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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

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 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, New York     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      No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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      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    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

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

 

                                             Class                                                         Outstanding at October 18, 2016        
Common Shares (par value $0.20 per share)                            915,255,379 Shares


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.   Financial Information      Page No.   
  Item 1.    Financial Statements   
     Consolidated Statements of Income – Three Months Ended September 30, 2016 and 2015      1   
     Consolidated Statements of Income – Nine Months Ended September 30, 2016 and 2015      2   
     Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2016 and 2015      3   
     Consolidated Balance Sheets – September 30, 2016 and December 31, 2015      4   
     Consolidated Statements of Cash Flows – Nine Months Ended September 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      32   
  Item 3.    Quantitative and Qualitative Disclosures about Market Risk      70   
  Item 4.    Controls and Procedures      70   
Part II.   Other Information   
  Item 1.    Legal Proceedings      73   
  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 September 30 (Millions, except per share amounts)

     2016         2015   

 

  

 

 

    

 

 

 

Revenues

     

Non-interest revenues

     

Discount revenue

   $ 4,516       $ 4,778   

Net card fees

     747         679   

Other fees and commissions

     694         727   

Other

     483         504   

 

  

 

 

    

 

 

 

Total non-interest revenues

             6,440                 6,688   

 

  

 

 

    

 

 

 

Interest income

     

Interest on loans

     1,690         1,847   

Interest and dividends on investment securities

     34         38   

Deposits with banks and other

     40         19   

 

  

 

 

    

 

 

 

Total interest income

     1,764         1,904   

 

  

 

 

    

 

 

 

Interest expense

     

Deposits

     150         125   

Long-term debt and other

     280         274   

 

  

 

 

    

 

 

 

Total interest expense

     430         399   

 

  

 

 

    

 

 

 

Net interest income

     1,334         1,505   

 

  

 

 

    

 

 

 

Total revenues net of interest expense

     7,774         8,193   

 

  

 

 

    

 

 

 

Provisions for losses

     

Charge card

     174         203   

Card Member loans

     319         309   

Other

     11         17   

 

  

 

 

    

 

 

 

Total provisions for losses

     504         529   

 

  

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

     7,270         7,664   

 

  

 

 

    

 

 

 

Expenses

     

Marketing and promotion

     930         847   

Card Member rewards

     1,566         1,763   

Card Member services and other

     278         269   

Salaries and employee benefits

     1,263         1,212   

Other, net

     1,498         1,635   

 

  

 

 

    

 

 

 

Total expenses

     5,535         5,726   

 

  

 

 

    

 

 

 

Pretax income

     1,735         1,938   

Income tax provision

     593         672   

 

  

 

 

    

 

 

 

Net income

   $ 1,142       $ 1,266   

 

  

 

 

    

 

 

 

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

     

Basic

   $ 1.21       $ 1.24   

Diluted

   $ 1.20       $ 1.24   

 

  

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

     

Basic

     920         994   

Diluted

     923         997   

Cash dividends declared per common share

   $ 0.32       $ 0.29   

 

 

 

(a) Represents net income less (i) earnings allocated to participating share awards of $9 million and $10 million for the three months ended September 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $21 million and $22 million for the three months ended September 30, 2016 and 2015, respectively.

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 
Nine Months Ended September 30 (Millions, except per share amounts)    2016      2015  

 

  

 

 

    

 

 

 

Revenues

     

Non-interest revenues

     

Discount revenue

   $         13,983       $         14,384   

Net card fees

     2,161         2,013   

Other fees and commissions

     2,076         2,162   

Other

     1,514         1,493   

 

  

 

 

    

 

 

 

Total non-interest revenues

     19,734         20,052   

 

  

 

 

    

 

 

 

Interest income

     

Interest on loans

     5,446         5,418   

Interest and dividends on investment securities

     104         120   

Deposits with banks and other

     104         60   

 

  

 

 

    

 

 

 

Total interest income

     5,654         5,598   

 

  

 

 

    

 

 

 

Interest expense

     

Deposits

     450         337   

Long-term debt and other

     841         886   

 

  

 

 

    

 

 

 

Total interest expense

     1,291         1,223   

 

  

 

 

    

 

 

 

Net interest income

     4,363         4,375   

 

  

 

 

    

 

 

 

Total revenues net of interest expense

     24,097         24,427   

 

  

 

 

    

 

 

 

Provisions for losses

     

Charge card

     496         542   

Card Member loans

     831         829   

Other

     74         45   

 

  

 

 

    

 

 

 

Total provisions for losses

     1,401         1,416   

 

  

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

     22,696         23,011   

 

  

 

 

    

 

 

 

Expenses

     

Marketing and promotion

     2,445         2,217   

Card Member rewards

     5,035         5,202   

Card Member services and other

     841         772   

Salaries and employee benefits

     4,052         3,767   

Other, net

     3,388         4,569   

 

  

 

 

    

 

 

 

Total expenses

     15,761         16,527   

 

  

 

 

    

 

 

 

Pretax income

     6,935         6,484   

Income tax provision

     2,352         2,220   

 

  

 

 

    

 

 

 

Net income

   $ 4,583       $ 4,264   

 

  

 

 

    

 

 

 

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

     

Basic

   $ 4.77       $ 4.16   

Diluted

   $ 4.76       $ 4.15   

 

  

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

     

Basic

     940         1,007   

Diluted

     943         1,011   

Cash dividends declared per common share

   $ 0.90       $ 0.84   

 

 

 

(a) Represents net income less (i) earnings allocated to participating share awards of $37 million and $32 million for the nine months ended September 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $61 million and $42 million for the nine months ended September 30, 2016 and 2015, respectively.

 

See Notes to Consolidated Financial Statements.

 

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AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

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

 

 

   

 

 

 

(Millions)

   2016     2015     2016     2015  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,142      $ 1,266      $ 4,583      $ 4,264   

Other comprehensive income (loss):

        

Net unrealized securities losses, net of tax of: 2016, $(9) and $(7); 2015, $(2) and $(13)

     (15     (7     (8     (27

Foreign currency translation adjustments, net of tax of: 2016, $(24) and $37; 2015, $181 and $221

     11        (220     (115     (464

Net unrealized pension and other postretirement benefit gains, net of tax of: 2016, $7 and $36; 2015, $8 and $24

     7        7        39        36   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3        (220     (84     (455

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $     1,145      $     1,046      $     4,499      $     3,809   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

(Millions, except share data)

    
 
September 30,
2016
  
  
   
 
December 31,
2015
  
  

 

  

 

 

   

 

 

 

Assets

    

Cash and cash equivalents

    

Cash and due from banks

   $ 2,524      $ 2,935   

Interest-bearing deposits in banks (includes securities purchased under resale agreements: 2016, $243; 2015, $41)

     22,988        19,569   

Short-term investment securities

     1,008        258   

 

  

 

 

   

 

 

 

Total cash and cash equivalents

     26,520        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, $5,485; 2015, $6,649), less reserves: 2016, $437; 2015, $462

     44,821        43,671   

Other receivables, less reserves: 2016, $48; 2015, $43

     2,510        3,024   

Loans

    

