Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

or

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

   

13-4922250

(State or other jurisdiction of     (I.R.S. Employer Identification No.)
incorporation or organization)    

200 Vesey Street, New York, NY

   

10285

(Address of principal executive offices)     (Zip Code)

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

None

 

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

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

Yes  X              No         

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

Yes X              No         

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

 

Large accelerated filer

 

x

 

        Accelerated filer ¨

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

 

        Smaller reporting company ¨

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

Yes                  No      

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 20, 2016

Common Shares (par value $0.20 per share)     

                951,033,100 shares


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.    Financial Information      Page No.   
   Item 1.   Financial Statements   
     Consolidated Statements of Income – Three Months Ended March 31, 2016 and 2015      1   
     Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2016 and 2015      2   
     Consolidated Balance Sheets – March 31, 2016 and December 31, 2015      3   
     Consolidated Statements of Cash Flows – Three Months Ended March 31, 2016 and 2015      4   
     Notes to Consolidated Financial Statements      5   
  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
  

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      65   
  

Item 4.

  Controls and Procedures      65   
Part II.    Other Information   
  

Item 1.

  Legal Proceedings      69   
  

Item 1A.

  Risk Factors      70   
  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      71   
  

Item 5.

  Other Information      72   
  

Item 6.

  Exhibits      72   
   Signatures      73   
   Exhibit Index      E-1   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                             

 

 

Three Months Ended March 31 (Millions, except per share amounts)

     2016      2015  

Revenues

       

Non-interest revenues

       

Discount revenue

     $ 4,643       $ 4,660   

Net card fees

       699         667   

Other fees and commissions

       680         708   

Other

       486         468   

 

    

 

 

    

 

 

 

Total non-interest revenues

       6,508         6,503   

 

    

 

 

    

 

 

 

Interest income

       

Interest on loans

       1,938         1,795   

Interest and dividends on investment securities

       36         41   

Deposits with banks and other

       31         21   

 

    

 

 

    

 

 

 

Total interest income

       2,005         1,857   

 

    

 

 

    

 

 

 

Interest expense

       

Deposits

       150         103   

Long-term debt and other

       275         307   

 

    

 

 

    

 

 

 

Total interest expense

       425         410   

 

    

 

 

    

 

 

 

Net interest income

       1,580         1,447   

 

    

 

 

    

 

 

 

Total revenues net of interest expense

       8,088         7,950   

 

    

 

 

    

 

 

 

Provisions for losses

       

Charge card

       169         174   

Card Member loans

       227         235   

Other

       38         11   

 

    

 

 

    

 

 

 

Total provisions for losses

       434         420   

 

    

 

 

    

 

 

 

Total revenues net of interest expense after provisions for losses

       7,654         7,530   

 

    

 

 

    

 

 

 

Expenses

       

Marketing and promotion

       727         609   

Card Member rewards

       1,703         1,640   

Card Member services and other

       282         261   

Salaries and employee benefits

       1,338         1,305   

Other, net

       1,420         1,399   

 

    

 

 

    

 

 

 

Total expenses

       5,470         5,214   

 

    

 

 

    

 

 

 

Pretax income

       2,184         2,316   

Income tax provision

       758         791   

 

    

 

 

    

 

 

 

Net income

     $ 1,426       $ 1,525   

 

    

 

 

    

 

 

 

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

       

Basic

     $ 1.45       $ 1.49   

Diluted

     $ 1.45       $ 1.48   

 

    

 

 

    

 

 

 

Average common shares outstanding for earnings per common share:

       

Basic

       961         1,019   

Diluted

       963         1,023   

Cash dividends declared per common share

     $ 0.29       $ 0.26   

 

 

 

(a) Represents net income less (i) earnings allocated to participating share awards of $11 million for both the three months ended March 31, 2016 and 2015, and (ii) dividends on preferred shares of $21 million and nil for the three months ended March 31, 2016 and 2015, respectively.

See Notes to Consolidated Financial Statements.

 

   1   


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended March 31 (Millions)   2016  

2015

Net income

  $    1,426    $    1,525 

Other comprehensive income (loss):

   

Net unrealized securities gains, net of tax: 2016, $(1); 2015, nil

    — 

Foreign currency translation adjustments, net of tax: 2016, $(38); 2015, $88

    (255)

Net unrealized pension and other postretirement benefit gains, net of tax: 2016, $19; 2015, $19

  26    23 

 

 

 

 

 

Other comprehensive income (loss)

  32    (232)

 

 

 

 

 

Comprehensive income

  $    1,458    $    1,293 

 

See Notes to Consolidated Financial Statements.

 

   2   


Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                             

 

 
(Millions, except share data)      March 31,
2016
     December 31,
2015
 

 

    

 

 

    

 

 

 

Assets

  

Cash and cash equivalents

       

Cash and due from banks

     $ 2,761        $ 2,935    

Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2016, $33; 2015, $41)

       21,899          19,569    

Short-term investment securities

       385          258    

 

    

 

 

    

 

 

 

Total cash and cash equivalents

       25,045          22,762    

Card Member loans and receivables held for sale (includes gross loans and receivables available to settle obligations of consolidated variable interest entities: 2016, $3,966; 2015, $4,966)

       11,689          14,992    

Accounts receivable

       

Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2016, $5,802; 2015, $6,649), less reserves: 2016, $446; 2015, $462

       44,027          43,671    

Other receivables, less reserves: 2016, $44; 2015, $43

       2,633          3,024    

Loans

       

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity: 2016, $22,206; 2015, $23,559), less reserves: 2016, $1,012; 2015, $1,028

       56,394          57,545    

Other loans, less reserves: 2016, $35; 2015, $20

       1,186          1,254    

Investment securities

       3,839          3,759    

Premises and equipment, less accumulated depreciation and amortization: 2016, $6,972; 2015, $6,801

       4,137          4,108    

Other assets (includes restricted cash of consolidated variable interest entities: 2016, $37; 2015, $155)

       9,866          10,069    

 

    

 

 

    

 

 

 

Total assets

     $ 158,816        $ 161,184    

 

    

 

 

    

 

 

 

Liabilities and Shareholders’ Equity

       

Liabilities

       

Customer deposits

     $ 55,764        $ 54,997    

Travelers Cheques and other prepaid products

       3,011          3,247    

Accounts payable

       12,027          11,822    

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

       2,596          4,812    

Long-term debt (includes debt issued by consolidated variable interest entities: 2016, $12,605; 2015, $13,602)

       47,311          48,061    

Other liabilities

       17,380          17,572    

 

    

 

 

    

 

 

 

Total liabilities

       138,089          140,511    

 

    

 

 

    

 

 

 

Commitments and Contingencies (Note 8)

       

Shareholders’ Equity

       

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

       —          —    

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 951 million shares as of March 31, 2016 and 969 million shares as of December 31, 2015

       191          194    

Additional paid-in capital

       13,089          13,348    

Retained earnings

       9,949          9,665    

Accumulated other comprehensive loss

       

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

       60          58    

Foreign currency translation adjustments, net of tax: 2016, $(139); 2015, $(100)

       (2,040)         (2,044)   

Net unrealized pension and other postretirement benefit losses, net of tax: 2016, $(204); 2015, $(223)

       (522)         (548)   

 

    

 

 

    

 

 

 

Total accumulated other comprehensive loss

       (2,502)         (2,534)   

 

    

 

 

    

 

 

 

Total shareholders’ equity

       20,727          20,673    

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     $ 158,816        $ 161,184    

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                             

 

 

Three Months Ended March 31 (Millions)

     2016      2015  

Cash Flows from Operating Activities

  

Net income

     $ 1,426        $ 1,525    

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

       

Provisions for losses

       434          420    

Depreciation and amortization

       261          251    

Deferred taxes and other

       218          219    

Stock-based compensation

       70          71    

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

  

Other receivables

       427          175    

Other assets

       232          957    

Accounts payable and other liabilities

       (356)         (1,230)   

Travelers Cheques and other prepaid products

       (243)         (262)   

 

    

 

 

    

 

 

 

Net cash provided by operating activities

       2,469          2,126    

 

    

 

 

    

 

 

 

Cash Flows from Investing Activities

       

Sales of available-for-sale investment securities

       45          —    

Maturities and redemptions of available-for-sale investment securities

       226          439    

Purchase of investments

       (345)         (447)   

Net decrease in Card Member receivables and loans, including held for sale

       4,039          3,129    

Purchase of premises and equipment, net of sales: 2016, $1; 2015, $17

       (302)         (256)   

Acquisitions/dispositions, net of cash acquired

       (155)         (59)   

Net decrease in restricted cash

       132          15    

 

    

 

 

    

 

 

 

Net cash provided by investing activities

       3,640          2,821    

 

    

 

 

    

 

 

 

Cash Flows from Financing Activities

       

Net increase in customer deposits

       773          784    

Net decrease in short-term borrowings

       (2,217)         (1,062)   

Issuance of long-term debt

       35          —    

Principal payments on long-term debt

       (1,036)         (3,100)   

Issuance of American Express preferred shares

       —          841    

Issuance of American Express common shares

       11          54    

Repurchase of American Express common shares

       (1,128)         (791)   

Dividends paid

       (302)         (268)   

 

    

 

 

    

 

 

 

Net cash used in financing activities

       (3,864)         (3,542)   

 

    

 

 

    

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

       38          (121)   

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

       2,283          1,284    

Cash and cash equivalents at beginning of period

       22,762          22,288    

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ 25,045        $ 23,572    

 

 

See Notes to Consolidated Financial Statements.

