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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 September 30, 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 every Interactive Data File required to be submitted 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 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 
                         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 October 15, 2018
Common Shares (par value $0.20 per share)
   
854,261,803  Shares
 
 
 
 
 
 

 
AMERICAN EXPRESS COMPANY
FORM 10-Q

INDEX
 
 
 
Part I.
 
Page No.
 
Item 1.
     
       
1
       
2
       
3
       
4
       
5
       
6
 
Item 2.
   
34
 
Item 3.
   
61
 
Item 4.
   
61
Part II.
   
 
Item 1.
   
64
 
Item 1A.
   
64
 
Item 2.
   
65
 
Item 5.
   
66
 
Item 6.
   
66
       
67
       
E-1
 
 
 
 
 

 


 
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)
 
2018
   
2017
 
Revenues
           
Non-interest revenues
           
Discount revenue
 
$
6,181
   
$
5,700
 
Net card fees
   
870
     
786
 
Other fees and commissions
   
798
     
755
 
Other
   
334
     
372
 
Total non-interest revenues
   
8,183
     
7,613
 
Interest income
               
Interest on loans
   
2,554
     
2,131
 
Interest and dividends on investment securities
   
35
     
22
 
Deposits with banks and other
   
149
     
92
 
Total interest income
   
2,738
     
2,245
 
Interest expense
               
Deposits
   
340
     
213
 
Long-term debt and other
   
437
     
355
 
Total interest expense
   
777
     
568
 
Net interest income
   
1,961
     
1,677
 
Total revenues net of interest expense
   
10,144
     
9,290
 
Provisions for losses
               
Charge card
   
214
     
214
 
Card Member loans
   
560
     
531
 
Other
   
43
     
25
 
Total provisions for losses
   
817
     
770
 
Total revenues net of interest expense after provisions for losses
   
9,327
     
8,520
 
Expenses
               
Marketing and business development
   
1,642
     
1,446
 
Card Member rewards
   
2,400
     
2,168
 
Card Member services
   
457
     
351
 
Salaries and employee benefits
   
1,350
     
1,265
 
Other, net
   
1,360
     
1,459
 
Total expenses
   
7,209
     
6,689
 
Pretax income
   
2,118
     
1,831
 
Income tax provision
   
464
     
472
 
Net income
 
$
1,654
   
$
1,359
 
Earnings per Common Share (Note 15):(a)
               
Basic
 
$
1.89
   
$
1.51
 
Diluted
 
$
1.88
   
$
1.51
 
Average common shares outstanding for earnings per common share:
               
Basic
   
858
     
878
 
Diluted
   
860
     
881
 
Cash dividends declared per common share
 
$
0.39
   
$
0.35
 
(a)
Represents net income less (i) earnings allocated to participating share awards of $13 million and $11 million for the three months ended September 30, 2018 and 2017, respectively, and (ii) dividends on preferred shares of $20 million and $21 million for the three months ended September 30, 2018 and 2017, respectively.
 


See Notes to Consolidated Financial Statements.
 
1

 
 
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
             
Nine Months Ended September 30 (Millions, except per share amounts)
 