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2016, $24,752; 2015, $23,559), less reserves: 2016, $1,114; 2015, $1,028

     59,504        57,545   

Other loans, less reserves: 2016, $30; 2015, $20

     1,157        1,254   

Investment securities

     3,728        3,759   

Premises and equipment, less accumulated depreciation and amortization: 2016, $4,995; 2015, $6,801

     4,301        4,108   

Other assets (includes restricted cash of consolidated variable interest entities: 2016, $612; 2015, $155)

     10,836        10,069   

 

  

 

 

   

 

 

 

Total assets

   $ 153,377      $ 161,184   

 

  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Customer deposits

   $ 53,500      $ 54,997   

Travelers Cheques and other prepaid products

     2,656        3,247   

Accounts payable

     11,372        11,822   

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

     2,861        4,812   

Long-term debt (includes debt issued by consolidated variable interest entities: 2016, $14,759; 2015, $13,602)

     44,894        48,061   

Other liabilities

     17,077        17,572   

 

  

 

 

   

 

 

 

Total liabilities

     132,360        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 September 30, 2016 and December 31, 2015

              

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 917 million shares as of September 30, 2016 and 969 million shares as of December 31, 2015

     184        194   

Additional paid-in capital

     12,790        13,348   

Retained earnings

     10,661        9,665   

Accumulated other comprehensive loss

    

Net unrealized securities gains, net of tax: 2016, $25; 2015, $32

     50        58   

Foreign currency translation adjustments, net of tax: 2016, $(63); 2015, $(100)

     (2,159     (2,044

Net unrealized pension and other postretirement benefit losses, net of tax: 2016, $(188); 2015, $(223)

     (509     (548

 

  

 

 

   

 

 

 

Total accumulated other comprehensive loss

     (2,618     (2,534

 

  

 

 

   

 

 

 

Total shareholders’ equity

     21,017        20,673   

 

  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $         153,377      $         161,184   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30 (Millions)

     2016        2015   

 

  

 

 

   

 

 

 

Cash Flows from Operating Activities

  

 

Net income

   $ 4,583      $ 4,264   

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

    

Provisions for losses

     1,401        1,416   

Depreciation and amortization

     810        780   

Deferred taxes and other

     (1,076     135   

Stock-based compensation

     190        200   

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

    

Other receivables

     485        (203

Other assets

     115        1,864   

Accounts payable and other liabilities

     (1,028     (53

Travelers Cheques and other prepaid products

     (594     (579

 

  

 

 

   

 

 

 

Net cash provided by operating activities

     4,886        7,824   

 

  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Sales of available-for-sale investment securities

     51        12   

Maturities and redemptions of available-for-sale investment securities

     1,209        1,821   

Purchases of investments

     (1,355     (1,564

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

     11,818        (1,292

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

     (975     (879

Acquisitions/dispositions, net of cash acquired

     (191     (122

Net increase in restricted cash

     (427     (683

 

  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     10,130        (2,707

 

  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net (decrease) increase in customer deposits

     (1,499     5,171   

Net decrease in short-term borrowings

     (2,040     (273

Issuance of long-term debt

     5,926        7,923   

Principal payments on long-term debt

     (9,349     (16,858

Issuance of American Express preferred shares

            841   

Issuance of American Express common shares

     78        169   

Repurchase of American Express common shares

     (3,477     (3,330

Dividends paid

     (892     (868

 

  

 

 

   

 

 

 

Net cash used in financing activities

     (11,253     (7,225

 

  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (5     (242

 

  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,758        (2,350

Cash and cash equivalents at beginning of period

     22,762        22,288   

 

  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $         26,520      $         19,938   

 

 

 

(a) Refer to Note 2 for additional information.

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. 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 activities related to long-term debt repayments were misclassified between financing activities and operating activities.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 nine months ended September 30, 2015, this revision resulted in a $250 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 method of implementation and the impact this guidance 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 does not intend to adopt the new standard early and 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. Among other items, the guidance requires excess tax benefits and deficiencies, which under previous guidance would have been recorded within additional paid-in capital, to now be recognized in the income tax provision within the results of operations. The Company continues to evaluate the impact this guidance will have on its financial position, results of operations and cash flows, among other items, but does not expect the impacts of the standard to be material upon adoption. The Company will adopt the standard, prospectively, effective January 1, 2017.

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 does not intend to adopt the new standard early and 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 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.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. The impact of the sales 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.

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 September 30, 2016.

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

 

 

 

(Millions)

     2016         2015   

 

  

 

 

    

 

 

 

U.S. Consumer Services(a)

   $ 44,857       $ 43,495   

International Consumer and Network Services

     6,700         7,072   

Global Commercial Services

     9,061         8,006   

 

  

 

 

    

 

 

 

Card Member loans

     60,618         58,573   

Less: Reserve for losses

     1,114         1,028   

 

  

 

 

    

 

 

 

Card Member loans, net

   $         59,504       $         57,545   

 

  

 

 

    

 

 

 

Other loans, net(b)

   $ 1,157       $ 1,254   

 

 

 

  (a) Includes approximately $24.8 billion and $23.6 billion of gross Card Member loans available to settle obligations of a consolidated variable interest entity (VIE) as of September 30, 2016 and December 31, 2015, respectively.
  (b) Other loans primarily represent merchant financing loans. Other loans are presented net of reserves for losses of $30 million and $20 million as of September 30, 2016 and December 31, 2015, respectively.

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

 

 

 

(Millions)

     2016         2015   

 

  

 

 

    

 

 

 

U.S. Consumer Services (a)

   $ 10,101       $ 11,807   

International Consumer and Network Services

     5,551         5,599   

Global Commercial Services

     29,606         26,727   

 

  

 

 

    

 

 

 

Card Member receivables (b)

     45,258         44,133   

Less: Reserve for losses

     437         462   

 

  

 

 

    

 

 

 

Card Member receivables, net

   $         44,821       $         43,671   

 

  

 

 

    

 

 

 

Other receivables, net (c)

   $ 2,510       $ 3,024   

 

 

 

  (a) Includes $5.5 billion and $6.6 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of September 30, 2016 and December 31, 2015, respectively.

 

  (b) Includes approximately $12.9 billion and $11.9 billion of Card Member receivables outside the United States as of September 30, 2016 and December 31, 2015, respectively.