 

   4   


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The Company

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

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

 

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

 

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

 

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

 

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

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

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

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

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

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. Travel commissions and fees, which were separately disclosed on the Consolidated Statements of Income historically, are now included within Other fees and commissions.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recently Issued Accounting Standards

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

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

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

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

 

2. Business Events

During the first quarter of 2016, the Company completed the sale of its outstanding Card Member loans held for sale (HFS) portfolio related to its cobrand partnership with JetBlue Airways Corporation and recognized a gain of $127 million in Other expenses.

Also during the first quarter of 2016, the Company reached an agreement to sell the outstanding Card Member loans and receivables HFS portfolio related to its cobrand partnership with Costco Wholesale Corporation in the United States. The sale of the portfolio is subject to customary closing conditions, and is expected to be completed in June 2016, at which time a related gain will be recognized. The Company continues to reflect the portfolio within Card Member loans and receivables held for sale on the Consolidated Balance Sheets and the associated valuation allowance adjustment for credit costs in Other expenses.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

3. Accounts Receivable and Loans

The Company’s charge and lending payment card products result in the generation of Card Member receivables and Card Member loans, respectively. This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of March 31, 2016 and December 31, 2015.

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

 

                                             

 

 

(Millions)

       2016         2015   

U.S. Consumer Services (a)

     $ 10,332       $ 11,807   

International Consumer and Network Services

       5,563         5,599   

Global Commercial Services

       28,578         26,727   

 

    

 

 

    

 

 

 

Card Member receivables (b)

       44,473         44,133   

Less: Reserve for losses

       446         462   

 

    

 

 

    

 

 

 

Card Member receivables, net

     $ 44,027       $ 43,671   

 

    

 

 

    

 

 

 

Other receivables, net (c)

     $ 2,633       $ 3,024   

 

 

 

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

 

  (b) Includes approximately $12.4 billion and $11.9 billion of Card Member receivables outside the United States as of March 31, 2016 and December 31, 2015, respectively.

 

  (c) Other receivables primarily represent amounts related to (i) certain merchants for billed discount revenue, (ii) GNS partner banks for items such as royalty and franchise fees and (iii) loyalty coalition partners for points issued, as well as program participation and servicing fees. Other receivables are presented net of reserves for losses of $44 million and $43 million as of March 31, 2016 and December 31, 2015, respectively.

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

 

                                             

 

 

(Millions)

       2016         2015   

U.S. Consumer Services(a)

     $ 42,432       $ 43,495   

International Consumer and Network Services

       6,646         7,072   

Global Commercial Services

       8,328         8,006   

 

    

 

 

    

 

 

 

Card Member loans

       57,406         58,573   

Less: Reserve for losses

       1,012         1,028   

 

    

 

 

    

 

 

 

Card Member loans, net

     $ 56,394       $ 57,545   

 

    

 

 

    

 

 

 

Other loans, net(b)

     $ 1,186       $ 1,254   

 

 

 

  (a) Includes approximately $22.2 billion and $23.6 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of March 31, 2016 and December 31, 2015, respectively.

 

  (b) Other loans primarily represent loans to merchants. Other loans are presented net of reserves for losses of $35 million and $20 million as of March 31, 2016 and December 31, 2015, respectively.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Card Member Receivables Aging

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

 

                                                                                                                  

 

 

2016 (Millions)

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

Card Member Loans:

                

U.S. Consumer Services

     $ 42,006         $ 122         $ 93         $ 211         $ 42,432     

International Consumer and Network Services

       6,529           37           26           54           6,646     

Global Commercial Services

                

Global Small Business Services

       8,183           27           19           39           8,268     

Global Corporate Payments(a)

       (b)          (b)          (b)          1           60     

Card Member Receivables:

                

U.S. Consumer Services

     $ 10,187         $ 48         $ 33         $ 64         $ 10,332     

International Consumer and Network Services

       5,478           27           16           42           5,563     

Global Commercial Services

                

Global Small Business Services

       12,997           68           49           94           13,208     

Global Corporate Payments(a)

       (b)          (b)          (b)          115           15,370     

 

 
                

 

 

2015 (Millions)

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

Card Member Loans:

                

U.S. Consumer Services

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

International Consumer and Network Services

       6,961           34           25           52           7,072     

Global Commercial Services

                

Global Small Business Services

       7,867           26           18           40           7,951     

Global Corporate Payments(a)

       (b)          (b)          (b)          1           55     

Card Member Receivables:

                

U.S. Consumer Services

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

International Consumer and Network Services

       5,515           24           18           42           5,599     

Global Commercial Services

                

Global Small Business Services

       12,734           69           45           102           12,950     

Global Corporate Payments(a)

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

 

  (a) For GCP Card Member receivables in GCS, delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if the Company initiates collection procedures on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes.

 

  (b) Delinquency data for periods other than 90 days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Card Member Loans and Receivables

The following tables present the key credit quality indicators as of or for the three months ended March 31:

 

                                                                                                                             

 

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

 

      
 
Principal
Only
  
 (a) 
   
 
 
Principal,
Interest, &
Fees
  
  
 (a) 
   

 

 

 

30+ Days

Past Due

as a % of

Total

  

  

  

  

   

 

Principal

Only

  

 (a) 

   
 
 
Principal,
Interest, &
Fees
  
  
 (a) 
   

 

 

 

30+ Days

Past Due

as a % of

Total

  

  

  

  

Card Member Loans:

              

U.S. Consumer Services

       1.5     1.7     1.0     1.5     1.7     0.9

International Consumer and Network Services

       1.9     2.4     1.8     2.0     2.5     1.8

Global Small Business Services

       1.4     1.6     1.0     1.3     1.6     1.0

Card Member Receivables:

              

U.S. Consumer Services

       1.8     2.0     1.4     2.1     2.3     1.5

International Consumer and Network Services

       2.2     2.4     1.5     1.9     2.1     1.6

Global Small Business Services

       1.8     2.1     1.6     2.2     2.4     1.8

 

 
              

 

 
           2016        2015   

 

     

 

 

 

 

Net Loss

Ratio as

a % of

Charge

Volume

  

  

  

  

  

   

 

 

 

90+ Days

Past Billing

as a % of

Receivables

  

  

  

  

   

 

 

 

 

Net Loss

Ratio as

a % of

Charge

Volume

  

  

  

  

  

   

 

 

 

90+ Days

Past Billing

as a % of

Receivables

  

  

  

  

Card Member Receivables:

              

Global Corporate Payments

  

    0.08     0.7     0.10     0.7

 

 

 

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

Impaired Card Member Loans and Receivables

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 
       As of March 31, 2016  
      
 

 
 

Over 90 days
Past Due &

Accruing
Interest

  
  

  
(a) 

     

 

Accounts Classified

as a TDR(c)

  

  

   

 
 

Total

Impaired
Balance

  

  
  

    

 
 

Unpaid

Principal
Balance

  

  
  

  

2016 (Millions)

        
 
Non-
Accruals
  
(b) 
    In Program(d)        
 
Out of
Program(e)
  
  
         
 
Allowance
for TDRs
  
  

Card Member Loans:

                   

U.S. Consumer Services

     $ 139       $ 123       $ 147        $ 99       $ 508        $ 469        $ 44    

International Consumer and Network Services

       54                               54          53            

Global Commercial Services

       24         26         23          19         92          85            

Card Member Receivables:

                   

U.S. Consumer Services

                                    13          13            

Global Commercial Services

                     20                 25          24          14    
    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     $ 217       $ 149       $ 199        $ 127       $ 692        $ 644        $ 72    

 

 
                   

 

 
       As of December 31, 2015  
      

 

 
 

Over 90 days

Past Due &

Accruing
Interest

  

  

  
(a) 

     

 

Accounts Classified

as a TDR(c)

  

  

   

 
 

Total

Impaired
Balance

  

  
  

    

 
 

Unpaid

Principal
Balance

  

  
  

  

2015 (Millions)

        
 
Non-
Accruals
  
(b) 
    In Program(d)        
 
Out of
Program
  
(e) 
         
 
Allowance
for TDRs
  
  

Card Member Loans:

                   

U.S. Consumer Services

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

International Consumer and Network Services

       52                          —        52          51            

Global Commercial Services

       24         26         23          18         91          85            

Card Member Receivables:

                   

U.S. Consumer Services

                     11                 14          14            

Global Commercial Services

                     16                 19          19          12    
    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

 

(a) The Company’s policy is generally to accrue interest through the date of write-off (typically 180 days past due). The Company establishes reserves for interest that it believes will not be collected. Amounts presented exclude loans classified as a TDR.

 

(b) Non-accrual loans not in modification programs primarily include certain Card Member loans placed with outside collection agencies for which the Company has ceased accruing interest.

 

(c) Accounts classified as a TDR include $18 million and $20 million that are over 90 days past due and accruing interest and $15 million and $18 million as of March 31, 2016 and December 31, 2015, respectively.

 

(d) In Program TDRs include Card Member accounts that are currently enrolled in a modification program.

 

(e) Out of Program TDRs include $98 million and $84 million of Card Member accounts that have successfully completed a modification program and $29 million and $29 million of Card Member accounts that were not in compliance with the terms of the modification programs as of March 31, 2016 and December 31, 2015, respectively.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information with respect to the Company’s average balances of, and interest income recognized from, impaired Card Member loans and the average balances of impaired Card Member receivables for the three months ended March 31:

 

 

 
       2016      2015  

(Millions)

      
 
Average
      Balance
  
  
    
 
 
Interest
Income
    Recognized
  
  
  
    
 
Average
      Balance
  
  
    
 
 
Interest
Income
    Recognized
  
  
  

Card Member Loans:

             

U.S. Consumer Services

     $ 505       $ 12       $ 587       $ 10   

International Consumer and Network Services

       53         4         56         4   

Global Commercial Services

       92         3         105         3   

Card Member Receivables:

             

U.S. Consumer Services

       14                 14           

Global Commercial Services

       22                 24           
    

 

 

    

 

 

 

Total

     $ 686       $ 19       $ 786       $ 17   

 

 

Card Member Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the USCS and GCS Card Member loans and receivables modified as TDRs for the three months ended March 31, 2016 and 2015. The ICNS Card Member loans and receivables modifications were not significant; therefore, this segment is not included in the following TDR disclosures.

