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Section 1: 10-Q (FORM 10-Q OF AMERICAN EXPRESS COMPANY)

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 March 31, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
         Large accelerated filer
                         Accelerated filer
         Non-accelerated filer (Do not check if a smaller reporting company)
                         Smaller reporting company
                         Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
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 April 18, 2018
Common Shares (par value $0.20 per share)
   
860,362,205 Shares
 
 
 

 
AMERICAN EXPRESS COMPANY
FORM 10-Q

INDEX
 
 
 
 
             
Part I.
 
Page No.
 
Item 1.
     
       
1
       
2
       
3
       
4
       
5
 
Item 2.
   
30
 
Item 3.
   
57
 
Item 4.
   
57
Part II.
   
 
Item 1.
   
60
 
Item 1A.
   
60
 
Item 2.
   
61
 
Item 5.
   
62
 
Item 6.
   
62
 
63
 
E-1
 
 
 
 

 


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
Three Months Ended March 31 (Millions, except per share amounts)
 
2018
   
2017
 
Revenues
           
Non-interest revenues
           
Discount revenue
 
$
5,889
   
$
5,387
 
Net card fees
   
830
     
748
 
Other fees and commissions
   
781
     
711
 
Other
   
377
     
361
 
Total non-interest revenues
   
7,877
     
7,207
 
Interest income
               
Interest on loans
   
2,326
     
1,862
 
Interest and dividends on investment securities
   
21
     
23
 
Deposits with banks and other
   
115
     
60
 
Total interest income
   
2,462
     
1,945
 
Interest expense
               
Deposits
   
270
     
149
 
Long-term debt and other
   
351
     
294
 
Total interest expense
   
621
     
443
 
Net interest income
   
1,841
     
1,502
 
Total revenues net of interest expense
   
9,718
     
8,709
 
Provisions for losses
               
Charge card
   
242
     
213
 
Card Member loans
   
499
     
337
 
Other
   
34
     
23
 
Total provisions for losses
   
775
     
573
 
Total revenues net of interest expense after provisions for losses
   
8,943
     
8,136
 
Expenses
               
Marketing and business development
   
1,345
     
1,285
 
Card Member rewards
   
2,347
     
2,061
 
Card Member services
   
409
     
317
 
Salaries and employee benefits
   
1,326
     
1,264
 
Other, net
   
1,434
     
1,370
 
Total expenses
   
6,861
     
6,297
 
Pretax income
   
2,082
     
1,839
 
Income tax provision
   
448
     
588
 
Net income
 
$
1,634
   
$
1,251
 
Earnings per Common Share (Note 15):(a)
               
Basic
 
$
1.86
   
$
1.36
 
Diluted
 
$
1.86
   
$
1.35
 
Average common shares outstanding for earnings per common share:
               
Basic
   
859
     
899
 
Diluted
   
861
     
903
 
Cash dividends declared per common share
 
$
0.35
   
$
0.32
 
(a)
Represents net income less (i) earnings allocated to participating share awards of $13 million and $10 million for the three months ended March 31, 2018 and 2017, respectively, and (ii) dividends on preferred shares of $21 million for both the three months ended March 31, 2018 and 2017.

 


See Notes to Consolidated Financial Statements.
 
1

 


AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended March 31 (Millions)
 
2018
   
2017
 
Net income
 
$
1,634
   
$
1,251
 
Other comprehensive income (loss):
               
Net unrealized debt securities (losses) gains, net of tax
   
(11
)
   
6
 
Foreign currency translation adjustments, net of tax
   
30
     
316
 
Net unrealized pension and other postretirement benefits, net of tax
   
28
     
(8
)
Other comprehensive income
   
47
     
314
 
Comprehensive income
 
$
1,681
   
$
1,565
 
 
 
 
See Notes to Consolidated Financial Statements.
 
2

 
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
   
March 31,
   
December 31,
 
 (Millions, except share data)
 
2018
   
2017
 
Assets
           
Cash and cash equivalents
           
Cash and due from banks
 
$
3,627
   
$
5,148
 
Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2018, $49; 2017, $48)
   
27,315
     
27,709
 
Short-term investment securities
   
150
     
70
 
Total cash and cash equivalents
   
31,092
     
32,927
 
Accounts receivable
               
Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2018, $7,807; 2017, $8,919), less reserves: 2018, $565; 2017, $521
   
53,676
     
53,526
 
Other receivables, less reserves: 2018, $31; 2017, $31
   
3,194
     
3,209
 
Loans
               
Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2018, $24,058; 2017, $25,695), less reserves: 2018, $1,786; 2017, $1,706
   
71,034
     
71,693
 
Other loans, less reserves: 2018, $91; 2017, $80
   
2,872
     
2,607
 
Investment securities
   
3,388
     
3,159
 
Premises and equipment, less accumulated depreciation and amortization: 2018, $5,732; 2017, $5,455
   
4,271
     
4,329
 
Other assets (includes restricted cash of consolidated variable interest entities: 2018, $147; 2017, $62)
   
10,429
     
9,746
 
Total assets
 
$
179,956
   
$
181,196
 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Customer deposits
 
$
66,665
   
$
64,452
 
Travelers Cheques and other prepaid products
   
2,435
     
2,555
 
Accounts payable
   
14,038
     
14,657
 
Short-term borrowings
   
1,852
     
3,278
 
Long-term debt (includes debt issued by consolidated variable interest entities: 2018, $15,800; 2017, $18,560)
   
52,461
     
55,804
 
Other liabilities
   
22,892
     
22,189
 
Total liabilities
 
$
160,343
   
$
162,935
 
Contingencies (Note 8)
               
Shareholders’ Equity
               
Preferred shares, $1.662/3 par value, authorized 20 million shares; issued and outstanding 1,600 shares as of March 31, 2018 and December 31, 2017
   
     
 
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 860 million shares as of March 31, 2018 and 859 million shares as of December 31, 2017
   
172
     
172
 
Additional paid-in capital
   
12,225
     
12,210
 
Retained earnings
   
9,597
     
8,307
 
Accumulated other comprehensive loss
               
Net unrealized debt securities losses, net of tax of: 2018, $(2); 2017, $1
   
(11
)
   