 

  (c) Other receivables primarily represent amounts related to (i) certain merchants for billed discount revenue, (ii) GNS partner banks for items such as royalty and franchise fees, 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 $48 million and $43 million as of September 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 September 30, 2016 and December 31, 2015:

 

 

 

2016 (Millions)

     Current       

 

 

 

30-59

Days

Past

Due

  

  

  

  

   

 

 

 

60-89

Days

Past

Due

  

  

  

  

   
 
 
 
90+
Days
Past
Due
  
  
  
  
     Total   

 

  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Card Member Loans:

           

U.S. Consumer Services

   $     44,367      $ 149      $ 105      $ 236       $ 44,857   

International Consumer and Network Services

     6,589        34        25        52         6,700   

Global Commercial Services

           

Global Small Business Services

     8,918        29        20        46         9,013   

Global Corporate Payments(a)

     (b     (b     (b     1         48   

Card Member Receivables:

           

U.S. Consumer Services

   $ 9,963      $ 51      $ 28      $ 59       $ 10,101   

International Consumer and Network Services

     5,470        25        17        39         5,551   

Global Commercial Services

           

Global Small Business Services

     13,605        77        44        83         13,809   

Global Corporate Payments(a)

     (b     (b     (b     124         15,797   

 

 
           

 

 

2015 (Millions)

     Current       

 

 

 

30-59

Days

Past

Due

  

  

  

  

   

 

 

 

60-89

Days

Past

Due

  

  

  

  

   
 
 
 
90+
Days
Past
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 loans and 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 loan and 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 nine months ended September 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     1.8     1.1     1.4     1.6     1.0

International Consumer and Network Services

    2.0     2.5     1.7     2.0     2.4     1.6

Global Small Business Services

    1.4     1.7     1.1     1.3     1.5     1.0

Card Member Receivables:

           

U.S. Consumer Services

    1.4     1.6     1.4     1.6     1.8     1.6

International Consumer and Network Services

    2.1     2.3     1.5     2.1     2.3     1.6

Global Small Business Services

    1.6     1.8     1.5     1.9     2.2     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     0.8     0.09     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 Card Member 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 September 30, 2016 and December 31, 2015; therefore, the segment’s receivables are not included in the following tables.

 

 

 
     As of September 30, 2016  
  

 

 

 
                   Accounts Classified as a
TDR(c)
                      
        

 

 

          
2016 (Millions)          Over 90 days
Past Due &
Accruing
Interest(a)
    

Non-

Accruals(b)

     In Program(d)      Out of
    Program(e)
       Total Impaired
Balance
     Unpaid
    Principal
Balance
         Allowance
for TDRs
 

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Card Member Loans:                     
U.S. Consumer Services    $ 156       $ 133         168       $ 124       $ 581       $ 532       $ 50   
International Consumer and Network Services      52                                 52         51           
Global Commercial Services      27         29         27         25         108         100         10   
Card Member Receivables:                     
U.S. Consumer Services                      9         5         14         14         6   
Global Commercial Services                      24         8         32         32         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 235       $ 162         228       $ 162       $ 787       $ 729       $ 84   

 

 
                    

 

 
     As of December 31, 2015  
  

 

 

 
                   Accounts Classified as a
TDR(c)
                      
        

 

 

          
2015 (Millions)    Over 90 days
Past Due &
Accruing
Interest(a)
    

Non-

Accruals(b)

     In Program(d)      Out of
Program(e)
    

Total

Impaired
Balance

     Unpaid
Principal
Balance
     Allowance
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         9   
Card Member Receivables:                     
U.S. Consumer Services                      11         3         14         14         8   
Global Commercial Services                      16         3         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 Card Member 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 $14 million and $18 million that are non-accruals as of September 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 $123 million and $84 million of Card Member accounts that have successfully completed a modification program and $39 million and $29 million of Card Member accounts that were not in compliance with the terms of the modification programs as of September 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 nine months ended September 30:

 

 

 
    Three Months Ended
September 30, 2016
    Nine Months Ended
September 30, 2016
 
(Millions)   Average
Balance
    Interest
Income
Recognized
    Average
Balance
    Interest
Income
Recognized
 

 

 

 

 

   

 

 

 

Card Member Loans:

       

U.S. Consumer Services

  $ 587      $ 14      $ 555      $ 38   

International Consumer and Network Services

    53        4        52        12   

Global Commercial Services

    111        4        102        10   

Card Member Receivables:

       

U.S. Consumer Services

    13               13          

Global Commercial Services

    29               24          
 

 

 

   

 

 

 

Total

  $ 793      $ 22      $ 746      $ 60   

 

 

 

 
    Three Months Ended
September 30, 2015
    Nine Months Ended
September 30, 2015
 
(Millions)       Average
    Balance
    Interest
Income
Recognized
        Average
    Balance
    Interest
Income
Recognized
 

 

 

 

 

   

 

 

 

Card Member Loans:

       

U.S. Consumer Services

  $ 585      $ 13      $ 580      $ 34   

International Consumer and Network Services

    53        3        55        10   

Global Commercial Services

    108        3        105        9   

Card Member Receivables:

       

U.S. Consumer Services

    11               14          

Global Commercial Services

    17               21          
 

 

 

   

 

 

 

Total

  $ 774      $ 19      $ 775      $ 53   

 

 

 

  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 nine months ended September 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

 

September 30, 2016

   

 

Nine Months Ended

 

September 30, 2016

 
  

 

 

   

 

 

 

 

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

Troubled Debt Restructurings:

                    

Card Member Loans

     8       $ 56         9        (b     23       $ 163         10        (b

Card Member Receivables

     2         29         (c     19        7         94         (c     17   

 

  

 

 

    

 

 

        

 

 

    

 

 

      

Total

     10       $ 85             30       $ 257        

 

 
                    

 

 
    

 

Three Months Ended

 

September 30, 2015

   

Nine Months Ended

 

September 30, 2015

 
  

 

 

   

 

 

 

 

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

Troubled Debt Restructurings:

                    

Card Member Loans

     10       $ 69         9        (b     31       $ 218         10        (b

Card Member Receivables

     3         37         (c     12        9         111         (c     12   

 

  

 

 

    

 

 

        

 

 

    

 

 

      

Total

     13       $ 106             40       $ 329        

 

 

 

  (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, in the three and nine months ended September 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

 

September 30, 2016

   

Nine Months Ended

 

September 30, 2016

 
 

 

 

   

 

 

 
   

Number of 
Accounts

  (in thousands)

   

Aggregated
Outstanding
Balances Upon
Default(a)

  ($ in millions)

   

Number of 
Accounts

  (in thousands)

   

Aggregated
Outstanding
Balances Upon
Default(a)

  ($ in millions)

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Troubled Debt Restructurings That Subsequently Defaulted:

       

Card Member Loans

    3      $ 12        5      $ 30   

Card Member Receivables

    1        1        3        3   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    4      $ 13        8      $ 33   

 

 

 

 
   

Three Months Ended

 

September 30, 2015

   

Nine Months Ended

 

September 30, 2015

 
 

 

 

   

 

 

 
   

Number of 
Accounts

(in thousands)

   

Aggregated
Outstanding
Balances Upon
Default(a)

($ in millions)

    Number of 
Accounts
(in thousands)
    Aggregated
Outstanding
Balances Upon
Default(a)
($ in millions)
 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Troubled Debt Restructurings That Subsequently Defaulted:

       

Card Member Loans

    1      $ 14        6      $ 39   

Card Member Receivables

    1        1        3        3   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    2      $ 15        9      $ 42   

 

 

 

  (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 September 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 nine months ended September 30:

 

 

 

(Millions)

     2016        2015   

 

  

 

 

   

 

 

 

Balance, January 1

   $ 1,028      $ 1,201   

Provisions(a)

     831        829   

Net write-offs

    

Principal(b)

     (687     (733

Interest and fees(b)

     (128     (122

Other(c)

     70        (11

 

  

 

 

   

 

 

 

Balance, September 30

   $             1,114      $             1,164   

 

 

 

  (a) Provisions for principal, interest and fee reserve components.