2018
   
2017
 
Revenues
           
Non-interest revenues
           
Discount revenue
 
$
18,264
   
$
16,830
 
Net card fees
   
2,544
     
2,305
 
Other fees and commissions
   
2,365
     
2,212
 
Other
   
1,060
     
1,112
 
Total non-interest revenues
   
24,233
     
22,459
 
Interest income
               
Interest on loans
   
7,267
     
5,943
 
Interest and dividends on investment securities
   
83
     
68
 
Deposits with banks and other
   
390
     
233
 
Total interest income
   
7,740
     
6,244
 
Interest expense
               
Deposits
   
910
     
538
 
Long-term debt and other
   
1,199
     
994
 
Total interest expense
   
2,109
     
1,532
 
Net interest income
   
5,631
     
4,712
 
Total revenues net of interest expense
   
29,864
     
27,171
 
Provisions for losses
               
Charge card
   
701
     
590
 
Card Member loans
   
1,587
     
1,272
 
Other
   
110
     
64
 
Total provisions for losses
   
2,398
     
1,926
 
Total revenues net of interest expense after provisions for losses
   
27,466
     
25,245
 
Expenses
               
Marketing and business development
   
4,650
     
4,187
 
Card Member rewards
   
7,180
     
6,425
 
Card Member services
   
1,282
     
1,009
 
Salaries and employee benefits
   
3,956
     
3,822
 
Other, net
   
4,107
     
4,175
 
Total expenses
   
21,175
     
19,618
 
Pretax income
   
6,291
     
5,627
 
Income tax provision
   
1,380
     
1,673
 
Net income
 
$
4,911
   
$
3,954
 
Earnings per Common Share (Note 15): (a)
               
Basic
 
$
5.60
   
$
4.34
 
Diluted
 
$
5.59
   
$
4.33
 
Average common shares outstanding for earnings per common share:
               
Basic
   
859
     
889
 
Diluted
   
861
     
892
 
Cash dividends declared per common share
 
$
1.09
   
$
0.99
 
                 
(a)
Represents net income less (i) earnings allocated to participating share awards of $38 million and $32 million for the nine months ended September 30, 2018 and 2017, respectively, and (ii) dividends on preferred shares of $61 million for both the nine months ended September 30, 2018 and 2017.
 
 
See Notes to Consolidated Financial Statements.
 
2

 
 
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Millions)
 
2018
   
2017
   
2018
   
2017
 
Net income
 
$
1,654
   
$
1,359
   
$
4,911
   
$
3,954
 
Other comprehensive (loss) income:
                               
Net unrealized securities (losses) gains, net of tax
   
(11
)
   
(2
)
   
(29
)
   
4
 
Foreign currency translation adjustments, net of tax
   
(19
)
   
107
     
(85
)
   
456
 
Net unrealized pension and other postretirement benefits, net of tax
   
9
     
7
     
38
     
8
 
Other comprehensive (loss) income
   
(21
)
   
112
     
(76
)
   
468
 
Comprehensive income
 
$
1,633
   
$
1,471
   
$
4,835
   
$
4,422
 
 
 
See Notes to Consolidated Financial Statements.
 
3

 
 
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
   
September 30,
   
December 31,
 
 (Millions, except share data)
 
2018
   
2017
 
Assets
           
Cash and cash equivalents
           
Cash and due from banks
 
$
4,323
   
$
5,148
 
Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2018, $55; 2017, $48)
   
25,856
     
27,709
 
Short-term investment securities
   
52
     
70
 
Total cash and cash equivalents
   
30,231
     
32,927
 
Accounts receivable
               
Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2018, $7,690; 2017, $8,919), less reserves: 2018, $544; 2017, $521
   
54,972
     
53,526
 
Other receivables, less reserves: 2018, $29; 2017, $31
   
3,160
     
3,209
 
Loans
               
Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2018, $23,739; 2017, $25,695), less reserves: 2018, $1,937; 2017, $1,706
   
75,666
     
71,693
 
Other loans, less reserves: 2018, $111; 2017, $80
   
3,431
     
2,607
 
Investment securities
   
6,071
     
3,159
 
Premises and equipment, less accumulated depreciation and amortization: 2018, $6,116; 2017, $5,455
   
4,295
     
4,329
 
Other assets (includes restricted cash of consolidated variable interest entities: 2018, $783; 2017, $62)
   
11,266
     
9,746
 
Total assets
 
$
189,092
   
$
181,196
 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Customer deposits
 
$
69,301
   
$
64,452
 
Travelers Cheques and other prepaid products
   
2,070
     
2,555
 
Accounts payable
   
15,605
     
14,657
 
Short-term borrowings
   
2,292
     
3,278
 
Long-term debt (includes debt issued by consolidated variable interest entities: 2018, $18,637; 2017, $18,560)
   
