105 million. These changes to the previously disclosed amounts have no impact on the Consolidated Statements of Income, Balance Sheets or Cash Flows.

The changes in the fair value of an embedded derivative are nil and a gain of $4 million for the three months ended June 30, 2016 and 2015, respectively, and gains of $6 million and $3 million for the six months ended June 30, 2016 and 2015, respectively, and are recognized in Card Member services and other expense.

 

24


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Fair Values

Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy, as of June 30, 2016 and December 31, 2015:

 

 

 
       2016      2015  

(Millions)

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

Assets:

                         

Investment securities:(a)

                         

Equity securities

     $ 1         $ 1         $          $ —         $ 1         $ 1         $ —         $ —     

Debt securities and other

       3,891           368           3,523           —             3,758           409           3,349           —     

Derivatives(a)

         1,143                              1,143           —           544           —           544           —     

 

          

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

         5,035           369           4,666                      4,303           410           3,893           —     

 

       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                         

Derivatives(a)

       389                      389           —           201           —           201           —     

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 389         $ —         $ 389         $          $ 201         $ —         $ 201         $ —     

 

 

 

  (a) Refer to Note 5 for the fair values of investment securities and to Note 9 for the fair values of derivative assets and liabilities, on a further disaggregated basis.

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the estimated fair values of the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of June 30, 2016 and December 31, 2015. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2016 and December 31, 2015, and require management judgment. These figures may not be indicative of future fair values, nor can the fair value of the Company be estimated by aggregating the amounts presented.

 

 

 
         Carrying  
Value
     Corresponding Fair Value Amount  

2016 (Billions)

      Total     Level 1      Level 2     Level 3  

Financial Assets:

            

 Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

   $ 34         $ 34        $ 33         $ 1   (a)    $ —     

Other financial assets(b)

     48           48          —           48          —     

 Financial assets carried at other than fair value

            

Loans, net

     60           61   (c)      —           —          61     

Financial Liabilities:

            

 Financial liabilities for which carrying values equal or approximate fair value

     63           63          —           63          —     

 Financial liabilities carried at other than fair value

            

Certificates of deposit(d)

     14           14          —           14          —     

Long-term debt

   $ 51         $ 52   (c)    $ —         $ 52        $ —     

 

 

 

 
         Carrying  
Value
     Corresponding Fair Value Amount  

2015 (Billions)

                Total             Level 1              Level 2             Level 3  

Financial Assets:

            

 Financial assets for which carrying values equal or approximate fair value

            

Cash and cash equivalents

   $ 23         $ 23        $ 22         $ 1   (a)    $ —     

Other financial assets(b)

     47           47          —           47          —     

 Financial assets carried at other than fair value

            

Card Member loans and receivables HFS(e)

     15           15          —           —          15     

Loans, net

     59           60   (c)      —           —          60     

Financial Liabilities:

            

 Financial liabilities for which carrying values equal or approximate fair value

     67           67          —           67          —     

 Financial liabilities carried at other than fair value

            

Certificates of deposit(d)

     14           14          —           14          —     

Long-term debt

   $ 48         $ 49   (c)    $ —         $ 49        $ —     

 

 

 

  (a) Reflects time deposits and short-term investments.
  (b) Includes Card Member receivables (including fair values of Card Member receivables of $5.8 billion and $6.7 billion held by a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively), Other receivables, restricted cash and other miscellaneous assets.
  (c) Includes the fair values of Card Member loans of $25.3 billion and $23.5 billion and long-term debt of $14.7 billion and $13.6 billion held by a consolidated VIE as of June 30, 2016 and December 31, 2015, respectively.
  (d) Presented as a component of customer deposits on the Consolidated Balance Sheets.
  (e) Does not include any fair value associated with the Card Member account relationships. Refer to Note 2 for additional information.

 

26


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Nonrecurring Fair Value Measurements

The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the six months ended June 30, 2016, the Company did not have any material assets that were measured at fair value due to impairment. During the year ended December 31, 2015, the Company recorded a $384 million impairment charge, consisting of a $219 million write-down of the entire balance of goodwill in the Prepaid Services business and a $165 million write-down of technology and other assets to fair value.