 

 

 
       Three Months Ended
March 31, 2016
 
        
 

 

Number of
Accounts

(in thousands)

  
  

  

    
 

 

Outstanding
Balances(a)

($ in millions)

  
  

  

    
 
 
Average Interest
Rate Reduction
(% points)
  
  
  
    
 
 
Average Payment
Term Extensions
(# of months)
  
  
  

Troubled Debt Restructurings:

             

Card Member Loans

       8       $ 57         13         (b

Card Member Receivables

       3         38         (c      16   

 

    

 

 

    

 

 

       

Total

       11       $ 95         

 

 
             

 

 
       Three Months Ended
March 31, 2015
 
        
 
 
Number of
Accounts
(in thousands)
  
  
  
    
 
 
Outstanding
Balances(a)
($ in millions)
  
  
  
    
 
 
Average Interest
Rate Reduction
(% points)
  
  
  
    
 
 
Average Payment
Term Extensions
(# of months)
  
  
  

Troubled Debt Restructurings:

             

Card Member Loans

       11       $ 80         12         (b

Card Member Receivables

       3         40         (c      12   

 

    

 

 

    

 

 

       

Total

       14       $ 120         

 

 

 

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information for the three months ended March 31, 2016 and 2015, with respect to the USCS and GCS 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 consecutive missed payments, depending on the terms of the modification program. For all Card Members that defaulted from a modification program, the probability of default is factored into the reserves for Card Member loans and receivables.

 

 
       2016      2015  
(Accounts in thousands, Dollars in millions)       
 
 
Number of
Accounts
    (thousands)
  
  
  
    
 
 
 
Outstanding
Balances
Upon Default
(millions)(a)
  
  
  
  
    
 
 
Number of
Accounts
    (thousands)
  
  
  
    
 
 

 

Outstanding
Balances
Upon Default

    (millions)(a)

  
  
  

  

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings That

             

Subsequently Defaulted:

             

Card Member Loans

       1       $ 9         2       $ 10   

Card Member Receivables

       1         1         1         1   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       2       $ 10         3       $ 11   

 

 

 

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

 

4. Reserves for Losses

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

This Note is presented excluding amounts associated with the Card Member loans and receivables HFS as of March 31, 2016 and December 31, 2015.

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)

       2016         2015   

Balance, January 1

     $ 462       $ 465   

Provisions(a)

       169         174   

Net write-offs(b)

       (186      (199

Other(c)

       1         (11

 

    

 

 

    

 

 

 

Balance, March 31

     $ 446       $ 429   

 

 

 

  (a) Provisions for principal and fee reserve components.

 

  (b) Consists of principal and fee components, less recoveries of $101 million and $99 million, including net write-offs from TDRs of $10 million and $31 million, for the three months ended March 31, 2016 and 2015, respectively.

 

  (c) Includes foreign currency translation adjustments of $2 million and $(7) million for the three months ended March 31, 2016 and 2015, respectively, and other adjustments of $(1) million and $(4) million for the three months ended March 31, 2016 and 2015, respectively.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Receivables Evaluated Individually and Collectively for Impairment

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

 

                                             

 

 

(Millions)

       2016         2015   

Card Member receivables evaluated individually for impairment(a)

     $ 38       $ 33   

Related reserves (a)

     $ 20       $ 20   

 

 

Card Member receivables evaluated collectively for impairment

     $ 44,435       $ 44,100   

Related reserves (b)

     $ 426       $ 442   

 

 

 

  (a) Represents receivables modified as a TDR and related reserves.

 

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

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)

       2016         2015   

Balance, January 1

     $ 1,028        $ 1,201    

Provisions(a)

       227          235    

Net write-offs

       

Principal(b)

       (214)         (259)   

Interest and fees(b)

       (40)         (43)   

Other(c)

       11          (4)   

 

 

Balance, March 31

     $ 1,012        $ 1,130    

 

 

 

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

 

  (b) Consists of principal write-offs, less recoveries of $88 million and $103 million, including net write-offs/(recoveries) from TDRs of $13 million and $16 million, for the three months ended March 31, 2016 and 2015, respectively. Recoveries of interest and fees were de minimis.

 

  (c) Includes foreign currency translation adjustments of $2 million and $(7) million and other adjustments of $2 million and $3 million for the three months ended March 31, 2016 and 2015, respectively. The three months ended March 31, 2016 also includes the transfer of reserves of $7 million associated with $20 million of Card Member loans transferred from HFS to held for investment.

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, 2016 and December 31, 2015:

 

                                             

 

 

(Millions)

       2016         2015   

Card Member loans evaluated individually for impairment(a)

     $ 288       $ 279   

Related reserves (a)

     $ 52       $ 53   

 

 

Card Member loans evaluated collectively for impairment(b)

     $ 57,118       $ 58,294   

Related reserves (b)

     $ 960       $ 975   

 

 

 

  (a) Represents loans modified as a TDR and related reserves.

 

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Investment Securities

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

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

 

                                                                                                               

 

 
    2016     2015  

Description of Securities (Millions)

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

State and municipal obligations

  $ 2,695      $ 76      $ (4)      $ 2,767      $ 2,813      $ 85      $ (5)      $ 2,893   

U.S. Government agency obligations

    2                      2        2                      2   

U.S. Government treasury obligations

    375        10               385        406        4        (1)        409   

Corporate debt securities

    28        1               29        29        1               30   

Mortgage-backed securities (a)

    117        5               122        117        4               121   

Equity securities

    1                      1        1                      1   

Foreign government bonds and obligations

    477        7               484        250        6        (1)        255   

Other (b)

    50        1        (2)        49        50               (2)        48   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,745      $ 100      $ (6)      $ 3,839      $ 3,668      $ 100      $ (9)      $ 3,759   

 

 

 

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

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

 

                                                                                                               

 

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

Description of Securities

(Millions)

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

State and municipal obligations

  $ 97      $ (4   $             $ 100      $ (3   $ 13      $ (2

U.S. Government treasury obligations

                                253        (1              

Foreign government bonds and obligations

                                99        (1              

Other

                  33        (2)                      33        (2)   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 97      $ (4)      $ 33      $ (2)      $ 452      $ (5)      $ 46      $ (4)   

 

 

 

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Table of Contents

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 March 31, 2016 and December 31, 2015:

 

                                                                                                                             

 

 
    Less than 12 months     12 months or more     Total  

Ratio of Fair Value to

Amortized Cost

(Dollars in millions)

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

2016:

                 

90%–100%

    14      $ 97      $ (4)        6      $ 33      $ (2)        20      $ 130      $ (6)   

Less than 90%

                                                              

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total as of March 31, 2016

    14      $ 97      $ (4)        6      $ 33      $ (2)        20      $ 130      $ (6)   

 

 
                 

 

 

2015:

                 

90%–100%

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

Less than 90%

                         2        9        (2)        2        9        (2)   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total as of December 31, 2015

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

 

 

The gross unrealized losses are attributed to overall wider credit spreads for state and municipal securities, wider credit spreads for specific issuers, adverse changes in market benchmark interest rates, or a combination thereof, all compared to those prevailing when the investment securities were acquired.

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

Contractual maturities of investment securities with stated maturities as of March 31, 2016 were as follows:

 

                                             

 

 

(Millions)

       Cost       
 
Estimated
Fair Value
  
  

Due within 1 year

     $ 556       $ 557   

Due after 1 year but within 5 years

       209         214   

Due after 5 years but within 10 years

       410         430   

Due after 10 years

       2,519         2,588   

 

    

 

 

    

 

 

 

Total(a)

     $ 3,694       $ 3,789   

 

 

 

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

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Asset Securitizations

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

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

 

                                             

 

 

(Millions)

     2016      2015  

Charge Trust

     $ 1       $ 2   

Lending Trust

       36         153   

 

    

 

 

    

 

 

 

Total

     $ 37       $ 155   

 

 

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

American Express Travel Related Services Company, Inc. (TRS), in its role as servicer of the Trusts, has the power to direct the most significant activity of the Trusts, which is the collection of the underlying Card Member receivables and loans. In addition, TRS directly and indirectly (through its consolidated subsidiaries) holds all of the variable interests in both Trusts, with the exception of the debt securities issued to third party investors. As of March 31, 2016, TRS’ direct and indirect ownership of variable interests was $14.7 billion for the Lending Trust and $4.4 billion for the Charge Trust. These variable interests held by TRS provide it with the right to receive benefits and the obligation to absorb losses, which could be significant to both the Lending Trust and the Charge Trust. Based on these considerations, TRS is the primary beneficiary of both Trusts and therefore consolidates both Trusts.

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Customer Deposits

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

 

(Millions)

       2016         2015   

U.S.:

       

Interest bearing

     $             54,934       $             54,102   

Non-interest bearing (includes Card Member credit balances of:

       

2016, $372 million; 2015, $389 million)

       405         478   

Non-U.S.:

       

Interest bearing

       87         82   

Non-interest bearing (includes Card Member credit balances of:

       

2016, $317 million; 2015, $323 million)

       338         335   

 

    

 

 

    

 

 

 

Total customer deposits

     $ 55,764       $ 54,997   

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

 

(Millions)

       2016         2015   

U.S. retail deposits:

       

Savings accounts – Direct

     $             30,295       $             29,023   

Certificates of deposit:

       

Direct

       282         281   

Third-party (brokered)

       13,676         13,856   

Sweep accounts – Third-party (brokered)

       10,681         10,942   

Other retail deposits:

       

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

       141         183   

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

       689         712   

 

    

 

 

    

 

 

 

Total customer deposits

     $ 55,764       $ 54,997   

The scheduled maturities of certificates of deposit as of March 31, 2016 were as follows:

 

(Millions)

       U.S.         Non-U.S.         Total   

2016

     $ 2,264       $ 6       $ 2,270   

2017

       3,651         2         3,653   

2018

       3,190                 3,190   

2019

       2,330                 2,330   

2020

       2,516                 2,516   

After 5 years

       7                 7   

 

    

 

 

    

 

 

    

 

 

 

Total

     $           13,958       $               8       $           13,966   

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

 

(Millions)

       2016         2015   

U.S.