 

  (b) Consists of principal write-offs, less recoveries of $280 million and $320 million, including net write-offs from TDRs of $24 million and $30 million, for the nine months ended September 30, 2016 and 2015, respectively. Recoveries of interest and fees were de minimis.

 

  (c) Includes foreign currency translation adjustments of $(3) million and $(18) million and other adjustments of $6 million and $7 million for the nine months ended September 30, 2016 and 2015, respectively. The nine months ended September 30, 2016 also includes reserves of $67 million associated with $265 million of retained Card Member loans reclassified from HFS to held for investment during the first half of the year.

Card Member Loans Evaluated Individually and Collectively for Impairment

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

 

 

 

(Millions)

     2016         2015   

 

  

 

 

    

 

 

 

Card Member loans evaluated individually for impairment(a)

   $ 344       $ 279   

Related reserves (a)

   $ 60       $ 53   

 

 

Card Member loans evaluated collectively for impairment(b)

   $         60,274       $         58,294   

Related reserves (b)

   $ 1,054       $ 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 nine months ended September 30:

 

 

 

(Millions)

     2016        2015   

 

  

 

 

   

 

 

 

Balance, January 1

   $ 462      $ 465   

Provisions(a)

     496        542   

Net write-offs(b)

     (518     (544

Other(c)

     (3     (22

 

  

 

 

   

 

 

 

Balance, September 30

   $             437      $             441   

 

 

 

  (a) Provisions for principal and fee reserve components.

 

  (b) Consists of principal and fee components, less recoveries of $301 million and $302 million, including net write-offs from TDRs of $16 million and $49 million, for the nine months ended September 30, 2016 and 2015, respectively.

 

  (c) Includes foreign currency translation adjustments of nil and $(13) million and other adjustments of $(3) million and $(9) million for the nine months ended September 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 September 30, 2016 and December 31, 2015:

 

 

 
(Millions)    2016      2015  

 

  

 

 

    

 

 

 

Card Member receivables evaluated individually for impairment(a)

   $ 46       $ 33   

Related reserves (a)

   $ 24       $ 20   

 

 

Card Member receivables evaluated collectively for impairment

   $         45,212       $         44,100   

Related reserves (b)

   $ 413       $ 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 and losses recorded in Accumulated Other Comprehensive Loss (AOCI), net of income taxes. Realized gains and losses are recognized upon disposition of securities on a trade-date basis in the Consolidated Statements of Income using the specific identification method.

The following is a summary of investment securities as of September 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

   $         2,255       $             50       $             —      $         2,305       $         2,813       $ 85       $ (5   $         2,893   

 

U.S. Government agency obligations

     12                        12         2                        2   

U.S. Government treasury obligations

     529         12                541         406         4         (1     409   

Corporate debt securities

     20         1                21         29         1                30   

Mortgage-backed securities (a)

     103         5                108         117         4                121   

Equity securities

     1                        1         1                             —        1   
Foreign government bonds and obligations      682         10                692         250         6         (1     255   

Other (b)

     50                 (2     48         50                 (2     48   

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3,652       $ 78       $ (2   $ 3,728       $ 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 September 30, 2016 and December 31, 2015:

 

 

 
     2016     2015  
  

 

 

   

 

 

 
     Less than 12 months      12 months or more     Less than 12 months     12 months or more  
  

 

 

    

 

 

   

 

 

   

 

 

 

Description of Securities

(Millions)

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

 

  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

State and municipal obligations

   $       $       $              $ 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 September 30, 2016 and December 31, 2015:

 

 

 
     Less than 12 months     12 months or more     Total  
  

 

 

   

 

 

   

 

 

 

Ratio of Fair Value to

Amortized Cost

(Dollars in millions)

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

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

2016:

                        

90%–100%

           $       $             —        6       $ 33       $             (1     6       $ 33       $             (1

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total as of September 30, 2016

           $       $        6       $ 33       $ (1     6       $ 33       $ (1

 

 

    

                        

 

 

2015:

                        

90%–100%

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

Less than 90%

     —                          2           9           (2     2           9           (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 September 30, 2016 were as follows:

 

 

 
(Millions)    Cost      Estimated
Fair Value
 

 

  

 

 

    

 

 

 

Due within 1 year

   $ 788       $ 789   

Due after 1 year but within 5 years

     347         352   

Due after 5 years but within 10 years

     399         418   

Due after 10 years

     2,067         2,120   

 

  

 

 

    

 

 

 

Total

   $             3,601       $             3,679   

 

 

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 businesses, including, prior to the sales discussed in Note 2, 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 Credit Account Master Trust (the Lending Trust) and the American Express Issuance Trust II (the Charge Trust, collectively the Trusts) as of September 30, 2016 and December 31, 2015, included in Other assets on the Consolidated Balance Sheets:

 

 

 
(Millions)    2016      2015  

 

  

 

 

    

 

 

 

Lending Trust

   $ 611       $ 153   

Charge Trust

     1         2   

 

  

 

 

    

 

 

 

Total

   $             612       $             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 September 30, 2016, TRS’ direct and indirect ownership of variable interests was $13.3 billion for the Lending Trust and $2.0 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 Lending Trust and the Charge 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 nine months ended September 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 September 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

   $ 52,767       $ 54,102   

Non-interest bearing (includes Card Member credit balances of: 2016, $297 million; 2015, $389 million)

     333         478   

Non-U.S.:

     

Interest bearing

     88         82   

Non-interest bearing (includes Card Member credit balances of: 2016, $297 million; 2015, $323 million)

     312         335   

 

  

 

 

    

 

 

 

Total customer deposits

   $     53,500       $     54,997   

 

 

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

 

 

 
(Millions)    2016      2015  

 

  

 

 

    

 

 

 

U.S. retail deposits:

     

Savings accounts – Direct

   $ 30,672       $ 29,023   

Certificates of deposit:

     

Direct

     290         281   

Third-party (brokered)

     12,879         13,856   

Sweep accounts – Third-party (brokered)

     8,926         10,942   

Other retail deposits:

     

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

     139         183   

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

     594         712   

 

  

 

 

    

 

 

 

Total customer deposits

   $     53,500       $     54,997   

 

 

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

 

 

 
(Millions)    U.S.      Non-U.S.      Total  

 

  

 

 

    

 

 

    

 

 

 

2016

   $ 1,416       $ 2       $ 1,418   

2017

     3,662         8         3,670   

2018

     3,203                 3,203   

2019

     2,336                 2,336   

2020

     2,518                 2,518   

After 5 years

     34                 34   

 

  

 

 

    

 

 

    

 

 

 

Total

   $     13,169       $     10       $     13,179   

 

 

As of September 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.

   $ 116       $ 105   

Non-U.S.

     1         1   

 

  

 

 

    

 

 

 

Total

   $         117       $         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’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.

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.

