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 September 30, 2015

or

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

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                  to                 

Commission file number 1-7657

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

    

13-4922250

  

(State or other jurisdiction of

incorporation or organization)

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

200 Vesey Street, New York, NY

    

10285

  
(Address of principal executive offices)      (Zip Code)   

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

 

None

  

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

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

Yes   X             No             

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

Yes   X             No             

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

 

Large accelerated filer  x

  

Accelerated filer  ¨

Non-accelerated filer  ¨    (Do not check if a smaller reporting company)

  

 Smaller reporting company  ¨

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

Yes                   No   X      

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

 

Class

  Outstanding at October 23, 2015
Common Shares (par value $0.20 per share)   984,245,923 shares      


Table of Contents

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

 

Part I.   Financial Information   

Page No.

 
  Item 1.    Financial Statements   
     Consolidated Statements of Income – Three Months Ended September 30, 2015 and 2014      1     
     Consolidated Statements of Income – Nine Months Ended September 30, 2015 and 2014      2     
    

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September  30, 2015 and 2014

     3     
     Consolidated Balance Sheets – September 30, 2015 and December 31, 2014      4     
     Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2015 and 2014      5     
     Notes to Consolidated Financial Statements      6     
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      34     
  Item 3.    Quantitative and Qualitative Disclosures about Market Risk      74     
  Item 4.    Controls and Procedures      74     
Part II.   Other Information  
  Item 1.    Legal Proceedings      77     
  Item 1A.    Risk Factors      79     
  Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      80     
  Item 5.    Other Information      81     
  Item 6.    Exhibits      81     
  Signatures      82     
  Exhibit Index      E-1     


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                         

 

Three Months Ended September 30, (Millions, except per share amounts)    2015      2014

 

  

 

 

    

 

Revenues

     

Non-interest revenues

     

Discount revenue

   $ 4,778       $           4,889

Net card fees

     679       680

Travel commissions and fees

     87       104

Other commissions and fees

     640       642

Other

     504       593

 

  

 

 

    

 

Total non-interest revenues

     6,688       6,908

 

  

 

 

    

 

Interest income

     

Interest on loans

     1,847       1,753

Interest and dividends on investment securities

     38       45

Deposits with banks and other

     19       17

 

  

 

 

    

 

Total interest income

     1,904       1,815

 

  

 

 

    

 

Interest expense

     

Deposits

     125       91

Long-term debt and other

     274       329

 

  

 

 

    

 

Total interest expense

     399       420

 

  

 

 

    

 

Net interest income

     1,505       1,395

 

  

 

 

    

 

Total revenues net of interest expense

     8,193       8,303

 

  

 

 

    

 

Provisions for losses

     

Charge card

     203       196

Card Member loans

     309       265

Other

     17       27

 

  

 

 

    

 

Total provisions for losses

     529       488

 

  

 

 

    

 

Total revenues net of interest expense after provisions for losses

     7,664       7,815

 

  

 

 

    

 

Expenses

     

Marketing and promotion

     847       783

Card Member rewards

     1,763       1,695

Card Member services and other

     269       205

Salaries and employee benefits

     1,212       1,290

Other, net

     1,635       1,596

 

  

 

 

    

 

Total expenses

     5,726       5,569

 

  

 

 

    

 

Pretax income

     1,938       2,246

Income tax provision

     672       769

 

  

 

 

    

 

Net income

   $ 1,266       $           1,477

 

  

 

 

    

 

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

     

Basic

   $ 1.24       $             1.41

Diluted

   $ 1.24       $             1.40

 

  

 

 

    

 

Average common shares outstanding for earnings per common share:

     

Basic

     994       1,041

Diluted

     997       1,047

Cash dividends declared per common share

   $ 0.29       $             0.26

 

 

(a)

Represents net income less (i) earnings allocated to participating share awards of $10 million and $11 million for the three months ended September 30, 2015 and 2014, respectively, and (ii) dividends on preferred shares of $22 million and nil for the three months ended September 30, 2015 and 2014, respectively.

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

                                         

 

Nine Months Ended September 30, (Millions, except per share amounts)    2015      2014

 

  

 

 

    

 

Revenues

     

Non-interest revenues

     

Discount revenue

   $ 14,384       $          14,428

Net card fees

     2,013       2,041

Travel commissions and fees

     271       1,027

Other commissions and fees

     1,891       1,884

Other

     1,493       1,679

 

  

 

 

    

 

Total non-interest revenues

     20,052       21,059

 

  

 

 

    

 

Interest income

     

Interest on loans

     5,418       5,160

Interest and dividends on investment securities

     120       136

Deposits with banks and other

     60       54

 

  

 

 

    

 

Total interest income

     5,598       5,350

 

  

 

 

    

 

Interest expense

     

Deposits

     337       276

Long-term debt and other

     886       1,026

 

  

 

 

    

 

Total interest expense

     1,223       1,302

 

  

 

 

    

 

Net interest income

     4,375       4,048

 

  

 

 

    

 

Total revenues net of interest expense

     24,427       25,107

 

  

 

 

    

 

Provisions for losses

     

Charge card

     542       594

Card Member loans

     829       797

Other

     45       71

 

  

 

 

    

 

Total provisions for losses

     1,416       1,462

 

  

 

 

    

 

Total revenues net of interest expense after provisions for losses

     23,011       23,645

 

  

 

 

    

 

Expenses

     

Marketing and promotion

     2,217       2,329

Card Member rewards

     5,202       5,050

Card Member services and other

     772       619

Salaries and employee benefits

     3,767       4,488

Other, net

     4,569       4,393

 

  

 

 

    

 

Total expenses

     16,527       16,879

 

  

 

 

    

 

Pretax income

     6,484       6,766

Income tax provision

     2,220       2,328

 

  

 

 

    

 

Net income

   $ 4,264       $           4,438

 

  

 

 

    

 

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

     

Basic

   $ 4.16       $             4.19

Diluted

   $ 4.15       $             4.17

 

  

 

 

    

 

Average common shares outstanding for earnings per common share:

     

Basic

     1,007       1,051

Diluted

     1,011       1,057

Cash dividends declared per common share

   $ 0.84       $             0.75

 

 

(a)

Represents net income less (i) earnings allocated to participating share awards of $32 million and $35 million for the nine months ended September 30, 2015 and 2014, respectively, and (ii) dividends on preferred shares of $42 million and nil for the nine months ended September 30, 2015 and 2014, respectively.

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

                                                                                   

 

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

(Millions)

   2015      2014      2015      2014
  

 

 

    

 

 

    

 

 

    

 

Net income

   $ 1,266        $ 1,477        $ 4,264        $        4,438 

Other comprehensive (loss) income:

           

Net unrealized securities (losses) gains,
net of tax: 2015, $(2) and $(13); 2014, $(5) and $19

     (7)         (11)         (27)       31 

Foreign currency translation adjustments,
net of tax: 2015, $181 and $221; 2014, $119 and $41

     (220)         (167)         (464)       (195)

Net unrealized pension and other postretirement benefit gains,
net of tax: 2015, $8 and $24; 2014, $9 and $29

                     36        48 

 

  

 

 

    

 

 

    

 

 

    

 

Other comprehensive loss

     (220)         (171)         (455)       (116)

 

  

 

 

    

 

 

    

 

 

    

 

Comprehensive income

   $ 1,046        $ 1,306        $ 3,809        $        4,322 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

                                         

 

     September 30,      December 31,
 (Millions, except share data)    2015      2014

 

  

 

 

    

 

Assets

     

Cash and cash equivalents

     

Cash and due from banks

   $ 2,613        $              2,628 

Interest-bearing deposits in other banks (includes securities purchased under resale agreements: 2015, $222; 2014, $204)

     16,716        19,190 

Short-term investment securities

     609        470 

 

  

 

 

    

 

Total cash and cash equivalents

     19,938        22,288 

Accounts receivable

     

Card Member receivables (includes gross receivables available to settle obligations of a consolidated variable interest entity: 2015, $5,959; 2014, $7,025), less reserves: 2015, $441; 2014, $465

     43,890        44,386 

Other receivables, less reserves: 2015, $61; 2014, $61

     2,517        2,614 

Loans

     

Card Member loans (includes gross loans available to settle obligations of a consolidated variable interest entity:
2015, $27,284; 2014, $30,115), less reserves: 2015, $1,164; 2014, $1,201

     67,731        69,184 

Other loans, less reserves: 2015, $18; 2014, $12

     1,054        920 

Investment securities

     3,947        4,431 

Premises and equipment, less accumulated depreciation and amortization: 2015, $6,733; 2014, $6,270

     4,032        3,938 

Other assets (includes restricted cash of consolidated variable interest entities: 2015, $748; 2014, $64)

     11,107        11,342 

 

  

 

 

    

 

Total assets

   $ 154,216        $          159,103 

 

  

 

 

    

 

Liabilities and Shareholders’ Equity

     

Liabilities

     

Customer deposits

   $ 49,301        $            44,171 

Travelers Cheques and other prepaid products

     3,044        3,673 

Accounts payable

     11,340        11,300 

Short-term borrowings

     3,160        3,480 

Long-term debt (includes debt issued by consolidated variable interest entities: 2015, $13,285; 2014, $19,516)

     48,653        57,955 

Other liabilities

     17,383        17,851 

 

  

 

 

    

 

Total liabilities

     132,881        138,430 

 

  

 

 

    

 

Contingencies (Note 8)

     

Shareholders’ Equity

     

Preferred shares, $1.662/3 par value, authorized 20 million shares; issued and outstanding 1,600 shares as of
September 30, 2015, and 750 shares as of December 31, 2014

          

Common shares, $0.20 par value, authorized 3.6 billion shares; issued and outstanding 985 million shares as of
September 30, 2015 and 1,023 million shares as of December 31, 2014

     197        205 

Additional paid-in capital

     13,487        12,874 

Retained earnings

     10,025        9,513 

Accumulated other comprehensive loss

     

Net unrealized securities gains, net of tax: 2015, $39; 2014, $52

     69        96 

Foreign currency translation adjustments, net of tax: 2015, $(96); 2014, $(317)

     (1,963)       (1,499)

Net unrealized pension and other postretirement benefit losses, net of tax: 2015, $(199); 2014, $(223)

     (480)       (516)

 

  

 

 

    

 

Total accumulated other comprehensive loss

     (2,374)       (1,919)

 

  

 

 

    

 

Total shareholders’ equity

     21,335        20,673 

 

  

 

 

    

 

Total liabilities and shareholders’ equity

   $ 154,216        $          159,103 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                         

 

Nine Months Ended September 30, (Millions)    2015      2014

 

  

 

 

    

 

Cash Flows from Operating Activities

     

Net income

   $ 4,264        $        4,438 

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

     

Provisions for losses

     1,416        1,462 

Depreciation and amortization

     780        764 

Deferred taxes and other

     25        (497)

Stock-based compensation

     200        210 

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

     

Other receivables

     (166)       275 

Other assets

     1,864        850 

Accounts payable and Other liabilities

     270        1,793 

Travelers Cheques and other prepaid products

     (579)       (709)

 

  

 

 

    

 

Net cash provided by operating activities

     8,074        8,586 

 

  

 

 

    

 