 
Foreign currency translation adjustments, net of tax of: 2018, $(415); 2017,$(363)
   
(1,931
)
   
(1,961
)
Net unrealized pension and other postretirement benefits, net of tax of: 2018, $(176); 2017, $(179)
   
(439
)
   
(467
)
Total accumulated other comprehensive loss
   
(2,381
)
   
(2,428
)
Total shareholders’ equity
   
19,613
     
18,261
 
Total liabilities and shareholders’ equity
 
$
179,956
   
$
181,196
 
 
 
 
 
See Notes to Consolidated Financial Statements.
3

 
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended March 31 (Millions)
 
2018
   
2017
 
Cash Flows from Operating Activities
           
Net income
 
$
1,634
   
$
1,251
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provisions for losses
   
775
     
573
 
Depreciation and amortization
   
348
     
296
 
Deferred taxes and other
   
(254
)
   
18
 
Stock-based compensation
   
84
     
89
 
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
               
Other receivables
   
122
     
786
 
Other assets
   
(85
)
   
351
 
Accounts payable and other liabilities
   
(431
)
   
(2,072
)
Travelers Cheques and other prepaid products
   
(130
)
   
(132
)
Net cash provided by operating activities
   
2,063
     
1,160
 
Cash Flows from Investing Activities
               
Maturities and redemptions of investment securities
   
886
     
860
 
Purchases of investments
   
(1,215
)
   
(1,294
)
Net decrease in Card Member receivables and loans(a)
   
348
     
1,450
 
Purchase of premises and equipment, net of sales: 2018, nil; 2017, nil
   
(237
)
   
(277
)
Acquisitions/dispositions, net of cash acquired
   
(475
)
   
(28
)
Net cash (used in) provided by investing activities
   
(693
)
   
711
 
Cash Flows from Financing Activities
               
Net increase in customer deposits
   
2,206
     
735
 
Net decrease in short-term borrowings
   
(1,489
)
   
(1,941
)
Proceeds from long-term borrowings
   
3,984
     
8,420
 
Payments of long-term borrowings
   
(7,203
)
   
(3,801
)
Issuance of American Express common shares
   
11
     
31
 
Repurchase of American Express common shares
   
(134
)
   
(926
)
Dividends paid
   
(324
)
   
(313
)
Net cash (used in) provided by financing activities
   
(2,949
)
   
2,205
 
Effect of foreign currency exchange rates on cash and cash equivalents
   
(178
)
   
107
 
Net increase in cash, cash equivalents and restricted cash
   
(1,757
)
   
4,183
 
Cash, cash equivalents and restricted cash at beginning of period
   
33,264
     
25,494
 
Cash, cash equivalents and restricted cash at end of period
 
$
31,507
   
$
29,677
 
 
(a)  Refer to Note 2 for additional information.
 
 
Supplementary cash flow information
 
    Mar-18     Dec-17    
Mar-17
   
Dec-16
 
Cash and cash equivalents per Consolidated Balance Sheets
 
$
31,092
   
$
32,927
   
$
29,366
   
$
25,208
 
Restricted cash included in Other assets per Consolidated Balance Sheets
   
415
     
337
     
311
     
286
 
Total cash, cash equivalents and restricted cash
 
$
31,507
   
$
33,264
   
$
29,677
   
$
25,494
 
 
 
 
See Notes to Consolidated Financial Statements.
 
4

 
 
 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.  Basis of Presentation

The Company

American Express Company is a global services company that provides 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 the non-consolidated joint venture, American Express Global Business Travel (the GBT JV). 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 mobile and online applications, direct mail, in-house sales teams, third-party vendors and direct response advertising.

The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (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.

Discount Revenue

Discount revenue primarily represents the amount we earn on transactions occurring at merchants that have entered into a card acceptance agreement with us, or a Global Network Services (GNS) partner or other third-party merchant acquirer, for facilitating transactions between the merchants and Card Members. The amount of fees charged, or merchant discount, varies with, among other factors, the industry in which the merchant conducts business, the merchant’s overall transaction volume, the timing and method of payment to the merchant, the method of submission of transactions and, in certain instances, the geographic scope of the card acceptance agreement signed with us (e.g., local or global) and the transaction amount. The merchant discount is generally deducted from the payment to the merchant and recorded as discount revenue at the time the Card Member transaction occurs.
The card acceptance agreements, which outline the agreed-upon terms for charging the merchant discount fee, vary in duration. Our contracts with small- and medium-sized merchants generally have no fixed contractual duration, while those with large merchants are generally for fixed periods, which typically range from three to seven years in duration. Our fixed-period agreements may include auto-renewal features, which may allow the existing terms to continue beyond the stated expiration date until a new agreement is reached.  We satisfy our obligations under these agreements over the contract term, often on a daily basis, through the processing of Card Member transactions and the availability of our payment network.

In cases where we are the card issuer and the merchant acquirer is a third party (which is the case, for example, under our OptBlue program, or with certain of our GNS partners), we receive a network rate fee in our settlement with the merchant acquirer, which is individually negotiated between us and that merchant acquirer and is recorded as discount revenue at the time the Card Member transaction occurs. In our role as the operator of the American Express network, we also settle with merchants on behalf of our GNS card issuing partners, who in turn receive an issuer rate that is individually negotiated between that issuer and us and is recorded as expense in Marketing and business development (see below) or as contra-revenue in Other revenue. In contrast with networks such as those operated by Visa Inc. and Mastercard Incorporated, there are no collectively set interchange rates or network rates on the American Express network, and no fees are agreed or due between the GNS partners on the network.

 
 
5


 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
 
Net Card Fees

Net card fees represent revenue earned from annual card membership fees, which vary based on the type of card and the number of cards for each account. These fees, net of acquisition costs and a reserve for projected refunds for Card Member cancellations, are deferred and recognized on a straight-line basis over the twelve-month card membership period as Net Card Fees in the Consolidated Statements of Income. The unamortized net card fee balance is reported in Other Liabilities on the Consolidated Balance Sheets.