55,300
     
55,804
 
Other liabilities
   
23,064
     
22,189
 
Total liabilities
 
$
167,632
   
$
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 September 30, 2018 and December 31, 2017
   
     
 
Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 854 million shares as of September 30, 2018 and 859 million shares as of December 31, 2017
   
171
     
172
 
Additional paid-in capital
   
12,272
     
12,210
 
Retained earnings
   
11,521
     
8,307
 
Accumulated other comprehensive loss
               
Net unrealized debt securities losses, net of tax of: 2018, $(8); 2017, $1
   
(29
)
   
 
Foreign currency translation adjustments, net of tax of: 2018, $(377); 2017,$(363)
   
(2,046
)
   
(1,961
)
Net unrealized pension and other postretirement benefits, net of tax of: 2018, $(167); 2017, $(179)
   
(429
)
   
(467
)
Total accumulated other comprehensive loss
   
(2,504
)
   
(2,428
)
Total shareholders’ equity
   
21,460
     
18,261
 
Total liabilities and shareholders’ equity
 
$
189,092
   
$
181,196
 
 
 
 
See Notes to Consolidated Financial Statements.
 
4

 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
Nine Months Ended September 30 (Millions)
 
2018
   
2017
 
Cash Flows from Operating Activities
           
Net income
 
$
4,911
   
$
3,954
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provisions for losses
   
2,398
     
1,926
 
Depreciation and amortization
   
1,007
     
953
 
Deferred taxes and other
   
(347
)
   
(47
)
Stock-based compensation
   
230
     
212
 
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
               
Other receivables
   
(88
)
   
1,026
 
Other assets
   
418
     
(129
)
Accounts payable and other liabilities
   
2,133
     
1,186
 
Travelers Cheques and other prepaid products
   
(480
)
   
(500
)
Net cash provided by operating activities
   
10,182
     
8,581
 
Cash Flows from Investing Activities
               
Sales of investment securities
   
     
1
 
Maturities and redemptions of investment securities
   
1,871
     
2,198
 
Purchases of investments
   
(5,198
)
   
(2,339
)
Net increase in Card Member receivables and loans(a)
   
(9,461
)
   
(7,535
)
Purchase of premises and equipment, net of sales: 2018, $1; 2017, $1
   
(871
)
   
(812
)
Acquisitions/dispositions, net of cash acquired
   
(512
)
   
(210
)
Net cash used in investing activities
   
(14,171
)
   
(8,697
)
Cash Flows from Financing Activities
               
Net increase in customer deposits
   
4,876
     
8,219
 
Net decrease in short-term borrowings
   
(969
)
   
(3,232
)
Proceeds from long-term borrowings
   
17,035
     
19,875
 
Payments of long-term borrowings
   
(17,262
)
   
(18,349
)
Issuance of American Express common shares
   
68
     
82
 
Repurchase of American Express common shares
   
(917
)
   
(3,087
)
Dividends paid
   
(970
)
   
(925
)
Net cash provided by financing activities
   
1,861
     
2,583
 
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
   
127
     
294
 
Net (decrease) increase in cash, cash equivalents and restricted cash
   
(2,001
)
   
2,761
 
Cash, cash equivalents and restricted cash at beginning of period
   
33,264
     
25,494
 
Cash, cash equivalents and restricted cash at end of period
 
$
31,263
   
$
28,255
 
 
(a) Refer to Note 2 for additional information.
 