Cash Flows from Investing Activities

     

Sales of available-for-sale investment securities

     12        122 

Maturities and redemptions of available-for-sale investment securities

     1,821        966 

Purchase of investments

     (1,564)       (825)

Net increase in Card Member receivables/loans

     (1,292)       (2,349)

Purchase of premises and equipment, net of sales: 2015, $32; 2014, $3

     (879)       (854)

Business acquisitions, net of cash acquired

     (122)       (130)

Net (increase) decrease in restricted cash

     (683)       90 

 

  

 

 

    

 

Net cash used in investing activities

     (2,707)       (2,980)

 

  

 

 

    

 

Cash Flows from Financing Activities

     

Net increase in customer deposits

     5,171        917 

Net decrease in short-term borrowings

     (273)       (1,595)

Issuance of long-term debt

     7,925        11,329 

Principal payments on long-term debt

     (17,110)       (10,659)

Issuance of American Express preferred shares

     841        — 

Issuance of American Express common shares

     169        251 

Repurchase of American Express common shares

     (3,330)       (3,205)

Dividends paid

     (868)       (770)

 

  

 

 

    

 

Net cash used in financing activities

     (7,475)       (3,732)

 

  

 

 

    

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (242)       (96)

 

  

 

 

    

 

Net (decrease) increase in Cash and cash equivalents

     (2,350)       1,778 

Cash and cash equivalents at beginning of period

     22,288        19,486 

 

  

 

 

    

 

Cash and cash equivalents at end of period

   $ 19,938       $      21,264 

 

Supplemental cash flow information

     

Non-cash financing activities

     

Gain on business travel joint venture transaction

   $         $              641 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 1. Basis of Presentation

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (GBT JV). Prior to July 1, 2014, these business travel operations were wholly owned. The Company also focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments, and fee-based services. 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, targeted direct and third-party sales forces, and direct response advertising.

The accompanying Consolidated Financial Statements should be read in conjunction with the consolidated financial statements incorporated by reference in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the Annual Report). If not materially different, certain footnote disclosures included in the Annual Report 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.

In the first quarter of 2015, the Company changed the classification related to certain payments to partners, reducing both discount revenue and marketing and promotion expense. Prior period amounts have been reclassified to conform to the current period presentation. None of the prior period financial statements were materially misstated from this misclassification.

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 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.

 

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Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In January 2014, the FASB issued new accounting guidance on investments in Qualified Affordable Housing projects. Provided certain conditions are met, this standard permits entities to account for investments in Qualified Affordable Housing projects using the proportional amortization method. The standard also requires new disclosures about all investments in Qualified Affordable Housing projects irrespective of the method used to account for the investments. The Company has adopted this guidance in the first quarter of 2015 and has elected not to use the proportional amortization method, but continues to account for these investments using the equity method of accounting, which has been the Company’s historical practice.

During the three and nine months ended September 30, 2015, the Company recognized equity method losses related to Qualified Affordable Housing of $14 million and $34 million, respectively, which were recognized in Other, net expenses; and associated tax credits of $15 million and $39 million, respectively, which were recognized in Income tax provision. Similarly, during the three and nine months ended September 30, 2014, the Company recognized equity method losses of $7 million and $39 million, respectively; and associated tax credits of $12 million and $30 million, respectively. The carrying value of these investments was $605 million and $522 million as of September 30, 2015 and December 31, 2014, respectively. In addition, as of September 30, 2015, the Company is contractually committed to provide additional funding related to certain of these investments, resulting in a liability of $134 million for unfunded commitments reported in Other liabilities, which is expected to be paid between 2015 and 2023.

 

 

 2. Divestiture and Portfolio Sale

On June 30, 2014, the Company completed a transaction to establish a non-consolidated joint venture comprising the former Global Business Travel (GBT) operations of the Company and an external cash investment. As a result of this transaction, the Company deconsolidated the GBT net assets, effective June 30, 2014, and began accounting for the GBT JV as an equity method investment reported in Other assets within the Consolidated Balance Sheets. Prior to the deconsolidation, the carrying amount of GBT’s assets and liabilities were not material to the Company’s financial position and its operations were reported within the Global Commercial Services (GCS) segment.

On October 26, 2015, the Company reached an agreement to sell the outstanding Card Member loan portfolio related to its co-brand partnership with JetBlue Airways Corporation (JetBlue). The carrying amount of the portfolio of JetBlue Card Member loans is not material to the Company’s financial position. The sale is subject to customary closing conditions, and is expected to be consummated in the first quarter of 2016 and is reported within the U.S. Card Services (USCS) segment, at which time the related gain will be recognized.

 

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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.

Accounts receivable by segment as of September 30, 2015 and December 31, 2014, consisted of:

 

                                         

 

(Millions)    2015      2014

 

  

 

 

    

 

U.S. Card Services(a)

   $               21,965      $              22,468

International Card Services

     6,511      7,653

Global Commercial Services(b)

     15,748      14,583

Global Network & Merchant Services(c)

     107      147

 

  

 

 

    

 

Card Member receivables(d)

     44,331      44,851

Less: Reserve for losses

     441      465

 

  

 

 

    

 

Card Member receivables, net

   $ 43,890      $              44,386

 

  

 

 

    

 

Other receivables, net(e)

   $ 2,517      $                2,614

 

 

  (a)

Includes $6.0 billion and $7.0 billion of gross Card Member receivables available to settle obligations of a consolidated variable interest entity (VIE) as of September 30, 2015 and December 31, 2014, respectively.

  (b)

Includes $327 million and $636 million due from airlines, of which Delta Air Lines comprises $265 million and $606 million as of September 30, 2015 and December 31, 2014, respectively.

  (c)

Includes receivables primarily related to the Company’s International Currency Card portfolios.

  (d)

Includes approximately $12.3 billion and $13.3 billion of Card Member receivables outside the U.S. as of September 30, 2015 and December 31, 2014, respectively.

  (e)

Other receivables primarily represent amounts related to (i) certain merchants for billed discount revenue and (ii) Global Network Services (GNS) partner banks for items such as royalty and franchise fees. Other receivables are presented net of reserves for losses of $61 million as of both September 30, 2015 and December 31, 2014.

Loans by segment as of September 30, 2015 and December 31, 2014, consisted of:

 

                                         

 

(Millions)    2015      2014

 

  

 

 

    

 

U.S. Card Services(a)

   $               62,133       $              62,592

International Card Services

     6,710       7,744

Global Commercial Services

     52       49

 

  

 

 

    

 

Card Member loans

     68,895       70,385

Less: Reserve for losses

     1,164       1,201

 

  

 

 

    

 

Card Member loans, net

   $ 67,731       $              69,184

 

  

 

 

    

 

Other loans, net(b)

   $ 1,054       $                   920

 

 

  (a)

Includes approximately $27.3 billion and $30.1 billion of gross Card Member loans available to settle obligations of a consolidated VIE as of September 30, 2015 and December 31, 2014, respectively.

  (b)

Other loans primarily represent loans to merchants. Other loans are presented net of reserves for losses of $18 million and $12 million as of September 30, 2015 and December 31, 2014, respectively.

 

 

 

8


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Card Member Receivables Aging

Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member loans and receivables as of September 30, 2015 and December 31, 2014:

 

                                                                                                        

 

            30-59      60-89      90+       
            Days      Days      Days       
            Past      Past      Past       
2015 (Millions)    Current      Due      Due      Due      Total

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

Card Member Loans:

              

U.S. Card Services

    $       61,530         $             191         $             131         $             281         $      62,133 

International Card Services

     6,604          35          22          49        6,710 

Card Member Receivables:

              

U.S. Card Services

    $ 21,612         $ 133         $ 73         $ 147         $      21,965 

International Card Services

     6,412          29          22          48        6,511 

Global Commercial Services(a)

     (b)         (b)         (b)         112        15,748 

 

 

            30-59      60-89      90+       
            Days      Days      Days       
            Past      Past      Past       
2014 (Millions)    Current      Due      Due      Due      Total

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

Card Member Loans:

              

U.S. Card Services

    $ 61,995         $ 179         $ 128         $ 290         $      62,592 

International Card Services

     7,621          39          27          57        7,744 

Card Member Receivables:

              

U.S. Card Services

    $ 22,096         $ 129         $ 72         $ 171         $      22,468 

International Card Services

     7,557          29          20          47        7,653 

Global Commercial Services(a)

     (b)         (b)         (b)         120        14,583 

 

 

  (a)

For 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.

 

9


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit Quality Indicators for Card Member Loans and Receivables

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

 

 

         2015         2014
             Net Write-Off Rate                       Net Write-Off Rate         
    

 

 

       

 

 

  
                           30+ Days                          30+ Days
               Principal,     Past Due                   Principal,    Past Due
                 Principal       Interest, &     as a % of                 Principal     Interest, &    as a % of
       Only  (a)      Fees  (a)      Total          Only  (a)    Fees (a)    Total

 

    

 

 

   

 

 

   

 

 

     

 

 

   

 

  

 

Card Member Loans:

                 

U.S. Card Services

       1.4     1.6     1.0       1.6   1.8%    1.0%

International Card Services

       2.0     2.4     1.6       2.0   2.4%    1.6%

Card Member Receivables:

                 

U.S. Card Services

       1.8     2.0     1.6       1.7   1.9%    1.6%

International Card Services

       2.1     2.2     1.5       2.0   2.1%    1.4%

 

 

                     2015    

2014

                     Net Loss               Net Loss     
                     Ratio as         90+ Days     Ratio as    90+ Days
                     a % of         Past Billing     a % of    Past Billing
                     Charge         as a % of     Charge    as a % of
                     Volume         Receivables     Volume    Receivables

 

   

 

 

     

 

 

   

 

  

 

Card Member Receivables:

  

          

Global Commercial Services

  

    0.09       0.7   0.09%    0.8%

 

 

  (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. The nine months ended September 30, 2015, reflects the impact of a change in the timing of charge-offs for Card Member loans and receivables in certain modification programs from 180 days past due to 120 days past due, which was fully recognized during the three months ended March 31, 2015.

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 modification programs. Beginning January 1, 2015, on a prospective basis the Company continues to classify Card Member accounts that have exited a modification program as a Troubled Debt Restructuring (TDR), with such accounts identified as “Out of Program TDRs.”

 

10


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides additional information with respect to the Company’s impaired Card Member loans (which are not significant for GCS) and impaired Card Member receivables (which are not significant for International Card Services (ICS) and GCS) as of September 30, 2015 and December 31, 2014:

 

 

        

 

As of September 30, 2015

         Over 90 days           Accounts Classified
as a TDR (c)
                 
         Past Due &                       Total      Unpaid     
         Accruing     Non-           Out of     Impaired      Principal    Allowance
(Millions)        Interest  (a)      Accruals (b)      In Program  (d)      Program  (e)      Balance       Balance    for TDRs

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  

 

Card Member Loans:

                  

U.S. Card Services

     $             192       $             175       $             224       $             109       $             700        $            649     $              66 

International Card Services

       49         —         —         —         49        49     — 

Card Member Receivables:

                  

U.S. Card Services

       —         —         26         4        30        30     18 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  

 

Total

     $ 241       $ 175       $ 250       $ 113       $ 779        $728     $              84 

 

 

  
         As of December 31, 2014   
    

 

 

  
         Over 90 days                                  
         Past Due &                 Total     Unpaid          
         Accruing     Non-     In Program     Impaired     Principal      Allowance   
(Millions)        Interest (a)      Accruals (b)      TDRs  (c)(d)      Balance        Balance       for TDRs   

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  

Card Member Loans:

                  

U.S. Card Services

     $ 161       $ 241       $ 286       $ 688       $ 646        $67    

International Card Services

       57         —         —         57         56        —    

Card Member Receivables:

                  

U.S. Card Services

       —         —         48         48         48        35    

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

  

Total

     $ 218       $ 241       $ 334       $ 793       $ 750        $102    

 

  

 

  (a)

The Company’s policy is generally to accrue interest through the date of write-off (generally 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 include certain Card Member loans placed with outside collection agencies for which the Company has ceased accruing interest.