Other Fees and Commissions
Other fees and commissions includes certain fees charged to Card Members, including delinquency fees and foreign currency conversion fees, which are primarily recognized in the period in which they are charged to the Card Member. Other fees and commissions also includes Membership Rewards program fees, which are deferred and recognized over the period covered by the fee, typically one year, the unamortized portion of which is included in Other Liabilities on the Consolidated Balance Sheets. In addition, Other fees and commissions includes loyalty coalition-related fees, travel commissions and fees and service fees earned from merchants, that are recognized when the service is performed, which is generally in the period the fee is charged. Refer to Note 13 for additional information.
Contra-revenue
Payments made through contractual arrangements with our merchants, GNS partners, and other customers are classified as expense where we receive goods, services or other benefits, for which the fair value is determinable and measurable. If these conditions are not met, the payment is classified as contra-revenue with the related revenue transaction (e.g., Discount revenue or Other revenue) and recorded when incurred.

Interest Income

Interest on Card Member loans is assessed using the average daily balance method. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding, in accordance with the terms of the applicable account agreement, until the outstanding balance is paid, or written off.
Interest and dividends on investment securities primarily relate to our performing fixed-income securities. Interest income is recognized as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that a constant rate of return is recognized on the investment security’s outstanding balance. Amounts are recognized until securities are in default or when it becomes likely that future interest payments will not be made as scheduled.
Interest on deposits with banks and other is recognized as earned, and primarily relates to the placement of cash, in excess of near-term funding requirements, in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts.

Interest Expense

Interest expense includes interest incurred primarily to fund Card Member loans and receivables, general corporate purposes and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories: (i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) debt, which primarily relates to interest expense on our long-term debt and short-term borrowings, as well as the realized impact of derivatives used to hedge interest rate risk on our long-term debt.

 
 
6


AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
 
 
Marketing and Business Development

As further described below under “Recently Adopted Accounting Standards,” effective January 1, 2018, in conjunction with the adoption of the new revenue recognition standard, the previously disclosed “Marketing and Promotion” line on the Consolidated Statements of Income was changed to “Marketing and Business Development” to reflect the inclusion of certain reclassified costs from Contra-discount revenue and Other expenses. Marketing and business development provides a more comprehensive view of costs related to building and growing our business, including the reclassified costs.

Marketing and business development expense includes costs incurred in the development and initial placement of advertising, which are expensed in the year in which the advertising first takes place. Also included in Marketing and business development expense are Card Member statement credits for qualifying charges on eligible card accounts, corporate incentive payments earned on achievement of preset targets, and certain payments to GNS card issuing partners. These costs are generally expensed as incurred.

Card Member Rewards
We issue charge and credit cards that allow Card Members to participate in various rewards programs (e.g., Membership Rewards, cobrand and cash back). Rewards expense is recognized in the period Card Members earn rewards, generally by spending on their enrolled card products.  We record a Card Member rewards liability that represents the estimated cost of points earned that are expected to be redeemed. Card Member rewards liabilities are impacted over time by enrollment levels, attrition, the volume of points earned and redeemed, and the associated redemption costs. Changes in the Card Member rewards liabilities during the period are taken as a charge or release to the Card Member rewards line.
Effective January 1, 2018, in conjunction with the new revenue recognition standard, Card Member rewards also includes cash-back rewards, which were reclassified from contra discount revenue.
Classification of various items


Certain reclassifications of prior period amounts have been made to conform to the current period presentation, including the reclassification of certain business development expenses from Other expenses to Marketing and business development, that were not directly attributable to the adoption of the new revenue recognition guidance.


Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued new accounting guidance on leases. The guidance, effective January 1, 2019, with early adoption permitted, requires virtually all leases to be recognized on the Consolidated Balance Sheets. We will adopt the standard effective January 1, 2019.  The new guidance currently requires a modified retrospective transition approach, which would cause us to record existing operating leases on the Consolidated Balance Sheets upon adoption and in the comparative period. In January 2018, the FASB released an exposure draft that, if issued in its current form, would provide us with the option to adopt the provisions of the new guidance prospectively, without adjusting the comparative periods presented.  We are in the process of upgrading our lease administration software and changing business processes and internal controls in preparation for the adoption. Specifically, we are currently reviewing our lease portfolio and are evaluating and interpreting the requirements under the guidance, including the available accounting policy elections, in order to determine the impacts on our financial position, results of operations and cash flows upon adoption.
 
 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, 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. In addition, for available-for-sale debt securities, the new guidance replaces the other-than-temporary impairment model, and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security when a valuation decline is determined to be other-than-temporary. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. We do not intend to adopt the new standard early and are currently evaluating the impact the new guidance will have on our financial position, results of operations and cash flows; however, it is expected that the CECL model will alter the assumptions used in estimating credit losses on Card Member loans and receivables, and may result in material increases to our credit reserves as the new guidance involves earlier recognition of expected losses for the life of the assets.  We have established an enterprise-wide, cross-discipline governance structure to implement the new standard, and continue to identify and conclude on key interpretive issues along with evaluating our existing credit loss forecasting models and processes in relation to the new guidance to determine what modifications may be required.

In February 2018, as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act), the FASB issued new accounting guidance on the reclassification of certain tax effects from accumulated other comprehensive income (loss) (AOCI) to retained earnings. The optional guidance is effective January 1, 2019, with early adoption permitted. We are evaluating whether we will adopt the new guidance along with any impacts on our financial position, results of operations and cash flows, none of which are expected to be material.


Recently Adopted Accounting Standards

Effective January 1, 2018, we adopted new revenue recognition guidance issued by the FASB related to contracts with customers. The scope of the new guidance excludes financial instruments such as credit and charge card arrangements. We elected to adopt the standard using the full retrospective method, which we believe is most useful to our investors. Under the full retrospective method, we are applying the standard back to January 1, 2016. As shown below, the most significant impacts of adoption are changes to the classification of certain revenues and expenses, including certain credit and charge card related costs previously netted against discount revenue, such as Card Member cash-back reward costs and statement credits, corporate incentive payments, as well as payments to third-party GNS card issuing partners. Under the new revenue standard, these costs are not considered components of the transaction price of our card acceptance agreements with merchants and thus are not netted against discount revenue, but instead are recognized as expenses. Our payments to third-party GNS card issuing partners are presented net of related revenues earned from the partners.