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 $190 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 its assessment of the credit risk of the Company’s derivative counterparties as of September 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 September 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

   $ 330      $ 236      $      $ 9   

Foreign exchange contracts - Net investment hedges

     189        191        92        57   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as hedging instruments

     519        427        92        66   

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts, including certain embedded derivatives(a)

     201        117        149        135   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives, gross

     720        544        241        201   

Less: Cash collateral netting on interest rate contracts(b)

     (256     (155              

Derivative asset and derivative liability netting(c)

     (99     (107     (99     (107

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives, net(d)

   $         365      $         282      $         142      $           94   

 

 

 

  (a) Includes foreign currency derivatives embedded in certain operating agreements.
  (b) Represents the offsetting of derivatives and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives 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 $24 million as of September 30, 2016, none of which was sold or repledged. Such non-cash collateral economically reduced the Company’s risk exposure to $341 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 $144 million and $149 million as of September 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 net derivative liabilities are presented within Other assets and Other liabilities, respectively, on the Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of September 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.

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 $17.0 billion and $18.8 billion of its fixed-rate debt to floating-rate debt using interest rate swaps as of September 30, 2016 and December 31, 2015, respectively.

 

  22  


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the gains (losses) recognized in Other expenses associated with the Company’s fair value hedges for the three and nine months ended September 30:

 

 

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

 

 

   

 

 

 

(Millions)

     2016        2015        2016        2015   

 

 

Interest rate derivative contracts

   $ (123   $         108      $         103      $ 82   

Hedged items

             134        (114     (90             (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Net hedge ineffectiveness

   $ 11      $ (6   $ 13      $ (3

 

 

The Company also recognized a net reduction in interest expense on long-term debt of $55 million and $73 million for the three months ended September 30, 2016 and 2015, respectively, and $173 million and $214 million for the nine months ended September 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 a loss of $18 million and a gain of $384 million for the three months ended September 30, 2016 and 2015, respectively, and gains of $25 million and $545 million for the nine months ended September 30, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change. Specifically, the net hedge ineffectiveness recognized was nil and a gain of $1 million for the nine months ended September 30, 2016 and 2015, respectively. Other amounts related to foreign exchange contracts reclassified from AOCI into Other expenses included a gain of $5 million and nil for the nine months ended September 30, 2016 and 2015, respectively. There were no amounts related to foreign exchange contracts reclassified from AOCI into Other expenses during the three months ended September 30, 2016 and 2015.

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 losses of $4 million and $3 million for the three months ended September 30, 2016 and 2015, respectively, and a net loss of $12 million and a net gain of $102 million for the nine months ended September 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 September 30, 2015, gains of $19 million and $15 million for the three and nine months ended September 30, 2015, respectively. These amounts should have been disclosed as gains of $8 million and $389 million, respectively, which are the amounts used to calculate the above-referenced net loss of $3 million and net gain of $102 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 resulted in a gain of $1 million and a loss of $4 million for the three months ended September 30, 2016 and 2015, respectively, and a gain of $7 million and a loss of $2 million for the nine months ended September 30, 2016 and 2015, respectively, and are recognized in Card Member services and other expense.

 

  23  


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 September 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 and other

   $ 49       $ 1       $ 48       $       $ 50       $ 1       $ 49       $   

Debt securities

     3,679         541         3,138                 3,709         409         3,300           

Derivatives(a)

     720                 720                 544                 544           

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

         4,448             542             3,906                 —             4,303             410             3,893                 —   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                       

Derivatives(a)

     241                 241                 201                 201           

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 241       $       $ 241       $       $ 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.

 

  24  


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 September 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 September 30, 2016 and December 31, 2015, and require management’s 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      Corresponding Fair Value Amount  
     

 

 

 

2016 (Billions)

     Value           Total         Level 1         Level 2         Level 3   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Assets:

              

Financial assets for which carrying values equal or approximate fair value

              

Cash and cash equivalents(a)

   $ 27       $     27       $ 25       $ 2       $   

Other financial assets(b)

     48         48                 48           

Financial assets carried at other than fair value

              

Loans, net(c)

     61         61                         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)

     13         13                 13           

Long-term debt(c)

   $ 45       $ 46       $       $ 46       $   

 

 
                   

 

 
     Carrying      Corresponding Fair Value Amount  
     

 

 

 

2015 (Billions)

     Value           Total         Level 1         Level 2         Level 3   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Assets:

              

Financial assets for which carrying values equal or approximate fair value

              

Cash and cash equivalents(a)

   $ 23       $ 23       $ 22       $ 1       $   

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(c)

     59         60                         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(c)

   $ 48       $ 49       $       $ 49       $   

 

 

 

  (a) Level 2 amounts reflect time deposits and short-term investments.

 

  (b) Includes Card Member receivables (including fair values of Card Member receivables of $5.5 billion and $6.7 billion held by a consolidated VIE as of September 30, 2016 and December 31, 2015, respectively), Other receivables, restricted cash and other miscellaneous assets.

 

  (c) Balances include amounts held by a consolidated VIE for which the fair values of Card Member loans were $24.7 billion and $23.5 billion as of September 30, 2016 and December 31, 2015, respectively, and the fair values of long-term debt were $14.8 billion and $13.6 billion as of September 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.

 

  25  


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Nonrecurring Fair Value Measurements

The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the nine months ended September 30, 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 September 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

   $ 42       $ 42       $ 41       $ 49   

Other(c)

     6         6         49         37   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             48       $             48       $             90       $             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 the 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.

 

  26  


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Changes In Accumulated Other Comprehensive Income

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

 

 

 

Three Months Ended September 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 June 30, 2016

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

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized losses

    (14                   (14

Decrease due to amounts reclassified into earnings

    (1                   (1

Net translation gain of investments in foreign operations

           29               29   

Net losses related to hedges of investments in foreign operations

           (18            (18

Pension and other postretirement benefit gains

                  7        7   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (15     11        7        3   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016

  $ 50      $ (2,159   $ (509   $ (2,618

 

 
            

 

 

Nine Months Ended September 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 losses

    (5                   (5

Decrease due to amounts reclassified into earnings

    (3                   (3

Net translation loss of investments in foreign operations

           (140            (140

Net gains related to hedges of investments in foreign operations

           25               25   

Pension and other postretirement benefit gains

                  39        39   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (8     (115     39        (84

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016

  $ 50      $ (2,159   $ (509   $ (2,618

 

 

 

  27  


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Three Months Ended September 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 June 30, 2015

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

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized losses

    (6                   (6

Decrease due to amounts reclassified into earnings

    (1                   (1

Net translation loss of investments in foreign operations

           (604            (604

Net gains related to hedges of investments in foreign operations

           384               384   

Pension and other postretirement benefit gains

                  7        7   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (7     (220     7        (220

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2015

  $ 69      $ (1,963   $ (480   $ (2,374

 

 
            

 

 

Nine Months Ended September 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 losses

    (26                   (26

Decrease due to amounts reclassified into earnings

    (1     (1            (2

Net translation loss of investments in foreign operations

           (1,009            (1,009

Net gains related to hedges of investments in foreign operations

           546               546   

Pension and other postretirement benefit gains

                  36        36   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in accumulated other comprehensive loss

    (27     (464     36        (455

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2015

  $ 69      $ (1,963   $ (480   $ (2,374

 