 
 
 
Supplementary cash flow information
                   
 
 
Cash, cash equivalents and restricted cash reconciliation
 
Sep-18
   
Dec-17
   
Sep-17
   
Dec-16
 
Cash and cash equivalents per Consolidated Balance Sheets
 
$
30,231
   
$
32,927
   
$
26,168
   
$
25,208
 
Restricted cash included in Other assets per Consolidated Balance Sheets
   
1,032
     
337
     
2,087
     
286
 
Total cash, cash equivalents and restricted cash
 
$
31,263
   
$
33,264
   
$
28,255
   
$
25,494
 
 
 
 
5

 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  Basis of Presentation
The Company
American Express Company is a globally integrated payments 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.

Effective for the second quarter of 2018, we realigned our reportable operating segments to reflect the organizational changes announced during the first quarter of 2018. Prior periods have been revised to conform to the new reportable segments, which are as follows:
Global Consumer Services Group (GCSG), which primarily issues a wide range of proprietary consumer cards globally. GCSG also provides services to consumers, including travel services and non-card financing products, and manages certain international joint ventures and our partnership agreements in China.
Global Commercial Services (GCS), which primarily issues a wide range of proprietary corporate and small business cards and provides payment and expense management services globally. In addition, GCS provides commercial financing products.
Global Merchant and Network Services (GMNS), which operates a global payments network that processes and settles card transactions, acquires merchants and provides multi-channel marketing programs and capabilities, services and data analytics, leveraging our global integrated network. GMNS enters into partnership agreements with third-party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network. GMNS also manages loyalty coalition businesses in certain countries around the world and our reloadable prepaid and gift card 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 our Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Form 10-K). 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 American Express-related 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.
 
 
6

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

 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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.
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 adoption of 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 standard, effective January 1, 2019, with early adoption permitted, would have caused us to recognize virtually all leases on the Consolidated Balance Sheets upon adoption and in the comparative period. However, in July 2018, the FASB issued an update to its guidance providing companies with the option to adopt the provisions of the standard prospectively without adjusting comparative periods; we will elect this option and adopt the standard on January 1, 2019. While we continue to assess the potential impacts upon adoption, we do not expect a material impact on our financial position, results of operations, cash flows or regulatory risk-based capital. We are also in the process of upgrading our lease administration software and changing business processes and internal controls in preparation for the adoption.
 
 
8

 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In June 2016, the FASB issued new accounting guidance for the 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, cash flows and regulatory risk-based capital; 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.

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 September 30, 2018 and December 31, 2017. Contract 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.

 
 
 
9

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




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 acquired 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.



 
 
10


 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 September 30, 2018 and December 31, 2017 consisted of:

(Millions)
 
2018
   
2017
 
Global Consumer Services Group(a)
 
$
65,400
   
$
62,319
 
Global Commercial Services
   
12,203
     
11,080
 
Card Member loans
   
77,603
     
73,399
 
Less: Reserve for losses
   
1,937
     
1,706
 
Card Member loans, net
 
$
75,666
   
$
71,693
 
Other loans, net(b)
 
$
3,431
   
$
2,607
 
(a)
Includes approximately $23.7 billion and $25.7 billion of gross Card Member loans available to settle obligations of a consolidated variable interest entity (VIE) as of September 30, 2018 and December 31, 2017, respectively. The balance as of September 30, 2018 also includes loans related to the acquired Hilton portfolio (refer to Note 2).
(b)
Other loans primarily represent consumer and commercial non-card financing products. Other loans are presented net of reserves for losses of $111 million and $80 million as of September 30, 2018 and December 31, 2017, respectively.

Card Member accounts receivable by segment and Other receivables as of September 30, 2018 and December 31, 2017 consisted of:

(Millions)
 
2018
   
2017
 
Global Consumer Services Group (a)
 
$
18,916
   
$
20,946
 
Global Commercial Services
   
36,600
     
33,101
 
Card Member receivables
   
55,516
     
54,047
 
Less: Reserve for losses
   
544
     
521
 
Card Member receivables, net
 
$
54,972
   
$
53,526
 
Other receivables, net (b)
 
$
3,160
   
$
3,209
 
(a)
Includes $7.7 billion and $8.9 billion of gross Card Member receivables available to settle obligations of a consolidated VIE as of September 30, 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 $29 million and $31 million as of September 30, 2018 and December 31, 2017, respectively.
 