The impact to the 2017 fiscal quarters and years ended December 31, 2017 and 2016 were as follows:

 
Increase (Decrease)
 
 
Three months ended
 
Year Ended December
 
 (Millions)
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
2017
 
2016
 
Revenues
                       
Discount revenue
 
$
981
   
$
930
   
$
928
   
$
868
   
$
3,707
   
$
3,699
 
Other
   
(78
)
   
(71
)
   
(64
)
   
(65
)
   
(278
)
   
(253
)
Expenses
                                               
Marketing and business development
   
617
     
591
     
593
     
549
     
2,350
     
2,420
 
    Card Member rewards
 
$
286
   
$
268
   
$
271
   
$
254
   
$
1,079
   
$
1,026
 

In addition, the cumulative impact to our retained earnings on January 1, 2016 was an increase of $55.2 million.


 
8

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
 
The adoption of the new guidance also resulted in changes to the recognition timing of certain revenues, the impact of which is not material to net income. Similarly, the adoption did not have a material impact on our Consolidated Balance Sheets or Statements of Cash Flows. We had no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017.  Contracts assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. In adopting the guidance, we implemented changes to our accounting policies, business processes, systems and internal controls to support the recognition, measurement and disclosure requirements under the new standard.  Such changes were not material.

In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities, which was effective and adopted by us as of January 1, 2018. The guidance makes targeted changes to GAAP; specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial assets and liabilities. This applies to investments we make in non-public companies in the ordinary course of business, which historically were recognized under the cost method of accounting. These investments will be prospectively adjusted through earnings for observable price changes upon the identification of identical or similar transactions of the same company. The adoption of the guidance did not have a material impact on our financial position, results of operations and cash flows. We implemented changes to our accounting policies, business processes and internal controls in support of the new guidance.  Such changes were not material.
In August 2017, the FASB issued new accounting guidance providing targeted improvements to the accounting for hedging activities, effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. Effective January 1, 2018, we adopted the guidance, with no material impact on our financial position, results of operations and cash flows, along with associated changes to our accounting policies, business processes and internal controls in support of the new guidance.  Such changes were not material.



 
9

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

 
 
2.  Business Events

During the first quarter of 2018, we acquired from Citibank, N.A. its existing Hilton Worldwide Holdings Inc. cobrand credit card loan portfolio (the acquired Hilton portfolio). The Hilton portfolio had an outstanding principal and interest balance of approximately $1 billion at acquisition. None of the credit card loans acquired were considered purchased credit impaired at acquisition date. The cash outflows related to this acquisition are reported within the investing section of the Consolidated Statements of Cash Flows as a net increase in Card Member receivables and loans.



 3.  Loans and Accounts Receivable

Our lending and charge payment card products result in the generation of Card Member loans and Card Member receivables, respectively.

Card Member loans by segment and Other loans as of March 31, 2018 and December 31, 2017 consisted of:

(Millions)
 
2018
   
2017
 
U.S. Consumer Services(a)
 
$
52,655
   
$
53,668
 
International Consumer and Network Services
   
8,667
     
8,651
 
Global Commercial Services
   
11,498
     
11,080
 
Card Member loans
   
72,820
     
73,399
 
Less: Reserve for losses
   
1,786
     
1,706
 
Card Member loans, net
 
$
71,034
   
$
71,693
 
Other loans, net(b)
 
$
2,872
   
$
2,607
 
(a)
Includes approximately $24.1 billion and $25.7 billion of gross Card Member loans available to settle obligations of a consolidated variable interest entity (VIE) as of March 31, 2018 and December 31, 2017, respectively. The balance as of March 31, 2018 also includes the acquired Hilton portfolio (refer to Note 2).
(b)
Other loans primarily represent personal and commercial financing products. Other loans are presented net of reserves for losses of $91 million and $80 million as of March 31, 2018 and December 31, 2017, respectively.

Card Member accounts receivable by segment and Other receivables as of March 31, 2018 and December 31, 2017 consisted of:

(Millions)
 
2018
   
2017
 
U.S. Consumer Services (a)
 
$
11,659
   
$
13,143
 
International Consumer and Network Services
   
7,071
     
7,803
 
Global Commercial Services
   
35,511
     
33,101
 
Card Member receivables
   
54,241
     
54,047
 
Less: Reserve for losses
   
565
     
521
 
Card Member receivables, net
 
$
53,676
   
$
53,526
 
Other receivables, net (b)
 
$
3,194
   
$
3,209
 
(a)
Includes $7.8 billion and $8.9 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of March 31, 2018 and December 31, 2017, respectively.
(b)
Other receivables primarily represent amounts related to (i) GNS partners for items such as royalty and franchise fees, (ii) tax-related receivables, (iii) certain merchants for billed discount revenue, and (iv) loyalty coalition partners for points issued, as well as program participation and servicing fees. Other receivables are presented net of reserves for losses of $31 million and $31 million as of March 31, 2018 and December 31, 2017, respectively.

 
 
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 March 31, 2018 and December 31, 2017:

2018  (Millions)
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Card Member Loans:
                   
  U.S. Consumer Services
 
$
51,922
   
$
201
   
$
156
   
$
376
   
$
52,655
 
  International Consumer and Network Services
   
8,524
     
46
     
31
     
66
     
8,667
 
  Global Commercial Services
                                       
      Global Small Business Services
   
11,278
     
45
     
33
     
71
     
11,427
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
     
1
     
71
 
Card Member Receivables:
                                       
  U.S. Consumer Services
   
11,510
     
48
     
35
     
66
     
11,659
 
  International Consumer and Network Services
   
6,967
     
33
     
22
     
49
     
7,071
 
  Global Commercial Services
                                       
      Global Small Business Services
 
$
15,931
   
$
93
   
$
68
   
$
126
   
$
16,218
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
   
$
163
   
$
19,293
 
                                         
2017  (Millions)
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Card Member Loans:
                                       
  U.S. Consumer Services
 
$
52,961
   
$
201
   
$
162
   
$
344
   
$
53,668
 
  International Consumer and Network Services
   
8,530
     
37
     
28
     
56
     
8,651
 
  Global Commercial Services
                                       
      Global Small Business Services
   
10,892
     
43
     
31
     
59
     
11,025
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
     
     
55
 
Card Member Receivables:
                                       
  U.S. Consumer Services
   
12,993
     
53
     
33
     
64
     
13,143
 
  International Consumer and Network Services
   
7,703
     
29
     
21
     
50
     
7,803
 
  Global Commercial Services
                                       
      Global Small Business Services
 
$
15,868
   
$
91
   
$
54
   
$
106
   
$
16,119
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
   
$
148
   
$
16,982
 
(a)
For Global Corporate Payments (GCP) Card Member loans and receivables in Global Commercial Services (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 we initiate 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. See also (b).
(b)
Delinquency data for periods other than 90 days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.