 

 

11. Guarantees

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

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

The following table provides information related to such guarantees and indemnifications as of June 30, 2016 and December 31, 2015:

 

 

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

Type of Guarantee

   2016      2015      2016      2015  

Return and Merchant Protection

   $ 44        $ 42       $ 41        $ 49    

Other(c)

             6         44          37    

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             50        $             48       $             85        $             86   

 

 

 

  (a) Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed or indemnified parties. The maximum potential undiscounted future payments for Merchant Protection are measured using management’s best estimate of maximum exposure, which is based on all eligible claims in relation to annual billed business volumes.
  (b) Included in Other liabilities on the Consolidated Balance Sheets.
  (c) Primarily includes guarantees related to the Company’s purchase protection, real estate and business dispositions.

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Changes In Accumulated Other Comprehensive Loss

AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component for the three and six months ended June 30, 2016 and 2015 were as follows:

 

                                                                                                                                           

 

 

Three Months Ended June 30, 2016 (Millions), net of tax

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

 

Net Unrealized
Pension and Other
Postretirement
Benefit (Losses)
Gains

    Accumulated Other
Comprehensive
(Loss) Income
 

Balances as of March 31, 2016

   $ 60       $ (2,040)      $ (522)      $ (2,502)   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains

            –          –            

Increase (decrease) due to amounts reclassified into earnings

     –          –          –          –     

Net translation loss of investments in foreign operations

     –          (265)        –          (265)   

Net gains related to hedges of investments in foreign operations

     –          135         –          135    

Pension and other postretirement benefit gains

     –          –                  

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

            (130)               (119)   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2016

   $ 65       $ (2,170)      $ (516)      $ (2,621)   

 

 
        

 

 

Six Months Ended June 30, 2016 (Millions), net of tax

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

Balances as of December 31, 2015

   $ 58       $ (2,044)      $ (548)      $ (2,534)   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains

            –         –           

Decrease due to amounts reclassified into earnings

     (2)        –         –         (2)   

Net translation loss of investments in foreign operations

     –         (169)        –         (169)   

Net gains related to hedges of investments in foreign operations

     –         43         –         43    

Pension and other postretirement benefit gains

     –         –         32         32    

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

            (126)        32         (87)   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2016

   $ 65       $ (2,170)      $ (516)      $ (2,621)   

 

 

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

                                                                                                                                   

 

 

Three Months Ended June 30, 2015 (Millions), net of tax

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

Balances as of March 31, 2015

  $ 96       $ (1,754)      $ (493)      $ (2,151)   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized loss

    (20)        –         –         (20)   

Decrease due to amounts reclassified into earnings

    –         (1)        –         (1)   

Net translation gain of investments in foreign operations

    –         45         –         45    

Net losses related to hedges of investments in foreign operations

    –         (33)        –         (33)   

Pension and other postretirement benefit gains

    –         –                  

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (20)        11                (3)   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2015

  $ 76       $ (1,743)      $ (487)      $ (2,154)   

 

 
       

 

 

Six Months Ended June 30, 2015 (Millions), net of tax

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

Balances as of December 31, 2014

  $ 96       $ (1,499)      $ (516)      $ (1,919)   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized loss

    (20)        –         –         (20)   

Decrease due to amounts reclassified into earnings

    –         (1)        –         (1)   

Net translation loss of investments in foreign operations

    –         (405)        –         (405)   

Net gains related to hedges of investments in foreign operations

    –         162         –         162    

Pension and other postretirement benefit gains

    –         –         29         29    

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (20)        (244)        29         (235)   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2015

  $ 76       $ (1,743)      $ (487)      $ (2,154)   

 

 

The following table presents the effects of reclassifications out of AOCI and into the Consolidated Statements of Income:

 

                                                                                                        

 

 
            Gains (losses) recognized in earnings  
                            Three Months Ended                                        Six Months Ended                   
            June 30,     June 30,  
       Income Statement    Amount     Amount  

Description (Millions)

    

Line Item

   2016     2015     2016     2015  

Available-for-sale securities

             

Reclassifications for previously unrealized net
gains on investment securities

     Other non-interest revenues    $  –       $ –       $      $ –    

Related income tax expense

     Income tax provision      –         –         (2)        –    

 

    

 

  

 

 

   

 

 

   

 

 

   

 

 

 

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

         

 

– 

– 

  

  

    –        

 


– 

  

  