  (c)

Accounts classified as a TDR include $19 million and $26 million that are over 90 days past due and accruing interest and $25 million and $34 million that are non-accrual as of September 30, 2015 and December 31, 2014, respectively.

  (d)

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

  (e)

Out of Program TDRs include $82 million of Card Member accounts that have successfully completed a modification program and $31 million of Card Member accounts that were not in compliance with the terms of the modification programs.

 

11


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 (which are not significant for GCS) and the average balances of impaired Card Member receivables (which are not significant for ICS and GCS) for the three and nine months ended September 30:

 

 

         Three Months Ended      Nine Months Ended
         September 30, 2015      September 30, 2015
    

 

 

    

 

 

         Average        Interest Income      Average        Interest Income
2015 (Millions)        Balance        Recognized      Balance        Recognized

 

    

 

 

      

 

 

    

 

 

      

 

Card Member Loans:

                 

U.S. Card Services

     $                             693          $                               16        $                             685          $                              43 

International Card Services

       53                    55          10 

Card Member Receivables:

                 

U.S. Card Services

       28            —          35          — 

 

    

 

 

      

 

 

    

 

 

      

 

Total

     $ 774          $ 19        $ 775          $                              53 

 

 

         Three Months Ended      Nine Months Ended
         September 30, 2014      September 30, 2014
    

 

 

    

 

 

         Average        Interest Income      Average        Interest Income
2014 (Millions)        Balance        Recognized      Balance        Recognized

 

    

 

 

      

 

 

    

 

 

      

 

Card Member Loans:

                 

U.S. Card Services

     $ 675          $ 12        $ 734          $                              37 

International Card Services

       63                    63          12 

Card Member Receivables:

                 

U.S. Card Services

       44            —          47          — 

 

    

 

 

      

 

 

    

 

 

      

 

Total

     $ 782          $ 16        $ 844          $                              49 

 

 

12


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Card Member Loans and Receivables Modified as TDRs

The following table provides additional information with respect to the USCS Card Member loans and receivables modified as TDRs for the three and nine months ended September 30, 2015 and 2014. The ICS Card Member loans and receivables modifications were not significant and the Company does not offer modification programs for its GCS Card Member receivables; therefore, these segments are not included in the following TDR disclosures.

 

 

    

 

Three Months Ended

     Nine Months Ended
    

 

September 30, 2015

     September 30, 2015
                          Average                           Average
                   Average      Payment                    Average      Payment
     Number of            Outstanding        Interest Rate      Term      Number of          Outstanding        Interest Rate      Term
     Accounts      Balances (a)      Reduction              Extension      Accounts      Balances (a)      Reduction              Extension
           (thousands)      (millions)      (% Points)      (Months)            (thousands)      (millions)      (% Points)      (Months)

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Troubled Debt Restructurings:

                       

Card Member Loans

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

Card Member Receivables

     3         37         (c)         12         9         111         (c)       12

 

  

 

 

    

 

 

          

 

 

    

 

 

       

Total

                       13       $               106                                 40       $               329         

 

 

    

 

Three Months Ended

     Nine Months Ended
    

 

September 30, 2014

     September 30, 2014
                          Average                           Average
                   Average      Payment                    Average      Payment
     Number of      Outstanding      Interest Rate      Term      Number of      Outstanding      Interest Rate      Term
     Accounts      Balances (a)      Reduction      Extension      Accounts      Balances (a)      Reduction      Extension
     (thousands)      (millions)      (% Points)      (Months)      (thousands)      (millions)      (% Points)      (Months)

 

  

 

 

    

 

 

    

 

 

    

 

 

Troubled Debt Restructurings:

                       

Card Member Loans

     11       $ 83         9         (b)         35       $ 261         11       (b)

Card Member Receivables

     4         41         (c)         12         11         129         (c)       12

 

  

 

 

    

 

 

          

 

 

    

 

 

       

Total

     15       $ 124               46       $ 390         

 

 

  (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.

 

13


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides information for the three and nine months ended September 30, 2015 and 2014, with respect to the USCS 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.

 

 

    

Three Months Ended

September 30, 2015

  

Nine Months Ended

September 30, 2015

  

 

  

 

     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    $                    14    6    $                    39

Card Member Receivables

   1    1    3    3

 

  

 

  

 

  

 

  

 

Total

   2    $                    15    9    $                    42

 

           

 

     Three Months Ended
September 30, 2014
   Nine Months Ended
September 30, 2014
  

 

  

 

     Number of
Accounts
(thousands)
   Outstanding
Balances
    Upon Default
(millions)(a)(b)
   Number of
Accounts
(thousands)
   Outstanding
Balances
    Upon Default
(millions)(a)(b)

 

  

 

  

 

  

 

  

 

Troubled Debt Restructurings That Subsequently Defaulted:

           

Card Member Loans

   2    $                    12    6    $                    40

Card Member Receivables

   1    2    2    9

 

  

 

  

 

  

 

  

 

Total

   3    $                    14    8    $                    49

 

 

  (a)

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

  (b)

The outstanding balances upon default have been revised to reflect the exclusion of written off accounts, which are not material.

 

14


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 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.

Changes in Card Member Receivables Reserve for Losses

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

 

 

(Millions)                           2015                          2014

 

   

 

 

    

 

Balance, January 1

    $ 465       $                     386

Provisions(a)

      542       594

Net write-offs(b)

      (544)       (527)

Other(c)

      (22)       (21)

 

   

 

 

    

 

Balance, September 30

    $ 441       $                     432

 

 

  (a)

Provisions for principal and fee reserve components.

  (b)

Consists of principal and fee components, less recoveries of $302 million and $269 million, including net write-offs from TDRs of $49 million and $14 million, for the nine months ended September 30, 2015 and 2014, respectively.

  (c)

For the nine months ended September 30, 2015, includes foreign currency translation adjustments of $(13) million, and other adjustments of $(9) million. For the nine months ended September 30, 2014, includes foreign currency translation adjustments of $(6) million, other adjustments of $(8) million, and an adjustment related to reserves for card-related fraud losses of $(7) million, which were reclassified to Other liabilities in the first quarter of 2014.

Card Member Receivables Evaluated Individually and Collectively for Impairment

The following table presents Card Member receivables evaluated individually and collectively for impairment, and related reserves, as of September 30, 2015 and December 31, 2014:

 

 

(Millions)                     2015                    2014

 

   

 

 

    

 

Card Member receivables evaluated individually for impairment(a)

    $ 30       $                     48

Related reserves (a)

    $ 18       $                     35

 

Card Member receivables evaluated collectively for impairment

    $ 44,301       $              44,803

Related reserves (b)

    $ 423       $                   430

 

 

  (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.

 

15


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Changes in Card Member Loans Reserve for Losses

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

 

 

(Millions)                           2015                          2014

 

   

 

 

    

 

Balance, January 1

    $ 1,201       $                    1,261

Provisions(a)

      829       797

Net write-offs

      

Principal(b)

      (733)       (786)

Interest and fees(b)

      (122)       (124)

Other(c)

      (11)       (2)

 

   

 

 

    

 

Balance, September 30

    $ 1,164       $                    1,146

 

 

  (a)

Provisions for principal, interest and fee reserve components.

  (b)

Consists of principal write-offs, less recoveries of $320 million and $324 million, including net write-offs/(recoveries) from TDRs of $30 million and $(5) million, for the nine months ended September 30, 2015 and 2014, respectively. Recoveries of interest and fees were de minimis.

  (c)

For the nine months ended September 30, 2015, includes foreign currency translation adjustments of $(18) million, and other adjustments of $7 million. For the nine months ended September 30, 2014, includes foreign currency translation adjustments of $(7) million, other adjustments of $11 million, and an adjustment related to reserves for card-related fraud losses of $(6) million, which were reclassified to Other liabilities in the first quarter of 2014.

Card Member Loans Evaluated Individually and Collectively for Impairment

The following table presents Card Member loans evaluated individually and collectively for impairment, and related reserves, as of September 30, 2015 and December 31, 2014:

 

 

(Millions)                     2015                    2014

 

   

 

 

    

 

Card Member loans evaluated individually for impairment(a)

    $ 333       $                286

Related reserves (a)

    $ 66       $                  67

 

Card Member loans evaluated collectively for impairment(b)

    $ 68,562       $           70,099

Related reserves (b)

    $ 1,098       $             1,134

 

 

  (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.

 

16


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 September 30, 2015 and December 31, 2014:

 

 

       

 

2015

   

 

2014

   

 

 

   

 

 

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

     $ 2,971         $ 97         $ (4)       $ 3,064         $ 3,366         $ 129         $ (2)       $             3,493  

U.S. Government agency obligations

      2          —          —         2          3          —          —       3  

U.S. Government treasury obligations

      297          5          —         302          346          4          —       350  

Corporate debt securities

      30          1          —         31          37          3          —       40  

Mortgage-backed securities (a)

      109          5          —         114          128          8          —       136  

Equity securities

      —          1          —         1          —          1          —       1  

Foreign government bonds and obligations

      379          6          (1)        384          350          9          —       359  

Other (b)

      50          —          (1)        49          50          —          (1)      49  

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

     $ 3,838         $ 115         $ (6)       $ 3,947         $ 4,280       $ 154       $ (3)       $               4,431

 

 

  (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 September 30, 2015 and December 31, 2014:

 

 

       

 

2015

   

 

2014

   

 

 

   

 

 

       

 

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

    $ 59        $ (2)      $ 13        $ (2)      $ —        $ —        $ 72        $               (2)

Foreign government bonds and obligations

      31          (1)        —          —         —          —          —        — 

Other

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

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

Total

    $ 90        $ (3)      $ 46        $ (3)      $ —        $ —        $ 105        $               (3)

 

The following table summarizes the gross unrealized losses due to temporary impairments by ratio of fair value to amortized cost as of September 30, 2015 and December 31, 2014:

 

 

        

 

Less than 12 months

     12 months or more      Total
    

 

 

    

 

 

    

 

 

Ratio of Fair Value to

Amortized Cost ($ 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

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

2015:

                            

90%–100%

       35         $ 88         $ (3)         12         $ 37         $ (2)         47         $ 125         $              (5)

Less than 90%

       —           —           —           2           9           (1)         2           9         (1)

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Total as of September 30, 2015

       35         $ 88         $ (3)         14         $ 46         $ (3)         49         $ 134         $              (6)

 

    

                            

 

2014:

                            

90%–100%

       —         $ —         $ —           15         $ 105       $ (3)         15       $ 105       $              (3)

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Total as of December 31, 2014

       —         $ —         $ —           15         $ 105       $ (3)         15       $ 105       $              (3)

 

 

17


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 as 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 September 30, 2015, were as follows:

 

 

(Millions)                           Cost     Estimated
          Fair Value

 

   

 

 

   

 

Due within 1 year

    $ 459       $                   459 

Due after 1 year but within 5 years

      324       331 

Due after 5 years but within 10 years

      259       275 

Due after 10 years

      2,746       2,832 

 

   

 

 

   

 

Total (a)

    $ 3,788       $                3,897 

 

 

  (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.