 

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
September 30,
     Nine Months Ended
September 30,
 
          Amount      Amount  

Description (Millions)

   Income Statement Line Item      2016         2015         2016        2015   

 

  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities

             

Reclassifications for previously unrealized net gains on investment securities

   Other non-interest revenues    $ 1       $ 1       $ 5      $ 1   

Related income tax expense

   Income tax provision              —                 —         (2             —   

 

  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

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

        1         1         3        1   

Foreign currency translation adjustments

             

Reclassification of realized losses on translation adjustments and related net investments hedges

   Other expenses                             1   

Related income tax benefit

   Income tax provision                               

 

  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Reclassification to net income related to foreign currency translation adjustments

                               1   

 

  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1       $ 1       $ 3      $ 2   

 

 

 

  28  


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
September 30,
     Nine Months Ended
September 30,
 
  

 

 

    

 

 

 
(Millions)    2016      2015      2016     2015  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Foreign currency conversion fee revenue

   $ 207       $ 213       $ 610      $ 646   

Delinquency fees

     183         197         575        586   

Loyalty coalition-related fees

     106         100         304        279   

Travel commissions and fees

     89         87         256        271   

Service fees

     71         97         228        279   

Other(a)

     38         33         103        101   

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other fees and commissions

   $ 694       $ 727       $ 2,076      $ 2,162   

 

 

 

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

 

The following is a detail of Other revenues:

 

       

  

 

 
    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
  

 

 

    

 

 

 
(Millions)    2016      2015      2016     2015  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Global Network Services partner revenues

   $ 156       $ 156       $ 498      $ 474   

Gross realized gains on sale of investment securities

     1         1         5        1   

Other(a)

     326         347         1,011        1,018   

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other revenues

   $ 483       $ 504       $ 1,514      $ 1,493   

 

 

 

(a)    Other includes revenues arising from net revenue earned on cross-border Card Member spending, insurance premiums earned from Card Member travel and other insurance programs, merchant-related fees, 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
September 30,
     Nine Months Ended
September 30,
 
  

 

 

    

 

 

 
(Millions)    2016      2015      2016     2015  

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Professional services

   $ 630       $ 687       $ 1,862      $ 1,966   

Occupancy and equipment

     429         523         1,332        1,372   

Communications

     68         84         231        257   

Card and merchant-related fraud losses

     67         64         182        247   

Gain on sale of HFS portfolios(a)

                     (1,218       

Other(b)

     304         277         999        727   

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total Other expenses

   $ 1,498       $ 1,635       $ 3,388      $ 4,569   

 

 

 

  (a) Refer to Note 2 for additional information.
  (b) Other expense primarily includes general operating expenses, gains and losses on sales of assets or businesses not classified as discontinued operations, regulatory and litigation-related costs, certain Card Member reimbursements, insurance costs, certain loyalty coalition-related expenses, and foreign currency-related gains and losses (including the favorable impact from the reassessment of the functional currency of certain UK legal entities in the nine months ended September 30, 2015). In addition, the nine months ended September 30, 2016 includes a valuation allowance adjustment associated with loans and receivables HFS.

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Income Taxes

The effective tax rate was 34.2 percent and 34.7 percent for the three months ended September 30, 2016 and 2015, respectively, and 33.9 percent and 34.2 percent for the nine months ended September 30, 2016 and 2015, respectively. The changes in tax rates 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 $527 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 $527 million of unrecognized tax benefits, approximately $310 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
September 30,
    Nine Months Ended
September 30,
 
  

 

 

   

 

 

 
(Millions, except per share amounts)    2016     2015     2016     2015  

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator:

        

Basic and diluted:

        

Net income

   $ 1,142      $ 1,266      $ 4,583      $ 4,264   

Preferred dividends

     (21     (22     (61     (42

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

     1,121        1,244        4,522        4,222   

Earnings allocated to participating share awards(a)

     (9     (10     (37     (32

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

   $ 1,112      $ 1,234      $ 4,485      $ 4,190   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator: (a)

        

Basic: Weighted-average common stock

     920        994        940        1,007   

Add: Weighted-average stock options (b)

     3        3        3        4   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     923        997        943        1,011   

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS

   $ 1.21      $ 1.24      $ 4.77      $ 4.16   

Diluted EPS

   $ 1.20      $ 1.24      $ 4.76      $ 4.15   

 

 

 

  (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 3.2 million and 0.6 million of options for the three months ended September 30, 2016 and 2015, respectively, and 2.2 million and 0.5 million of options for the nine months ended September 30, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 September 30, 2016

(Millions, except where indicated)

   USCS      ICNS      GCS      GMS    

Corporate

& Other(a)

    Consolidated  

 

  

 

 

   

 

 

 

Non-interest revenues

   $ 1,849       $ 1,205       $ 2,240       $ 1,044      $ 102      $ 6,440   

Interest income

     1,178         231         282                73        1,764   

Interest expense

     125         55         98         (60     212        430   

Total revenues net of interest expense

     2,902         1,381         2,424         1,104        (37     7,774   

Net income (loss)

   $ 401       $ 155       $ 466       $ 359      $ (239   $ 1,142   

 

  

 

 

   

 

 

 

Total assets (billions)

   $ 79       $ 34       $ 47       $ 23      $ (30   $ 153   

 

  

 

 

   

 

 

 

Total equity (billions)

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

 

  

 

 

   

 

 

 
               

 

 

Nine Months Ended September 30, 2016

(Millions, except where indicated)

   USCS      ICNS      GCS      GMS     Corporate
& Other(a)
    Consolidated  

 

  

 

 

   

 

 

 

Non-interest revenues

   $       5,947       $       3,587       $       6,710       $       3,172      $ 318      $ 19,734   

Interest income

     3,847         692         913         1        201        5,654   

Interest expense

     404         167         297         (180     603        1,291   

Total revenues net of interest expense

     9,390         4,112         7,326         3,353        (84     24,097   

Net income (loss)

   $ 2,162       $ 571       $ 1,527       $ 1,089      $ (766   $ 4,583   

 

  

 

 

   

 

 

 

Total assets (billions)

   $ 79       $ 34       $ 47       $ 23      $ (30   $ 153   

 

  

 

 

   

 

 

 

Total equity (billions)

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

 

  

 

 

   

 

 

 
               

 

 

Three Months Ended September 30, 2015

(Millions, except where indicated)

   USCS      ICNS      GCS      GMS     Corporate
& Other(a)
    Consolidated  

 

  

 

 

   

 

 

 

Non-interest revenues

   $ 2,117       $ 1,141       $ 2,217       $ 1,123      $ 90      $ 6,688   

Interest income

     1,324         228         297                55        1,904   

Interest expense

     123         55         91         (46     176        399   

Total revenues net of interest expense

     3,318         1,314         2,423         1,169        (31     8,193   

Net income (loss)

   $ 542       $ 154       $ 468       $ 397      $ (295   $ 1,266   

 

  

 

 

   

 

 

 

Total assets (billions)

   $ 84       $ 35       $ 46       $ 23      $ (34   $ 154   

 

  

 

 

   

 

 

 

Total equity (billions)