    –    

Foreign currency translation adjustments

             

Reclassification of realized losses on
translation adjustments and related hedges

     Other expenses      –                –           

Related income tax benefit

     Income tax provision      –         –         –         –    

 

    

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification of foreign currency
translation adjustments

          –                –           

 

    

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total

        $ –       $      $      $   

 

 

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13.  Non-Interest Revenue and Expense Detail

The following is a detail of Other fees and commissions:

 

                                                           

 

 
             Three Months Ended      
June 30,
          Six Months Ended      
June 30,
 

(Millions)

     2016     2015     2016     2015  

Foreign currency conversion fee revenue

     $ 207       $ 222       $ 403       $ 433    

Delinquency fees

       192         194         392         389    

Loyalty coalition-related fees

       104         88         198         179    

Travel commissions and fees

       87         95         167         184    

Service fees

       79         95         157         182    

Other(a)

       33         33         65         68    

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Other fees and commissions

     $ 702       $ 727       $ 1,382       $ 1,435    

 

 

 

  (a) Other primarily includes revenues from fees related to Membership Rewards programs.

The following is a detail of Other revenues:

 

                                                           

 

 
             Three Months Ended      
June 30,
          Six Months Ended      
June 30,
 

(Millions)

     2016     2015     2016     2015  

Global Network Services partner revenues

     $ 197       $ 155       $ 342       $ 318    

Gross realized gains on sale of investment securities

       –         –                –    

Other(a)

       348         366         685         671    

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Other revenues

     $ 545      $ 521      $ 1,031      $ 989   

 

 

 

  (a) Other includes revenues arising from net revenue earned on cross-border Card Member spending, merchant-related fees, insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques-related revenues, revenues related to the GBT JV transition services agreement, earnings from equity method investments (including the GBT JV) and other miscellaneous revenue and fees.

The following is a detail of Other expenses:

 

                                                           

 

 
             Three Months Ended      
June 30,
          Six Months Ended      
June 30,
 

(Millions)

     2016     2015     2016     2015  

Professional services

     $ 628      $ 655      $ 1,232      $ 1,279   

Occupancy and equipment

       438        415        903        849   

Communications

       80        85        163        173   

Card and merchant-related fraud losses

       57        83        115        183   

Gain on sale of HFS portfolios(a)

       (1,091)        —         (1,218)        —    

Other(b)

       358        297        695        450   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Other expenses

     $ 470      $ 1,535      $ 1,890      $ 2,934   

 

 

 

  (a) Refer to Note 2 for additional information.

 

  (b) Other expense includes general operating expenses, gains and losses on sale of assets or businesses not classified as discontinued operations, litigation, certain internal and regulatory review-related reimbursements and insurance costs or settlements, certain loyalty coalition-related expenses, the valuation allowance adjustment associated with loans and receivables HFS (refer to Note 2), and foreign currency-related gains and losses (including the favorable impact from the reassessment of the functional currency of certain UK legal entities in prior year).

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14.  Income Taxes

The effective tax rate was 33.2 percent and 33.9 percent for the three months ended June 30, 2016 and 2015, respectively, and 33.8 percent and 34.0 percent for the six months ended June 30, 2016 and 2015, respectively. The tax rates in all periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business.

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2014.

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $237 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $237 million of unrecognized tax benefits, approximately $21 million relates to amounts that if recognized would be recorded in shareholders’ equity and would not impact the Company’s results of operations or its effective tax rate.

 

15.  Earnings Per Common Share (EPS)

The computations of basic and diluted EPS were as follows:

 

 

 
       Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Millions, except per share amounts)

     2016     2015     2016     2015  

Numerator:

          

Basic and diluted:

          

Net income

     $         2,015      $         1,473      $         3,441      $         2,998   

Preferred dividends

       (19)        (20)        (40)        (20)   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

       1,996        1,453        3,401        2,978   

Earnings allocated to participating share awards(a)

       (17)        (11)        (28)        (22)   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

     $ 1,979      $ 1,442      $ 3,373      $ 2,956   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Denominator: (a)

          

Basic: Weighted-average common stock

       938        1,009        949        1,013   

Add: Weighted-average stock options (b)

       3        4        3        5   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       941        1,013        952        1,018   

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS

     $ 2.11      $ 1.43      $ 3.55      $ 2.92   

Diluted EPS

     $ 2.10      $ 1.42      $ 3.54      $ 2.90   

 

 

 

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

 

  (b) The dilutive effect of unexercised stock options excludes from the computation of EPS 2.5 million and 0.6 million of options for the three months ended June 30, 2016 and 2015, respectively, and 1.7 million and 0.5 million of options for the six months ended June 30, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.