Supplemental Information

Gross realized gains on the sales of investment securities, included in Other revenues, were $1 million for both the three and nine months ended September 30, 2015, and $20 million and $100 million for the three and nine months ended September 30, 2014, respectively. There were no realized losses during any of these periods.

 

18


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 through the transfer of those assets to securitization trusts. The trusts then issue 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, and collectively, the Trusts) as of September 30, 2015 and December 31, 2014, included in Other assets on the Company’s Consolidated Balance Sheets:

 

 

(Millions)                           2015                          2014

 

   

 

 

    

 

Charge Trust

    $ 1       $                          2

Lending Trust

      747       62

 

   

 

 

    

 

Total

    $ 748       $                        64

 

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 investor securities, credit losses and upcoming debt maturities.

American Express Travel Related Services Company, Inc. (TRS), which is a consolidated subsidiary of the Company, is the primary beneficiary of both Trusts. Excluding its consolidated subsidiaries, TRS owns approximately $1.0 billion of subordinated securities issued by the Lending Trust as of September 30, 2015.

Under the respective terms of the Charge Trust and 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 investor securities. During the nine months ended September 30, 2015 and the year ended December 31, 2014, no such triggering events occurred.

 

19


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 7. Customer Deposits

As of September 30, 2015 and December 31, 2014, customer deposits were categorized as interest bearing or non-interest bearing, as follows:

 

 

(Millions)                           2015                          2014

 

   

 

 

    

 

U.S.:

      

Interest bearing

    $ 48,513        $                43,279

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

      

2015, $312; 2014, $372)

      356        418

Non-U.S.:

      

Interest bearing

      106        115

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

      

2015, $314; 2014, $347)

      326        359

 

   

 

 

    

 

Total customer deposits

    $ 49,301        $                44,171

 

Customer deposits by deposit type as of September 30, 2015 and December 31, 2014, were as follows:

 

 

(Millions)                           2015                          2014

 

   

 

 

    

 

U.S. retail deposits:

      

Savings accounts – Direct

    $ 28,229        $                26,159

Certificates of deposit:

      

Direct

      291        333

Third-party

      11,053        7,838

Sweep accounts – Third-party

      8,940        8,949

Other retail deposits:

      

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

      162        173

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

      626        719

 

   

 

 

    

 

Total customer deposits

    $ 49,301        $                44,171

 

The scheduled maturities of certificates of deposit as of September 30, 2015, were as follows:

 

 

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

 

   

 

 

    

 

 

    

 

2015

    $ 398        $ 18        $                 416 

2016

      2,411                2,416 

2017

      2,730          —        2,730 

2018

      2,527          —        2,527 

2019

      1,846          —        1,846 

After 5 years

      1,432          —        1,432 

 

   

 

 

    

 

 

    

 

Total

    $ 11,344        $ 23        $            11,367 

 

As of September 30, 2015 and December 31, 2014, certificates of deposit in denominations of $250,000 or more, in the aggregate, were as follows:

 

 

(Millions)                       2015                      2014

 

   

 

 

    

 

U.S.

    $ 106        $                111

Non-U.S.

      17        17 

 

   

 

 

    

 

Total

    $ 123        $                128

 

 

20


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.  Contingencies

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

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

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

Other matters have progressed sufficiently through discovery and/or development of important factual information and legal issues so that the Company is able to estimate an amount of loss or a range of possible loss. Accordingly, 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 liability, and for which the Company is able to estimate a range of possible loss, the current estimated range is zero to $370 million in excess of any reserves related to these 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 Part II, Item 1. “Legal Proceedings” in this Quarterly Report on Form 10-Q, we may need to increase our range of possible loss or reserves for legal contingencies.

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

 

21


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 9. Derivatives and Hedging Activities

The Company uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rate, 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 September 30, 2015 and December 31, 2014, the Company does not have derivative positions that warrant credit valuation adjustments.

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of September 30, 2015 and December 31, 2014:

 

 

       

Other Assets

Fair Value

     Other Liabilities
Fair Value
   

 

 

    

 

 

(Millions)                 2015                2014                2015                2014

 

   

 

 

    

 

 

    

 

 

    

 

Derivatives designated as hedging instruments:

            

Interest rate contracts

            

Fair value hedges

    $ 391        $ 314       $ —       $            4 

Foreign exchange contracts

            

Net investment hedges

      385          492         102       46 

 

   

 

 

    

 

 

    

 

 

    

 

Total derivatives designated as hedging instruments

      776          806         102       50 

Derivatives not designated as hedging instruments:

            

Foreign exchange contracts, including certain embedded derivatives(a)

      146          185         116       114 

 

   

 

 

    

 

 

    

 

 

    

 

Total derivatives, gross

      922          991         218       164 

Less: Cash collateral netting(b)

      (307)         (158)         —        (4)

Derivative asset and derivative liability netting(c)

      (130)         (122)         (130)       (122)

 

   

 

 

    

 

 

    

 

 

    

 

Total derivatives, net(d)

    $ 485        $ 711        $ 88        $          38 

 

 

  (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. From time to time, the Company also receives non-cash collateral from counterparties in the form of security interests in U.S. Treasury securities, which reduces the Company’s risk exposure, but does not reduce the net exposure on the Company’s Consolidated Balance Sheets. The Company had such non-cash collateral as of December 31, 2014 with a fair value of $91 million, none of which was sold or repledged. The Company did not have any such non-cash collateral as of September 30, 2015. Additionally, the Company posted $155 million and $114 million as of September 30, 2015 and December 31, 2014, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other receivables on the Company’s 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 Company’s Consolidated Balance Sheets.

A majority of the Company’s derivative assets and liabilities as of September 30, 2015 and December 31, 2014 are subject to master netting agreements with its derivative counterparties. In addition, the Company has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Company’s Consolidated Balance Sheets.

 

22


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hedges

Interest Rate Contracts

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. As of September 30, 2015 and December 31, 2014, the Company hedged $18.5 billion and $17.6 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

Total Return Contract

The Company hedged its exposure to changes in the fair value of its equity investment in Industrial and Commercial Bank of China (ICBC) in local currency. The Company used a total return contract (TRC) to transfer its exposure to its derivative counterparty. On July 18, 2014, the Company sold its remaining shares in ICBC and terminated the TRC.

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

 

 

Three Months Ended September 30: (Millions)

 

     Gains (losses) recognized in income
  

 

     Derivative contract      Hedged item      Net hedge
  

 

    

 

       
          Amount           Amount      ineffectiveness
     

 

 

       

 

 

    

 

 

Derivative relationship

   Income Statement Line Item      2015         2014       Income Statement Line Item      2015         2014        2015       2014

 

  

 

  

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

    

 

Interest rate contracts

   Other expenses    $ 108       $ (109)       Other expenses    $ (114)       $ 112      $ (6)       $                3

 

    

                       

 

Nine Months Ended September 30: (Millions)

 

     Gains (losses) recognized in income
  

 

     Derivative contract      Hedged item      Net hedge
  

 

    

 

       
          Amount           Amount      ineffectiveness
     

 

 

       

 

 

    

 

 

Derivative relationship

   Income Statement Line Item              2015                2014       Income Statement Line Item              2015                 2014                2015               2014

 

  

 

  

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

    

 

Interest rate contracts

   Other expenses    $ 82      $ (170)       Other expenses    $ (85)       $ 176      $ (3)       $                6

Total return contract

   Other non-interest revenues      —          11        Other non-interest revenues      —          (11)        —        — 

 

The Company also recognized a net reduction in interest expense on long-term debt of $73 million and $74 million for the three months ended September 30, 2015 and 2014, respectively, and $214 million and $217 million for the nine months ended September 30, 2015 and 2014, 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 on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment was $384 million and $246 million for the three months ended September 30, 2015 and 2014, respectively, and $545 million and $113 million for the nine months ended September 30, 2015 and 2014, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three months ended September 30, 2015 and 2014, the Company reclassified nil and $(1) million, respectively, and $1 million and $9 million for the nine months ended September 30, 2015 and 2014, respectively, from Accumulated Other Comprehensive Loss to earnings as a component of Other expenses, including ineffectiveness associated with net investment hedges of nil and $1 million for the three and nine months ended September 30, 2015, respectively.

 

23


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the impact on the Consolidated Statements of Income associated with the Company’s derivatives not designated as hedges:

 

 

                  Pretax (losses) gains
         

 

 

                  Three Months Ended
September 30,
    

Nine Months Ended

September 30,

         

 

 

    

 

 

                  Amount      Amount
         

 

 

    

 

 

Description (Millions)        Income Statement Line Item                        2015                      2014                      2015                      2014

 

    

 

    

 

 

    

 

 

    

 

 

    

 

Foreign exchange contracts (a)

     Other expenses      $ (19)       $ 2         $ 15       $                84  
     Cost of Card Member services                —           (2)       4  

 

    

 

    

 

 

    

 

 

    

 

 

    

 

Total

          $ (15)       $ 2       $ 13       $                  88

 

 

  (a)

Foreign exchange contracts include forwards and embedded foreign currency derivatives.

 

 

 

10. Fair Values

Financial Assets and Financial Liabilities Carried at Fair Value

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s valuation hierarchy, as of September 30, 2015 and December 31, 2014:

 

 

        2015      2014
   

 

 

    

 

 

(Millions)                 Total          Level 1              Level 2          Level 3              Total          Level 1          Level 2          Level 3

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Assets:

                        

Investment securities:(a)

                        

Equity securities

    $      $      $ —       $         $      $      $ —       $            — 

Debt securities and other

      3,946          302         3,644                  4,430          350         4,080       — 

Derivatives(a)

      922          —         922                  991          —         991       — 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Total assets

      4,869         303         4,566                  5,422         351         5,071       — 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Liabilities:

                        

Derivatives(a)

      218         —         218                  164         —         164       — 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Total liabilities

    $ 218       $ —       $ 218       $         $ 164       $ —       $ 164       $            — 

 

 

  (a)

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

 

24


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the estimated fair values of the Company’s financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of September 30, 2015 and December 31, 2014. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of September 30, 2015 and December 31, 2014, 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
       

 

 

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

     $ 20         $ 20          $ 19         $ 1 (a)    $            —

Other financial assets(b)

       48           48            —           48         

  Financial assets carried at other than fair value

              

Loans, net

       69           69 (c)      —           —        69

Financial Liabilities:

              

  Financial liabilities for which carrying values equal or approximate fair value

       62           62            —           62         

  Financial liabilities carried at other than fair value

              

Certificates of deposit(d)

       11           11            —           11         

Long-term debt

     $ 49         $ 50 (c)    $ —         $ 50          $            —

 

    

              

 

               Carrying        Corresponding Fair Value Amount
       

 

 

2014 (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

     $ 22         $ 22         $ 21         $ 1 (a)    $            —

Other financial assets(b)

       48           48           —           48        

  Financial assets carried at other than fair value

              

Loans, net

       70           71 (c)      —           —        71

Financial Liabilities:

              

  Financial liabilities for which carrying values equal or approximate fair value

       61           61           —           61        

  Financial liabilities carried at other than fair value

              

Certificates of deposit(d)

       8           8           —           8        

Long-term debt

     $ 58         $ 60 (c)    $ —         $ 60         $            —

 

 

  (a)

Reflects time deposits.