     $                 109       $                 105   

Non-U.S.

       1         1   

 

    

 

 

    

 

 

 

Total

     $ 110       $ 106   

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

8. Contingencies

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

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

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

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

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

9. Derivatives and Hedging Activities

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

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

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

 

        Other Assets
Fair Value
     Other Liabilities Fair Value  

(Millions)

     2016      2015      2016      2015  

Derivatives designated as hedging instruments:

             

Interest rate contracts

             

Fair value hedges

     $       391        $           236        $             —        $               9    

Foreign exchange contracts

             

Net investment hedges

       113          191          279          57    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

       504          427          279          66    

Derivatives not designated as hedging instruments:

             

Foreign exchange contracts, including certain embedded derivatives(a)

       120          117          177          135    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives, gross

       624          544          456          201    

Less: Cash collateral netting(b)

       (324)         (155)         —          —    

Derivative asset and derivative liability netting(c)

       (120)         (107)         (120)         (107)   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives, net(d)

     $ 180        $ 282        $ 336        $ 94    

 

  (a) Includes foreign currency derivatives embedded in certain operating agreements.
  (b) Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. Additionally, the Company posted $140 million and $149 million as of March 31, 2016 and December 31, 2015, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Consolidated Balance Sheets and are not netted against the derivative balances.
  (c) Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
  (d) The Company has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Other liabilities on the Consolidated Balance Sheets.

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

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hedges

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

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s fair value hedges for the three months ended March 31:

 

For the Three Months Ended March 31: (Millions)

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

Derivative
relationship

     Income Statement Line Item            2016              2015      Income Statement Line Item            2016              2015              2016              2015  
Interest rate contracts      Other expenses    $ 165       $ 63       Other expenses    $ (171)       $ (57)       $ (6)       $ 6   

The Company also recognized a net reduction in interest expense on long-term debt of $59 million and $70 million for the three months ended March 31, 2016 and 2015, respectively, primarily related to the net settlements (interest accruals) on the Company’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment, was $ (92) million and $195 million for the three months ended March 31, 2016 and 2015, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three months ended March 31, 2016 and 2015, the Company did not reclassify any amounts from Accumulated Other Comprehensive Loss to earnings as a component of Other expenses and no ineffectiveness was recognized in either period.

Derivatives Not Designated as Hedges

The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures totaled a net loss of $13 million and a net gain of $97 million for the three months ended March 31, 2016 and 2015, respectively, and are recognized in Other expenses.

The Company previously disclosed in Note 9 to the Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the period ended March 31, 2015, a loss of $45 million related to derivatives not designated as hedges. This amount should have been disclosed as a gain of $293 million, which is the amount used to calculate the above referenced net gain of $97 million. This change to the previously disclosed amount has no impact on the Consolidated Statements of Income, Balance Sheets or Cash Flows.

The changes in the fair value of an embedded derivative gain of $6 million and nil for the three months ended March 31, 2016 and 2015, respectively, is recognized in Card Member services and other expense.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

10. Fair Values

Financial Assets and Financial Liabilities Carried at Fair Value

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

 

        2016      2015  

(Millions)

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

Assets:

                         

Investment securities:(a)

                         

Equity securities

     $ 1       $ 1       $       $       $ 1       $ 1       $       $   

Debt securities and other

       3,838         385         3,453                 3,758         409         3,349           

Derivatives(a)

       624                 624                 544                 544           

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

       4,463         386         4,077                 4,303         410         3,893           

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                         

Derivatives(a)

       456                 456                 201                 201           

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 456       $       $ 456       $       $ 201       $       $ 201       $   

 

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

 

   21   


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

        Carrying      Corresponding Fair Value Amount  

2016 (Billions)

     Value                Total           Level 1            Level 2           Level 3  

Financial Assets:

              

Financial assets for which carrying values equal or approximate fair value

              

Cash and cash equivalents

     $             25       $             25      $             24       $ 1 (a)    $   

Other financial assets(b)

       47         47                            47          

Financial assets carried at other than fair value

              

Card Member loans and receivables HFS(d)

       12         12                       12   

Loans, net

       58         58 (c)                                 58   

Financial Liabilities:

              

Financial liabilities for which carrying values equal or approximate fair value

       65         65                65          

Financial liabilities carried at other than fair value

              

Certificates of deposit(e)

       14         14                14          

Long-term debt

     $ 47       $ 49 (c)    $       $ 49      $   
                                              
        Carrying      Corresponding Fair Value Amount  

2015 (Billions)

     Value      Total     Level 1      Level 2     Level 3  

Financial Assets:

              

Financial assets for which carrying values equal or approximate fair value

              

Cash and cash equivalents

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

Other financial assets(b)

       47         47                47          

Financial assets carried at other than fair value

              

Card Member loans and receivables HFS(d)

       15         15                       15   

Loans, net

       59         60 (c)                     60   

Financial Liabilities:

              

Financial liabilities for which carrying values equal or approximate fair value

       67         67                67          

Financial liabilities carried at other than fair value

              

Certificates of deposit(e)

       14         14                14          

Long-term debt

     $ 48       $ 49 (c)    $       $ 49      $   

 

(a) Reflects time deposits.
(b) Includes Card Member receivables (including fair values of Card Member receivables of $5.8 billion and $6.7 billion held by consolidated VIEs as of March 31, 2016 and December 31, 2015, respectively), Other receivables, restricted cash and other miscellaneous assets.
(c) Includes the fair values of Card Member loans of $22.2 billion and $23.5 billion and long-term debt of $12.6 billion and $13.6 billion held by consolidated VIEs as of March 31, 2016 and December 31, 2015, respectively.
(d) Does not include any fair value associated with the Card Member account relationships. Refer to Note 2 for additional information.
(e) Presented as a component of customer deposits on the Consolidated Balance Sheets.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Nonrecurring Fair Value Measurements

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

 

11. Guarantees

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

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

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

 

                                                                                           

 

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

Type of Guarantee

       2016         2015         2016         2015   

Return and Merchant Protection

     $ 43       $ 42       $ 42       $ 49   

Other(c)

       6         6         40         37   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 49       $ 48       $ 82       $ 86   
                                       

 

  (a) Represents the notional amounts that could be lost under the guarantees and indemnifications if there were a total default by the guaranteed or indemnified parties. The maximum potential undiscounted future payments for Merchant Protection are measured using management’s best estimate of maximum exposure, which is based on all eligible claims in relation to annual billed business volumes.

 

  (b) Included in Other liabilities on the Company’s Consolidated Balance Sheets.

 

  (c) Primarily includes guarantees related to the Company’s purchase protection, real estate and business dispositions.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

12. Changes In Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in each component for the three months ended March 31, 2016 and 2015 were as follows:

 

                                                                                           

 

 

2016 (Millions), net of tax

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

Balances as of December 31, 2015

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

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized gains

       4                         4   

Decrease due to amounts reclassified into earnings

       (2                      (2

Net translation gain of investments in foreign operations

               96                 96   

Net losses related to hedges of investments in foreign operations

               (92              (92

Pension and other postretirement benefit gains

                       26         26   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive loss

       2         4         26         32   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of March 31, 2016

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

 

 

2015 (Millions), net of tax

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

Balances as of December 31, 2014

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

Net translation loss of investments in foreign operations

               (450              (450

Net gains related to hedges of investments in foreign operations

               195                 195   

Pension and other postretirement benefit gains

                       23         23   

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in accumulated other comprehensive loss

               (255      23         (232

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of March 31, 2015

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

The following table presents the effects of reclassifications out of Accumulated Other Comprehensive Loss and into the Consolidated Statements of Income for the three months ended March 31, 2016 and 2015:

 

                                                                    

 

 
            Gains (losses) recognized in earnings  
       Income Statement    Amount  

Description (Millions)

     Line Item    2016      2015  

Available-for-sale securities

          

Reclassifications for previously unrealized net gains on investment securities

     Other non-interest
revenues
   $ 4       $   

Related income tax expense

     Income tax provision      (2        

 

    

 

  

 

 

    

 

 

 

Total

   $ 2       $   
                          

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13. Non-Interest Revenue and Expense Detail

The following is a detail of Other fees and commissions for the three months ended March 31:

 

                                             

 

 

(Millions)

     2016      2015  

Delinquency fees

     $ 200         $ 195     

Foreign currency conversion fee revenue

       196           211     

Loyalty coalition-related fees

       94           91     

Travel commissions and fees

       80           89     

Service fees

       78           87     

Other(a)

       32           35     

 

    

 

 

    

 

 

 

Total Other fees and commissions

     $ 680         $ 708     
                     

 

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

The following is a detail of Other revenues for the three months ended March 31:

 

                                             

 

 

(Millions)

     2016       2015   

Global Network Services partner revenues

     $ 145        $ 164    

Gross realized gains on sale of investment securities

               —    

Other(a)

       337          304    

 

    

 

 

    

 

 

 

Total Other revenues

     $ 486        $ 468    
                     

 

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

The following is a detail of Other expenses for the three months ended March 31:

 

                                             

 

 

(Millions)

     2016      2015  

Professional services

     $ 604       $ 624   

Occupancy and equipment

       465         434   

Communications

       83         88   

Card and merchant-related fraud losses

       58         100   

Gain on sale of JetBlue HFS portfolio(a)

       (127      —    

Other(b)

       337         153   

 

    

 

 

    

 

 

 

Total Other Expenses

     $ 1,420       $ 1,399   
                     

 

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

 

 

14. Income Taxes

The effective tax rate was 34.7 percent and 34.2 percent for the three months ended March 31, 2016 and 2015, respectively. The tax rates in both periods primarily reflected the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. Additionally, the effective tax rate in both periods reflected the resolution of certain prior years’ tax items.