 

31


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For the three and six months ended June 30, 2016 and 2015, the Company met specified performance measures related to the $750 million of Subordinated Debentures issued in 2006, and maturing in 2036. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.

 

16.  Reportable Operating Segments

The Company is a global services company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICNS, GCS and GMS. Corporate functions and certain other businesses and operations are included in Corporate & Other.

The following table presents certain selected financial information for the Company’s reportable operating segments and Corporate & Other:

 

                                                                                                                             

 

 

Three Months Ended June 30, 2016 (Millions, except where indicated)

     USCS     ICNS     GCS     GMS     Corporate
& Other(a)
    Consolidated  
    

 

 

   

 

 

 

Non-interest revenues

     $ 2,069       $ 1,242       $ 2,280       $ 1,087       $ 108       $ 6,786    

Interest income

       1,278         234         310                62         1,885    

Interest expense

       139         58         104         (61)        196         436    

Total revenues net of interest expense

       3,208         1,418         2,486         1,149         (26)        8,235    

Net income (loss)

       1,067         228         576         373         (229)        2,015    
    

 

 

   

 

 

 

Total assets (billions)

       81        35        46        24        (26)        160    
    

 

 

   

 

 

 

Total equity (billions)

     $ 7      $ 3      $ 8      $ 2      $      $ 21    
    

 

 

   

 

 

 
              

 

 

Six Months Ended June 30, 2016 (Millions, except where indicated)

     USCS     ICNS     GCS     GMS     Corporate
& Other(a)
    Consolidated  
    

 

 

   

 

 

 

Non-interest revenues

     $ 4,098       $ 2,382       $ 4,470       $ 2,128       $ 216       $ 13,294    

Interest income

       2,669         461         631                128         3,890    

Interest expense

       279         112         199         (120)        391         861    

Total revenues net of interest expense

       6,488         2,731         4,902         2,249         (47)        16,323    

Net income (loss)

       1,761         416         1,061         730         (527)        3,441    
    

 

 

   

 

 

 

Total assets (billions)

       81        35        46        24        (26)        160   
    

 

 

   

 

 

 

Total equity (billions)

     $ 7      $ 3      $ 8      $ 2      $ 1      $ 21   
    

 

 

   

 

 

 
              

 

 

Three Months Ended June 30, 2015 (Millions, except where indicated)

     USCS     ICNS     GCS     GMS     Corporate
& Other(a)
    Consolidated  
    

 

 

   

 

 

 

Non-interest revenues

     $ 2,176       $ 1,163       $ 2,285       $ 1,130       $ 107       $ 6,861    

Interest income

       1,252         237         289                58         1,837    

Interest expense

       121         58         91         (49)        193         414    

Total revenues net of interest expense

       3,307         1,342         2,483         1,180         (28)        8,284    

Net income (loss)

       613         193         550         369         (252)        1,473    
    

 

 

   

 

 

 

Total assets (billions)

       84        29        46        17        (19)        157    
    

 

 

   

 

 

 

Total equity (billions)

     $ 8      $ 3      $ 7      $ 2      $      $ 22    
    

 

 

   

 

 

 
              

 

 

Six Months Ended June 30, 2015 (Millions, except where indicated)

     USCS     ICNS     GCS     GMS     Corporate
& Other(a)
    Consolidated  
    

 

 

   

 

 

 

Non-interest revenues

     $ 4,207       $ 2,308       $ 4,460       $ 2,200       $ 189       $ 13,364    

Interest income

       2,525         482         567                119         3,694    

Interest expense

       235         121         180         (108)        396         824    

Total revenues net of interest expense

       6,497         2,669         4,847         2,309         (88)        16,234    

Net income (loss)

       1,272         390         1,067         738         (469)        2,998    
    

 

 

   

 

 

 

Total assets (billions)

       84         29         46         17         (19)        157    
    

 

 

   

 

 

 

Total equity (billions)

     $      $      $      $      $      $ 22    
    

 

 

   

 

 

 

 

  (a) Corporate & Other includes adjustments and eliminations for intersegment activity.