  (b)

Includes accounts receivable (including fair values of Card Member receivables of $5.9 billion and $7.0 billion held by a consolidated VIE as of September 30, 2015 and December 31, 2014, respectively), restricted cash and other miscellaneous assets.

  (c)

Includes fair values of Card Member loans of $27.2 billion and $29.9 billion, and long-term debt of $13.4 billion and $19.5 billion held by a consolidated VIE as of September 30, 2015 and December 31, 2014, respectively.

  (d)

Presented as a component of customer deposits on the Consolidated Balance Sheets.

Nonrecurring Fair Value Measurements

The Company has certain assets that are subject to measurement at fair value on a nonrecurring basis. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if determined to be impaired. During the nine months ended September 30, 2015 and during the year ended December 31, 2014, the Company did not have any material assets that were measured at fair value due to impairment.

 

25


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 11.  Guarantees

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

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

The following table provides information related to such guarantees and indemnifications as of September 30, 2015 and December 31, 2014:

 

 

    

Maximum potential
undiscounted future
payments(a)

(Billions)

  

Related liability(b)
(Millions)

Type of Guarantee                2015                2014                2015                2014

 

  

 

  

 

  

 

  

 

Return and Merchant Protection

   $             42     $              37    $             49     $             44 

Other(c)

      8    57     67 

 

  

 

  

 

  

 

  

 

Total

   $             48     $              45    $           106     $            111

 

 

  (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.

 

26


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 and nine months ended September 30, 2015 and 2014 were as follows:

 

 

Three Months Ended September 30, 2015 (Millions), net of tax        Net Unrealized
  Gains (Losses) on
Investment
Securities
           Foreign Currency
Translation
Adjustments
    

Net Unrealized
Pension and

Other
Postretirement
    Benefit (Losses)
Gains

     Accumulated Other
    Comprehensive (Loss)
Income

 

    

 

 

    

 

 

    

 

 

    

 

Balances as of June 30, 2015

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

 

    

 

 

    

 

 

    

 

 

    

 

Net unrealized loss

       (6)         —          —        (6)

Decrease due to amounts reclassified into earnings

       (1)         —          —        (1)

Net translation loss on investments in foreign operations

       —          (604)         —        (604)

Net gains related to hedges of investments in foreign operations

       —          384          —        384 

Pension and other postretirement benefit gains

       —          —               

 

    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive (loss) income

       (7)         (220)               (220)

 

    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2015

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

 

 

 

Nine Months Ended September 30, 2015 (Millions), net of tax        Net Unrealized
  Gains (Losses) on
Investment
Securities
           Foreign Currency
Translation
Adjustments
    

Net Unrealized
Pension and

Other
Postretirement
    Benefit (Losses)
Gains

     Accumulated Other
    Comprehensive (Loss)
Income

 

    

 

 

    

 

 

    

 

 

    

 

Balances as of December 31, 2014

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

 

    

 

 

    

 

 

    

 

 

    

 

Net unrealized loss

       (26)         —          —        (26)

Decrease due to amounts reclassified into earnings

       (1)         (1)         —        (2)

Net translation loss on investments in foreign operations

       —          (1,009)         —        (1,009)

Net gains related to hedges of investments in foreign operations

       —          546          —        546 

Pension and other postretirement benefit gains

       —          —          36        36 

 

    

 

 

    

 

 

    

 

 

    

 

Net change in accumulated other comprehensive (loss) income

       (27)         (464)         36        (455)

 

    

 

 

    

 

 

    

 

 

    

 

Balances as of September 30, 2015

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

 

 

27


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Three Months Ended September 30, 2014 (Millions), net of tax       Net Unrealized
Gains (Losses) on
Investment
Securities
    Foreign Currency
Translation
Adjustments
    Net Unrealized
Pension and
Other
Postretirement
Benefit (Losses)
Gains
    Accumulated
Other
Comprehensive
(Loss) Income

 

   

 

 

   

 

 

   

 

 

   

 

Balances as of June 30, 2014

    $ 105       $ (1,118)      $ (358)      $            (1,371)

 

   

 

 

   

 

 

   

 

 

   

 

Net unrealized gains

             —         —      

(Decrease) increase due to amounts reclassified into earnings

      (13)               —       (12)

Net translation loss on investments in foreign operations

      —         (414)        —       (414)

Net gains related to hedges of investments in foreign operations

      —         246         —       246 

Pension and other postretirement benefit gains

      —         —             

 

   

 

 

   

 

 

   

 

 

   

 

Net change in accumulated other comprehensive (loss) income

      (11)        (167)             (171)

 

   

 

 

   

 

 

   

 

 

   

 

Balances as of September 30, 2014

    $ 94       $ (1,285)      $ (351)      $            (1,542)

 

 

 

Nine Months Ended September 30, 2014 (Millions), net of tax       Net Unrealized
Gains (Losses) on
Investment
Securities
    Foreign Currency
Translation
Adjustments
    Net Unrealized
Pension and
Other
Postretirement
Benefit (Losses)
Gains
    Accumulated
Other
Comprehensive
(Loss) Income

 

   

 

 

   

 

 

   

 

 

   

 

Balances as of December 31, 2013

    $ 63       $ (1,090)      $ (399)      $            (1,426)

 

   

 

 

   

 

 

   

 

 

   

 

Net unrealized gains

      102         —         —       102 

(Decrease) increase due to amounts reclassified into earnings

      (71)               —       (66)

Net translation loss on investments in foreign operations

      —         (313)        —       (313)

Net gains related to hedges of investments in foreign operations

      —         113         —       113 

Pension and other postretirement benefit gains

      —         —         48       48 

 

   

 

 

   

 

 

   

 

 

   

 

Net change in accumulated other comprehensive income (loss)

      31         (195)        48       (116)

 

   

 

 

   

 

 

   

 

 

   

 

Balances as of September 30, 2014

    $ 94       $ (1,285)      $ (351)      $            (1,542)

 

The following table presents the effects of reclassifications out of Accumulated Other Comprehensive Loss and into the Consolidated Statements of Income:

 

 

            Gains (losses) recognized in earnings
     

 

                   

Three Months Ended

September 30,

       

Nine Months Ended

September 30,

       

 

     

 

 

                    Amount         Amount
       

 

   

 

Description (Millions)      

Income Statement Line Item

                              2015                             2014                             2015                             2014

 

   

 

   

 

   

 

   

 

   

 

Available-for-sale securities

                     

Reclassifications for previously unrealized net gains on investment securities

    Other non-interest revenues     $          $     21       $          $   111 

Related income tax expense

    Income tax provision         —           (8)          —         (40)

 

   

 

     

 

 

     

 

 

     

 

 

     

 

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

                     13                  71 

Foreign currency translation adjustments

                     

Reclassification of realized losses on translation adjustments and related hedges

    Other expenses         —           —                  (8)

Related income tax benefit

    Income tax provision         —           (1)          —        

 

   

 

   

 

   

 

   

 

     

 

Reclassification of foreign currency translation adjustments

            —           (1)                 (5)

 

   

 

     

 

 

     

 

 

     

 

 

     

 

Total

        $          $     12       $          $   66 

 

 

28


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13. Non-Interest Revenue and Expense Detail

The following is a detail of Other commissions and fees:

 

                                                           

 

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

 

 

    

 

 

(Millions)

     2015         2014         2015      

2014

Foreign currency conversion fee revenue

   $ 213        $ 225        $ 646        $             665

Delinquency fees

     197          184          586        539

Loyalty coalition-related fees

     101          100          280        286

Service fees

     97          94          279        274

Other(a)

     32          39          100       

120

Total Other commissions and fees

   $ 640        $ 642        $ 1,891        $          1,884

 

 

  (a)

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

The following is a detail of Other revenues:

 

                                                           

 

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

 

 

    

 

 

(Millions)

     2015         2014         2015      

2014

Global Network Services partner revenues

   $ 156        $ 173        $ 474        $             513

Net realized gains on investment securities

             20                100

Other(a)

     347          400          1,018       

1,066

Total Other revenues

   $ 504        $ 593        $ 1,493        $          1,679

 

 

  (a)

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

The following is a detail of Other expenses:

 

                                                           

 

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

 

 

    

 

 

(Millions)    2015      2014      2015      2014

 

  

 

 

    

 

 

    

 

 

    

 

Professional services

   $ 687       $ 731        $ 1,966       $          2,240 

Occupancy and equipment

     523         432          1,372       1,361 

Card and merchant-related fraud losses(a)

     64         96          247       282 

Communications

     84         91          257       285 

Gain on business travel joint venture transaction

     —           (15)         —         (641)

Other(b)

     277         261          727       866 

 

  

 

 

    

 

 

    

 

 

    

 

Total Other expenses

   $ 1,635       $ 1,596        $ 4,569       $          4,393 

 

 

  (a)

Beginning January 1, 2015, merchant-related fraud losses are reported within Other expenses.

  (b)

Other expense includes general operating expenses, gains (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 and foreign currency-related gains and losses (including the favorable impact from the reassessment of the functional currency of certain UK legal entities in the nine months ended September 30, 2015).

 

29


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Income Taxes

The effective tax rate was 34.7 percent and 34.2 percent for the three and nine months ended September 30, 2015, respectively, and 34.2 percent and 34.4 percent for the three and nine months ended September 30, 2014, respectively.

The tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2011.

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $431 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 $431 million of unrecognized tax benefits, approximately $288 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.

 

30


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15. Earnings Per Common Share (EPS); Preferred Shares

EPS

The computations of basic and diluted EPS were as follows:

 

                                                           

 

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

 

 

    

 

 

(Millions, except per share amounts)    2015      2014      2015      2014

 

  

 

 

    

 

 

    

 

 

    

 

Numerator:

           

Basic and diluted:

           

Net income

   $ 1,266       $ 1,477       $ 4,264       $    4,438 

Preferred dividends

     (22)                   (42)        

 

  

 

 

    

 

 

    

 

 

    

 

Net income available to common shareholders

     1,244         1,477         4,222       4,438 

Earnings allocated to participating share awards(a)

     (10)         (11)         (32)       (35)

 

  

 

 

    

 

 

    

 

 

    

 

Net income attributable to common shareholders

   $ 1,234       $ 1,466       $ 4,190       $    4,403 

 

  

 

 

    

 

 

    

 

 

    

 

Denominator: (a)

           

Basic: Weighted-average common stock

     994         1,041         1,007       1,051 

Add: Weighted-average stock options (b)

     3         6         4      

 

  

 

 

    

 

 

    

 

 

    

 

Diluted

     997         1,047         1,011       1,057 

 

  

 

 

    

 

 

    

 

 

    

 

Basic EPS

   $ 1.24       $ 1.41       $ 4.16       $      4.19 

Diluted EPS

   $ 1.24       $ 1.40       $ 4.15       $      4.17 

 

 

  (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 0.6 million and 0.2 million of options for the three months ended September 30, 2015 and 2014, respectively, and 0.5 million and 0.2 million of options for the nine months ended September 30, 2015 and 2014, respectively, because inclusion of the options would have been anti-dilutive.