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

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $263 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $263 million of unrecognized tax benefits, approximately $21 million relates to amounts that if recognized would be recorded in shareholders’ equity and would not impact the Company’s results of operations or its effective tax rate.

 

15. Earnings Per Common Share (EPS)

The computations of basic and diluted EPS for the three months ended March 31 were as follows:

 

                                             

 

 

(Millions, except per share amounts)

     2016      2015  

Numerator:

       

Basic and diluted:

       

Net income

     $ 1,426       $ 1,525   

Preferred dividends

       (21        

 

    

 

 

    

 

 

 

Net income available to common shareholders

     $ 1,405       $ 1,525   

Earnings allocated to participating share awards(a)

       (11      (11

 

    

 

 

    

 

 

 

Net income attributable to common shareholders

     $ 1,394       $ 1,514   

 

    

 

 

    

 

 

 

Denominator:(a)

       

Basic: Weighted-average common stock

       961         1,019   

Add: Weighted-average stock options (b)

       2         4   

 

    

 

 

    

 

 

 

Diluted

       963         1,023   

 

    

 

 

    

 

 

 

Basic EPS

     $ 1.45       $ 1.49   

Diluted EPS

     $ 1.45       $ 1.48   

 

 

 

  (a) The Company’s unvested restricted stock awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered participating securities. Calculations of EPS under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator.
  (b) The dilutive effect of unexercised stock options excludes from the computation of EPS 1.5 million and 0.5 million of options for the three months ended March 31, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.

For the three months ended March 31, 2016 and 2015, the Company met specified performance measures related to the $750 million of Subordinated Debentures issued in 2006, and maturing in 2036. If the performance measures were not achieved in any given quarter, the Company would be required to issue common shares and apply the proceeds to make interest payments.

 

 

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AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Reportable Operating Segments

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

The following table presents certain selected financial information for the Company’s reportable operating segments and Corporate & Other for the three months ended March 31, 2016 and 2015:

 

 

 
(Millions, except where indicated)      USCS      ICNS      GCS      GMS      Corporate &
Other(a)
     Consolidated  

 

 

2016

                   

Non-interest revenues

     $         2,029       $         1,140       $ 2,190       $ 1,041       $ 108       $ 6,508   

Interest income

       1,391         227         321                 66         2,005   

Interest expense

       140         54         95         (59      195         425   

Total revenues net of interest expense

       3,280         1,313         2,416         1,100         (21      8,088   

Net income (loss)

       694         188         485         357         (298      1,426   

 

 

Total assets (billions)

       86         34         47         24         (32      159   

 

 

Total equity (billions)

       7         3         7         2         2         21   

 

 

2015

                   

Non-interest revenues

       2,031         1,145         2,175         1,070         82         6,503   

Interest income

       1,273         245         278                 61         1,857   

Interest expense

       114         63         89         (59      203         410   

Total revenues net of interest expense

       3,190         1,327         2,364         1,129         (60      7,950   

Net income (loss)

       659         197         517         369         (217      1,525   

 

 

Total assets (billions)

       84         29         46         17         (21      155   

 

 

Total equity (billions)

     $ 8       $ 3       $ 7       $ 2       $ 2       $ 22   

 

 

 

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

 

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

Business Introduction

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

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

 

  Charge and credit card products

 

  Network services

 

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

 

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

 

  Expense management products and services

 

  Other lending products, including merchant financing

 

  Travel-related services

 

  Stored-value/prepaid products

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

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

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

 

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

 

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

 

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

 

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

 

 

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

 

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

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

Forward-Looking Statements and Non-GAAP Measures

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

Bank Holding Company

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

Business Environment

During the quarter, we continued to focus on our key initiatives to accelerate growth and optimize investments. Our results for the first quarter of 2016 reflected higher revenues and elevated investment levels as compared to the prior year, as well as healthy underlying loan growth, excellent credit performance and a strong balance sheet that enabled us to return a substantial amount of capital to shareholders. Results also included a $127 million pretax gain ($79 million after-tax) from our sale of the JetBlue Airways Corporation (JetBlue) cobrand portfolio and an $84 million pretax restructuring charge ($55 million after-tax), which reflected the initial phase of actions to take $1 billion out of our cost base by the end of 2017. We expect to incur an additional charge or charges in future quarters that, in the aggregate, will likely be significant as we continue our cost reduction efforts.

 

Billings growth for the first quarter, as compared to the prior year, increased sequentially reflecting a benefit from the leap year as well as slightly higher international volume growth, partially offset by a year-over-year decline in U.S. billings related to Costco Wholesale Corporation (Costco) as we move closer to the end of the Costco relationship in the United States in June. Within GCS, we continue to see differing performance trends with better growth among small and middle market businesses as compared to more cautious spending among global and large corporate customers. Internationally, billings growth after adjusting for foreign currency exchange rates remained strong as compared to the prior year, driven by China, Korea, Japan and the UK, although there is relatively little economic contribution from spending occurring within China and Korea.

 

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Revenues net of interest expense grew as compared to the prior year driven by net interest income, Card Member spending, (which increased despite a slowdown in Costco-related spending), and net card fees. This growth was partially offset by the higher costs associated with cash back rewards and a greater decline in the reported average discount rate, which was due to the continued expansion of OptBlue, merchant negotiations, changes in industry mix and the impact from regulatory changes enacted in the EU late last year. Revenue growth also continues to be impacted by a stronger U.S. dollar, although this impact was smaller than in recent quarters.

Growth in net interest income remained strong during the quarter, driven primarily by loan growth. Card Member loans held for investment were down in the first quarter of 2016 compared to the prior year on a reported basis due to the transfer of the Costco U.S. cobrand loan portfolio to Card Member loans and receivables held for sale effective December 1, 2015, and the sale of the JetBlue cobrand portfolio this quarter. Excluding the Costco and JetBlue cobrand portfolios from the prior year, worldwide loans increased driven by growth in both Card Member loans and loans related to our merchant financing products. We continue to believe there are opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing the overall risk profile of the Company.

Excluding from the prior year credit costs related to the Costco and JetBlue cobrand portfolios, which are reported in Other expenses for the first quarter of 2016, our credit provision increased year-over-year as a result of an increase in overall loan balances, including our merchant financing loans, although Card Member lending write-off rates were slightly lower versus the prior year. We expect continued growth in loans held for investment will contribute to an increase in provisions for losses; we also expect to see some upward pressure on our write-off rates, due primarily to the seasoning of loans related to new Card Members.

Our strong capital position allowed us to return substantially all of the capital we generated in the first quarter to our shareholders in the form of dividends and share repurchases, while maintaining strong capital ratios. We continue to believe our ability to return a high level of capital to our shareholders while maintaining our capital ratios illustrates the strength of our balance sheet and business model.

As mentioned above, we expect our relationship with Costco in the United States to end in June. The ultimate gain on the sale of the Costco cobrand portfolio will be determined based on the assets actually sold, but we continue to estimate a gain of approximately $1 billion, although given that Card Member borrowing and paydown trends are difficult to predict in this type of transition, the final gain could differ from our estimate. We expect the portfolio sale gain will be partially used to fund spending on growth initiatives throughout 2016. We expect total spending on growth initiatives during 2016 to be consistent with 2015 levels.

Relative to the first quarter of 2016, we expect earnings per share to be higher during the second quarter as a result of the Costco portfolio sale gain, with lower earnings during the second half of 2016 following the end of the Costco relationship. As of March 31, 2016, Costco cobrand accounts were responsible for approximately 10 percent of our total cards-in-force. Costco cobrand accounts generated approximately 7 percent of our worldwide billed business during the first quarter of 2016. Approximately 70 percent of the spending on these accounts occurred outside Costco warehouses. In addition, 1 percent of our worldwide billed business during the first quarter of 2016 came from spending on other (non-Costco cobrand) American Express cards at Costco in the United States.

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

 

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American Express Company

Consolidated Results of Operations

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

Effective December 1, 2015, we transferred the Card Member loans and receivables related to our cobrand partnerships with Costco in the United States and JetBlue (the HFS portfolios) to Card Member loans and receivables HFS (included in the USCS and GCS segments) on the Consolidated Balance Sheets (the sale of JetBlue was completed on March 18, 2016). The primary impacts beyond the HFS classification on the Consolidated Balance Sheets are to provisions for losses and credit metrics, which no longer reflect amounts related to these loans and receivables, as credit costs are reported in Other expenses through a valuation allowance adjustment. Other, non-credit related metrics (i.e., billed business, cards-in-force, net interest yield) continue to reflect amounts related to the HFS portfolios. Refer to Note 2 to the “Consolidated Financial Statements” for additional information.

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

Table 1: Summary of Financial Performance

 

        Three Months Ended                 
       March 31,     Change  

(Millions, except percentages and per share amounts)

     2016     2015         2016 vs. 2015      

Total revenues net of interest expense

     $         8,088      $         7,950      $         138         2

Provisions for losses

       434        420        14         3   

Expenses

       5,470        5,214        256         5   

Net income

       1,426        1,525        (99      (6

Earnings per common share — diluted(a)

     $ 1.45      $ 1.48      $ (0.03      (2 )% 

Return on average equity(b)

       23.6     29.0     

Return on average tangible common equity (c)

       30.6     36.2                 

 

(a) Earnings per common share — diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $11 million for both the three months ended March 31, 2016 and 2015, and (ii) dividends on preferred shares of $21 million and nil for the three months ended March 31, 2016 and 2015, respectively.