 
 
 
 
11

 
 
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, 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:
                       
Global Consumer Services Group
 
$
64,490
   
$
271
   
$
197
   
$
442
   
$
65,400
 
Global Commercial Services
                                       
      Global Small Business Services
   
12,018
     
46
     
30
     
63
     
12,157
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
     
     
46
 
Card Member Receivables:
                                       
Global Consumer Services Group
   
18,681
     
79
     
48
     
108
     
18,916
 
Global Commercial Services
                                       
      Global Small Business Services
 
$
16,671
   
$
90
   
$
49
   
$
103
   
$
16,913
 
      Global Corporate Payments(a)
(b)
 
(b)
 
(b)
   
$
153
   
$
19,687
 
 
 
2017  (Millions)
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
   
90+ Days Past Due
   
Total
 
Card Member Loans:
                             
Global Consumer Services Group
 
$
61,491
   
$
238
   
$
190
   
$
400
   
$
62,319
 
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:
                                       
Global Consumer Services Group
   
20,696
     
82
     
54
     
114
     
20,946
 
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 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 or 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.

 
 
 
 
12

 
 
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:
   
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:
                                   
Global Consumer Services Group
   
2.1
%
   
2.5
%
   
1.4
%
   
1.8
%
   
2.1
%
   
1.3
%
Global Small Business Services
   
1.7
%
   
2.0
%
   
1.1
%
   
1.6
%
   
1.9
%
   
1.1
%
Card Member Receivables:
                                               
Global Consumer Services Group
   
1.7
%
   
1.8
%
   
1.2
%
   
1.6
%
   
1.7
%
   
1.3
%
Global Small Business Services
   
1.8
%
   
2.1
%
   
1.4
%
   
1.6
%
   
1.8
%
   
1.4
%
 
 
   
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
   
0.11
%
   
0.8
%
   
0.10
%
   
0.9
%
(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 our reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented.

 
 
 
13

 
 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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. Impaired Card Member loans and receivables outside the U.S. are not significant as of September 30, 2018 and December 31, 2017; therefore, such loans and receivables are not included in the following tables unless otherwise noted.

The following tables provide additional information with respect to our impaired Card Member loans and receivables as of September 30, 2018 and December 31, 2017:
 
As of September 30, 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:
                           
Global Consumer Services Group(f)
 
$
304
   
$
205
   
$
279
   
$
122
   
$
910
   
$
823
   
$
69
 
Global Commercial Services
   
37
     
36
     
53
     
26
     
152
     
142
     
11
 
Card Member Receivables:
                                                       
Global Consumer Services Group
   
     
     
26
     
11
     
37
     
36
     
2
 
Global Commercial Services
   
     
     
56
     
23
     
79
     
78
     
3
 
Total
 
$
341
   
$
241
   
$
414
   
$
182
   
$
1,178
   
$
1,079
   
$
85
 

 
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:
                           
Global Consumer Services Group(f)
 
$
289
   
$
168
   
$
178
   
$
131
   
$
766
   
$
694
   
$
49
 
Global Commercial Services
   
38
     
31
     
31
     
27
     
127
     
118
     
8
 
Card Member Receivables:
                                                       
Global Consumer Services Group
   
     
     
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 $17 million and $15 million that are over 90 days past due and accruing interest and $5 million that are non-accruals as of both September 30, 2018 and December 31, 2017.
(d)
In Program TDRs include Card Member accounts that are currently enrolled in a modification program.
(e)
Out of Program TDRs include $138 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 September 30, 2018 and December 31, 2017, respectively.
(f)
GCSG includes balances outside the U.S. of $65 million and $56 million that are over 90 days and accruing interest and $64 million and $55 million in unpaid principal as of September 30, 2018 and December 31, 2017, respectively.
 