 

32


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

Business Introduction

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

We are a global services company that provides our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through our non-consolidated joint venture, American Express Global Business Travel (GBT JV). Our range of products and services includes:

 

    Charge and credit card products

 

    Network services

 

    Merchant acquisition and processing, servicing and settlement, marketing and information products and services for merchants

 

    Fee services, including fraud prevention services and the design and operation of customer loyalty and rewards programs

 

    Expense management products and services

 

    Other lending products, including merchant financing

 

    Travel-related services

 

    Stored-value/prepaid products

Our various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving and growing alternative payment providers. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers’ existing accounts and relationships to create payment or other fee-based solutions.

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

 

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

 

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

 

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

 

    Other fees and commissions, which are earned on card-related fees (such as late fees and assessments), foreign exchange conversions, loyalty coalition-related fees, travel commissions and fees and other service fees; and

 

   

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

 

33


Table of Contents
 

GBT JV transition services agreement, earnings from equity method investments (including the GBT JV) and other miscellaneous revenue and fees.

Effective for the first quarter of 2016, we realigned our segment presentation to reflect the organizational changes announced during the fourth quarter of 2015. Prior periods have been restated to conform to the new reportable operating segments, which are: U.S. Consumer Services (USCS), International Consumer and Network Services (ICNS), Global Commercial Services (GCS) and Global Merchant Services (GMS), with corporate functions and certain other businesses and operations included in Corporate & Other. Refer to Note 1 to the Consolidated Financial Statements for additional information.

Forward-Looking Statements and Non-GAAP Measures

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

Bank Holding Company

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

Business Environment

For the quarter ended June 30, 2016, earnings included a gain of $1.1 billion ($677 million after-tax) from the previously announced sale of our Costco Wholesale Corporation (Costco) U.S. cobrand card portfolio, a $232 million ($151 million after-tax) restructuring charge related to our on-going cost reduction efforts, together with a continued elevated level of spending on growth initiatives. During the quarter, we continued to make progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage and driving strong momentum across our lending growth initiatives. In addition, we used our capital strength to repurchase $1.7 billion of outstanding shares.

The year-over-year growth in worldwide billings for the second quarter, adjusted for foreign currency exchange rates, slowed versus the first quarter as a result of a continued slowdown in Costco-related volumes leading up to the date of the portfolio sale. International volumes continued to be strong and performance remained relatively consistent sequentially across most regions.

Revenues net of interest expense decreased modestly as compared to the prior year. Similar to last quarter, we experienced a year-over-year decline in the discount rate from the continued expansion of OptBlue and merchant negotiations, including those resulting from the regulatory changes in the EU that went into effect late last year. Discount revenue growth was also impacted by an increase in contra-discount revenues as compared to the prior year, primarily related to cash rebate rewards. In addition, in the prior year both the discount rate and discount revenue benefited from certain merchant rebate accruals.

Net interest income grew, as compared to the prior year, although growth slowed sequentially due primarily to the sales of the Costco and JetBlue cobrand card portfolios as well as the continued decline in Costco loans prior to the portfolio sale in June. Card member loans were down in the second quarter of 2016 compared to the prior year, reflecting the sales of the two cobrand card portfolios in the first half of this year. Excluding the Card Member loans related to the Costco and JetBlue portfolios from the prior year,

 

34


Table of Contents

worldwide loan growth during the quarter was sequentially consistent, with a portion of the growth coming from increased usage of other American Express cards by former Costco cobrand Card Members. We continue to believe there are opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing our overall credit risk profile.

Provision expenses were down modestly and credit quality remained strong during the quarter. The prior period included credit costs associated with the Costco and JetBlue cobrand card portfolios subsequently classified as held for sale; the credit costs associated with the Costco portfolio for the current quarter were reported in Other expense. We expect some modest upward pressure on our write-off rates, due primarily to the seasoning of loans related to new Card Members.

Total expenses decreased significantly as compared to the prior year, reflecting the Costco cobrand portfolio sale gain, which was classified as an expense reduction in Other expense. Excluding the Costco portfolio sale gain and the restructuring charge during the current quarter, total expenses grew modestly and reflect a continued elevated level of investment spending on growth initiatives. We expect our investment spending during 2016, including marketing and promotion, will be at a higher level than 2015. Rewards expense declined in the second quarter driven by a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue.