 
 
11

 
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 three months ended March 31:
   
2018
   
2017
 
   
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
   
2.0
%
   
2.4
%
   
1.4
%
   
1.7
%
   
2.0
%
   
1.2
%
International Consumer and Network Services
   
2.1
%
   
2.6
%
   
1.6
%
   
2.0
%
   
2.5
%
   
1.7
%
Global Small Business Services
   
1.6
%
   
1.9
%
   
1.3
%
   
1.6
%
   
1.8
%
   
1.2
%
Card Member Receivables:
                                               
U.S. Consumer Services
   
1.3
%
   
1.5
%
   
1.3
%
   
1.5
%
   
1.7
%
   
1.3
%
International Consumer and Network Services
   
2.0
%
   
2.2
%
   
1.5
%
   
2.1
%
   
2.3
%
   
1.5
%
Global Small Business Services
   
1.7
%
   
1.9
%
   
1.8
%
   
1.8
%
   
2.0
%
   
1.6
%
 
  2018   2017  
        
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
   
0.10
%
   
0.8
%
   
0.11
%
   
0.7
%
(a)
We present a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because we consider 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 we 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 our various Troubled Debt Restructuring (TDR) modification programs.

 
 
12

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
The following tables provide additional information with respect to our impaired Card Member loans and receivables. Impaired Card Member receivables are not significant for International Consumer and Network Services (ICNS) as of March 31, 2018 and December 31, 2017; therefore, this segment’s receivables are not included in the following tables.

 
As of March 31, 2018
 
                             
         
Accounts Classified as a TDR(c)
             
2018 (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
 
$
254
   
$
182
   
$
209
   
$
125
   
$
770
   
$
691
   
$
52
 
International Consumer and Network Services
   
66
     
     
     
     
66
     
65
     
 
Global Commercial Services
   
46
     
35
     
38
     
25
     
144
     
134
     
8
 
Card Member Receivables:
                                                       
U.S. Consumer Services
   
     
     
19
     
10
     
29
     
29
     
1
 
Global Commercial Services
   
     
     
48
     
21
     
69
     
69
     
3
 
Total
 
$
366
   
$
217
   
$
314
   
$
181
   
$
1,078
   
$
988
   
$
64
 

 
As of December 31, 2017
 
                             
         
Accounts Classified as a TDR(c)
             
2017 (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
 
$
233
   
$
168
   
$
178
   
$
131
   
$
710
   
$
639
   
$
49
 
International Consumer and Network Services
   
56
     
     
     
     
56
     
55
     
 
Global Commercial Services
   
38
     
31
     
31
     
27
     
127
     
118
     
8
 
Card Member Receivables:
                                                       
U.S. Consumer Services
   
     
     
15
     
9
     
24
     
24
     
1
 
Global Commercial Services
   
     
     
37
     
19
     
56
     
56
     
2
 
Total
 
$
327
   
$
199
   
$
261
   
$
186
   
$
973
   
$
892
   
$
60
 
(a)
Our policy is generally to accrue interest through the date of write-off (typically 180 days past due). We establish reserves for interest that we believe 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 we have ceased accruing interest. Amounts presented exclude Card Member loans classified as a TDR.
(c)
Accounts classified as a TDR include $15 million and $15 million that are over 90 days past due and accruing interest and $4 million and $5 million that are non-accruals as of March 31, 2018 and December 31, 2017, respectively.
(d)
In Program TDRs include Card Member accounts that are currently enrolled in a modification program.
(e)
Out of Program TDRs include $137 million and $141 million of Card Member accounts that have successfully completed a modification program and $44 million and $45 million of Card Member accounts that were not in compliance with the terms of the modification programs as of March 31, 2018 and December 31, 2017, respectively.

 
 
 
13

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

 
The following table provides information with respect to our average balances and interest income recognized from impaired Card Member loans and the average balances of impaired Card Member receivables for the three months ended March 31:
 
2018
 
2017
 
                 
     
Interest
     
Interest
 
 
Average
 
Income
 
Average
 
Income
 
(Millions)
Balance
 
Recognized
 
Balance
 
Recognized
 
Card Member Loans:
               
U.S. Consumer Services
 
$
740
   
$
21
   
$
616
   
$
16
 
International Consumer and Network Services
   
61
     
5
     
53
     
4
 
Global Commercial Services
   
136
     
5
     
116
     
4
 
Card Member Receivables:
                               
U.S. Consumer Services
   
27
     
     
18
     
 
Global Commercial Services
   
63
     
     
40
     
 
Total
 
$
1,027
   
$
31
   
$
843
   
$
24
 

Card Member Loans and Receivables Modified as TDRs


The following table provides additional information with respect to the U.S. Consumer Services (USCS) and GCS Card Member loans and receivables modified as TDRs for the three months ended March 31, 2018 and 2017. 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
March 31, 2018
 
   
Number of
 
Outstanding
 
Average Interest
   
Average Payment
 
   
Accounts
 
Balances(a)
 
Rate Reduction
   
Term Extensions
 
   
(in thousands)
 
($ in millions)
 
(% Points)
   
(# of Months)
 
Troubled Debt Restructurings:
                     
Card Member Loans
   
11
   
$
81
     
11
   
(b)
 
Card Member Receivables
   
1
     
29
   
(c)
     
28
 
Total
   
12
   
$
110
                 
 
                         
   
Three Months Ended
March 31, 2017
 
   
Number of
 
Outstanding
 
Average Interest
   
Average Payment
 
   
Accounts
 
Balances(a)
 
Rate Reduction
   
Term Extensions
 
   
(in thousands)
 
($ in millions)
 
(% Points)
   
(# of Months)
 
Troubled Debt Restructurings:
                       
Card Member Loans
   
8
   
$
57
     
13
   
(b)
 
Card Member Receivables
   
2
     
28
   
(c)
     
22
 
Total     10     $ 85                  
 
(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)
We do not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing.