 
 
 
14

 
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:
   
Three Months Ended
September 30, 2018
   
Nine Months Ended
September 30, 2018
 
(Millions)
 
Average Balance
   
Interest Income Recognized
   
Average Balance
   
Interest Income Recognized
 
Card Member Loans:
                       
Global Consumer Services Group
 
$
882
   
$
27
   
$
841
   
$
79
 
Global Commercial Services
   
153
     
5
     
144
     
16
 
Card Member Receivables:
                               
Global Consumer Services Group
   
35
     
     
31
     
 
Global Commercial Services
   
77
     
     
70
     
 
Total
 
$
1,147
   
$
32
   
$
1,086
   
$
95
 
 
   
Three Months Ended
September 30, 2017
   
Nine Months Ended
September 30, 2017
 
(Millions)
 
Average Balance
   
Interest Income Recognized
   
Average Balance
   
Interest Income Recognized
 
Card Member Loans:
                       
Global Consumer Services Group
 
$
695
   
$
21
   
$
682
   
$
61
 
Global Commercial Services
   
122
     
5
     
119
     
13
 
Card Member Receivables:
                               
Global Consumer Services Group
   
20
     
     
19
     
 
Global Commercial Services
   
44
     
     
42
     
 
Total
 
$
881
   
$
26
   
$
862
   
$
74
 
 
 
 
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 Card Member loans and receivables modified as TDRs for the three and nine months ended September 30, 2018 and 2017.

 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
 
Number of Accounts (in thousands)
 
Outstanding Balances
($ in millions)(a)
 
Average Interest Rate Reduction
(% Points)
 
Average Payment Term Extension (# of Months)
 
Number of Accounts (in thousands)
 
Outstanding Balances
($ in millions)(a)
 
Average Interest Rate Reduction (% Points)
 
Average Payment Term Extension (# of Months)
 
Troubled Debt Restructurings:
                               
Card Member Loans
   
13
   
$
98
     
12
 
(b)
     
36
   
$
267
     
12
 
(b)
 
Card Member Receivables
   
1
     
24
 
(c)
     
27
     
4
     
78
 
(c)
     
28
 
Total
   
14
   
$
122
                     
40
   
$
345
                 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
 
 
Number of Accounts (in thousands)
 
Outstanding Balances
($ in millions)(a)
 
Average Interest Rate Reduction
(% Points)
 
Average Payment Term Extension (# of Months)
 
Number of Accounts (in thousands)
 
Outstanding Balances
($ in millions)(a)
 
Average Interest Rate Reduction (% Points)
 
Average Payment Term Extension (# of Months)
 
Troubled Debt Restructurings:
                                               
Card Member Loans
   
8
   
$
57
     
9
 
(b)
     
23
   
$
160
     
10
 
(b)
 
Card Member Receivables
   
1
     
18
 
(c)
     
31
     
4
     
64
 
(c)
     
27
 
Total
   
9
   
$
75
                     
27
   
$
224
                 
(a)
Represents the outstanding balance immediately prior to modification. The outstanding balance includes principal, fees and accrued interest on Card Member loans and principal and fees on Card Member receivables. Modifications did not reduce the principal balance.
(b)
For Card Member loans, there have been no payment term extensions.
(c)
We do not offer interest rate reduction programs for Card Member receivables as the receivables are non-interest bearing.