 

(b) Return on average equity (ROE) is computed by dividing (i) one-year period net income ($5.1 billion and $6.0 billion for March 31, 2016 and 2015, respectively) by (ii) one-year average total shareholders’ equity ($21.5 billion and $20.6 billion for March 31, 2016 and 2015, respectively).

 

(c) Return on average tangible common equity (ROTCE), a non-GAAP measure, is computed in the same manner as ROE except the computation of average tangible common equity, a non-GAAP measure, excludes from average total shareholders’ equity, average goodwill and other intangibles of $3.7 billion and $3.8 billion as of March 31, 2016 and 2015, respectively, and average preferred shares of $1.6 billion and $350 million as of March 31, 2016 and 2015, respectively. We believe ROTCE is a useful measure of the profitability of our business.

 

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Table 2: Total Revenue Net of Interest Expense Summary

 

        Three Months Ended                  
       March 31,      Change  

(Millions, except percentages)

     2016      2015              2016 vs. 2015          

Discount revenue

     $         4,643       $         4,660       $ (17      —%   

Net card fees

       699         667         32         5       

Other fees and commissions

       680         708         (28      (4)     

Other

       486         468         18         4       

 

    

 

 

    

 

 

    

 

 

    

Total non-interest revenues

       6,508         6,503         5         —       

 

    

 

 

    

 

 

    

 

 

    

Total interest income

       2,005         1,857         148         8       

Total interest expense

       425         410         15         4       

 

    

 

 

    

 

 

    

 

 

    

Net interest income

       1,580         1,447         133         9       

 

    

 

 

    

 

 

    

 

 

    

Total revenues net of interest expense

     $ 8,088       $ 7,950       $         138         2 %   

Total Revenues Net of Interest Expense

Discount revenue remained relatively flat for the three months ended March 31, 2016, compared to the same period in the prior year, and increased 1 percent on an FX-adjusted basis, driven by 3 percent growth in billed business (6 percent on an FX-adjusted basis), partially offset by a decrease in the average discount rate, and increases in contra discount revenues, such as higher cash rebate rewards including new Card Member acquisition offers.1 U.S. billed business increased 4 percent, and non-U.S. billed business increased 2 percent (9 percent on an FX-adjusted basis), compared to the same period in the prior year.1

The average discount rate was 2.44 percent and 2.49 percent for the three months ended March 31, 2016 and 2015, respectively. The decrease was driven in part by growth of the OptBlue program, merchant negotiations, changes in industry mix, and impacts from European regulatory changes. We expect the average discount rate will likely decline by a greater amount during 2016 than 2015 due to the continued expansion of OptBlue, a greater impact from international regulatory changes and continued competitive pressures. More broadly, overall changes in the mix of spending by location and industry, merchant incentives and concessions, volume related pricing discounts, strategic investments, certain pricing initiatives, competition, pricing regulation (including regulation of competitors’ interchange rates) and other factors will likely result in continued erosion of our discount rate over time. See Tables 5 and 6 for more details on billed business performance and the average discount rate.

Net card fees increased $32 million or 5 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by higher proprietary cards-in-force.

Other fees and commissions decreased $28 million or 4 percent for the three months ended March 31, 2016, compared to the same period in the prior year, and remained relatively flat on an FX-adjusted basis.1

Other revenues increased $18 million or 4 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by higher revenues from our Prepaid Services business.

Interest income increased $148 million or 8 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily reflecting an increase in average Card Member loans (including Card Member loans HFS) and a higher yield.

 

 

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

 

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Interest expense increased $15 million or 4 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by higher average customer deposit balances, partially offset by lower average long-term debt.

Table 3: Provisions for Losses Summary

 

                                                   
        Three Months Ended                
       March 31,      Change

(Millions, except percentages)

     2016      2015          2016 vs. 2015    

Charge card

     $ 169       $ 174       $ (5)       (3)%

Card Member loans

       227         235         (8)       (3) 

Other

       38         11         27        #

 

    

 

 

    

 

 

    

 

 

    

Total provisions for losses(a)

     $         434       $         420       $           14            3 %

# Denotes a variance greater than 100 percent.

 

(a) For the three months ended March 31, 2016, provisions for losses does not reflect the HFS portfolios.

Provisions for Losses

Charge card provision for losses decreased $5 million or 3 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by lower write-offs, partially offset by a lower reserve release in the current year.

Card Member loans provision for losses decreased $8 million or 3 percent for the three months ended March 31, 2016, compared to the same period in the prior year, as the current year period does not reflect HFS portfolios as related credit costs are reported in Other expenses through a valuation allowance adjustment, the decrease from which was substantially offset by growth in Card Member loans.

Other provision for losses increased $27 million for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by growth and higher delinquency rates in merchant financing loans.

Table 4: Expenses Summary

 

                                                   
        Three Months Ended                
       March 31,      Change

(Millions, except percentages)

     2016      2015          2016 vs. 2015    

Marketing and promotion

     $ 727       $ 609       $         118       19 %

Card Member rewards

               1,703                 1,640         63       4  

Card Member services and other

       282         261         21       8  

 

    

 

 

    

 

 

    

 

 

    

 

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

       2,712         2,510         202       8  

 

    

 

 

    

 

 

    

 

 

    

 

Salaries and employee benefits

       1,338         1,305         33       3  

Other, net(a)

       1,420         1,399         21       2  

 

    

 

 

    

 

 

    

 

 

    

 

Total expenses

     $ 5,470       $ 5,214       $ 256       5 %

 

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

Expenses

Marketing and promotion expenses increased $118 million or 19 percent for the three months ended March 31, 2016, compared to the same period in the prior year, driven by elevated levels of spending on growth initiatives, predominantly within the USCS and ICNS segments.

 

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Card Member rewards expenses increased $63 million or 4 percent for the three months ended March 31, 2016, compared to the same period in the prior year. The current period increase was primarily driven by higher Membership Rewards expense of $49 million and higher cobrand rewards expense of $14 million. The increase in Membership Rewards expense was primarily driven by an increase in new points earned as a result of higher spending volumes. The increase in cobrand rewards expense was primarily driven by higher spending volumes, partially offset by a continued decline in spending on the Costco cobrand card portfolio.

The Membership Rewards Ultimate Redemption Rate (URR) for current program participants was 95 percent (rounded down) at March 31, 2016, compared to 95 percent (rounded up) at March 31, 2015.

Card Member services and other expenses increased $21 million or 8 percent for the three months ended March 31, 2016, compared to the same period in the prior year, driven by growth in proprietary cards-in-force as well as increased usage of new benefits.

Salaries and employee benefits expenses increased $33 million or 3 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by restructuring in the current year.

Other expenses increased $21 million or 2 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by the benefit in the prior year from both the reassessment of the functional currency of certain UK legal entities and other FX-related activity. The increase was also driven by the impact of the transfer of the HFS portfolios to Card Member loans and receivables HFS, as related credit costs are reported in Other expenses through a valuation allowance adjustment, both of which were partially offset by the gain on the sale of the JetBlue Card Member loans HFS portfolio, as well as lower fraud expense in the current year.

Income Taxes

The effective tax rate was 34.7 percent and 34.2 percent for the three months ended March 31, 2016, and 2015, respectively. The tax rates in both periods primarily reflect the level of pretax income in relation to permanent tax benefits and geographic mix of business. Additionally, the effective tax rates in both periods reflect the resolution of certain prior years’ tax items.

 

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Table 5: Selected Card Related Statistical Information

 

        As of or for the     Change    
       Three Months Ended     2016    
       March 31,     vs.    

 

     2016     2015         2015        

Card billed business: (billions)

        

United States

     $ 176.3      $ 169.4                    4%

Outside the United States

       77.5        76.2                 2
    

 

 

   

 

 

   

Worldwide

     $             253.8      $             245.6                 3
    

 

 

   

 

 

   

Total cards-in-force: (millions)

        

United States

       57.9        54.8                 6

Outside the United States

       60.7        57.4                 6
    

 

 

   

 

 

   

Worldwide

       118.6        112.2                 6
    

 

 

   

 

 

   

Basic cards-in-force: (millions)

        

United States

       45.1        42.4                 6

Outside the United States

       50.0        47.3                 6
    

 

 

   

 

 

   

Worldwide

       95.1        89.7                 6
    

 

 

   

 

 

   

Average basic Card Member spending: (dollars)(a)

        

United States

     $ 4,249      $ 4,320                (2)

Outside the United States

       3,082        3,135                (2)

Worldwide Average

       3,952        4,008                (1)

Card Member loans: (billions)(b)

        

United States

       50.7        59.9                (15)

Outside the United States

       6.7        6.9                (3)
    

 

 

   

 

 

   

Worldwide

     $ 57.4      $ 66.8                (14)
    

 

 

   

 

 

   

Average discount rate

       2.44     2.49  

Average fee per card (dollars)(a)

     $ 40      $ 39                 3

Average fee per card adjusted (dollars)(a)

     $ 43      $ 44                   (2)%

 

(a) Average basic Card Member spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The average fee per card adjusted, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $68 million and $84 million for the three months ended March 31, 2016 and 2015, respectively. We present the average fee per card adjusted because we believe this metric presents a useful indicator of card fee pricing across a range of our proprietary card products.
(b) Effective December 1, 2015, does not reflect the HFS portfolios.