For the three and nine months ended September 30, 2015 and 2014, 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.

 

31


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Preferred Shares

The Board of Directors is authorized to permit the Company to issue up to 20 million Preferred Shares at a par value of $1.662/3 without further shareholder approval. The Company has the following perpetual Fixed Rate/Floating Rate Noncumulative Preferred Share series issued and outstanding as of September 30, 2015:

 

 

    Series B   Series C

 

 Issuance date   November 10, 2014   March 2, 2015
 Securities issued  

750 Preferred Shares;

represented by 750,000

depositary shares

 

850 Preferred Shares;

represented by 850,000

depositary shares

 Aggregate liquidation preference   $750 million   $850 million
 Fixed dividend rate per annum   5.20%   4.90%
 Semi-annual fixed dividend payment dates   Beginning May 15, 2015   Beginning September 15, 2015
 Floating dividend rate per annum   3 month LIBOR+ 3.428%   3 month LIBOR+ 3.285%
 Quarterly floating dividend payment dates   Beginning February 15, 2020   Beginning June 15, 2020
 Fixed to floating rate conversion date(a)   November 15, 2019   March 15, 2020

 

(a)     The date on which dividends convert from a fixed rate calculation to a floating rate calculation.

The Company may redeem these Preferred Shares at $1 million per Preferred Share (equivalent to $1,000 per depositary share) plus any declared but unpaid dividends in whole or in part, from time to time, on any dividend payment date on or after the respective fixed to floating rate conversion date, or in whole, but not in part, within 90 days of certain bank regulatory changes.

 

32


Table of Contents

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Reportable Operating Segments

The Company is a global services company that is principally engaged in businesses comprising four reportable operating segments: USCS, ICS, GCS and Global Network & Merchant Services (GNMS). Corporate functions and certain other businesses, including the Company’s Enterprise Growth business, as well as other Company operations are included in Corporate & Other.

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

 

                                                                           

 

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

 

 

    

 

 

(Millions)    2015      2014      2015      2014

 

  

 

 

    

 

 

    

 

 

    

 

Non-interest revenues:

           

USCS

   $ 3,302      $ 3,188       $ 9,822      $        9,375 

ICS

     1,071        1,206         3,214      3,571 

GCS

     858        957         2,653      3,538 

GNMS

     1,302         1,368         3,898       4,027 

Corporate & Other, including adjustments and eliminations(a)

     155         189         465       548 

 

  

 

 

    

 

 

    

 

 

    

 

Total

   $ 6,688      $ 6,908       $ 20,052      $      21,059 

 

  

 

 

    

 

 

    

 

 

    

 

Interest income:

           

USCS

   $ 1,593      $ 1,465       $ 4,639      $        4,296 

ICS

     226        273         706      825 

GCS

     3        4         10      11 

GNMS

     26         14         69       35 

Corporate & Other, including adjustments and eliminations(a)

     56         59         174       183 

 

  

 

 

    

 

 

    

 

 

    

 

Total

   $ 1,904      $ 1,815       $ 5,598      $        5,350 

 

  

 

 

    

 

 

    

 

 

    

 

Interest expense:

           

USCS

   $ 166      $ 152       $ 481      $455 

ICS

     59        85         183      259 

GCS

     44        61         138      186 

GNMS

     (42)         (68)         (143)       (208)

Corporate & Other, including adjustments and eliminations(a)

     172         190         564       610 

 

  

 

 

    

 

 

    

 

 

    

 

Total

   $ 399      $ 420       $ 1,223      $        1,302 

 

  

 

 

    

 

 

    

 

 

    

 

Total revenues net of interest expense:

           

USCS

   $ 4,729      $ 4,501       $ 13,980      $13,216 

ICS

     1,238        1,394         3,737      4,137 

GCS

     817        900         2,525      3,363 

GNMS

     1,370         1,450         4,110       4,270 

Corporate & Other, including adjustments and eliminations(a)

     39         58         75       121 

 

  

 

 

    

 

 

    

 

 

    

 

Total

   $ 8,193      $ 8,303       $ 24,427      $      25,107 

 

  

 

 

    

 

 

    

 

 

    

 

Net income (loss):

           

USCS

   $ 794      $ 889       $ 2,614      $        2,535 

ICS

     89        142         348      378 

GCS

     151        204         534      949 

GNMS

     462         427         1,354       1,243 

Corporate & Other, including adjustments and eliminations(a)

     (230)         (185)         (586)       (667)

 

  

 

 

    

 

 

    

 

 

    

 

Total

   $ 1,266      $ 1,477       $ 4,264      $        4,438 

 

 

  (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 with four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS). We provide 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 the non-consolidated joint venture, American Express Global Business Travel (GBT JV). Prior to July 1, 2014, these business travel operations were wholly owned. Our range of products and services includes:

 

 

charge and credit card products;

 

 

expense management products and services;

 

 

travel-related services;

 

 

stored-value/prepaid products;

 

 

network services;

 

 

merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and

 

 

fee services, including fraud prevention services and the design and operation of customized customer loyalty and rewards programs.

Our 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. We are transforming our existing businesses and creating new products and services for the digital marketplace as we seek to enhance our customers’ digital experiences and develop platforms for online and mobile commerce.

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;

 

 

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

 

 

Travel commissions and fees, which are earned by charging a transaction or management fee to both customers and suppliers for travel-related transactions (business travel commissions and fees included through June 30, 2014);

 

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

 

 

Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including commissions and signing fees), insurance premiums earned from Card Member travel and other insurance programs, prepaid card-related revenues, revenues related to the GBT JV transition services agreement, earnings from equity method investments (including the GBT JV after June 30, 2014) and other miscellaneous revenue and fees; and

 

 

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

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, leverage and liquidity requirements.

Current Business Environment/Outlook

Our third quarter performance was in line with our 2015 financial outlook, reflecting the headwinds that we have been managing throughout 2015, including a challenging economic, competitive and regulatory environment. Results for the quarter were significantly affected by higher spending on growth initiatives, as well as the continued impact of certain previously renewed co-brand partnerships and the stronger U.S. dollar. While our reported third quarter earnings reflected the impact of these discrete items, our performance continued to reflect healthy loan growth, write-off rates at historically low levels, disciplined operating expense control and the benefits of our strong capital position, as well as strong Card Member and merchant acquisitions.

On a reported basis, the Card Member billed business growth rate in the third quarter was modestly slower relative to the second quarter of 2015, and billings were flat when compared with the third quarter of 2014. Billings growth, particularly in the U.S., continued to be impacted by a number of headwinds during 2015. We saw lower average transaction sizes, although there has been an increase in the number of transactions. In addition, we saw a slowdown in growth in spending by middle market corporate customers in the U.S. We also saw spending by Costco U.S. co-brand Card Members soften compared to the prior year. While we will continue to face an evolving regulatory landscape, we have seen very solid performance trends across our international regions over the last several quarters. Overall, international volumes were up compared to the third quarter of 2014 excluding Canada (due to the termination of our relationship with Costco Canada last year) and after adjusting for foreign currency exchange rates.

 

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We have continued to see strong growth in worldwide Card Member loans, which along with a reduction in borrowing costs during the quarter, contributed to an increase in net interest income. U.S. loan growth was steady and loan growth internationally, excluding the negative impact of foreign currency exchange rates and changes in Canadian loan balances, which were negatively impacted by the end of our Costco relationship in Canada, improved during the quarter. Our credit performance during the quarter, combined with higher loan balances, drove an increase in provision versus last year. While credit metrics had been steadily improving since the latter half of 2009, following the economic downturn, they have generally stabilized at their current levels over the course of the past year. Therefore, reserve releases from improved credit performance are no longer offsetting the additional reserves needed for higher loan balances. This performance is in line with our expectation that provision would increase year-over-year and, in part, reflects the steady growth that we are seeing in the loan portfolio. Going forward, we do anticipate that write-off rates will gradually increase from today’s low levels, in part due to the seasoning of our newer loan vintages.

We have increased our spending on growth initiatives, which appears in our marketing and promotion expenses, as well as in operating expenses and contra-discount revenue. Operating expenses for the third quarter of 2015 decreased on a reported basis, but are higher after adjusting for foreign currency exchange rates. We continue to remain committed to containing operating expense growth in 2015. For the third quarter of 2015, operating expenses include a $91 million impairment charge related to previously capitalized software development costs, primarily in our Enterprise Growth (EG) business, including our decision not to continue with certain investments in the business. We continuously evaluate our investments across the Company to ensure that we are deploying the right level of resources against our most attractive opportunities.

In this context, we decided to pull back on certain initiatives in our EG business during the current quarter, including the decision not to proceed with the launch of our Serve product in Mexico. These decisions are consistent with recent organizational changes designed to better align EG’s capabilities with the overall strategy and priorities of the Company, while focusing on those opportunities that can produce the best returns, and ensure that we have the proper operating structure to deliver results in the most efficient and effective way. We plan to continue to evaluate the strategic direction of the EG business in the fourth quarter, which could result in additional impairment.

While our business is diversified by product and geography, including a range of consumer and commercial card offerings, a large international business and GNS partners around the world, which we believe provide a range of growth opportunities, we will continue to face a number of challenges throughout the remainder of 2015 and 2016.

Global economic growth remains uneven. In addition, our results continued to be adversely impacted by the strengthening U.S. dollar, and we expect foreign exchange will continue to have an adverse impact for the remainder of 2015, and could impact 2016 as well. Our results could also be adversely affected by increases in interest rates and U.S. income tax law changes.

Regulation of the payments industry has increased significantly in recent years and various governments around the world have established or are proposing to establish payment system regulatory regimes. See “Certain Legislative, Regulatory and Other Developments” for additional information on the legislative and regulatory environment, including the potential impacts of regulatory changes in the card payment sector in the European Union (EU).

Competition is extremely intense across the payments industry, including within the co-brand space, which has generally led to increased costs in our renewed co-brand partnerships. During the third quarter of 2015, both Card Member rewards expense and cost of Card Member services continued to grow when compared to the prior year, reflecting a portion of the increased costs related to recently renewed co-brand partnerships.

 

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As previously announced, our co-brand and merchant acceptance agreements with Costco in the U.S. will not be renewed and are contractually set to expire on March 31, 2016. Although the softening in spending by existing Costco U.S. co-brand Card Members mentioned above has adversely impacted our billed business volumes, we have not yet seen a significant earnings impact, as lower volume growth has been offset by reduced marketing expenses associated with the co-brand portfolio earlier this year. In early 2015, as we considered the implications of the end of our relationship with Costco in the U.S., we made the decision to increase spending in 2015 across a range of business opportunities to best position us for long-term growth.