 
The following table provides information with respect to Card Member loans and receivables modified as TDRs that subsequently defaulted within 12 months of modification. 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.
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2018
 
 
Number of Accounts
(in thousands)
 
Aggregated Outstanding Balances Upon Default
($ in millions)(a)
 
Number of Accounts
(in thousands)
 
Aggregated Outstanding Balances Upon Default
($ in millions)(a)
 
Troubled Debt Restructurings That Subsequently Defaulted:
               
Card Member Loans
   
2
   
$
13
     
5
   
$
30
 
Card Member Receivables
   
1
     
2
     
3
     
7
 
Total
   
3
   
$
15
     
8
   
$
37
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
 
 
Number of Accounts
(in thousands)
 
Aggregated Outstanding Balances Upon Default
($ in millions)(a)
 
Number of Accounts
(in thousands)
 
Aggregated Outstanding Balances Upon Default
($ in millions)(a)
 
Troubled Debt Restructurings That Subsequently Defaulted:
                       
Card Member Loans
   
2
   
$
9
     
5
   
$
30
 
Card Member Receivables
   
1
     
2
     
3
     
4
 
Total
   
3
   
$
11
     
8
   
$
34
 
(a)
The outstanding balances upon default include principal, fees and accrued interest on Card Member loans, and principal and fees on Card Member receivables.
 
 
 
16

 
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 nine months ended September 30:

(Millions)
 
2018
   
2017
 
Balance, January 1
 
$
1,706
   
$
1,223
 
Provisions(a)
   
1,587
     
1,272
 
Net write-offs(b)
               
Principal
   
(1,140
)
   
(856
)
Interest and fees
   
(225
)
   
(163
)
Other(c)
   
9
     
26
 
Balance, September 30
 
$
1,937
   
$
1,502
 
(a)
Provisions for principal, interest and fee reserve components.
(b)
Principal write-offs are presented less recoveries of $330 million and $307 million for the nine months ended September 30, 2018 and 2017, respectively. Recoveries of interest and fees were not significant. Amounts include net (write-offs) recoveries from TDRs of $(21) million and $(25) million for the nine months ended September 30, 2018 and 2017, respectively.
(c)
Includes foreign currency translation adjustments of $(4) million and $14 million and other adjustments of $13 million and $12 million for the nine months ended September 30, 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 September 30, 2018 and December 31, 2017:
(Millions)
 
2018
   
2017
 
Card Member loans evaluated individually for impairment(a)
 
$
480
   
$
367
 
Related reserves (a)
 
$
80
   
$
57
 
Card Member loans evaluated collectively for impairment(b)
 
$
77,123
   
$
73,032
 
Related reserves (b)
 
$
1,857
   
$
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.

 
 
 
 
17

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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)
 
2018
   
2017
 
Balance, January 1
 
$
521
   
$
467
 
Provisions(a)
   
701
     
590
 
Net write-offs(b)
   
(661
)
   
(548
)
Other(c)
   
(17
)
   
3
 
Balance, September 30
 
$
544
   
$
512
 
(a)
Provisions for principal and fee reserve components.
(b)
Net write-offs are presented less recoveries of $266 million and $271 million for the nine months ended September 30, 2018 and 2017, respectively. Amounts include net recoveries (write-offs) from TDRs of $1 million and $(2) million, for the nine months ended September 30, 2018 and 2017, respectively.
(c)
Includes foreign currency translation adjustments of nil and $18 million and other adjustments of $(17) million and $(15) million for the nine months ended September 30, 2018 and 2017, respectively.

Card Member Receivables Evaluated Individually and Collectively for Impairment
The following table presents Card Member receivables evaluated individually and collectively for impairment, and related reserves, as of September 30, 2018 and December 31, 2017:
(Millions)
 
2018
   
2017
 
Card Member receivables evaluated individually for impairment(a)
 
$
116
   
$
80
 
Related reserves (a)
 
$
5
   
$
3
 
Card Member receivables evaluated collectively for impairment
 
$
55,400
   
$
53,967
 
Related reserves (b)
 
$
539
   
$
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.
 
 
 
 
18

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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, the unrealized gains and losses on equity securities are recorded in the Consolidated Statements of Income; prior to January 1, 2018, the unrealized gains and losses on equity securities were recorded in AOCI, net of income taxes.