 

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Table 6: Billed Business Growth

 

     Three Months Ended  
    March 31, 2016  
          Percentage Increase  
    Percentage       (Decrease) Assuming  
    Increase     No Changes in  
                  (Decrease)        FX Rates  (a) 

Worldwide(b)

   

Total billed business

    3     6

Proprietary billed business

    3        4   

GNS billed business(c)

    5        13   

Airline-related volume (9% of worldwide billed business)

    (4     (2

United States(b)

   

Billed business

    4     

Proprietary consumer card billed business(d)

    4     

Proprietary small business and corporate services billed business(e)

    5     

T&E-related volume (27% of U.S. billed business)

    1     

Non-T&E-related volume (73% of U.S. billed business)

    5     

Airline-related volume (8% of U.S. billed business)

    (5  

Outside the United States(b)

   

Billed business

    2        9   

Japan, Asia Pacific & Australia billed business

    8        13   

Latin America & Canada billed business

    (14     5   

Europe, the Middle East & Africa billed business

    3        8   

Proprietary consumer card billed business(c)

    1        8   

Proprietary small business and corporate services billed business(e)

    (3 )%      4

 

(a) The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current period apply to the corresponding period against which such results are being compared).
(b) Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data.
(c) Included in the ICNS segment.
(d) Included in the USCS segment.
(e) Included in the GCS segment.

 

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Table 7: Selected Credit Related Statistical Information

 

        As of or for the
Three Months Ended
March 31,
   

Change    

2016    

vs.    

 

(Millions, except percentages and where indicated)

     2016     2015         2015          

Worldwide Card Member receivables: (a)

        

Total receivables (billions)

     $ 44.5      $ 43.7        2 %    

Loss reserves:

        

Beginning balance

     $ 462      $ 465        (1)       

Provisions (b)

       169        174        (3)       

Net write-offs (c)

       (186     (199     (7)       

Other

       1        (11     #        
    

 

 

   

 

 

   

Ending balance

     $ 446      $ 429        4        
    

 

 

   

 

 

   

% of receivables

       1.0     1.0  

Net write-off rate — principal only (d)

       1.9     2.1  

Net write-off rate — principal and fees (d)

       2.1     2.3  

30+ days past due as a % of total (d)

       1.5     1.6  

Net loss ratio as a % of charge volume — GCP

       0.08     0.10  

90+ days past billing as a % of total — GCP

       0.7     0.7  

Worldwide Card Member loans: (a)

        

Total loans (billions)

     $ 57.4      $ 66.8        (14)       

Loss reserves:

        

Beginning balance

     $         1,028      $ 1,201        (14)       

Provisions (b)

       227        235        (3)       

Net write-offs — principal only (c)

       (214     (259     (17)       

Net write-offs — interest and fees (c)

       (40     (43     (7)       

Other

       11        (4     #        
    

 

 

   

 

 

   

Ending balance

     $ 1,012      $         1,130        (10)       
    

 

 

   

 

 

   

Ending reserves — principal

     $ 959      $ 1,074        (11)       

Ending reserves — interest and fees

     $ 53      $ 56        (5)       

% of loans

       1.8     1.7  

% of past due

       161     163  

Average loans (billions)(a)

     $ 57.4      $ 67.6        (15)%   

Net write-off rate — principal only (d)

       1.5     1.5  

Net write-off rate — principal, interest and fees (d)

       1.8     1.8  

30+ days past due as a % of total (d)

       1.1     1.0        

 

# Denotes a variance greater than 100 percent.

 

(a) Refer to Table 5 footnote (b).

 

(b) Provisions on principal and fee reserve components on Card Member receivables and provisions for principal, interest and/or fees on Card Member loans. Refer to Table 3 footnote (a).

 

(c) Write-offs, less recoveries.

 

(d) 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 our reserves for credit losses, a net write-off rate including principal, interest and/or fees is also presented. The net write-off rates and 30+ days past due as a percentage of total relate to USCS, ICNS and Global Small Business Services (GSBS) Card Member receivables.

 

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Table 8: Net Interest Yield on Card Member Loans

 

        Three Months Ended  
       March 31,  

(Millions, except percentages and where indicated)

       2016        2015   

Net interest income

     $ 1,580      $ 1,447   

Exclude:

      

Interest expense not attributable to the Company’s Card Member loan portfolio

       238        246   

Interest income not attributable to the Company’s Card Member loan portfolio

       (103     (87
    

 

 

   

 

 

 

Adjusted net interest income (a)

     $         1,715      $         1,606   

Average loans including HFS loan portfolios (billions)

     $ 70.8      $ 67.6   

Net interest income divided by average loans

       8.9     8.6

Net interest yield on Card Member loans (a)

       9.7     9.6

 

(a) Adjusted net interest income and net interest yield on Card Member loans are non-GAAP measures. Refer to “Glossary of Selected Terminology” for definitions of these terms. We believe adjusted net interest income is useful to investors because it is a component of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio.

 

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Business Segment Results

U.S. Consumer Services

Table 9: USCS Selected Income Statement Data

 

        Three Months Ended                 
       March 31,     Change  

(Millions, except percentages)

     2016     2015     2016 vs. 2015  

Revenues

           

Non-interest revenues

     $         2,029      $         2,031      $ (2     
    

 

 

   

 

 

   

 

 

    

Interest income

       1,391        1,273                   118         9   

Interest expense

       140        114        26         23   
    

 

 

   

 

 

   

 

 

    

Net interest income

       1,251        1,159        92         8   
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense

       3,280        3,190        90         3   

Provisions for losses

       190        193        (3      (2
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense after provisions for losses

       3,090        2,997        93         3   
    

 

 

   

 

 

   

 

 

    

Expenses

           

Marketing, promotion, rewards, Card Member services and other

       1,348        1,210        138         11   

Salaries and employee benefits and other operating expenses

       655        746        (91      (12
    

 

 

   

 

 

   

 

 

    

Total expenses

       2,003        1,956        47         2   
    

 

 

   

 

 

   

 

 

    

Pretax segment income

       1,087        1,041        46         4   

Income tax provision

       393        382        11         3   
    

 

 

   

 

 

   

 

 

    

Segment income

     $ 694      $ 659      $ 35         5
    

 

 

   

 

 

   

 

 

    

Effective tax rate

       36.2     36.7                 

USCS issues a wide range of proprietary consumer cards and provides services to consumers in the United States, including consumer travel services.

Non-interest revenues decreased marginally for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by lower discount revenue as a result of higher cash rebate rewards including new Card Member acquisition offers, which was partially offset by growth in billed business. The decrease in discount revenue was largely offset by both an increase in net card fees, resulting from higher proprietary cards-in-force, and higher delinquency fees. Billed business increased 4 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by a 6 percent increase in proprietary cards-in-force, partially offset by a 3 percent decrease in average spending per proprietary basic card.

Net interest income increased $92 million or 8 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by higher average Card Member loans (including Card Member loans HFS), partially offset by higher interest expense.

Overall, provisions for losses decreased $3 million or 2 percent for the three months ended March 31, 2016, compared to the same period in the prior year, as the current year period does not reflect provisions for the HFS portfolios as related credit costs are reported in Other expenses through a valuation allowance adjustment, the decrease from which was partially offset by growth in Card Member loans held for investment.

Marketing, promotion, rewards, Card Member services and other expenses increased $138 million or 11 percent for the three months ended March 31, 2016, compared to the same period in the prior year. This increase was primarily driven by an $81 million increase in marketing and promotion expense, driven by elevated levels of spending on growth initiatives, and a $36 million increase in Card Member rewards expense. The increase in Card Member rewards expense was due to higher Membership Rewards expense of $30 million primarily driven by an increase in new points earned due to higher spending volumes and an increase in the URR, partially offset by a decline in the weighted average cost (WAC) per point assumption. The increase in cobrand rewards expense of $6 million was primarily driven by higher spending volumes, partially offset by a continued decline in spending on the Costco cobrand card portfolio.

 

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Salaries and employee benefits and other operating expenses decreased $91 million or 12 percent for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by the gain on the sale of the JetBlue Card Member loans HFS portfolio.

 

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Table 10: USCS Selected Statistical Information

 

        As of or for the
Three Months Ended
March 31,
   

Change

2016

vs.

 

(Millions, except percentages and where indicated)

     2016     2015         2015      

Card billed business (billions)

     $ 89.0      $ 85.7        4

Total cards-in-force

       40.9        38.6        6   

Basic cards-in-force

       28.8        26.9        7   

Average basic Card Member spending (dollars)

     $         3,092      $         3,184        (3

Total segment assets (billions)(a)

     $ 86.3      $ 84.0        3   

Segment capital (billions)

     $ 7.4      $ 7.8        (5

Return on average segment capital (b)

       31.8     30.5  

Return on average tangible segment capital (b)

       33.3     31.6  

 

    

 

 

   

 

 

   

 

 

 

Card Member receivables: (c)

        

Total receivables (billions)

     $ 10.3      $ 10.5        (2

Net write-off rate – principal only (d)

       1.8     2.1  

Net write-off rate – principal and fees (d)

       2.0     2.3  

30+ days past due as a % of total

       1.4     1.5  

 

    

 

 

   

 

 

   

 

 

 

Card Member loans: (c)

        

Total loans (billions)

     $ 42.4      $ 50.3        (16

Average loans (billions)

     $ 42.5      $ 50.9        (16 )% 

Net write-off rate – principal only (d)

       1.5     1.5  

Net write-off rate – principal, interest and fees (d)

       1.7     1.7  

30+ days past due loans as a % of total

       1.0     0.9  

Calculation of Net Interest Yield on Card Member loans:

        

Net interest income

     $ 1,251      $ 1,159     

Exclude:

        

Interest expense not attributable to the Company’s Card

        

Member loan portfolio

       19        17     

Interest income not attributable to the Company’s Card

        

Member loan portfolio

       (5     (4  
    

 

 

   

 

 

   

Adjusted net interest income (e)

     $ 1,265      $ 1,172     

Average loans including HFS loan portfolios (billions)

     $ 53.8      $ 50.9     

Net interest income divided by average loans

       9.3     9.1  

Net interest yield on Card Member loans(e)

       9.5     9.4        

 

(a) Effective September 30, 2015, certain intercompany balances have been reclassified between operating segments, as a result of system enhancements.
(b) Return on average segment capital is calculated by dividing (i) one-year period segment income ($2.4 billion and $2.3 billion for the twelve months ended March 31, 2016 and 2015, respectively) by (ii) one-year average segment capital ($7.5 billion and $7.4 billion for the twelve months ended March 31, 2016 and 2015, respectively). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $330 million and $261 million as of March 31, 2016 and 2015, respectively. We believe the return on average tangible segment capital is a useful measure of the profitability of our business.
(c) Refer to Table 5 footnote (b).
(d) Refer to Table 7 footnote (d).
(e) Adjusted net interest income and net interest yield on Card Member loans are non-GAAP measures. Refer to “Glossary of Selected Terminology” for the definitions of these terms. We believe adjusted net interest income is useful to investors because it is a component of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio.