Relative to the first half of the year, we continue to anticipate earnings will be lower during the second half of the year due to the end of our relationship with Costco in the U.S. and our higher level of spending on growth initiatives. Overall, we remain focused on accelerating revenue growth, optimizing investments and resetting our cost base.

See “Certain legislative, regulatory and other developments” in “Other Matters” for information on the potential impacts of an adverse decision in the Department of Justice (DOJ) case and related merchant litigations on our business, as well as other legislative and regulatory changes that could have a material adverse effect on our results of operations and financial condition.

 

35


Table of Contents

American Express Company

Consolidated Results of Operations

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

Effective December 1, 2015, we transferred the Card Member loans and receivables related to our cobrand partnerships with JetBlue and Costco in the United States (the HFS portfolios) to Card Member loans and receivables HFS (included in the USCS and GCS segments) on the Consolidated Balance Sheets, the sales of which were completed on March 18, 2016 and June 17, 2016, respectively. For the periods from December 1, 2015 through the sale completion dates, the primary impacts beyond the HFS classification on the Consolidated Balance Sheets were to provisions for losses and credit metrics, which do not reflect amounts related to these HFS loans and receivables, as credit costs were reported in Other expenses through a valuation allowance adjustment. Other, non-credit related metrics (i.e., billed business, cards-in-force, net interest yield) reflect amounts related to the HFS portfolios through the sale completion dates. Refer to Note 2 to the Consolidated Financial Statements for additional information.

The relative strengthening of the U.S. dollar over the periods of comparison has had an impact on our results of operations. Where meaningful in describing our performance, foreign currency-adjusted amounts, which exclude the impact of changes in the foreign exchange (FX) rates, have been provided.

Table 1: Summary of Financial Performance

 

                                                                                       

 

 
     Three Months Ended                  Six Months Ended               
(Millions, except percentages and    June 30,     Change     June 30,     Change  

per share amounts)

   2016     2015     2016 vs. 2015                         2016     2015     2016 vs. 2015  

Total revenues net of interest expense

    $         8,235       $         8,284       $ (49)          (1)    $         16,323       $         16,234       $ 89          

Provisions for losses

     463        467        (4)          (1)        897        887        10             

Expenses

     4,756        5,587        (831)          (15)        10,226        10,801        (575)          (5)   

Net income

     2,015        1,473        542           37         3,441        2,998        443           15    

Earnings per common share — diluted(a)

    $ 2.10       $ 1.42       $         0.68           48     $ 3.54       $ 2.90       $         0.64           22 

Return on average equity(b)

     26.4  %      28.1          26.4  %      28.1     

Return on average tangible common equity (c)

     34.5  %      35.4          34.5  %      35.4     

 

 

 

  (a) Earnings per common share — diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $17 million and $11 million for the three months ended June 30, 2016 and 2015, respectively, and $28 million and $22 million for the six months ended June 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $19 million and $20 million for the three months ended June 30, 2016 and 2015, respectively, and $40 million and $20 million for the six months ended June 30, 2016 and 2015, respectively.

 

  (b) Return on average equity (ROE) is computed by dividing (i) one-year period net income ($5.6 billion and $5.9 billion for June 30, 2016 and 2015, respectively) by (ii) one-year average total shareholders’ equity ($21.2 billion and $21.1 billion for June 30, 2016 and 2015, respectively).

 

  (c) Return on average tangible common equity (ROTCE), a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity, average goodwill and other intangibles of $3.7 billion and $3.8 billion as of June 30, 2016 and 2015, respectively, and average preferred shares of $1.6 billion and $0.7 billion as of June 30, 2016 and 2015, respectively. We believe ROTCE is a useful measure of the profitability of our business.