The following is a summary of investment securities as of September 30, 2018 and December 31, 2017:

 
2018
 
2017
 
     
Gross
 
Gross
 
Estimated
     
Gross
 
Gross
 
Estimated
 
Description of Securities
   
Unrealized
 
Unrealized
 
Fair
     
Unrealized
 
Unrealized
 
Fair
 
 (Millions)
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
Available-for-sale debt securities:
                               
State and municipal obligations
 
$
682
   
$
5
   
$
(3
)
 
$
684
   
$
1,369
   
$
11
   
$
(3
)
 
$
1,377
 
U.S. Government agency obligations
   
10
     
     
(1
)
   
9
     
11
     
     
     
11
 
U.S. Government treasury obligations
   
4,688
     
2
     
(39
)
   
4,651
     
1,051
     
3
     
(9
)
   
1,045
 
Corporate debt securities
   
32
     
     
     
32
     
28
     
     
     
28
 
Mortgage-backed securities (a)
   
54
     
1
     
(1
)
   
54
     
67
     
2
     
     
69
 
Foreign government bonds and obligations
   
595
     
     
(1
)
   
594
     
581
     
     
     
581
 
Equity securities (b)
   
51
     
     
(4
)
   
47
     
51
     
     
(3
)
   
48
 
Total
 
$
6,112
   
$
8
   
$
(49
)
 
$
6,071
   
$
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.

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 an unrealized loss position as of September 30, 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
 
$
67
   
$
(2
)
 
$
31
   
$
(1
)
 
$
157
   
$
(3
)
 
$
   
$
 
U.S. Government treasury obligations
   
4,213
     
(31
)
   
172
     
(8
)
   
650
     
(3
)
   
175
     
(6
)
Mortgage-backed securities
   
     
     
16
     
(1
)
   
     
     
     
 
Equity securities (a)
   
     
     
     
     
     
     
36
     
(2
)
Foreign government bonds and obligations
   
586
     
(1
)
   
     
     
     
     
     
 
Total
 
$
4,866
   
$
(34
)
 
$
219
   
$
(10
)
 
$
807
   
$
(6
)
 
$
211
   
$
(8
)
(a)
Effective January 1, 2018, the 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.
 
 
 
19

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of September 30, 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%
   
93
   
$
4,866
   
$
(34
)
   
21
   
$
219
   
$
(10
)
   
114
   
$
5,085
   
$
(44
)
Total as of September 30, 2018
   
93
   
$
4,866
   
$
(34
)
   
21
   
$
219
   
$
(10
)
   
114
   
$
5,085
   
$
(44
)
                                                                         
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 September 30, 2018 were as follows:

         
Estimated
 
(Millions)
 
Cost
   
Fair Value
 
Due within 1 year
 
$
3,613
   
$
3,612
 
Due after 1 year but within 5 years
   
1,622
     
1,590
 
Due after 5 years but within 10 years
   
210
     
204
 
Due after 10 years
   
616
     
618
 
Total
 
$
6,061
   
$
6,024
 

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.

 
 
 
20

 
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 September 30, 2018, our ownership of variable interests was $5.4 billion and $7.7 billion for the Lending Trust and the Charge Trust, respectively. 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 the Trusts and therefore consolidate the Trusts.

The following table provides information on the restricted cash held by the Lending Trust and the Charge Trust as of September 30, 2018 and December 31, 2017, included in Other assets on the Consolidated Balance Sheets:

(Millions)
 
2018
   
2017
 
Lending Trust
 
$
783
   
$
55
 
Charge Trust
   
     
7
 
Total
 
$
783
   
$
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 nine months ended September 30, 2018 and the year ended December 31, 2017, no such triggering events occurred.
 
 
 
 
 
21

 
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.  Customer Deposits

As of September 30, 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
 
$
68,572
   
$
63,666
 
Non-interest bearing (includes Card Member credit balances of: 2018, $321; 2017, $358)
   
355