For the balance of the year, we expect results to reflect some of the same headwinds as the current quarter, including incremental spending on growth initiatives as well as the discrete impacts from changes in our co-brand relationships and a stronger U.S. dollar. Year-over-year earnings-per-share growth will also be negatively impacted by a net benefit in the fourth quarter of 2014 related to the sale of our investment in Concur. We estimate that full-year 2015 earnings per share will be between $5.20 and $5.35. We believe our outlook to return to positive earnings per share growth in 2016 and within our target range of 12 to 15 percent earnings per share growth in 2017 remains appropriate. Our outlook for 2015 through 2017 does not contemplate the impact of any restructuring charges or other contingencies.

As previously disclosed, a trial court ruled in favor of the U.S. Department of Justice (DOJ) in its antitrust lawsuit against us. Following the decision, on April 30, 2015, the trial court issued an injunction requiring us to change the provisions in our agreements with merchants accepting American Express cards in the U.S. that historically prohibited merchants from engaging in various actions to encourage Card Members to use other credit or charge card products or networks. The injunction became effective on July 20, 2015. We are vigorously pursuing an appeal of the decision and judgment, and we are vigorously defending similar antitrust claims initiated by merchants in other court and arbitration proceedings. See “Certain Legislative, Regulatory and Other Developments” in this Report and Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 for additional information on the potential impacts of the trial court’s decision, the subsequent injunction and the related merchant litigation on our business.

 

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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.

As a result of the GBT JV transaction, we deconsolidated the Global Business Travel (GBT) net assets, effective June 30, 2014, resulting in a lack of comparability between the nine months ended September 30, 2015 and the same period in the prior year.

Table 1: Summary of Financial Performance

 

 

(Millions, except percentages and   

    Three Months Ended

    September 30,

                     Nine Months Ended
    September 30,
            
  

 

 

        

 

 

      
per share amounts)    2015     2014     Change     2015     2014     Change

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Total revenues net of interest expense

    $           8,193       $           8,303       $ (110)         (1)    $         24,427       $         25,107       $ (680)       (3)%

Provisions for losses

     529        488        41                 1,416        1,462        (46)       (3)   

Expenses

     5,726        5,569        157                 16,527        16,879        (352)       (2)   

Net income

     1,266        1,477        (211)         (14)        4,264        4,438        (174)       (4)   

Earnings per common share — diluted(a)

    $ 1.24       $ 1.40       $     (0.16)             (11)    $ 4.15       $ 4.17       $     (0.02)        %

Return on average equity(b)

     26.8      28.8          26.8      28.8     

Return on average tangible common equity (c)

     34.2      35.6          34.2      35.6     

 

(a)  Earnings per common share — diluted was reduced by the impact of (i) earnings allocated to participating share awards and other items of $10 million and $11 million for three months ended September 30, 2015 and 2014, respectively, and $32 million and $35 million for the nine months ended September 30, 2015 and 2014, respectively, and (ii) dividends on preferred shares of $22 million and nil for the three months ended September 30, 2015 and 2014, respectively, and $42 million and nil for the nine months ended September 30, 2015 and 2014, respectively.

(b)  Return on Average Equity (ROE) is computed by dividing (i) one-year period net income ($5.7 billion for both September 30, 2015 and 2014) by (ii) one-year average total shareholders’ equity ($21.4 billion and $19.9 billion for September 30, 2015 and 2014, respectively).

(c)  Return on average tangible common equity (ROTCE), a non-GAAP measure, is computed in the same manner as ROE except the computation excludes from one-year average total shareholders’ equity, one-year average goodwill and other intangibles of $3.8 billion and $3.9 billion as of September 30, 2015 and 2014, respectively, and one-year average preferred shares of $1.1 billion and nil as of September 30, 2015 and 2014, respectively. We believe ROTCE is a useful measure of the profitability of our business.

Table 2: Total Revenue Net of Interest Expense Summary

 

 

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

 

 

        

 

 

      
(Millions, except percentages)    2015     2014     Change     2015     2014     Change

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Discount revenue

    $ 4,778       $ 4,889       $ (111)         (2)    $         14,384       $ 14,428       $ (44)        %

Net card fees

     679        680        (1)         —         2,013        2,041        (28)       (1)   

Travel commissions and fees

     87        104        (17)         (16)        271        1,027        (756)       (74)   

Other commissions and fees

     640        642        (2)         —         1,891        1,884              —    

Other

     504        593        (89)         (15)        1,493        1,679        (186)       (11)   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

    

Total non-interest revenues

     6,688        6,908        (220)         (3)        20,052        21,059        (1,007)       (5)   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

    

Total interest income

     1,904        1,815        89                 5,598        5,350        248        5    

Total interest expense

     399        420        (21)         (5)        1,223        1,302        (79)       (6)   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

    

Net interest income

     1,505        1,395        110                 4,375        4,048        327        8    
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

    

Total revenues net of interest expense

    $         8,193       $         8,303       $     (110)         (1)    $ 24,427       $ 25,107       $ (680)       (3)%

 

 

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Total Revenues Net of Interest Expense

Discount revenue decreased $111 million or 2 percent for the three months ended September 30, 2015 and was relatively flat for the nine months ended September 30, 2015, as compared to the same periods in the prior year. Foreign currency-adjusted discount revenue, which excludes the impact of changes in foreign exchange (FX) rates, increased 1 percent and 3 percent for the three and nine months ended September 30, 2015, respectively.1 The increases on an FX-adjusted basis were due to growth in billed business of 5 percent and 6 percent, also FX-adjusted, for the three and nine month periods, respectively, partially offset by a decrease in the average discount rate, faster growth in GNS billings than in overall Company billings, increases in cash rebate rewards (recognized as contra-discount revenue) and generally higher contra-revenues related to payments under previously renewed co-brand partnership agreements.1 Billed business in the U.S. increased 4 percent and 5 percent for the three and nine months ended September 30, 2015, respectively, and decreased 8 percent and 5 percent outside the U.S., in the same respective periods, with FX-adjusted billed business outside the U.S. increasing 8 percent for both the three and nine month periods.1

The average discount rate was 2.46 percent and 2.48 percent for the three and nine months ended September 30, 2015, respectively, and 2.48 percent and 2.49 percent for the three and nine months ended September 30, 2014, respectively. The decrease in the average discount rate for both the three and nine month periods was driven in part by growth of the OptBlue program, changes in industry mix, and competition, partially offset by the decline in Costco merchant volume in Canada (which was at a lower discount rate than the average) due to the expiration of our merchant agreement, as well as changes in FX rates. As indicated in prior quarters, changes in the mix of spending by location and industry, 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 decreased $1 million and $28 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, while FX-adjusted net card fees increased 6 percent and 5 percent for the respective periods, primarily driven by higher basic cards-in-force, as well as a benefit from certain pricing initiatives.1

Travel commissions and fees decreased $17 million or 16 percent and $756 million or 74 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, primarily due to the business travel joint venture transaction in the prior year, resulting in a lack of comparability between periods.

Other commissions and fees remained relatively flat for both the three and nine months ended September 30, 2015, as compared to the same periods in the prior year, while FX-adjusted other commissions and fees increased 9 percent and 10 percent for the respective periods.1 The increases on an FX-adjusted basis were driven in part by higher loyalty coalition revenues, as well as higher delinquency fees.

Other revenue decreased $89 million or 15 percent and $186 million or 11 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, while FX-adjusted other revenue decreased 7 percent and 4 percent for the respective periods.1 The decrease on an FX-adjusted basis for the three month period was primarily driven by gains related to the sale of investment securities in the Industrial and Commercial Bank of China (ICBC) and in Concur Technologies in the prior year, which for the nine month period was partially offset by higher revenues earned related to the GBT JV transition services agreement in the current year.

 

 

 

1The 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 year apply to the corresponding year 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 income increased $89 million or 5 percent and $248 million or 5 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, primarily reflecting higher average Card Member loans.

Interest expense decreased $21 million or 5 percent and $79 million or 6 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, primarily driven by a lower cost of funds and lower average long-term debt.

Table 3: Provisions for Losses Summary

 

 

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

 

 

         

 

 

        
(Millions, except percentages)    2015      2014      Change     2015      2014      Change

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

Charge card

    $ 203        $             196        $            $ 542        $ 594        $(52)     (9)%

Card Member loans

     309         265         44          17         829         797       32      4     

Other

     17         27               (10)             (37)        45         71       (26)     (37)    

 

  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

Total provisions for losses

    $             529        $ 488        $ 41             $          1,416        $          1,462        $      (46)     (3)%

 

Provisions for Losses

Charge card provisions for losses increased $7 million or 4 percent and decreased $52 million or 9 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year. The increase for the three month period was primarily driven by higher write-off rates in USCS, versus the prior year and the decrease in the nine month period was primarily driven by a reserve release in the current year versus a reserve build in the prior year.

Card Member loans provision for losses increased $44 million or 17 percent and $32 million or 4 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year. The increases were driven by credit performance, combined with higher loan balances.

Table 4: Expenses Summary

 

                       

 

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

 

 

         

 

 

        
(Millions, except percentages)    2015      2014      Change     2015      2014      Change

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

Marketing and promotion

    $ 847        $ 783        $ 64             $ 2,217        $ 2,329        $(112)     (5)%

Card Member rewards

     1,763         1,695         68                 5,202         5,050       152      3     

Card Member services and other

     269         205         64          31         772         619       153      25     

Salaries and employee benefits

     1,212         1,290         (78)         (6)        3,767         4,488       (721)     (16)    

Other, net

     1,635         1,596         39                 4,569         4,393       176      4     

 

  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

   

Total expenses

    $ 5,726        $ 5,569        $ 157             $ 16,527        $ 16,879        $(352)     (2)%

 

Expenses

Marketing and promotion expense increased $64 million or 8 percent and decreased $112 million or 5 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year. The increase for the three month period was primarily driven by increased spending on incremental growth initiatives, while the decrease for the nine month period was primarily driven by the prior-year reinvestment of a significant portion of the gain from the business travel joint venture transaction in growth initiatives.

 

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Card Member rewards expense increased $68 million or 4 percent and $152 million or 3 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, and FX-adjusted Card Member rewards expense increased 7 percent and 6 percent for the respective periods.2

The increase for the three months ended September 30, 2015, was primarily due to an increase in co-brand rewards expense of $60 million, driven by rate impacts as a result of the previously renewed co-brand partnership agreements, and an increase in Membership Rewards expense of $8 million. The latter was driven by an increase of $31 million related to new points earned, resulting from higher spending volumes, partially offset by a $23 million decrease from slower growth in the Membership Rewards ultimate redemption rate (URR), and a decline in the weighted average cost (WAC) per point.

The increase for the nine months ended September 30, 2015, was primarily due to an increase in co-brand rewards expense of $180 million, also driven by rate impacts, partially offset by a decrease in Membership Rewards expense of $28 million. The latter was driven by slower growth in the URR, and a charge in 2014 related to an enhancement in the Membership Rewards URR estimation process for certain international countries, partially offset by increased expenses related to new points earned, driven by higher spending volumes.