 

36


Table of Contents

Table 2: Total Revenue Net of Interest Expense Summary

 

                                                                                       

 

 
     Three Months Ended                   Six Months Ended                
     June 30,      Change     June 30,      Change  

(Millions, except percentages)

   2016      2015      2016 vs. 2015     2016      2015      2016 vs. 2015  

Discount revenue

    $         4,824        $         4,946        $         (122)         (2)    $         9,467        $         9,606        $         (139)         (1)

Net card fees

     715         667         48                 1,414         1,334         80          6     

Other fees and commissions

     702         727         (25)         (3)        1,382         1,435         (53)         (4)    

Other

     545         521         24                 1,031         989         42          4     
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

Total non-interest revenues

     6,786         6,861         (75)         (1)        13,294         13,364         (70)         (1)    
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

Total interest income

     1,885         1,837         48                 3,890         3,694         196          5     

Total interest expense

     436         414         22                 861         824         37          4     
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

Net interest income

     1,449         1,423         26                 3,029         2,870         159          6     
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

Total revenues net of interest expense

    $ 8,235        $ 8,284        $ (49)         (1)    $ 16,323        $ 16,234        $ 89          1  

 

 

Total Revenues Net of Interest Expense

Discount revenue decreased $122 million or 2 percent and $139 million or 1 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year. The decreases were primarily driven by a decrease in the average discount rate and increases in contra discount revenues, including higher cash rebate rewards due to new Card Member acquisition offers, partially offset by growth in billed business. Billed business increased 3 percent for both the three and six months ended June 30, 2016, compared to the same periods in the prior year. U.S. billed business increased 2 percent and 3 percent for the three and six months ended June 30, 2016, respectively, with a decline in Costco cobrand card volumes and the sale of the Costco cobrand card portfolio in the current year negatively impacting billed business growth in both periods. Non-U.S. billed business increased 5 percent and 3 percent in the same respective periods (10 percent and 9 percent on an FX-adjusted basis).1

The average discount rate was 2.43 percent for both the three and six months ended June 30, 2016 and 2.49 percent for both the three and six months ended June 30, 2015. The decrease was driven in part by a prior-year benefit related to certain merchant rebate accruals, growth of the OptBlue program, and merchant negotiations, including those resulting from the recent European regulatory changes. We expect the average discount rate will likely decline by a greater amount during 2016 than 2015 due to the further expansion of OptBlue, a greater impact from international regulatory changes and continued competitive pressures. More broadly, overall changes in the mix of spending by location and industry, merchant incentives and concessions, volume related pricing discounts, strategic investments, certain pricing initiatives, competition, pricing regulation (including regulation of competitors’ interchange rates) and other factors will likely result in continued erosion of our discount rate over time. See Tables 5, 6 and 7 for more details on billed business performance and the average discount rate.

Net card fees increased $48 million or 7 percent and $80 million or 6 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by growth in the Platinum, Gold and Delta portfolios.

Other fees and commissions decreased $25 million or 3 percent and $53 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, and remained relatively flat on an FX-adjusted basis for both periods.1

Other revenues increased $24 million or 5 percent and $42 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by a contractual payment from a GNS partner in the second quarter of 2016, as well as higher revenues from our

 

 

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

 

37


Table of Contents

Prepaid Services business, partially offset by lower revenues earned related to the GBT JV transition services agreement.

Interest income increased $48 million or 3 percent and $196 million or 5 percent for the three and six months ended June 30, 2016, compared to the same periods in the prior year, primarily reflecting a modestly higher yield and an increase in average Card Member loans (including Card Member loans HFS), in the six month period, partially offset by the impact from the sales of the HFS portfolio.

Interest expense increased $22 million or 5 percent and $37 million or 4 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher average customer deposit balances, partially offset by lower average long-term debt.

Table 3: Provisions for Losses Summary

 

                                                                                       

 

 
           Three Months Ended                             Six Months Ended                    
     June 30,      Change     June 30,      Change  

(Millions, except percentages)

   2016      2015      2016 vs. 2015     2016      2015      2016 vs. 2015  

Charge card

    $         153        $         165        $         (12)         (7)    $         322        $         339        $         (17)          (5)

Card Member loans

     285         285         —                 512         520         (8)          (2)   

Other

     25         17                 47        63         28         35           #   

 

  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

Total provisions for losses(a)

    $ 463        $ 467        $ (4)         (1)    $ 897        $ 887        $ 10          

 

 

# Denotes a variance greater than 100 percent.

 

  (a) For the three and six months ended June 30, 2016, provisions for losses does not reflect the HFS portfolios.

Provisions for Losses

Charge card provision for losses decreased $12 million or 7 percent and $17 million or 5 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by a higher reserve release in the current year.