 

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International Consumer and Network Services

Table 11: ICNS Selected Income Statement Data

 

                                                   
        Three Months Ended                 
       March 31,     Change  

(Millions, except percentages)

     2016     2015         2016 vs. 2015      

Revenues

           

Non-interest revenues

     $         1,140      $         1,145      $ (5     
    

 

 

   

 

 

   

 

 

    

    Interest income

       227        245        (18      (7

    Interest expense

       54        63        (9      (14
    

 

 

   

 

 

   

 

 

    

        Net interest income

       173        182        (9      (5
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense

       1,313        1,327        (14      (1

Provisions for losses

       71        70        1         1   
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense after provisions for losses

       1,242        1,257        (15      (1
    

 

 

   

 

 

   

 

 

    

Expenses

           

    Marketing, promotion, rewards, Card Member services and other

       481        447            34         8   

    Salaries and employee benefits and other operating expenses

       506        530        (24      (5
    

 

 

   

 

 

   

 

 

    

        Total expenses

       987        977        10         1   
    

 

 

   

 

 

   

 

 

    

Pretax segment income

       255        280        (25      (9

Income tax provision

       67        83        (16      (19
    

 

 

   

 

 

   

 

 

    

Segment income

     $ 188      $ 197      $ (9      (5 )% 
    

 

 

   

 

 

   

 

 

    

Effective tax rate

       26.3 %      29.6                 

ICNS issues a wide range of proprietary consumer cards outside the United States and enters into partnership agreements with third party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network. It also provides travel services to consumers outside the United States.

Non-interest revenues remained relatively flat for the three months ended March 31, 2016, compared to the same period in the prior year, and increased 8 percent on an FX-adjusted basis, primarily driven by higher discount revenue, due to an increase in both proprietary and non-proprietary (i.e., GNS) billed business, as well as higher net card fees.2 Total billed business increased 3 percent (11 percent on an FX adjusted basis) for the three months ended March 31, 2016, compared to the same period in the prior year, primarily due to increased proprietary and GNS cards in force, with a relatively consistent level of average spend per card.2 Refer to Tables 6 and 7 for additional information on billed business by region.

Interest income decreased $18 million or 7 percent for the three months ended March 31, 2016, compared to the same period in the prior year, and increased 5 percent on an FX-adjusted basis, primarily driven by higher average FX-adjusted loan balances. 2

Interest expense decreased $9 million or 14 percent for the three months ended March 31, 2016, compared to the same period in the prior year, and was relatively flat on an FX-adjusted basis. 2

Provisions for losses remained relatively flat for the three months ended March 31, 2016, compared to the same period in the prior year, and increased 13 percent on an FX-adjusted basis, driven by higher charge card net write-offs.2

Marketing, promotion, rewards, Card Member services and other expenses increased $34 million or 8 percent (15 percent on an FX-adjusted basis) for the three months ended March 31, 2016, compared to the same period in the prior year, primarily driven by elevated levels of spending on growth initiatives and higher rewards expense, mostly due to higher spending volumes. 2

 

 

2  Refer to footnote 1 on page 32 for details regarding foreign currency adjusted information.

 

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Salaries and employee benefits and other operating expenses decreased $24 million or 5 percent for the three months ended March 31, 2016, compared to the same period in the prior year, and was relatively flat on an FX-adjusted basis.3

The effective tax rate in all periods reflects the recurring permanent tax benefit related to the segment’s ongoing funding activities outside the United States, which is allocated to ICNS under the Company’s internal tax allocation process. The effective tax rate for 2015 also reflects the allocated share of tax benefits related to the resolution of certain prior years’ items. In addition, the effective tax rate in each of the periods reflects the impact of recurring permanent tax benefits on varying levels of pretax income.

 

 

 

 

3 Refer to footnote 1 on page 32 for details regarding foreign currency adjusted information.

 

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Table 12: ICNS Selected Statistical Information

 

        As of or for the     Change  
       Three Months Ended     2016  
       March 31,     vs.  

(Millions, except percentages and where indicated)

     2016     2015         2015      

Card billed business (billions)

        

Proprietary

     $ 24.7      $ 24.5        1

GNS

       40.5        38.6        5   
    

 

 

   

 

 

   

Total

     $ 65.2      $ 63.1        3   
    

 

 

   

 

 

   

Total cards-in-force

        

Proprietary

       14.8        14.3        3   

GNS

       47.7        44.5        7   
    

 

 

   

 

 

   

Total

       62.5        58.8        6   
    

 

 

   

 

 

   

Proprietary basic cards-in-force

       10.1        9.9        2   

Average proprietary basic Card Member spending (dollars)

     $         2,455      $         2,454          

Total segment assets (billions)(a)

     $ 34.3      $ 28.6        20   

Segment capital (billions)

     $ 2.5      $ 3.0        (17

Return on average segment capital (b)

       23.6     24.3  

Return on average tangible segment capital (b)

       31.7     34.2  

 

    

 

 

   

 

 

   

 

 

 

Card Member receivables:

        

Total receivables (billions)

     $ 5.6      $ 5.1        10   

Net write-off rate – principal only (c)

       2.2     1.9  

Net write-off rate – principal and fees(c)

       2.4     2.1  

30+ days past due loans as a % of total

       1.5     1.6  

 

    

 

 

   

 

 

   

 

 

 

Card Member loans:

        

Total loans (billions)

     $ 6.6      $ 6.8        (3

Average loans (billions)

     $ 6.8      $ 7.2        (6 )% 

Net write-off rate – principal only (c)

       1.9     2.0  

Net write-off rate – principal, interest and fees (c)

       2.4     2.5  

30+ days past due loans as a % of total

       1.8     1.8  

Calculation of Net Interest Yield on Card Member loans:

        

Net interest income

     $ 173      $ 182     

Exclude:

        

Interest expense not attributable to the Company’s Card Member loan portfolio

       11        15     

Interest income not attributable to the Company’s Card Member loan portfolio

       (3     (4  
    

 

 

   

 

 

   

    Adjusted net interest income (d)

     $ 181      $ 193     

Average loans (billions)

     $ 6.7      $ 7.2     

Net interest income divided by average loans

       10.3     10.2  

Net interest yield on Card Member loans (d)

       10.8     10.9        

 

(a) Effective September 30, 2015, certain intercompany balances have been reclassified between operating segments as a result of system enhancements.

 

(b) Return on average segment capital is calculated by dividing (i) one-year period segment income ($676 million and $651 million for the twelve months ended March 31, 2016 and 2015, respectively) by (ii) one-year average segment capital ($2.9 billion and $2.7 billion for the twelve months ended March 31, 2016 and 2015, respectively). Return on average tangible segment capital, a non-GAAP measure, is computed in the same manner as return on average segment capital except the computation excludes from average segment capital average goodwill and other intangibles of $0.7 billion and $0.8 billion as of March 31, 2016 and 2015, respectively. We believe return on average tangible segment capital is a useful measure of the profitability of our business.

 

(c) Refer to Table 7 footnote (d).

 

(d) Adjusted net interest income and net interest yield on Card Member loans are non-GAAP measures. Refer to “Glossary of Selected Terminology” for the definitions of these terms. We believe adjusted net interest income is useful to investors because it is a component of net interest yield on Card Member loans, which provides a measure of profitability of our Card Member loan portfolio.

 

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Global Commercial Services

Table 13: GCS Selected Income Statement Data

 

        Three Months Ended                 
       March 31,     Change  

(Millions, except percentages)

     2016     2015         2016 vs. 2015      

Revenues

           

Non-interest revenues

     $         2,190      $         2,175      $ 15          1
    

 

 

   

 

 

   

 

 

    

Interest income

       321        278        43          15   

Interest expense

       95        89                7   
    

 

 

   

 

 

   

 

 

    

Net interest income

       226        189        37          20   
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense

       2,416        2,364        52          2   

Provisions for losses

       160        151                6   
    

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense after provisions for losses

       2,256        2,213        43          2   
    

 

 

   

 

 

   

 

 

    

Expenses

           

Marketing, promotion, rewards, Card Member services and other

       766        723        43          6   

Salaries and employee benefits and other operating expenses

       729        673        56          8   
    

 

 

   

 

 

   

 

 

    

Total expenses

       1,495        1,396        99          7   
    

 

 

   

 

 

   

 

 

    

Pretax segment income

       761        817        (56)         (7

Income tax provision

       276        300        (24)         (8
    

 

 

   

 

 

   

 

 

    

Segment income

     $ 485      $ 517      $     (32)         (6 )% 
    

 

 

   

 

 

   

 

 

    

Effective tax rate

       36.3     36.7