   $ 7       $ 3       $ 7       $ 3      $ 1      $ 21   

 

  

 

 

   

 

 

 
               

 

 

Nine Months Ended September 30, 2015

(Millions, except where indicated)

   USCS      ICNS      GCS      GMS     Corporate
& Other(a)
    Consolidated  

 

  

 

 

   

 

 

 

Non-interest revenues

   $ 6,324       $ 3,449       $ 6,677       $ 3,323      $       279      $ 20,052   

Interest income

     3,849         710         864         1        174        5,598   

Interest expense

     358         176         271         (154     572        1,223   

Total revenues net of interest expense

     9,815         3,983         7,270         3,478        (119     24,427   

Net income (loss)

   $ 1,814       $ 544       $ 1,535       $ 1,135      $ (764   $ 4,264   

 

  

 

 

   

 

 

 

Total assets (billions)

   $ 84       $ 35       $ 46       $ 23      $ (34   $ 154   

 

  

 

 

   

 

 

 

Total equity (billions)

   $ 7       $ 3       $ 7       $ 3      $ 1      $ 21   

 

  

 

 

   

 

 

 

 

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

 

31


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

 

 

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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

During the third quarter we remained focused on our key initiatives to accelerate revenue growth, optimize our investments and reset our cost base. Our results reflected progress on our cost reduction efforts and steady credit performance, partially offset by a higher level of investment spending and a restructuring charge. Reported billed business, loans and revenues declined year-over-year primarily due to the end of our relationship with Costco Wholesale Corporation in the United States (Costco) and the sales of the Card Member loans and receivables related to our cobrand partnerships with Costco and JetBlue Airways Corporation (JetBlue) (collectively, the HFS portfolios). However, we saw underlying growth in billed business, loans and revenues on an adjusted basis, as described further below. In addition, our strong capital position allowed us to return capital to shareholders.

For the third quarter, worldwide billings adjusted for foreign currency exchange rates were down year-over-year, but were up after excluding Costco-related billings from the prior year. Billings in the quarter were also impacted by lower gas and airline ticket prices, which remained headwinds across our U.S. businesses. We continued to see differing trends between spending by large corporations, which declined year-over-year, and spending by middle market and small businesses, which grew versus the prior year after adjusting for the effects of Costco. International billings continued to be strong.

Revenues net of interest expense declined year-over-year on a reported basis, reflecting lower billed business and a decline in Card Member loans. After excluding Costco-related revenues from the prior year, adjusted revenues net of interest expense grew year-over-year resulting from an increase in adjusted billed business and growth in net card fees across our premium card portfolios. Net interest income also declined year-over-year on a reported basis, reflecting lower Card Member loans and higher funding costs related to our charge card portfolio, due to an increase in interest rates versus the prior year. Excluding Costco cobrand card-related activity from the prior year, adjusted net interest income grew year-over-year as a result of growth in adjusted Card Member loans.

 

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Card Member loans declined reflecting the sales of the HFS portfolios in the first half of the year. Adjusted Card Member loans grew year-over-year, after excluding from the prior year Card Member loans related to these portfolios. Provision expenses on a reported basis were also down year-over-year as the prior period included credit costs associated with the HFS portfolios. Provision expenses, adjusted for these credit costs, increased primarily as a result of growth in adjusted Card Member loans and seasoning of loans related to new Card Members. We expect that continued growth in adjusted loans and some modest upward pressure on our write-off rates, due primarily to this seasoning of loans related to new Card Members, will both contribute to an increase in provision expenses going forward.

Total expenses decreased versus the prior year, reflecting a decline in rewards expense, partially offset by an increase in investment spending on growth initiatives. The decrease in rewards expense was driven by the Costco cobrand expenses included in the prior year and the continued shift in volumes to cash rebate products, for which the rewards costs are classified as contra-discount revenue. After adjusting for the Costco cobrand, we expect rewards expense, including costs associated with cash rebate products, to grow faster than billings as we continue to enhance our card product value propositions over time. In addition, we expect that our investment spending on growth initiatives, including marketing and promotion, during the fourth quarter will be significantly higher than in the third quarter.

Competition remains intense across our businesses, particularly in the U.S. While our businesses are global and diversified, to remain competitive we need to continue to demonstrate the value we deliver to merchants, customers and business partners in all aspects of our relationships. More intense competition has and will continue to impact our cost of renewing and ability to win or extend cobrand and other relationships. Throughout our business, we are focused on those products, services and relationships that offer the best value to our customers while also providing appropriate returns to our business and shareholders.

See “Certain legislative, regulatory and other developments” in “Other Matters” for information on legislative and regulatory changes that could have a material adverse effect on our results of operations and financial condition.

 

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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 HFS portfolios to Card Member loans and receivables HFS on the Consolidated Balance Sheets. On March 18, 2016 and June 17, 2016, we completed the sales of the JetBlue and Costco cobrand card portfolios, 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. Additionally, for periods after the sale completion dates, activities associated with these cobrand partnerships and the HFS portfolios are no longer included in our Consolidated Results of Operations. Specifically, these impacts include: Discount revenue from Costco in the U.S. for spend on all American Express cards and from other merchants for spend on the Costco cobrand card; Other fees and commissions and Interest income from Costco cobrand Card Members; and Card Member rewards expense related to the Costco cobrand card.

Table 1: Summary of Financial Performance

 

 

 
     Three Months
Ended
September 30,
   

Change

    Nine Months Ended

 

September 30,

    Change  

(Millions, except percentages and per share amounts)

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

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues net of interest expense

   $       7,774      $     8,193      $ (419     (5 )%    $       24,097      $     24,427      $ (330     (1 )% 

Provisions for losses

     504        529        (25     (5     1,401        1,416        (15     (1

Expenses

     5,535        5,726        (191     (3     15,761        16,527        (766     (5

Net income

     1,142        1,266        (124     (10     4,583        4,264        319        7   

Earnings per common share - diluted(a)

   $ 1.20      $ 1.24      $ (0.04     (3 )%    $ 4.76      $ 4.15      $ 0.61        15

Return on average equity(b)

     26.1     26.8         26.1     26.8    

 

 

 

(a) Earnings per common share - diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $9 million and $10 million for the three months ended September 30, 2016 and 2015, respectively, and $37 million and $32 million for the nine months ended September 30, 2016 and 2015, respectively, and (ii) dividends on preferred shares of $21 million and $22 million for the three months ended September 30, 2016 and 2015, respectively, and $61 million and $42 million for the nine months ended September 30, 2016 and 2015, respectively.

 

(b) Return on average equity (ROE) is computed by dividing (i) one-year period net income ($5.5 billion and $5.7 billion for September 30, 2016 and 2015, respectively) by (ii) one-year average total shareholders’ equity ($21.0 billion and $21.4 billion for September 30, 2016 and 2015, respectively).