The Membership Rewards URR for current program participants remained at 95 percent (rounded up) at September 30, 2015, in line with June 30, 2015 and September 30, 2014.

Card Member services and other expense increased $64 million or 31 percent and $153 million or 25 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, while FX-adjusted Card Member services and other expense increased 38 percent and 32 percent for the respective periods, primarily driven by higher costs related to the previously renewed co-brand partnership agreements.2

Salaries and employee benefits expense decreased $78 million or 6 percent and $721 million or 16 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year. The decrease for the nine month period was primarily driven by the business travel joint venture transaction (resulting in a lack of comparability between periods), and the restructuring charge in the prior year. The restructuring initiatives in the prior year resulted in lower compensation costs and contributed to the current year decrease for both the three and nine month periods.

Other expenses increased $39 million or 2 percent and $176 million or 4 percent for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in the prior year, and FX-adjusted other expenses increased 6 percent and 8 percent for the respective periods.2 The increase in the three month period primarily reflected a $91 million impairment charge related to previously capitalized software development costs, primarily within our EG business, including our decision not to continue with certain initiatives within EG. Other expenses were also favorably impacted by a litigation reserve release of $64 million in the GNMS segment associated with the rejected 2013 merchant litigation settlement. See Part II, Item 1. “Legal Proceedings” for further information on this merchant litigation. The increase in the nine month period reflected the net gain recognized as a result of the business travel joint venture transaction in the prior year (resulting in a lack of comparability between periods), as well as the previously mentioned impairment charge in the current year, which were partially offset by a favorable impact from the reassessment of the functional currency of certain UK legal entities in the current year, the litigation reserve release mentioned previously, a contribution to the American Express Foundation and a change in the estimated value of certain investments in our Community Reinvestment Act (CRA) portfolio, the latter two in the prior year.

 

 

2 Refer to footnote 1 on page 39 for details regarding foreign currency adjusted information.

 

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Income Taxes

The effective tax rate was 34.7 percent and 34.2 percent for the three months ended September 30, 2015 and 2014, respectively, and 34.2 percent and 34.4 percent for the nine months ended September 30, 2015 and 2014, respectively. The tax rates for all periods reflect the level of pretax income in relation to recurring permanent tax benefits and geographic mix of business.

Table 5: Selected Statistical Information

 

 

         

Three Months Ended

September 30,

         Nine Months Ended
September 30,
     
  

 

      

 

 

   
          2015     2014           Change          2015     2014           Change      

 

     

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

Card billed business: (billions)

                

United States

      $ 180.3      $ 173.0          4 %    $ 531.1      $ 505.6          5 %

Outside the United States

        78.6        85.1      (8)      235.4        248.7      (5)
     

 

 

   

 

 

      

 

 

   

 

 

   

Total

      $ 258.9      $ 258.1         $ 766.5      $ 754.3      2
     

 

 

   

 

 

      

 

 

   

 

 

   

Total cards-in-force: (millions)

                

United States

        56.4        54.5      3      56.4        54.5      3

Outside the United States

        59.4        56.6      5      59.4        56.6      5
     

 

 

   

 

 

      

 

 

   

 

 

   

Total

        115.8        111.1      4      115.8        111.1      4
     

 

 

   

 

 

      

 

 

   

 

 

   

Basic cards-in-force: (millions)

                

United States

        43.6        42.2      3      43.6        42.2      3

Outside the United States

        49.0        46.3      6      49.0        46.3      6
     

 

 

   

 

 

      

 

 

   

 

 

   

Total

        92.6        88.5      5      92.6        88.5      5
     

 

 

   

 

 

      

 

 

   

 

 

   

Average discount rate(a)

        2.46     2.48        2.48     2.49  

Average basic Card Member spending(b)

      $      4,165      $      4,223      (1)    $    12,437       $    12,504      (1)

Average fee per card(b)

      $ 39      $ 40      (3)    $ 39       $ 41      (5)

Average fee per card, adjusted(b)

      $ 44      $ 45         (2)%    $ 44       $ 45         (2)%

 

 

(a)

In the three months ended March 31, 2015, we changed the classification related to certain payments to partners, reducing both discount revenue and marketing and promotion expense. The misclassification in prior periods has been revised to conform to the current period presentation. Accordingly, the average discount rate for prior periods was also revised, resulting in a reduction of between zero and one basis point in any period from what was originally reported.

(b)

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 $72 million and $77 million for the three months ended September 30, 2015 and 2014, respectively, and $217 million and $227 million for the nine months ended September 30, 2015 and 2014, 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.

 

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Table of Contents

Table 6: Selected Statistical Information

 

 

          Three Months Ended
September 30, 2015

 

       

 

Percentage 

Increase (Decrease)

  

  

 

    Percentage Increase

Assuming

No Changes in

Foreign Exchange

Rates(a)

Worldwide(b)

       

Billed business

          5 %

Proprietary billed business

             4     

GNS billed business(c)

        (1)      13     

Airline-related volume (8% of worldwide billed business)

        (6)      —     

United States(b)

       

Billed business

            

Proprietary consumer card billed business(d)

            

Proprietary small business billed business(d)

            

Proprietary corporate services billed business(e)

            

T&E-related volume (26% of U.S. billed business)

            

Non-T&E-related volume (74% of U.S. billed business)

            

Airline-related volume (7% of U.S. billed business)

        (3)     

Outside the United States(b)

       

Billed business

        (8)      8     

Japan, Asia Pacific & Australia (JAPA) billed business

        (1)      14     

Latin America & Canada (LACC) billed business

        (23)      (4)    

Europe, the Middle East & Africa (EMEA) billed business

        (4)      9     

Proprietary consumer and small business billed business(f)

        (13)      2     

JAPA billed business

        (7)      10     

LACC billed business

        (26)      (11)    

EMEA billed business

        (2)      11     

Proprietary corporate services billed business(e)

        (10)   5 %

 

(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 year apply to the corresponding prior year 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 GNMS segment.

(d)  Included in the USCS segment.

(e)  Included in the GCS segment.

(f)  Included in the ICS segment.

 

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Table of Contents

Table 7: Selected Statistical Information

 

 

          Nine Months Ended
September 30, 2015

 

       

 

Percentage 

Increase (Decrease)

  

  

 

    Percentage Increase

Assuming

No Changes in

Foreign Exchange

Rates(a)

Worldwide(b)

       

Billed business

        2   6%

Proprietary billed business

        1      4    

GNS billed business(c)

        3      15    

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

        (5   1    

United States(b)

       

Billed business

        5     

Proprietary consumer card billed business(d)

        5     

Proprietary small business billed business(d)

        7     

Proprietary corporate services billed business(e)

        2     

T&E-related volume (26% of U.S. billed business)

        4     

Non-T&E-related volume (74% of U.S. billed business)

        5     

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

        (1  

Outside the United States(b)

       

Billed business

        (5   8    

JAPA billed business

        3      15    

LACC billed business

        (18   (4)   

EMEA billed business

        (6   8    

Proprietary consumer and small business billed business(f)

        (12   2    

JAPA billed business

        (4   10    

LACC billed business

        (30   (19)   

EMEA billed business

        (5   10    

Proprietary corporate services billed business(e)

        (10 )%    4%

 

 

(a)

Refer to Note (a) in Table 6.

(b)

Captions in the table above not designated as “proprietary” or “GNS” include both proprietary and GNS data.

(c)

Included in the GNMS segment.

(d)

Included in the USCS segment.

(e)

Included in the GCS segment.

(f)

Included in the ICS segment.

 

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Table of Contents

Table 8: Selected Statistical Information

 

 

         As of or for the
    Three Months Ended
    September 30,
         

As of or for the     
Nine Months Ended 
     September 30,      

     

(Millions, except percentages and where indicated)

   2015     2014     Change     2015     2014    

Change

Worldwide Card Member receivables:

            

Total receivables (billions)

   $ 44.3      $ 45.1        (2) %     $ 44.3      $ 45.1      (2)%

Loss reserves:

            

Beginning balance

   $ 420      $ 413             $ 465      $ 386      20    

Provisions (a)

     203        196               542        594      (9)   

Net write-offs (b)

     (174)        (168)               (544)        (527)      3    

Other

     (8)        (9)        (11)        (22)        (21)      5    
  

 

 

   

 

 

     

 

 

   

 

 

   

Ending balance

   $ 441      $ 432             $ 441      $ 432      2    
  

 

 

   

 

 

     

 

 

   

 

 

   

% of receivables

     1.0     1.0       1.0     1.0  

Net write-off rate — principal only — USCS/ICS (c)

     1.8        1.6          1.8        1.8     

Net write-off rate — principal and fees — USCS/ICS (c)

     2.0        1.8          2.1        2.0     

30+ days past due as a % of total — USCS/ICS

     1.6        1.6          1.6        1.6     

Net loss ratio as a % of charge volume — GCS

     0.08        0.09          0.09        0.09     

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

     0.7     0.8       0.7     0.8  

Worldwide Card Member loans:

            

Total loans (billions)

   $ 68.9      $ 66.1             $ 68.9      $ 66.1      4    

Loss reserves:

            

Beginning balance

   $ 1,132       $ 1,170         (3)      $ 1,201       $ 1,261       (5)   

Provisions (a)

     309         265         17         829         797       4    

Net write-offs — principal (b)

     (231)        (245)        (6)        (733)        (786)      (7)   

Net write-offs — interest and fees (b)

     (37)        (40)        (8)        (122)        (124)      (2)   

Other

     (9)        (4)        #        (11)        (2)      #   
  

 

 

   

 

 

     

 

 

   

 

 

   

Ending balance

   $     1,164       $     1,146              $     1,164       $     1,146       2    
  

 

 

   

 

 

     

 

 

   

 

 

   

Ending reserves — principal

   $ 1,114       $ 1,093              $ 1,114       $ 1,093       2    

Ending reserves — interest and fees

   $ 50       $ 53         (6)      $ 50       $ 53       (6)   

% of loans

     1.7      1.7        1.7      1.7   

% of past due

     164      165        164      165   

Average loans (billions)

   $ 69.0       $ 66.4           $ 68.3       $ 65.4       4 %

Net write-off rate — principal only (c)

     1.3      1.5        1.4      1.6   

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

     1.6         1.7           1.7         1.9      

30+ days past due as a % of total

     1.0         1.1           1.0         1.1      

Net interest income divided by average loans (d)

     8.7         8.5           8.5         8.1      

Net interest yield on Card Member loans (d)

     9.5      9.3        9.5      9.3   

 

# Denotes a variance greater than 100 percent

 

(a)  Provisions on principal (resulting from authorized transactions) and fee reserve components on Card Member receivables and provisions for principal (resulting from authorized transactions), interest and/or fees on Card Member loans.

(b)  Write-offs, less recoveries.

(c)  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 nine months ended September 30, 2015 reflects the impact of a change in the timing of charge-offs for Card Member loans and receivables in certain modification programs from 180 days past due to 120 days past due, which was fully recognized in the three months ended September 30, 2015.

(d)  Refer to Table 9 for the calculation of net interest income divided by average loans, a GAAP measure, net interest yield on Card Member loans, a non-GAAP measure, and our rationale for presenting net interest yield on Card Member loans.

 

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