 
 
 
14

 
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, for the three months ended March 31, 2018 and 2017. A Card Member is considered in default of a modification program after one and up to two 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.
 
2018
 
2017
 
 
Number of
Accounts
 
Aggregated
Outstanding
Balances
Upon Default(a)
 
Number of
Accounts
 
Aggregated
Outstanding
Balances
Upon Default(a)
 
 
(thousands)
 
(millions)
 
(thousands)
 
(millions)
 
Troubled Debt Restructurings That
               
Subsequently Defaulted:
               
Card Member Loans
   
2
   
$
9
     
2
   
$
11
 
    Card Member Receivables
   
1
     
2
     
1
     
1
 
Total
   
3
   
$
11
     
3
   
$
12
 
(a)
The outstanding balances upon default include principal, fees and accrued interest on Card Member loans, and principal and fees on Card Member receivables.



15

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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 our outstanding portfolio of loans and receivables as of the balance sheet date. Management’s evaluation process requires certain estimates and judgments.

Changes in Card Member Loans Reserve for Losses

The following table presents changes in the Card Member loans reserve for losses for the three months ended March 31:

(Millions)
 
2018
   
2017
 
Balance, January 1
 
$
1,706
   
$
1,223
 
Provisions(a)
   
499
     
337
 
Net write-offs(b)
               
Principal
   
(358
)
   
(272
)
Interest and fees
   
(71
)
   
(51
)
Other(c)
   
10
     
11
 
Balance, March 31
 
$
1,786
   
$
1,248
 
(a)
Provisions for principal, interest and fee reserve components.
(b)
Principal write-offs are presented less recoveries of $106 million and $100 million, and include net write-offs from TDRs of $7 million and $12 million, for the three months ended March 31, 2018 and 2017, respectively. Recoveries of interest and fees were not significant.
(c)
Includes foreign currency translation adjustments of $6 million and $7 million and other adjustments of $4 million and $4 million for the three months ended March 31, 2018 and 2017, respectively.

Card Member Loans Evaluated Individually and Collectively for Impairment
The following table presents Card Member loans evaluated individually and collectively for impairment and related reserves as of March 31, 2018 and December 31, 2017:
(Millions)
 
2018
   
2017
 
Card Member loans evaluated individually for impairment(a)
 
$
397
   
$
367
 
Related reserves (a)
 
$
60
   
$
57
 
Card Member loans evaluated collectively for impairment(b)
 
$
72,423
   
$
73,032
 
Related reserves (b)
 
$
1,726
   
$
1,649
 
(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 three months ended March 31:

(Millions)
 
2018
   
2017
 
Balance, January 1
 
$
521
   
$
467
 
Provisions(a)
   
242
     
213
 
Net write-offs(b)
   
(199
)
   
(194
)
Other(c)
   
1
     
5
 
Balance, March 31
 
$
565
   
$
491
 
(a)
Provisions for principal and fee reserve components.
(b)
Principal and fee write-offs are presented less recoveries of $88 million and $93 million, including net write-offs (recoveries) from TDRs of $(2) million and $6 million, for the three months ended March 31, 2018 and 2017, respectively.
(c)
Includes foreign currency translation adjustments of $10 million and $9 million and other adjustments of $(9) million and $(4) million for the three months ended March 31, 2018 and 2017, respectively.

 
 
16

 
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 March 31, 2018 and December 31, 2017:
(Millions)
 
2018
   
2017
 
Card Member receivables evaluated individually for impairment(a)
 
$
98
   
$
80
 
Related reserves (a)
 
$
4
   
$
3
 
Card Member receivables evaluated collectively for impairment
 
$
54,143
   
$
53,967
 
Related reserves (b)
 
$
561
   
$
518
 
(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 available-for-sale debt securities carried at fair value on the Consolidated Balance Sheets, with unrealized gains and losses recorded in AOCI, net of income taxes. Realized gains and losses are recognized upon disposition of the securities using the specific identification method.
Investment securities also include equity securities carried at fair value on the Consolidated Balance Sheets. Effective January 1, 2018, unrealized gains and losses are recorded in the Consolidated Statements of Income; prior to January 1, 2018, unrealized gains and losses were recorded in AOCI, net of income taxes.

The following is a summary of investment securities as of March 31, 2018 and December 31, 2017:

 
2018
 
2017
 
     
Gross
 
Gross
 
Estimated
     
Gross
 
Gross
 
Estimated
 
     
Unrealized
 
Unrealized
 
Fair
     
Unrealized
 
Unrealized
 
Fair
 
Description of Securities (Millions)
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
Available-for-sale debt securities:
                               
State and municipal obligations
 
$
1,122
   
$
8
   
$
(5
)
 
$
1,125
   
$
1,369
   
$
11
   
$
(3
)
 
$
1,377
 
U.S. Government agency obligations
   
10
     
     
     
10
     
11
     
     
     
11
 
U.S. Government treasury obligations
   
1,678
     
4
     
(21
)
   
1,661
     
1,051
     
3
     
(9
)
   
1,045
 
Corporate debt securities
   
29
     
     
     
29
     
28
     
     
     
28
 
Mortgage-backed securities (a)
   
63
     
2
     
(1
)
   
64
     
67
     
2
     
     
69
 
Foreign government bonds and obligations
   
451
     
     
     
451
     
581
     
     
     
581
 
Equity securities (b)
   
51
     
     
(3
)
   
48
     
51
     
     
(3
)
   
48
 
Total
 
$
3,404
   
$
14
   
$
(30
)
 
$
3,388
   
$
3,158
   
$
16
   
$
(15
)
 
$
3,159
 
(a)
Represents mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
(b)
Equity securities comprise investments in common stock and mutual funds.