Table 2: Total Revenue Net of Interest Expense Summary

 

 

 
     Three Months Ended
September 30,
    

Change

    Nine Months Ended
September 30,
     Change  

(Millions, except percentages)

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

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Discount revenue

   $       4,516       $       4,778       $ (262     (5 )%    $       13,983       $     14,384       $ (401     (3 )% 

Net card fees

     747         679         68        10        2,161         2,013         148        7   

Other fees and commissions

     694         727         (33     (5     2,076         2,162         (86     (4

Other

     483         504         (21     (4     1,514         1,493         21        1   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total non-interest revenues

     6,440         6,688         (248     (4     19,734         20,052         (318     (2
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total interest income

     1,764         1,904         (140     (7     5,654         5,598         56        1   

Total interest expense

     430         399         31        8        1,291         1,223         68        6   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Net interest income

     1,334         1,505         (171     (11     4,363         4,375         (12       
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total revenues net of interest expense

   $ 7,774       $ 8,193       $ (419     (5 )%    $ 24,097       $ 24,427       $ (330     (1 )% 

 

 

 

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Total Revenues Net of Interest Expense

Discount revenue decreased $262 million or 5 percent and $401 million or 3 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by the Costco-related revenue included in the prior year, as previously mentioned, as well as increases in contra-discount revenues, including higher cash rebate rewards, partially offset by lower discount revenue share with GNS issuing partners.

Billed business decreased 3 percent and increased 1 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. U.S. billed business decreased 9 percent and 1 percent for the three and nine months ended September 30, 2016, respectively, primarily driven by Costco-related volumes in the prior year. Non-U.S. billed business increased 10 percent and 6 percent in the same respective periods.

The average discount rate was 2.47 percent and 2.45 percent for the three and nine months ended September 30, 2016, respectively, and 2.46 percent and 2.48 percent for the three and nine months ended September 30, 2015, respectively. The increase for the three-month period reflects the absence of Costco merchant volumes in the current year, which were at a lower discount rate than the average. The decrease for the nine-month period was driven primarily 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, partially offset by the benefit to the discount rate from the decline in Costco merchant volumes in the current period. We expect the average discount rate will likely decline over time due to further expansion of OptBlue, 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. See Tables 5, 6 and 7 for more details on billed business performance and the average discount rate.

Net card fees increased $68 million or 10 percent and $148 million or 7 percent for the three and nine months ended September 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 $33 million or 5 percent and $86 million or 4 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by Costco-related fees included in the prior year, partially offset by an increase in delinquency and loyalty coalition-related fees.

Other revenues decreased $21 million or 4 percent and increased $21 million or 1 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. Both periods reflect Costco-related revenues in the prior year and lower revenues related to the GBT JV transition services agreement in the current period, both of which were more than offset in the nine-month period by a contractual payment from a GNS partner in the second quarter of 2016 and higher revenues from our Prepaid Services business.

Interest income decreased $140 million or 7 percent and increased $56 million or 1 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. Both periods reflect Costco-related interest income in the prior year, which was more than offset in the nine-month period by modestly higher yields and an increase in average Card Member loans (including Card Member loans HFS).

Interest expense increased $31 million or 8 percent and $68 million or 6 percent for the three and nine months ended September 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.

 

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Table 3: Provisions for Losses Summary

 

 

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

 

 

        

 

 

      

(Millions, except percentages)

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

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Charge card

   $ 174       $ 203       $ (29     (14 )%    $ 496       $ 542       $ (46     (8 )% 

Card Member loans

     319         309         10        3        831         829         2          

Other

     11         17         (6     (35     74         45         29        64   

 

  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total provisions for losses(a)

   $     504       $ 529       $ (25     (5 )%    $     1,401       $ 1,416       $ (15     (1 )% 

 

 

 

(a) Beginning December 1, 2015 through to the sale completion dates, does not reflect the HFS portfolios.

Provisions for Losses

Charge card provision for losses decreased $29 million or 14 percent and $46 million or 8 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by lower net write-offs and improved delinquencies.

Card Member loans provision for losses increased $10 million or 3 percent and remained flat for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, as the current year periods do not reflect credit costs associated with the HFS portfolios, as previously mentioned, which was offset by strong momentum in our lending growth initiatives, resulting in higher loan balances and net write-offs.

Other provision for losses decreased $6 million and increased $29 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase in the nine-month period was primarily driven by higher net write-offs in the merchant financing loan portfolio as a result of historic growth, whereas the decrease in the three-month period was due to improving merchant financing loan credit performance.

Table 4: Expenses Summary

 

 

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

 

 

        

 

 

      

(Millions, except percentages)

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

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Marketing and promotion

   $ 930       $ 847       $ 83        10   $ 2,445       $ 2,217       $ 228        10

Card Member rewards

     1,566         1,763         (197     (11     5,035         5,202         (167     (3

Card Member services and other

     278         269         9        3        841         772         69        9   

 

  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

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

     2,774         2,879         (105     (4     8,321         8,191         130        2   

 

  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Salaries and employee benefits

     1,263         1,212         51        4        4,052         3,767         285        8   

Other, net(a)

     1,498         1,635         (137     (8     3,388         4,569         (1,181     (26

 

  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total expenses

   $ 5,535       $ 5,726       $ (191     (3 )%    $ 15,761       $ 16,527       $ (766     (5 )% 

 

 

 

(a) Beginning December 1, 2015 through to the sale completion dates, includes the valuation allowance adjustment associated with the HFS portfolios.

Expenses

Marketing and promotion expenses increased $83 million or 10 percent and $228 million or 10 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, driven by higher levels of spending on growth initiatives, predominantly within the USCS and ICNS segments.

Card Member rewards expenses decreased $197 million or 11 percent and $167 million or 3 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decreases were primarily driven by lower cobrand rewards expense of $236 million and $289 million, in the same respective periods, primarily reflecting Costco-related expenses in the prior year, as well as, in the current year, a shift in volumes to cash rebate products for which the rewards costs are classified as contra-discount revenue, partially offset in both periods by increased spending volumes across other cobrand card products. The lower cobrand rewards expense was partially offset by higher Membership Rewards expense of $38 million and $122 million, in the same respective periods, primarily driven by an increase in new points earned as a result of higher spending volumes and a lower benefit in the weighted average cost per point (WAC).

 

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

Card Member services and other expenses increased $9 million or 3 percent and $69 million or 9 percent for the three and nine months ended September 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 $51 million or 4 percent and $285 million or 8 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily driven by restructuring in the current year.

Other expenses decreased $137 million or 8 percent and $1.2 billion or 26 percent for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decreases in both periods reflected an impairment charge related to previously capitalized software development costs, partially offset by a litigation reserve release, both in the prior year, and lower technology-related costs in the current year. The decrease in the nine-month period also reflected the gains on the sales of the HFS portfolios, partially offset by the benefit in the prior year from both the reassessment of the functional currency of certain UK legal entities and other foreign exchange (FX) related activity.

Income Taxes

The effective tax rate was 34.2 percent and 33.9 percent for the three and nine months ended September 30, 2016, respectively, and 34.7 percent and 34.2 percent for the three and nine months ended September 30, 2015, respectively. The changes in tax rates primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business.

 

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Table 5: Selected Card-Related Statistical Information

 

 

 
    As of or for the        Change        As of or for the        Change   
    Three Months Ended        2016        Nine Months Ended        2016   
    September 30,        vs.        September 30,        vs.