Card Member loans provision for losses remained flat and decreased $8 million or 2 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, as the current year periods do not reflect the HFS portfolios as related credit costs were reported in Other expenses through a valuation allowance adjustment, the decrease from which was offset by strong momentum in our lending growth initiatives.

Other provision for losses increased $8 million and $35 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by higher net write-offs in merchant financing loans as a result of growth in the portfolio.

Table 4: Expenses Summary

 

                                                                                       

 

 
     Three Months Ended                   Six Months Ended                
     June 30,      Change     June 30,      Change  

(Millions, except percentages)

   2016      2015      2016 vs. 2015     2016      2015      2016 vs. 2015  

Marketing and promotion

    $ 788        $ 761        $ 27          4      $ 1,515        $ 1,370        $ 145          11 

Card Member rewards

     1,766         1,799         (33)         (2)        3,469         3,439         30            

Card Member services and other

     281         242         39          16         563         503         60          12    

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

     2,835         2,802         33                 5,547         5,312         235            

Salaries and employee benefits

     1,451         1,250         201          16         2,789         2,555         234            

Other, net(a)

     470         1,535             (1,065)         (69)        1,890         2,934             (1,044)         (36)   

Total expenses

    $         4,756        $         5,587        $ (831)         (15)    $         10,226        $         10,801        $ (575)         (5)

 

 

 

  (a) Effective December 1, 2015, Other, net included the valuation allowance adjustment associated with the HFS portfolios.

Expenses

Marketing and promotion expenses increased $27 million or 4 percent and $145 million or 11 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year,

 

38


Table of Contents

driven by elevated levels of spending on growth initiatives, predominantly within the USCS and ICNS segments.

Card Member rewards expenses decreased $33 million or 2 percent and increased $30 million or 1 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year.

The decrease for the three-month period was primarily driven by lower cobrand rewards expense of $67 million, reflecting the decline in spending on Costco cobrand cards, as well as a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue, partially offset by increased spending volumes across other cobrand card products. The lower cobrand rewards expense was partially offset by higher Membership Rewards expense of $34 million, primarily driven by an increase in new points earned as a result of higher spending volumes and growth in the Ultimate Redemption Rate (URR).

The increase for the six months ended was primarily driven by higher Membership Rewards expense of $83 million, primarily driven by an increase in new points earned as a result of higher spending volumes, partially offset by lower cobrand rewards expense of $53 million as a result of the above mentioned decline in spending on Costco cobrand cards and the shift in volumes to cash rebate products.

The Membership Rewards URR for current program participants was 95 percent (rounded down) at June 30, 2016, compared to 95 percent (rounded up) at June 30, 2015.

Card Member services and other expenses increased $39 million or 16 percent and $60 million or 12 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by increased usage of travel-related benefits.

Salaries and employee benefits expenses increased $201 million or 16 percent and $234 million or 9 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year, driven by restructuring in the current year.

Other expenses decreased $1.1 billion or 69 percent and $1.0 billion or 36 percent for the three and six months ended June 30, 2016, respectively, compared to the same periods in the prior year. The decreases in both periods were driven by the gain on the sale of the Costco Card Member loans and receivables HFS portfolio and lower fraud expenses, partially offset by the impact of the transfer of the HFS portfolios to Card Member loans and receivables HFS effective December 2015, as related credit costs were reported in Other expenses through a valuation allowance adjustment. The decrease in the six-month period also includes the gain on the sale of the JetBlue Card Member loans HFS portfolio, partially offset by the benefit in the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity.

Income Taxes

The effective tax rate was 33.2 percent and 33.8 percent for the three and six months ended June 30, 2016, respectively, and 33.9 percent and 34.0 percent for the three and six months ended June 30, 2015, respectively. The tax rates in all periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. Additionally, the effective tax rate in the current-year periods reflected the resolution of certain prior years’ tax items.

 

39


Table of Contents

Table 5: Selected Card-Related Statistical Information

 

                                                                 

 

 
     As of or for the
    Three Months Ended  
June 30,
   

Change
2016

vs.

     As of or for the
    Six Months Ended  
June 30,
   

Change
2016

vs.

 

 

   2016     2015       2015          2016     2015       2015      

Card billed business: (billions)