 
17

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
The following table provides information about our available-for-sale debt securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 and December 31, 2017:
 
2018
 
2017
 
 
Less than 12 months
 
12 months or more
 
Less than 12 months
 
12 months or more
 
     
Gross
     
Gross
     
Gross
     
Gross
 
Description of Securities (Millions)
Estimated Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
State and municipal obligations
 
$
144
   
$
(4
)
 
$
   
$
   
$
157
   
$
(3
)
 
$
   
$
 
U.S. Government treasury obligations
   
811
     
(14
)
   
173
     
(7
)
   
650
     
(3
)
   
175
     
(6
)
Equity securities(a)
   
     
N/A
     
     
N/A
     
     
     
36
     
(2
)
Total
 
$
955
   
$
(18
)
 
$
173
   
$
(7
)
 
$
807
   
$
(6
)
 
$
211
   
$
(8
)

(a)
Effective January 1, 2018, unrealized gains and losses on equity securities are recorded in the Consolidated Statements of Income and are no longer assessed for other-than-temporary impairment.


The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of March 31, 2018 and December 31, 2017:

 
Less than 12 months
 
12 months or more
 
Total
 
Ratio of Fair Value to
       
Gross
         
Gross
         
Gross
 
Amortized Cost
Number of
 
Estimated
 
Unrealized
 
Number of
 
Estimated
 
Unrealized
 
Number of
 
Estimated
 
Unrealized
 
(Dollars in millions)
Securities
 
Fair Value
 
Losses
 
Securities
 
Fair Value
 
Losses
 
Securities
 
Fair Value
 
Losses
 
2018:
                                   
90%–100%
   
30
   
$
955
   
$
(18
)
   
5
   
$
173
   
$
(7
)
   
35
   
$
1,128
   
$
(25
)
Total as of March 31, 2018
   
30
   
$
955
   
$
(18
)
   
5
   
$
173
   
$
(7
)
   
35
   
$
1,128
   
$
(25
)
                                                                         
2017:
                                                                       
90%–100%
   
34
   
$
807
   
$
(6
)
   
13
   
$
211
   
$
(8
)
   
47
   
$
1,018
   
$
(14
)
Total as of December 31, 2017
   
34
   
$
807
   
$
(6
)
   
13
   
$
211
   
$
(8
)
   
47
   
$
1,018
   
$
(14
)

The gross unrealized losses for available-for-sale debt securities are attributed to wider credit spreads for specific issuers, adverse changes in benchmark interest rates, or a combination thereof, all compared to those prevailing when the investment securities were purchased.

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

Contractual maturities for investment securities with stated maturities as of March 31, 2018 were as follows:

         
Estimated
 
(Millions)
 
Cost
   
Fair Value
 
Due within 1 year
 
$
465
   
$
465
 
Due after 1 year but within 5 years
   
1,653
     
1,639
 
Due after 5 years but within 10 years
   
218
     
214
 
Due after 10 years
   
1,017
     
1,022
 
Total
 
$
3,353
   
$
3,340
 

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

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

 
6.  Asset Securitizations

We periodically securitize Card Member loans and receivables arising from our card businesses through the transfer of those assets to securitization trusts, American Express Credit Account Master Trust (the Lending Trust) and American Express Issuance Trust II (the Charge Trust and together with the Lending Trust, the Trusts). The Trusts then issue debt securities collateralized by the transferred assets to third-party investors.

We perform the servicing and key decision making for the Trusts, and therefore have the power to direct the activities that most significantly impact the Trusts’ economic performance, which are the collection of the underlying Card Member loans and receivables. In addition, we hold all of the variable interests in both Trusts, with the exception of the debt securities issued to third-party investors. As of March 31, 2018, our ownership of variable interests was $9.2 billion for the Lending Trust and $7.1 billion for the Charge Trust. These variable interests held by us provide us 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, we are the primary beneficiary of both Trusts and therefore consolidate both Trusts.

The following table provides information on the restricted cash held by the Lending Trust and the Charge Trust as of March 31, 2018 and December 31, 2017, included in Other assets on the Consolidated Balance Sheets:

(Millions)
 
2018
   
2017
 
Lending Trust
 
$
145
   
$
55
 
Charge Trust
   
2
     
7
 
Total
 
$
147
   
$
62
 


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.

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 three months ended March 31, 2018 and the year ended December 31, 2017, no such triggering events occurred.

 
19

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
 
7.  Customer Deposits

As of March 31, 2018 and December 31, 2017, customer deposits were categorized as interest bearing or non-interest bearing as follows:

(Millions)
 
2018
   
2017
 
U.S.:
           
Interest bearing
 
$
65,913
   
$
63,666
 
Non-interest bearing (includes Card Member credit balances of: 2018, $319 million; 2017, $358 million)
   
353
     
395
 
Non-U.S.:
               
Interest bearing
   
42
     
34
 
Non-interest bearing (includes Card Member credit balances of: 2018, $344 million; 2017, $344 million)
   
357
     
357
 
Total customer deposits
 
$
66,665
   
$
64,452
 

Customer deposits by deposit type as of March 31, 2018 and December 31, 2017 were as follows:

(Millions)
 
2018
   
2017
 
U.S. retail deposits:
           
Savings accounts – Direct
 
$
34,544
   
$
31,915
 
Certificates of deposit:(a)
               
Direct
   
325
     
290
 
Third-party (brokered)
   
16,453
     
16,684
 
Sweep accounts – Third-party (brokered)
   
14,591
     
14,777
 
Other deposits:
               
U.S. non-interest bearing deposits
   
34
     
37
 
Non-U.S. deposits
   
55
     
47
 
Card Member credit balances ― U.S. and non-U.S.
   
663
     
702
 
Total customer deposits
 
$
66,665
   
$
64,452
 
(a)
The weighted average remaining maturity and weighted average interest rate at issuance on the total portfolio of U.S. retail certificates of deposit issued through direct and third-party programs were 39 months and 2.16 percent, respectively, as of March 31, 2018.
The scheduled maturities of certificates of deposit as of March 31, 2018 were as follows:
(Millions)
 
U.S.
   
Non-U.S.
   
Total
 
2018
 
$
4,984
   
$
16
   
$
5,000
 
2019
   
4,610
     
11
     
4,621
 
2020
   
3,693
     
     
3,693
 
2021
   
1,317
     
     
1,317
 
2022
   
2,149
     
     
2,149
 
After 5 years
   
25
     
     
25
 
Total
 
$
16,778
   
$
27
   
$
16,805
 

As of March 31, 2018 and December 31, 2017, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:

(Millions)
 
2018
   
2017
 
U.S.
 
$
126
   
$
114
 
Non-U.S.
   
17
     
11
 
Total
 
$
143
   
$
125
 

 
 
20

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
8.  Contingencies

In the ordinary course of business, we and our subsidiaries are subject to various pending and potential legal actions, arbitration proceedings, claims, investigations, examinations, information gathering requests, subpoenas, inquiries and matters relating to compliance with laws and regulations (collectively, legal proceedings). We disclose our 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.


In addition to the matters disclosed under “Legal Proceedings,” we are being challenged in a number of countries regarding our application of value-added taxes (VAT) to certain of our international transactions, which are in various stages of audit, or are being contested in legal actions (collectively, VAT matters). While we believe we have complied with all applicable tax laws, rules and regulations in the relevant jurisdictions, the tax authorities may determine that we owe additional VAT. In certain jurisdictions where we are contesting the assessments, we were required to pay the VAT assessments prior to contesting.

Our 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 and a variety of claims (including, but not limited to, common law tort, contract, application of tax laws, antitrust and consumer protection claims), some of which present novel factual allegations and/or unique legal theories. While some matters pending against us 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 us 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 us to estimate an amount of loss or a range of possible loss, while other matters have progressed sufficiently such that we are able to estimate an amount of loss or a range of possible loss.

We have recorded reserves for certain of our 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. We evaluate, 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 and VAT matters where a loss is reasonably possible in future periods, whether in excess of a related reserve for legal or tax contingencies or where there is no such reserve, and for which we are able to estimate a range of possible loss, the current estimated range is zero to $420 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 our maximum loss exposure; actual results may vary significantly. As such legal proceedings evolve, we may need to increase our range of possible loss or reserves.

Based on our current knowledge, and taking into consideration our litigation-related liabilities, we believe we are not a party to, nor are any of our properties the subject of, any legal proceeding that would have a material adverse effect on our 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 our results of operations.

 
21

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

 
9.   Derivatives and Hedging Activities

We use 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 our market risk management. We do not transact in derivatives for trading purposes.

In relation to our credit risk, under the terms of the derivative agreements we have with our various counterparties, we are 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 our assessment of the credit risk of our derivative counterparties as of March 31, 2018 and December 31, 2017, no credit risk adjustment to the derivative portfolio was required.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of March 31, 2018 and December 31, 2017:

   
Other Assets Fair Value
   
Other Liabilities Fair Value
 
(Millions)
 
2018
   
2017
   
2018
   
2017
 
Derivatives designated as hedging instruments:
                       
Fair value hedges - Interest rate contracts(a)
 
$
3
   
$
11
   
$
95
   
$
34
 
Net investment hedges - Foreign exchange contracts
   
71
     
117
     
167
     
89
 
Total derivatives designated as hedging instruments
   
74
     
128
     
262
     
123
 
Derivatives not designated as hedging instruments:
                               
Foreign exchange contracts, including certain embedded derivatives(b)
   
77
     
82
     
117
     
95
 
Total derivatives, gross
   
151
     
210
     
379
     
218
 
Less: Cash collateral netting(c)(d)
   
     
(6
)
   
(94
)
   
(45
)
Derivative asset and derivative liability netting(e)
   
(85
)
   
(80
)
   
(85
)
   
(80
)
Total derivatives, net
 
$
66
   
$
124
   
$
200
   
$
93
 
(a)
For centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral. Accordingly, the amounts disclosed for centrally cleared derivatives are based on gross assets and gross liabilities, net of variation margin. We also maintained several bilateral interest rate contracts that are shown gross of any collateral exchanged.
(b)
Includes foreign currency derivatives embedded in certain operating agreements.
(c)
Represents the offsetting of the fair value of bilateral interest rate contracts and certain foreign exchange contracts with the right to reclaim cash collateral or the obligation to return cash collateral.
(d)
We posted $125 million and $146 million as of March 31, 2018 and December 31, 2017, respectively, as initial margin on our 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.
(e)
Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
A majority of our derivative assets and liabilities as of March 31, 2018 and December 31, 2017 are subject to master netting agreements with our derivative counterparties. We have no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.
Fair Value Hedges
We are exposed to interest rate risk associated with our fixed-rate long-term debt obligations. At the time of issuance, certain fixed-rate debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. We have $23.4 billion and $23.8 billion of fixed-rate debt obligations designated in fair value hedging relationships as of March 31, 2018 and December 31, 2017, respectively.
 
The following table represents the total amounts of income and expense line items associated with the fair value hedges of our fixed-rate long-term debt on the Consolidated Statements of Income for the three months ended March 31:

 
Gains (losses)
 
(Millions)
2018
 
2017
 
 
Interest expense(a)
 
Other expenses
 
Hedged items
 
$
210
   
$
50
 
Derivatives designated as hedging instruments
   
(191
)
   
(75
)
Total
 
$
19
   
$
(25
)
(a)
We adopted new accounting guidance providing targeted improvements to the accounting for hedging activities effective January 1, 2018. In compliance with the standard, amounts previously recorded in Other expenses have been prospectively recorded in Total interest expense. Refer to Note 1 for additional information.
 
 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $22.9 billion and $23.6 billion as of March 31, 2018 and December 31, 2017, respectively, including offsetting amounts of $392 million and $182 million for the respective periods, related to the cumulative amount of fair value hedging adjustments.
We recognized a net reduction in interest expense on long-term debt of $14 million and $44 million for the three months ended March 31, 2018 and 2017, respectively, primarily related to the net settlements (interest accruals) on our interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The losses on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, were $162 million and $229 million for the three months ended March 31, 2018 and 2017, respectively. Accumulated gains within AOCI of $1 million and nil for the three months ended March 31, 2018 and 2017, respectively, were reclassified in